PROBLEM 1 Jason R. and Jenni L. Dane are married and live at 13071 Sterling Drive, Marquette, MI 49866. Jason is a self-employed insurance claims adjuster (business activity code 524290), and Jenni is the dietitian for the local school district. They choose to file a joint tax return each year. 1. Jason represents several national casualty insurance companies on a contract basis. He operates this business on the cash basis. He is paid a retainer and receives additional compensation if the claims he processes for the year exceed a specified number. As an independent contractor, he is responsible for whatever expenses he incurs. Jason works out of an office near his home. The office is located at 1202 Moose Road. He shares Suite 326 with a financial consultant, and operating expenses are divided equally between them. The suite has a common waiting room with a receptionist furnished and paid by the landlord. Jason paid his onehalf share of the 2017 expenses as detailed below: Office rent $11,600 Utilities (includes telephone and fax) 4,300 Replacement of waiting room furniture on April 22 3,600 Renters insurance (covers personal liability, casualty, theft) 1,400 Office expense (supplies, postage) 740 New Toshiba copier on February 7 300 Waiting room coffee service (catered) 280 Waiting room magazine subscriptions 90 For his own business use, Jason purchased a $2,100 laptop computer on June 17 and a $1,200 Nikon camera on February 5. Except for his vehicle (see item 2 below), Jason uses the 179 write-off option whenever possible. Jason has no expenditures for which he is required to file Form 1099s. 02546_em_appE_hr_001-009_online2017.indd 1 7/13/18 1:43 PM E-2 APPENDIX E Practice Set AssignmentsComprehensive Tax Return Problems 2. On January 2, 2017, Jason paid $31,000 (including sales tax) to purchase a gently used Toyota Camry that he uses 92% of the time for business. No trade-in was involved, and he did not claim any 179 expensing. Jason uses the actual operating cost method to compute his tax deduction. He elects to use the 200% decliningbalance MACRS depreciation method with a half-year convention. His 2017 expenses relating to the Camry are as follows: Gasoline $3,500 Auto insurance 1,700 Interest on car loan 820 Auto club dues 325 Oil changes and lubrication 210 License and registration 190 In connection with his business use of the Camry, Jason paid $510 for tolls and $350 in fines for traffic violations. In 2017, Jason drove the Camry 14,352 miles for business and 1,248 miles for personal use (which includes his daily round-trip commute to work). 3. Jason handles most claim applications locally, but on occasion, he must travel out of town. Expenses in connection with these business trips during 2017 were $930 for lodging and $1,140 for meals. He also paid $610 for business dinners he had with several visiting executives of insurance companies with whom he does business. Jasons other business-related expenses for 2017 are listed below: Contribution to H.R. 10 (Keogh) retirement plan $8,000 Premiums on medical insurance covering self and family (spouse and children) 4,600 Premiums on disability insurance policy (pays for loss of income in the event Jason is disabled and cannot work) 2,400 State and local occupation fee 450 Birthday gift for receptionist ($25 box of Godiva chocolates plus $3 for gift wrap) 28 4. Jenni earns $32,000 working as a registered dietician for the Marquette Public School District. The job she holds, manager of the school lunch program, is not classified as full-time. Consequently, she is not eligible to participate in the teacher retirement or health insurance programs. Jennis expenses for 2017 are summarized as follows: Contribution to traditional IRA $5,500 Job-hunting expense 720 Continuing education program 350 Membership dues to the National Association of Dietitians 120 Subscription to Nutrition Today 90 In order to work full-time and earn a larger salary, Jenni applied for a position as chief dietitian for a chain of nursing homes. According to the director of the recruiting service Jenni hired, the position has not yet been filled and she is one of the leading candidates. The continuing education program was sponsored by the National Association of Dietitians and consisted of a one-day seminar on special diets for seniors. Jenni drove the family Chevrolet Malibu 930 miles on job-related use and 5,200 miles in commuting to work, out of a total of 8,670 miles driven for the year. The Danes purchased the car on July 11, 2015, for $23,400. Jenni uses the automatic mileage method for computing any available deduction for business use of the car. 5. The Danes have supported Jesse Voss (Jennis widowed father) for several years, appropriately claiming him as a dependent for tax purposes. On December 27, 2016, Jesse suffered a massive stroke. The doctors did everything they could for 02546_em_appE_hr_001-009_online2017.indd 2 7/13/18 1:43 PM APPENDIX E Practice Set AssignmentsComprehensive Tax Return Problems E-3 Jesse, but he died in the intensive care unit of Riverwood Hospital on January 8, 2017. In January and February 2017, the Danes paid the following bills on behalf of Jesse: medical expenses of $11,800 not covered by Medicare ($6,000 incurred in 2016 and $5,800 in 2017) and funeral expenses of $15,300. Jesses health insurance was limited to his Medicare coverage because the Danes medical insurance (see item 3 above) only covered Jason, Jenni, and their sons. Jesses will named Jenni as executor and sole heir of his estate. 6. One of the assets Jenni inherited with the transfer of Jesses estate was his house. Upon the advice of the financial consultant who shares office space with Jason, the Danes decided to convert Jesses home into a furnished rental house. After several minor repairs (e.g., touching up the paint on the interior walls, replacing various window screens, pressure washing the brick exterior), the property was advertised for rent in the classified section of the local newspaper on March 1, 2017. The repairs cost $720, and the newspaper ad was $360. Based on reconstructed records and appraisal estimates, information about the property is as follows: Original Cost FMV 1/8/17 House $40,000 $220,000 Land 10,000 50,000 Furniture and appliances 21,000 14,000 7. Jesses former residence was rented almost immediately with occupancy commencing April 1, 2017, under the following terms: one-year lease; $2,400 per month due the first day of the month, first and last months rent in advance; $2,000 damage deposit; lawn care included but not utilities. The tenant complied with all terms except that the December rent payment was not made until January 1, 2018the tenant took an extended holiday trip that started on Thanksgiving Day (November 23) through Christmas Day (December 25). Expenses in connection with the property were as follows: property taxes, $2,600; repairs, $320; lawn maintenance, $540; insurance, $1,800; and street paving assessment, $2,100. The property is located at 12120 Lake Road, Harvey, MI 49855. 8. In early December 2016, a friend advised Jason to buy stock in Pioneer Aviation Inc. (PAI). At that time, PAI was in serious financial straits and was headed toward bankruptcy. Nevertheless, according to Jasons friend, the value of the corporations underlying assets was such that the shareholders were bound to recover considerably more than the current market price of $.50 per share. Excited at the chance for a sure profit, on December 15, 2016, Jason purchased 20,000 shares for $10,000. In September 2017, the trustee in bankruptcy announced that the stock was worthless and that even some of PAIs preferred creditors would not be paid. 9. On June 14, 2017, the Danes sold 500 shares of Garnet Corporation for $17,500 ($35 per share). They owned 1,000 shares acquired as follows: 500 shares on November 5, 2016, for $25 a share and 700 shares on April 5, 2017, for $30 a share. The Danes did not instruct their broker as to which shares to sell, so Form 1099B for this sale reported $12,500 basis for these shares. 10. One month before she died on April 14, 2008, Susan Voss (Jennis mother) gave Jenni a coin collection. Based on careful records that Susan kept, the collection had a cost basis of $9,000 and a fair market value of $18,000 at the time Susan passed away. On February 12, 2017, the Dane residence was burglarized and the coin collection was stolen. The Danes filed a claim with the carrier of their homeowners insurance policy for $24,000 (the current value of the collection). Unfortunately, they were only able to collect $10,000, which was the maximum payout allowed for valuables (e.g., jewelry, antiques) without a special rider attached to the insurance policy. 02546_em_appE_hr_001-009_online2017.indd 3 7/13/18 1:43 PM E-4 APPENDIX E Practice Set AssignmentsComprehensive Tax Return Problems 11. In her will, Susan Voss (see item 10) left Jenni a vacant lot on Wright Street. Susan had paid $15,000 for the property, and it had a value of $19,000 when she died. Susan had purchased the lot because it was adjacent to Northern Michigan University property and she expected the school to eventually expand the campus. By 2017, it had become clear that the university did not have the funds to expand. Consequently, on July 1, 2017, Jenni sold the lot for $19,000. Not included in this price are unpaid property taxes (and interest on the unpaid taxes) of $700 on the lot, which the purchaser assumed and later paid. Form 1099B did not report the basis of this property. 12. Every year around Christmas, Jason receives cards from various car repair facilities (including dealerships) expressing thanks for the business referrals and enclosing cash. Jason has no arrangement, contractual or otherwise, that requires any compensation for the referrals he makes. Concerned about the legality of such gifts, Jason consulted an attorney about the matter a few years ago. Without passing judgment on the status of the payors, the attorney found that Jasons acceptance of the payments does not violate state or local law. Jason sincerely believes that the payments he receives have no effect on the referrals he makes. During December 2017, Jason received cards containing $7,200. One additional card containing $900 was delayed in the mail and was not received by Jason until January 4, 2018. 13. In addition to those previously noted, the Danes receipts during 2017 are summarized below: Payments to Jason for services rendered (as reported on Forms 1099MISC issued by several payor insurance companies) pursuant to contractual arrangement $82,000 Income tax refunds for tax year 2016: Federal 210 State of Michigan 90 Interest income (reported on separate Forms 1099INT): State of Michigan general-purpose bonds 1,400 General Electric corporate bonds 1,100 Certificate of deposit at Marquette National Bank 900 Qualified dividends (Krist Energy, reported on Form 1099DIV) 1,200 Proceeds from garage sale (see item 14 below) 9,200 Cash gifts from Jasons parents 24,000 Jasons net state lottery losses ($1,000 of winnings reported on Form W2G; $2,300 of losses) (1,300) 14. On June 7 and 8, 2017, the Danes held a garage sale to dispose of unwanted furniture, appliances, books, bicycles, clothes, and one boat (including trailer). The estimated basis of the items sold is $25,500. All assets were used by the Danes for personal purposes. 15. Payments made for 2017 expenditures not mentioned elsewhere are as follows: Medical Copayment portion of medical expenses $1,300 Dental (orthodontist) 1,200 Taxes State income tax (see item 17 below) 3,456 State sales taxes 1,120 Property taxes on personal residence 3,800 Interest on home mortgage reported on Form 1098 4,200 Charitable contributions 3,600 02546_em_appE_hr_001-009_online2017.indd 4 7/13/18 1:43 PM APPENDIX E Practice Set AssignmentsComprehensive Tax Return Problems E-5 The Danes medical insurance does not cover dental services. The Danes pledge contributions of $1,200 per year to their church, The Waters Edge Church in Marquette, MI. In 2017, they paid the pledges for 2016 through 2018. During 2017, the Danes drove the Malibu 270 miles for medical purposes (e.g., trips to the hospital, doctor and dentist offices) and 320 miles delivering meals for Meals on Wheels, a qualified charity. 16. The Danes have two sons who live with them: Ethan and Isaac. Both are full-time students. Ethan is an accomplished singer and earned $4,200 during the year performing at special events (e.g., weddings, anniversaries, civic functions). Ethan deposits his earnings in a savings account intended to help cover future college expenses. Isaac does not have a job. 17. The Form W2 Jenni receives from her employer reflects wages of $32,000. Appropriate amounts for Social Security and Medicare taxes were deducted. Income tax withholdings were $1,320 for Federal and $1,056 for state. The Danes made quarterly tax payments of $1,900 for Federal and $600 for state on each of the following dates: April 17, 2017; June 15, 2017; September 15, 2017; and December 29, 2017. None of the Danes hold any foreign financial accounts. Relevant Social Security numbers are noted below: Name Social Security Number Birth Date Jason R. Dane 111-11-1111 06/06/1975 Jenni L. Dane 123-45-6781 08/14/1976 Jesse S. Voss 123-45-6784 03/12/1937 Ethan T. Dane 123-45-6788 09/13/2000 Isaac S. Dane 123-45-6789 07/20/2002 Requirements Prepare an income tax return (with all appropriate forms and schedules) for the Danes for 2017 following these guidelines: Make necessary assumptions for information not given in the problem but needed to complete the return. The taxpayers are preparing their own return (i.e., no preparer is involved). The taxpayers have substantiation (e.g., records, receipts) to support all transactions for the year. If a refund is due, the Danes want a refund check sent to them by mail. The Danes had itemized deductions from AGI of $16,700 for 2016, of which $1,500 was for state and local income tax. The Danes do not want to contribute to the Presidential Election Campaign Fund.