PROBLEM 1

Bruce and Alice are married taxpayers (and filing a joint return), with no dependents. They are both employed by Lincoln College. They have the following items potentially pertaining to their federal income tax return for the current year:

• Total combined salary is $230,000.
• Lincoln College withheld $42,000 in federal income tax.
• Alice received a gift of 2,000 shares of Oz Corporation stock with a $100,000 FMV from Alice’s mother. She also received $4,000 of qualified cash dividends from Oz Corporation.
• Bruce and Alice received $3,000 worth of interest income on bonds issued by the State of Maryland.
• Bruce received a regular stock dividend of 50 shares of Lily Co. stock with a FMV of $6,000.
• Lincoln College paid $12,000 of medical and health insurance premiums on behalf of Bruce and Alice.
• Alice received $13,000 in alimony from her ex-husband. They were divorced in 2014.
• Lincoln College provided $60,000 of group term life insurance. Alice is 42 years old and is not a key employee.
• Alice received a $1,000 cash award from Lincoln College for being designated employee of the month for August.
• Total itemized deductions for Bruce and Alice are $12,000.

Required: Calculate federal tax due or refund due for Alice and Bruce.

PROBLEM 2

Yan Corporation paid $25 to each full-time employee at the year-end recognition of the holidays. The company is interested in whether the amounts are taxable income to its employees, and whether the company can deduct the amounts.

Required: Prepare a brief memo responding to Yan Corporations inquiry.

PROBLEM 3

A client, Henry Price, fills out his client questionnaire for the previous year and on it he provides information for the preparation of his individual income tax return. The IRS has never audited Henry’s returns. Henry reports that he made over 100 relatively small cash contributions totaling $26,735 to charitable organizations. In the last few years, Henry’s contributions have averaged about $12,000 per year. For the previous year, Henry’s adjusted gross income was roughly $325,000, about a 10% increase from the previous year.

Required: Applying Statements on Standards for Tax Services No. 3, determine whether you can accept at face value, Henry’s information concerning his charitable contributions. Now assume that the IRS recently audited Henry’s return for two years ago and denied 75% of that year’s charitable contribution deduction because the deduction was not substantiated. Assume also that Henry indicates in the previous year that he contributed $27,000 (instead of $26,375). How do these changes of fact impact your earlier decision?

PROBLEM 4

Ron contributes $5,000 toward the support of his widowed mother, aged 75, a U.S. citizen and resident. She earns gross income of $2,000 and spends it all for her own support. In addition, Medicare pays $3,200 of her medical expenses. She does not receive financial support from sources other than those described above. Must the Medicare payments be included in the support that Josh’s mother is deemed to provide for herself?

Required: Prepare a brief client letter (to Ron) addressing the issue presented above.