Jack Dawn Milo (her Daddy wanted a boy) age 37 lived at 416 Grouse Avenue, Allentown, PA 18105. Jack’s mother, Lulu Belle Taxdeduction age 65, is a resident of Windsor, Canada. Jack provides all of her support. Lulu does have a pension that pays her $2,500 per year. Lulu has a dirty old man that lives with her, Goof Off age 72. Jack provides all Goof’s support, and Goof has no income.

Carson and Jack officially tied the knot early in the day of December 31, 2016. Jack has two children from a previous marriage who both live with her - Jack (Jack was never creative and could not come up with a new name. It has been complicated having two Jacks in the house, but who cares. She was reading a nursery rhyme to Jack one day and found a good name for a girl), age 19, a full-time student at Cedar Crest College, and Jill age 8. Jack and Carson had May on December 31, 2016 (the preacher came to the labor room to tie the knot). Well, evidently Jack and Carson have known each other for a while.

Relevant social security numbers are:

Jack Milo (Hart)268-01-5869Jack Sprat (son)445-88-5432Jesse White109-72-2277

Jill Sprat445-88-5996Lulu (mother)206-55-1919Bobby Brown109-72-2278

May Hart466-99-2255Goof222-11-7755Gerta Green109-72-2279

Jack received the following cash:

Sale of breeding cattle (raised) 150,000

Royalties from Phillips Petroleum Co 200,000

FSA payments 60,000

Sale of calves 125,000

Federal Crop Insurance from milo failure in fall 150,000

(I generally sell the crop in January every year so just ignore this for now)

Crop sold 215,000

Directors fees, from First National Bank 20,000

Interest income (Tbills, $5,000, Pennsylvania municipal bonds, $10,000) 15,000

Dividends, Phillips 1,500

Cash received from Uncle Clem’s estate in California 150,000

Jack’s expenses and other items:

Cattle purchased 15,000

Feed 100,000

Seed 40,000

Irrigation gas 25,000

Electric (includes just a little house, but mostly barns) 3,000

I want the maximum IRA deduction

Farm repairs 35,000

Supplies 80,000

Gas 12,000

Machine hire 15,000

Taxes (includes last yrs fed inc tax, 10,000 and state inc tax, 5,000) 50,000

Salaries (includes 10,000 to Jack’s son Jack) 40,000

Mortgage interest on land 15,000

Hedging loss 105,000

Last year tax prep fee (way too high) 2,250

Fertilizer 40,000

Federal tax estimates (I should get all of this back if you do my taxes right) 40,000

State estimates 10,000

Travel (Airline tickets $5,000, lodging 2,000, 1,000 meals) 8,000

trip to Australia to check on buying a herd of kangaroos to install on my

ranch. Haven’t done the deal yet but believe me they will be bigger than

Ostriches in 5 years

Child care 6,000

Contributions 10,000

Medical expenses (includes insurance of 12,000) 50,000

Home mortgage interest 18,500

Mortgage interest on motor home 6,000

Other items that I am not sure about

1. Got a K-1 from my uncle’s trust that said I had rental income of $5,000 and interest of $4,000 but I’ve never seen it.

2. Planted cotton this year. I got a good deal on a new cotton baler – JD 7760 for $465,000. I planted cotton on a 480 acre circle. These revenues and costs need to be added to my stuff on the first page. I kept it separate to see if I was going to plant agin next year. I think that it looks pretty good!

Revenue – I cut 3 bales/acre or 1,500 lbs. x a contract price of $ .76/lb = $1140/acre = $547,200 total revenue.

Costs – Seed (treated) - $50/acre = $24,000; sprayed it 8 times at $15/acre = $120/acre = $57,600; water/irrigation/acre at $47 = $22,560; planting/harvesting costs of $28.50/acre = $13,680; insurance of $11/acre = $5,280. Total costs = $123,120

3. Assets purchased in 2016

New 1 ton Ford PU, July 15 65,000

New combine (well, new to me), August 12, (traded my 2010 JD Combine) 435,000

New JD tractor $380,000 (no trade-in) 380,000

New planter – JD 1775NT 215,000

One section of land, has house barn, 4 miles of fence, irrigation well

2600 feet undergraund line, and some really nice corrals, paid

$915,000 for the whole shooting match

Carson A. Hart, age 45, was single until December 31 and lives with his dependent mother at 426 Grouse Avenue, Allentown, PA 18105. His social security number is 121-22-1211.

Carson is a licensed hairstylist and operates his own business. Located at 480 Laurel Street, Allentown, PA 18105, the business is conducted under the name of “Carson's Coiffures.” Carson's business activity code is 812112. In addition to 10 workstations (i.e., stylist chairs) and a small reception area, the shop has display and storage areas for the products Carson sells (see item 2 below). During the year, Carson leased nine of the stations to other hairstylists. As is common practice in similar businesses in the area, the other stylists are considered to be self-employed. In fact, the IRS sanctioned the self-employment classification for the stylists in an audit of one of Carson's prior tax returns. Each stylist pays Carson a fixed rent for the use of a workstation, resulting in $68,000 of rents received during 2016. From his own station, Carson earned $44,000 (including tips of $12,000) for the styling services he provided to his own clients.

Carson's Coiffures is the local distributor for several beauty products (e.g., conditioners, shampoos) that cannot be purchased anywhere else. Carson buys these items from the manufacturers and sells them to regular patrons, walk-in customers, and other beauticians (including those who lease chairs from him). Carson's Coiffures is also known for the selection and quality of its hairpieces (i.e., wigs, toupees). Through the shop, Carson made the following sales during the year:

Hairpieces and wigs	$69,000
Beauty products	48,000

Although Carson operates his business on a cash basis, he maintains inventory accounts for the items he sells as required by law. Relevant information about the inventories (based on lower of cost or market) is summarized below.

	12/31/15	12/31/16
Hairpieces and wigs	$10,700	$12,600
Beauty products	11,400	9,900

Carson's purchases for 2016 were $30,500 of hairpieces and wigs and $26,100 of beauty products.

Carson's Coiffures had the following operating expenses for 2016:

Utilities (i.e., gas, electric, telephone)		$12,900
Ad valorem property taxes:
On realty (e.g., shop building and land)	$4,200
On personalty (e.g., equipment, inventory)	1,800	6,000
Styling supplies (e.g., rinses, dyes, gels, hair spray)		5,700
Fire and casualty insurance		4,100
Liability insurance		4,000
Accounting services		3,800
Janitorial services		2,400
Sewer service, garbage pickup		2,300
Water		2,200
Occupation licenses (city and state)		1,500
Waiting room supplies (e.g., magazines, coffee)		1,300

As Carson prefers to avoid employer-employee arrangements and the payroll tax complexities, he retains outside agencies to handle his accounting and janitorial needs.

In early 2016, Carson decided to renovate the waiting room. On May 10, he spent $10,400 for new chairs, a sofa, various lamps, coffee bar, and other furnishings. Carson follows a policy of claiming as much depreciation as soon as possible. The old furnishings were thrown away or given to customers. For tax purposes, the old furnishings had a zero basis.

Carson's Coiffures is located in a building Carson had constructed at 480 Laurel Street in March, 2002. The shop was built for a cost of $300,000 on a lot he purchased earlier for $35,000. Except for a down payment from savings, the cost was financed by a 20-year mortgage. For tax purposes, MACRS depreciation is claimed on the building. During 2016, the following expenses were attributable to the property:

Repainting (both exterior and interior)	$8,000
Repairs (plumbing and electrical)	1,900

In May (after his accident settlement discussed in item 11 below), Carson paid the balance due on the business mortgage. To do so, he incurred a prepayment penalty of $4,400. Prior to paying it off, he paid regular interest on the mortgage in 2016 of $6,000.

In February 2016, Carson's Coiffures was cited by the city for improper disposal of certain waste chemicals. Carson questioned the propriety of the proposed fine of $2,000 and retained an attorney to represent him at the hearing. By pleading nolo contendere, the attorney was able to get the fine reduced to $500. Carson paid both the fine of $500 and the attorney's fee of $600 in 2016.

In August 2016, Carson saw an ad in a trade publication that attracted his attention. The owner of a well-respected styling salon in Reading (PA) had died, and his estate was offering the business for sale. Carson traveled to Reading, spent several days looking over the business (including books and financial results), and met with the executor. Carson treated the executor to dinner and a music concert. Immediately after the concert, Carson made an offer for the business, but the executor rejected it. His expenses in connection with this trip were as follows:

Car rental	$140
Entertainment of executor	280
Motel (August 6-7)	220
Meals	110

In March 2015, Joan Myers, one of Carson's best stylists, left town to get away from a troublesome ex-husband. In order to help Joan establish a business elsewhere, Carson loaned her $7,000. Joan signed a note dated March 3, 2015, that was payable in one year with 6% interest. On December 30, 2016, Carson learned that Joan had declared bankruptcy and was awaiting trial on felony theft charges. Carson never received payment from Joan, nor did he receive any interest on the loan.

At Christmas, Carson gave each of his 35 best customers a large bottle of body lotion. Each bottle had a wholesale cost to Carson of $12 but a retail price of $24. Carson also spent $3 to have each bottle gift wrapped. (Note: The lotion was special order merchandise and was not part of the business's inventory or purchases for the year—see item 2 above.) He also gave each of the nine stylists who leased chairs from him a basket of fruit that cost $30 (not including $5 delivery cost).

In March 2016, the Pennsylvania Department of Revenue audited Carson's state income tax returns for 2014 and 2015. He was assessed additional state income tax of $340 for these years. Surprisingly, no interest was included in the assessment. Carson paid the back taxes promptly.

On a morning walk in November, 2015, Carson was injured when he was sideswiped by a delivery truck. Carson was hospitalized for several days, and the driver of the truck was ticketed and charged with DUI. The owner of the truck, a national parcel delivery service, was concerned that further adverse publicity might result if the matter went to court. Consequently, the owner offered Carson a settlement if he would sign a release. Under the settlement, his medical expenses were paid and he would receive a cash award of $200,000. The award specified that the entire amount was for physical pain and suffering. Because he suffered no permanent injury as a result of the mishap, he signed the release in April, 2016 and received the $200,000 settlement.

In January 2016, Carson was contacted by the state of Pennsylvania regarding a tract of land he owned in York County. The state intended to convert the property into a district headquarters, barracks, and training center for its highway patrol. Carson had inherited the property from his father when he died on August 11, 2015. The property had a value of $140,000 on that date and had been purchased by his father on March 3, 1980, for $30,000. On July 25, 2016, after considerable negotiation and after the state threatened to initiate condemnation proceedings, he sold the tract to the state for $158,000. Since Carson is not comfortable with real estate investments, he does not plan to reinvest any of the proceeds received in another piece of realty.

When his father died in 2015, Carson did not know that he had an insurance policy on his life (maturity value of $50,000) in which he was named as the beneficiary. When his mother told him about the policy in July 2016, Carson filed a claim with the carrier, Falcon Life Insurance Company. In August 2016, he received a check from Falcon for $51,500 (including $1,500 interest).

Upon the advice of a client who is a respected broker, Carson purchased 1,000 shares of common stock in Grosbeak Exploration for $40,000 on March 4, 2016. In the months following his purchase, the share value of Grosbeak plummeted. Disgusted with the unexpected erosion in the value of his investment, Carson sold the stock for $28,000 on December 23, 2016.

While on his way to work in 2015, Carson was rear-ended by a hit-and-run driver. The damage to his Lexus was covered by his insurance company, General Casualty, except for the $1,000 deductible he was required to pay. In 2016, the insurance company located the driver who caused the accident and was reimbursed by his insurer. Consequently, Carson received a $1,000 refund check from General Casualty in May 2016 to reimburse him for his $1,000 deductible.

After his father's death, Carson's mother (Mildred Morgan, Social Security number 123-45-6789) moved in with him. Mildred's persistent back trouble made it difficult for her to climb the stairs to the second-floor bedrooms in Carson's house. So Carson had an elevator installed in his personal residence at a cost of $12,000 in January 2016. A qualified appraiser determined that the elevator increased the value of the personal residence by $7,000. The appraisal cost $400. The operation of the elevator during 2016 increased Carson's electric bill by $300.

As a favor to a long-time client who is a drama professor at a local state university, Carson spent a weekend as a stylist preparing hairdos for the key actresses in the annual Theater Department fund-raising event. The drama professor supplied all of the resources that Carson needed to provide his services. Carson estimates that he would have charged $800 for the services he donated to this charitable event.

In addition to the items already mentioned, Carson had the following receipts during 2016:

Interest income—
CD at Scranton First National Bank	$900
City of Lancaster general purpose bonds	490
Money market account at Allentown State Bank	340	$1,730
Qualified dividends on stock investments—
General Motors		$470
AT&T common	380	850
Federal income tax refund (for tax year 2015)		791
Pennsylvania state income tax refund (for tax year 2015)		205
Contribution to pension plan		$10,000
Medical—
Premiums on medical insurance	$4,800
Dental bills	1,400	6,200
Property taxes on personal residence		3,800
Interest on home mortgage		3,200
Professional expenses—
Subscriptions to trade journals	$ 180
Dues to beautician groups	140	320

Expenditures for 2016, not previously noted, are summarized below.

Contribution to pension plan		$10,000
Medical—
Premiums on medical insurance	$4,800
Dental bills	1,400	6,200
Property taxes on personal residence		3,800
Interest on home mortgage		3,200
Professional expenses—
Subscriptions to trade journals	$ 180
Dues to beautician groups	140	320

The $10,000 contribution to the pension plan is to a § 401(k) type of plan he established in 2015. Previously, he had contributed to an H.R. 10 (Keogh) plan but found that the § 401(k) retirement arrangement provides more flexibility and is less complex. The medical insurance policy covers Carson and his dependents and was issued in the name of the business (i.e., “Carson's Coiffures”). It does not cover dental work or capital modifications to a residence (see item 16 above).

During 2016, Carson made the following total estimated tax payments with respect to his 2016 tax returns:

Federal estimated income tax payments	$20,800
Pennsylvania estimated income tax payments	2,400
Allentown City estimated income tax payments	800

REQUIREMENTS

Prepare a federal income tax return (with appropriate schedules) for Carson and Jack for 2016. In doing this, use the following guidelines:

Make necessary assumptions for information not given in the problem. For example, since no brokerage commissions are listed for the purchase and sale of the Grosbeak Exploration stock (see item 14), assume that none were incurred. Write down any assumptions that you make and turn them in with your tax return. Also, based on ages, which are given in the problem, you may make up any birthdays for any individuals who do not have a birthday listed.

Ever since Carson became a homeowner many years ago, he has not claimed the standard deduction. Instead he itemizes his deduction from AGI.

The sales tax option was not chosen in 2015 for Carson or Jack, and they had no major purchases that qualify for the sales tax deduction in 2016 other than those listed in the problem above.

Carson and Jack have substantiation (e.g., records, receipts) to support the transactions involved.

If a refund results, we want a check sent to us.

We do not wish to contribute to the Presidential Election Campaign Fund.

You do not have to file a state return for Pennsylvania.

There is a discussion area in your “Farmer Tax Return” unit under content in Aggie Scholars. All questions must be asked in that discussion area. There should be some questions asked about the farmer information. There are some dates and other stuff missing. The beautician should have complete facts.