Jacob, age 42, and Jane Brewster, age 37, are married and file a joint return in 2015. The Brewsters have two dependent children, Ellen and Sean, 10-year-old twins.

Decision Making

Jacob is a factory supervisor; he earned $95,000 in 2015. Jane is a computer systems analyst and earned $103,000. In addition to their salaries, the Brewsters reported the following income items.

Interest income (Carmel Sanitation District Bonds)	$22,000 (a)
Interest income (Carmel National Bank)	8,500
Qualified dividend income (Able Computer Corporation)	12,000
Gambling winnings	6,500
Gift from Uncle Raymond to Jacob	27,000
Citizen of the Year award (Jane)	7,500 (b)
Gain on land sale	14,000 (c)

a.The Carmel Sanitation District Bonds are private activity bonds that were originally issued in April 2008.

b.Jane was selected Citizen of the Year by the Carmel City Council. She used the award proceeds to pay down the familys credit card debt.

c.Jacob sold 5 acres of land to a real estate developer on October 12, 2015, for $100,000. He had acquired the land on May 15, 2009, for $86,000.

On April 1, 2015, Jacob exercised an incentive stock option granted by his employer. At the date of exercise, the fair market value of the stock was $18 per share and the exercise price was $10 per share. Jacob purchased 500 shares with the ISO exercise. As of December 31, 2015, the stocks fair market value had declined to $13 per share.

The Brewsters incurred the following expenses during 2015.

Medical expenses (doctor and hospital bills)	$28,000
Charitable contributions (cash)	9,500 (d)
Real property tax on personal residence	8,100
Mortgage interestpersonal residence (reported on Form 1098)	8,600
Mortgage interesthome equity loan	1,800 (e)
Investment interest expense	3,500
Gambling losses	6,800

d.In addition to their cash charitable contributions, the Brewsters contributed stock in Ace Corporation, which they acquired on February 9, 2005, at a cost of $6,500, to the Carmel Salvation Army, a qualifying charity. The fair market value of the stock was $11,000 on November 1, 2015, the date of the contribution.

e.The home equity loan was used to purchase the familys new minivan.

Taking into consideration the above amounts, for 2015, the Brewsters AGI is $246,500 and taxable income is $178,150. The following table presents a first draft of the Brewsters 2015 AMTI calculation.

Regular taxable income	$178,150
Adjustments and preferences
Citizen of the Year award	(7,500)
Reduction in medical expenses (10% of AGI for AMT)	6,163
Real property taxes	(8,100)
Mortgage interest	10,400
Charitable contribution of stock (difference between basis and FMV)	4,500
Incentive stock option exercise	1,000
Gambling loss disallowed for regular tax purposes	(300)
AMTI	$184,313
Exemption amount	(77,047)
AMTI base	$107,266

Review the AMTI calculation, and prepare a list, including explanations, of any errors in the calculation. An error could include a missing amount or an amount that should not have been included, an amount that enters the calculation in the wrong direction, or an amount that enters the calculation in the wrong amount. You can presume that the Brewsters AGI and taxable income amounts for 2015 are calculated correctly.

Research Problems

Note: Solutions to Research Problems can be prepared by using the Checkpoint Student Edition online research product, which is available to accompany this text. It is also possible to prepare solutions to the Research Problems by using tax research materials found in a standard tax library.

Research Problem 1. Samuel had worked for Pearl, Inc., for 35 years when he was discharged and his position filled by a much younger person. He filed and pursued a suit for age discrimination and received an award of $1.5 million. Under the contingent fee arrangement with his attorney, one-third of the award was paid directly to the attorney, with the balance going to Samuel. Of the $1.5 million received, Samuel included his net $1 million as gross income on his tax return; he neither took as gross income nor deducted the $500,000 paid to the attorney.

The IRS audited Samuels return and included the $500,000 contingency fee in gross income. At the same time, Samuel was allowed a miscellaneous itemized deduction (subject to the 2% floor) for the fee paid to the attorney. The IRS adjustment caused a tax deficiency to be assessed for both the regular income tax and the AMT.

Evaluate the results reached.

Research Problem 2. Jolene receives tax-exempt interest of $33,000 on bonds that are classified as private activity bonds. She properly excludes the $33,000 from her gross income for regular income tax purposes. Jolene asks your advice on the treatment of the interest income for AMT purposes. Locate the Code Section that covers this matter, and advise Jolene accordingly.