M6 Comprehensive Tax Return must use Proconnect Intuit Tax Software

Anthony (Tony) and Kayla Harrington are husband and wife and live at 4112 Foxglove Drive, McKinney, TX 75070. Tony is a retired petroleum engineer, and Kayla is a portrait artist. They choose to file a joint tax return each year.

1. When he retired at age 65, Tony was chief of offshore operations at Pelican Exploration Corporation. While employed, Tony participated in Pelicans contributory qualified pension plan, to which he had contributed $250,000 in after-tax dollars. Under one of the plan options, he chose a life annuity payout of $60,000 per year over his life. As part of his retirement package, Tony also receives nontaxable health insurance coverage for himself and Kayla. Due to Tonys expertise in Gulf of Mexico offshore operations, Pelican continues to use his services on a consulting basis (see item 3 below)

2. Kayla, an accomplished artist, is well known regionally for oil portraits (business activity code 711510). She paints in the Photorealism style, providing her clients with portraits that are often mistaken for photographs. Painting in this style is very time consuming. Consequently, her output averages between 15 and 16 portraits a year. Her fee of $3,200 per portrait was set several years ago and never varies. As this is quite reasonable for a Photorealistic oil portrait, she has a long waiting list of clients who have not yet been scheduled for sittings. The Harringtons maintain a studio in their personal residence (see item 6 below) where Kayla performs all her work. Kayla is a cash basis taxpayer with respect to her art business.

3. During 2020, Tony made seven trips on behalf of Pelican as an outside consultant (business activity code 541330). On a typical trip, Tony flies by commercial airline to New Orleans, Houston, or Corpus Christi and then takes a company helicopter to the offshore platform. If necessary, he rents a room at a local motel. Sometimes offsite consultations can solve the problem, and a trip to the rig is not necessary. His expenses for these trips are as follows:

Airfare $5,100

Lodging 3,100

Meals 2,200

Ground transportation (taxis, limos, rental cars) 750

After each trip, Pelican pays Tony the agreed-upon fees for services rendered plus his out-of-pocket expenses for his travel. Pelican does not require an accounting for the expenses and reimburses Tony based on a verbal report of how much he spent. Tony received $35,000 from Pelican in 2020, which included $11,150 for travel expenses.

4. In early January 2020, Kayla was paid for three portraits she painted and delivered in late 2019. During 2020, Kayla completed 14 portraits. Payment was received for 11 portraits when they were delivered to the buyers. One portrait was delivered in mid-2020 to the CEO of a company who promised payment within 30 days. Payment was never received, and the company has since entered bankruptcy. Since the CEO has been indicted for securities fraud, Kayla feels certain she will never be paid for the portrait. The final two portraits were delivered in late 2020, and payments for both were received in early 2021. In December 2020, Kayla accepted $3,200 as payment for a portrait to be done in 2021. Although she did not like the arrangement, the customer said the prepayment was motivated by anticipated cash flow considerations.

5. Kayla keeps receipts for all her expenses. Her total cost for painting supplies (e.g., canvases, brushes, oil paints, smocks, palettes, and other art supplies) in 2020 was $3,010. The framing of the finished portrait is left to the customer since the most appropriate frame is a matter of personal taste and consideration for where the painting will be exhibited

6. For convenience and security reasons, Kayla prefers to work at home. One-fourth of the 4,000-square-foot living area in the Harrington home is devoted to Kaylas studio. The Harringtons built the home at a cost of $350,000 on a lot previously acquired for $100,000, and they moved in on June 15, 2017. As to business use, depreciation is based on MACRS (using the mid-month convention) applicable to 39-year nonresidential realty. Besides home mortgage interest and property taxes (see item 20 below), residence expenses for 2020 are summarized below.

Utilities $4,200

Molly Maid cleaning service 2,800

Service fee for home security system 1,600

Removal of stains from studio flooring 1,100

Homeowners insurance 970

Repairs to studio skylight 340

7 At a mortgage foreclosure auction held on February 4, 2007, Tony acquired an abandoned sugarcane farm near Magnolia, known as La Beaux Place, for $30,000. Due to the current expansion trend in nearby Houston, he regarded the purchase a good investment. Early in 2020, a Houston real estate developer offered Tony $250,000 for La Beaux Place. To realize a large taxable gain, Tony arranged for a property swap by written notice on May 10. In exchange for several vacant lots on Padre Island (TX) worth $240,000 and cash of $10,000, Tony transferred La Beaux Place to the developer. The exchange took place on June 20, 2020.

8. Tony purchased unimproved land near Beaumont (TX) for $18,200 at an auction held on April 17, 1994. Described as Block 46, the property was adjacent to a modest prison rice farm owned by the Texas Department of Corrections (TDC). Tony bought the property based on a hunch that the TDC might someday wish to expand its Beaumont prison facility. In late 2019, the TDC offered him $160,000 for Block 46. Tony countered with a selling price of $225,000. After prolonged negotiations, Tony and the TDC could not come to a mutually agreeable selling price. The TDC then threatened to condemn Block 46. After repeated threats of condemnation, Tony transferred the property to the TDC on June 28, 2020, for $180,000. On December 17, 2020, Tony reinvested $175,000 in vacant land located near Texas State University in San Marcos. Tony spent the remaining $5,000 on a vacation to Hawaii with Kayla in early 2021.

9.The Harringtons always thought that taking extended road trips in a recreational vehicle (RV) would be fun. In June 2020, they bought a new Winnebago Deluxe Coach RV for $106,250 [$100,000 (discounted list price) + $6,250 (state sales tax)].However, it only took Tony and Kayla two weeks on the road to determine that this mode of traveling the continental United States was not for them. In August 2020, they sold the RV to a neighbor for $90,000. The neighbor paid $20,000 down and paid the balance of $70,000 in early December 2020. Tony did not charge his neighbor any interest.

10. On May 9, 2002, Tonys father gave him 400 shares of Ragusa Corporation com-mon stock as a birthday gift. The stock cost his father $16,000 ($40 a share) and was worth $20,000 on the date of the gift. In 2014, when the stock was worth $140 per share, Ragusa declared a 2-for-1 stock split. On July 27, 2020, Tony sold 400 shares for $20,000 ($50 a share). For sentimental reasons, Tony kept the remaining 400 shares. Form 1099-B did not report the basis of this property.

11. On December 21, 2020, the Harringtons sold 500 shares of Cormorant Power common stock for $40,000 ($80 per share). They purchased the stock on February 1, 2020, for $50,000 ($100 per share), the basis reported on Form 1099-B. The Harringtons sold the stock to generate a loss to offset some of their capital gains. However, they considered Cormorant Power to be a good investment, so they repurchased 500 shares on February 19, 2021, for $45,000 ($90 per share)

12. On March 2, 2019, Kayla was contacted by Eva Baum, a former college roommate. Over lunch, Eva asked Kayla for a loan of $6,000 to help finance a new venture. Kayla made the loan because the venture, a summer art camp in Sedona, AZ, sounded interesting. Eva signed a note due in two years at 10% interest. In late 2020, Kayla learned that Eva had disappeared after being charged by Arizona authorities with grand theft. She also learned that Eva is wanted in New Mexico for parole violation from a prior felony conviction. Eva made no payments to Kayla on the note.

13. The Harringtons have a long-term capital loss carryover of $7,000 from 2019.

14. On May 9, 2015, Maximilian Harrington (Tonys favorite uncle) gifted him the family antique gun collection. Based on family records and qualified appraisals, the collection had an adjusted basis to Maximilian of $4,200 and was worth $13,000 on the date of the gift. Since Kayla abhors guns, Tony has been under heavy pressure to get rid of the collection. After Maximilian died in early 2020, Tony donated the collection to the Remember the Alamo Foundation. The transfer was made on December 5, 2020. At that time, several qualified appraisers valued the collection at $16,000. The museum added the guns to its extensive collection of firearms.

16. While walking the dog in late December 2019, Kayla was hit by an out-of-control delivery truck. The mishap sent Kayla to the hospital for several days of observation and medical evaluation. Aside from severe bruises, she suffered no permanent injury. Once apprehended, the driver of the truck was ticketed for DUI. The owner of the truck, a local distributor for a national brewery, was quite concerned about the adverse publicity that would result if Kayla filed a lawsuit. Consequently, it paid all her medical expenses and offered Kayla a settlement if she would sign a release. Under the terms of the settlement, Kayla would receive $134,000 - $126,000 for personal injury and $8,000 for loss of income because her injuries prevented her from painting for a period of weeks. On January 31, 2020, Kayla signed the release and was immediately paid $134,000.

17. In August 2019, Tony was rear-ended while stopped for a red light. Thankfully, Tony was uninjured. However, his car was damaged. The driver who caused the accident left the scene immediately, so Tony was forced to use his insurance to repair the damage to his car. The insurance company paid for all of the repairs except for the $1,000 deductible. Tony paid the $1,000 in 2019, when the repairs were completed. The Harringtons claimed no deductions with respect to the accident on their 2019 income tax return. In 2020, the insurance company (Peregrine Casualty) located the driver at fault and recovered the amount paid for repairs by both Tony and Peregrine. Consequently, in April 2020, Tony received a check from Peregrine refunding the $1,000 he paid for repairs.

19 In addition to the receipts previously noted, the Harringtons received the following amounts during 2020:

Social Security benefits (Tony, $12,000; Kayla, $6,000) $18,000

Qualified dividend income (reported on separate Forms 1099-DIV):

Ragusa Corporation 1200

Pelican Exploration Corporation 400

Interest income (reported on separate Forms 1099-INT):

IBM bonds 600

CD at First National Bank of McKinney 400

Wells Fargo money market fund 300

City of Beaumont (TX) general-purpose bonds 9000

20. Payments made for 2020 expenditures not already mentioned are as follows:

Payment of Madelines legal fees and court costs incident to her divorce $9,000

Medical:

Medicare B insurance premiums for Tony and Kayla 2,244

Premiums on medical insurance for dependents from a plan that was not established under either taxpayers business 3600

Dental implants for Kayla 8000

Taxes on personal residence 3600

Interest on home mortgage 2200

Cash donations to New Samaria Baptist Church, McKinney, TX 1200

Professional journals:

Oil and gas related (Tony) 160

Art related (Kayla) 120

Dues to professional organizations (Tony) 140

State professional license fee (Tony) 250

2019 tax return preparation fee ($200 for Tonys business, $250 for Kaylas business, and $450 for personal income tax return) 900

Texas does not impose an income tax, so the Harringtons choose the state and local sales tax option. In addition to the state general sales tax, the local sales tax rate is 2% (1% city; 1% community development). They do not keep track of sales tax expenditures for routine purchases (e.g., clothes, prepared foods) but can verify the sales tax on exceptional items (i.e., big-ticket purchases like the RV)

21. The Harringtons made quarterly Federal income tax payments of $2,400 on each of the following dates: April 10, 2020; June 12, 2020; September 11, 2020; and December 28, 2020. Last years Federal income tax return reflected an overpayment of $800 tax, which they chose to apply to their 2020 income tax liability. The trustee of Tonys retirement plan also withheld $6,500 of tax with respect to his retirement withdrawals for the year. The Harringtons do not hold any foreign financial accounts nor do they have any dealings in virtual currencies. Relevant Social Security numbers are noted below.

Anthony Harrington 213-45-6785 09/15/1949

Kayla Harrington 213-45-6786 12/03/1954

Madeline Hawkins 213-45-6784 10/19/1987

Olivia Hawkins 213-45-6787 06/25/2014

Emma Hawkins 213-45-6788 06/25/2014

Requirements

Prepare an income tax return (with all appropriate forms and schedules) for the Harringtons for 2020 following these guidelines.

Make necessary assumptions for info not given in the problem but needed to complete the return.

The Harringtons are employing the same tax return preparer who completed their prior year tax return.

The taxpayers have substantiation (e.g., records, receipts) to support all transactions for the year.

If any refund is due, the Harringtons want it applied to next years tax liability.

The Harringtons do not want to contribute to the Presidential Election Campaign Fund.