Part 2: Comprehensive Tax Return Problems

1

a.

David and Susan Holman are married and file a joint return. David is 38 years of age and Susan is 36. David is a self-employed certified real estate appraiser (C.R.E.), and Susan is employed by Wells Fargo Bank as a trust officer. They have two children: Richard Lawrence, age seven, and Karen Ann, age four. The Holmans currently live at 5901 W. 75th Street, Los Angeles, California 90034, in a home they purchased and occupied on September 6,2017.Until August 12,2017 the Holman family lived at 3085 Windmill Lane in Dallas, Texas, where David was employed by Vestpar Company, a real estate appraisal company and Susan was a bank officer for First National Bank. They sold their home in Dallas and moved to Los Angeles so that Susan could assume her new job as a trust officer and David could become self-employed.

b.

The Holmans purchased their new home for $525,000 by making a $125,000 down payment and financing the remaining balance with a 30-year, 6% conventional mortgage loan from California Federal Savings and Loan. They were required to prepay two points ($8,000) in return for the favorable mortgage terms. New furniture and drapes cost an additional $27,500.

c.

The Holmans received the following Forms W-2, reporting their salaries for 2017:

1. David R. Holman, Social Security No. 452-64-5837:

Gross salary from Vestpar, Inc...............................$95,000

Federal income taxes withheld .............................. 9,050

F.I.C.A. taxes withheld:

Social Security ....................................... 4,650

Medicare ............................................ 1,088

California income taxes withheld .......................... 3,000

2. Susan L. Holman, Social Security No. 467-32-5452:

First National Bank Wells Fargo Bank Total

Gross salary $17,500 $34,000 $51,500

Federal income taxes withheld ...... 1,100 4,150 5,250

F.I.C.A. taxes withheld:

Social Security .................. 1,085 2,108 3,193

Medicare ...................... 254 493 747

California income taxes withheld...... 2,950 2,950

d.

On October 1,2017 David rented office space at 5510 Wacker Drive, Los Angeles, California 90025. The terms of the one-year lease agreement called for a monthly rent of $800, with the first and last months rent paid in advance. David decided to operate his business in the name of David R. Holman, Certified Real Estate Appraiser, and he elected to use the cash method of accounting for his revenues and expenses. The following items relate to his business for 2017 :

Gross receipts .............................. $85,000

Expenses:

Advertising ............................. 250

Bank service charges...................... 50

Dues and publications ..................... 450

Insurance............................... 600*

Interest ................................ 275

Professional services ...................... 525

Office rent .............................. 3,200**

Office supplies........................... 700

Meals and entertainment................... 500

Miscellaneous expenses.................... 75

* Three months of coverage

** Includes prepayment of last months rent for September, 2018

***meals were $500 and entertainment was $300

David drove his personal automobile, a 2014 Ford Mustang, 5,000 miles for business purposes from October 1 through December 31. Rather than keeping receipts, he elected to use the automatic mileage method for determining his auto expenses. Davids total auto mileage for the year was 20,000 miles.

On October 3, 2017 David purchased the following furniture and equipment for use in his business:

Office furniture ....................................... $17,000

Copying machine ...................................... 5,800

Computers ........................................... 6,500

Laser printers ......................................... 2,500

Telephone system ...................................... 3,100

David elects to expense the maximum amount allowed under the optional expensing rules of 179.

He also elects to compute the maximum depreciation allowance

using the appropriate MACRS percentages.

e.

The Holmans received interest income during 2017 from the following:

U.S. Treasury bills ...................................... $1,475

First National Bank, Dallas ............................... 625

Wells Fargo Bank ...................................... 400

Tarrant County municipal bonds ........................... 800

f.

David and Susan received the following dividends during 2017 :

Ford Motor Company .................................. $300

Eastman Kodak Company............................... 575

IBM Corporation...................................... 125

Apple stock dividend (20 new shares of stock valued at

$60 per share, received March 9,2017) .................. 1,200

g.

The Holmans have never maintained foreign bank accounts or created foreign trusts.

h.

The Holmans report the following stock transactions for2017:

1. Sold 100 shares of IBM stock for $120 per share on August 1,2017. David had inherited 500 shares of IBM stock from his uncle on July 18, 2013, and the stock was valued at $170 per share on the date of his uncles death.
2. Sold 400 shares of Apple stock for $78 per share on July 20, 2017. Susan had received 1,000 shares of Apple stock as a birthday present from her grand - father on June 3, 2008. Her grandfather had purchased the stock for $35 per share on May 7, 2004, and the stock was valued at $60 per share on the date of the gift. Susans grandfather paid gift taxes of $10,000 as a result of the gift. Note: The amount of the annual exclusion taken into account in determining the taxable gift was $10,000.
3. Sold 300 shares of Intel stock for $40 per share on December 28, 2017, but did not receive the sales proceeds until January 3, 2018. The Holmans had paid $25 per share for the stock on May 21, 2014.

i.

Susan has summarized the following cash expenditures fo 2017 from canceled checks, mortgage company statements, and other documents:

Prescription medicines and drugs ..........................$982

Medical insurance premiums (paid by Susan).................2,830

Doctors and hospital bills (net of reimbursements)............1,535

Contact lenses for David................................218

Real estate taxes paid on:

Dallas residence....................................3,400

Los Angeles residence................................5,600

Sales taxes paid on Susans new auto.......................1,485

Ad valorem taxes paid on both autos.......................350

Interest paid for:

Dallas home mortgage...............................5,250*

Los Angeles home mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . .10,200**

Credit card interest..................................480

Personal car loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,720

Cash contributions to:

United Methodist Church.............................5,200

Salvation Army.....................................1,500

Barack Obama Campaign Fund........................250

Susans unreimbursed employee expenses...................470***

Davids unreimbursed employee expenses...................360

Tax return preparation fee...............................375

*Does not include the mortgage prepayment penalty of $1500 upon sale of their old home.

**Does not include the interest points charged for the new mortgage identified in item (d) above.

***Does not include any costs for meals or entertainment.

Susan also noted that she and David had driven their personal automobiles 500 miles to receive medical treatment for themselves and their children. She also has a receipt for 100 shares of Apple stock that she gave to her alma mater, Southern Methodist University, on November 12, 2017. The stock was valued at $70 per share on the date of the gift and was from the block of Apple stock Susan had received as a wedding present from her grandfather (see item (j)(2) above for details).

j.

The Holmans paid the following child care expenses during 2017 :

1. Kindergarten Daycare School ....................... $2,800

1177 Valley View

Dallas, Texas 75210

EIN: 74-0186254

2. Happy Trails Day Center ........................... 2,200

3692 Airport Blvd.

Los Angeles, California 90034

EIN: 78-0593676

Of the $5,000 total child care expenses, $3,000 was for Karen, and the remaining

$2,000 was for Richard.

k.

Social Security numbers for the Holman children are provided below:

Richard L. Holman, Social Security No. 582-60-4732

Karen A. Holman, Social Security No. 582-60-5840

l.

David and Susan made estimated Federal income tax payments of $1,750 each quarter, on 4/15/17, 6/15/17, 9/15/17, and 1/15/18.

m.

The Holmans have always directed that $6 go to the Presidential Election Campaign by checking the yes boxes on their Form 1040. Everyone was covered by health insurance all year.

Required: Complete the Holmans Federal income tax return for 2017. If they have a refund due, they would prefer having it credited against their 2018 taxes.