PROBLEM 1-INDIVIDUALS (FORM 1040) Matthew B. (age 42) and Courtney S. (age 41) Mumford are married and live at 11426 W. Antelope Drive, Sioux Falls, SD 57107. Matthew is the manager for The Pour House, a popular bar and grill in Sioux Falls. Courtney is a self-employed architect. They are calendar year, cash basis taxpayers. 1. Matthew's annual salary from The Pour House is $98,000. He also earns an annual bonus. The amount is determined in late December based on performance dur- ing the year and is paid in January of the following year. Matthew's 2018 bonus was $6,000 (received in 2019), and his 2019 bonus was $7,000 (received in 2020). Matthew participates in his employer's group health insurance plan to which he contributed $7,200 in 2019 for medical coverage. These contributions are made with after-tax dollars. The health plan covers Matthew, Courtney, and their two dependent children. The Pour House does not provide any retirement benefits, but it has established a 401(k) plan to enable its employees to save for retire- ment. Matthew contributed $19,000 to the plan in 2019. Matthew commutes to and from work 6 days a week (a roundtrip of 18 miles) in the family SUV. During 2019, Matthew drove the SUV a total of 12,700 miles. 2. Courtney is a licensed architect who works part time as an architectural consult- ant. Her professional activity code is 541310. Her major clients are real estate developers (both residential and commercial) for whom she prepares structural designs and construction plans. She also advises on building code requirements regarding the renovation and remodeling of existing structures. Courtney does some of her work at client locations and the remainder in her office at home (see item 3 below). Courtney collected $72,000 in consulting fees during 2019. This total includes a $3,000 payment for work she performed in 2018 and does not include $5,000 she billed in December for work performed in late 2019. In addition, Courtney has a $6,400 unpaid invoice for work done in 2017. This client was convicted of arson in August 2016 and is now serving a 5-year sentence in a state prison. APPENDIX E Practice Set Assignments-Comprehensive Tax Return Problems 860 250 240 Courtney feels certain that she will never collect the $6,400 she is owed. Her business expenses for 2019 are as follows: Drafting supplies $4,800 Reproduction materials (e.g., molds, models, photos, blueprints, copies) 3,200 On-site work clothing (e.g., hip boots, safety glasses, safety helmet) Professional license fee 400 Subscriptions to professional journals Dues to professional organizations In addition, Courtney drove the family Acura (purchased on June 7, 2018) 940 miles on her job assignments. She uses the standard mileage method to deduct business costs related to the Acura. During 2019, Courtney drove the car a total of 10,000 miles. 3. When the Mumfords purchased their home on February 2, 2017, they set aside 300 square feet (out of a total of 2,400 square feet) of living space for Court- ney's office. The Mumfords do not use the simplified method for computing the home office deduction. As of January 1, 2019, the home had an adjusted basis of $240,000 $40,000 of which is attributable to the land) for purposes of line 37 of Form 8829. The fair market value of the property was $282,000. Relevant information concerning the residence for all of 2019 appears below. Homeowner's insurance $3,200 Repairs and maintenance 1,800 Utilities 6,200 Painting (office area only) 1,250 The cost of Courtney's office furniture and equipment was previously deducted under $ 179 in the years these assets were acquired. On June 29, 2019, she pur- chased a fireproof file cabinet for $800 to safeguard the blueprints of her struc- tural designs and construction plans. Whenever possible, Courtney prefers to avoid depreciating capital expenditures over time. 4. One of Courtney's clients was interested in building a shopping center on a tract of land she owned in Lincoln County. Courtney inherited the property from her uncle when he died on June 6, 1999. At that time, the land was valued at $40,000. It has since been rezoned for commercial use and has a current value of $200,000. On February 10, 2019, Courtney exchanged the Lincoln parcel for a similar tract in Minnehaha County worth $190,000 and cash of $10,000. 5. On September 2, 2019, Courtney sold a tract of land in McCook County to a farmer who owned the adjoining property. The land was inherited from the same uncle who died in 1999 and was valued at $30,000 on June 6, 1999. Under the terms of the sale, Courtney received cash of $20,000 and a note receivable to be paid in four equal installments at 1-year intervals from the date of sale. Each note calls for the payment of $25,000 plus simple interest of 8%. To the extent allowed by law, Courtney wants to defer recognition of gain for as long as possible. 6. In early 2018, Matthew learned that one of the restaura best servers, Mindy Smith, was suffering domestic abuse at the hands of her husband Billy. When Billy started to abuse their 5-year-old daughter as well, Mindy decided it was time to leave. Before they left on April 14, 2018, Matthew loaned Mindy $5,500 to help her relocate with her daughter. Matthew had her sign an interest-free note due in 1 year. Matthew never heard from Mindy again. In late 2019, Matthew learned that Billy tracked Mindy and their daughter down and killed both of them before committing suicide. Given these tragic circumstances, Matthew has no expecta- tion that the loan will ever be repaid. APPENDIX E Practice Set Assignments-Comprehensive Tax Return Problems 7. On August 5, 2017, Matthew purchased 1,000 shares of Farmers' Markets America (FMA) common stock for $16 a share as part of its initial public offering. The corporation was formed to establish and operate farmers' markets in mid-size cities throughout the United States. Although some market locations were profit- able, the venture as a whole proved to be a failure. In November 2019, FMA's remaining assets were seized by its creditors, and FMA stock became worthless. 8. In addition to the items previously noted, the Mumfords had the following receipts for 2019: $1,900 1,400 210 $ 3,510 Interest income from: General Motors corporate bonds City of Sioux Falls, SD bonds Castle Bank certificate of deposit Qualified dividends from MG&E Inc. Refund from HomeStuff Loan repayment by Sarah Mumford-Caine Cash gifts from Courtney's parents 2018 Federal income tax refund 3,100 430 4,500 32,000 290 In December 2018, the Mumfords made a major purchase of household items (e.g., appliances, furniture, etc.) at HomeStuff. They called the manager when they realized they did not receive the advertised sale price. Consequently, the store corrected the mistake and sent a $430 refund to the Mumfords in January 2019. Four years ago, Matthew lent his sister Sarah $4,000 to help pay for a hon- eymoon trip following her wedding to John Caine. Matthew was pleasantly sur- prised when Sarah paid him back (plus interest of $500) on December 20, 2019. On March 20 of each year, Courtney's parents send a generous gift of cash as a birthday present. Just as she has done for the past 7 years, Courtney immediately invested the cash in her children's $ 529 college savings plans. 9. The Mumfords had the following expenditures for 2019: Courtney's contribution to her traditional IRA $ 6,000 Net gambling loss 1,000 Life insurance premiums 2,700 Medical and dental expenses not covered by insurance 16,612 Taxes: Ad valorem taxes on personal residence $4,100 State and local sales taxes from receipts 2,800 6,900 Interest on home mortgage reported on Form 1098 4,000 Cash contributions: Feeding South Dakota (EIN 36-3293534) $1,750 South Dakota governor's election campaign fund 300 2,050 The $1,000 net gambling loss for 2019 is the difference between the Mumfords' gambling winnings of $1,200 and losses of $2,200. The life insurance premiums relate to the universal life insurance policies that Matthew and Courtney own. The first beneficiary on both policies is the other spouse, with the second benefi- ciaries being the children. Included in the medical expenses are $1,200 incurred in 2018, which were paid in early February 2019. While South Dakota does not impose income taxes on individuals, it does impose sales taxes. The Mumfords can substantiate the $2,800 in sales taxes paid based on their purchase receipts for the year. The local sales tax rate in Sioux Falls is 2%. (Hint: Be sure to check to see if the Optional Sales Tax Tables provide the Mumfords with a greater deduction.) Courtney contributed to the governor's campaign fund because she thinks her influence was key in getting the Minnehaha County land rezoned for commercial use (see item 4 above). APPENDIX E Practice Set AssignmentsComprehensive Tax Return Problems 10. The Mumfords maintain a household that includes their two children, Nickolas (age 16) and Kaleigh (age 19). Nickolas is a junior in high school and a talented wrestler. In hopes of competing at the state tournament, all of his free time is consumed with weight training and wrestling practices. Kaleigh graduated from high school on June 7, 2018, and is undecided about college. She is an accom- plished vocalist and during 2019 earned $7,200 performing at various events (e.g., weddings, funerals). Kaleigh placed most of her earnings in a savings account for future use and kept only a small amount to spend on herself. 11. Matthew's Form W-2 from The Pour House shows $15,800 withheld for Federal income tax. The Mumfords also made estimated tax payments to the IRS totaling $5,000 for 2019. 12. Relevant Social Security numbers are noted below. Name Social Security Number Matthew B. Mumford Courtney S. Mumford Kaleigh J. Mumford Nickolas W. Mumford 123-45-6786 123-45-6787 123-45-6788 123-45-6798 . Requirements Prepare an income tax return (with all appropriate forms and schedules) for the Mum- fords for 2019, using the following guidelines: The Mumfords choose to file a joint income tax return. The Mumfords do not wish to contribute to the Presidential Election Campaign Fund. The Mumfords do not own any foreign bank accounts or other investments. In addition, the Mumfords do not have any financial interests in virtual currencies. The Mumfords prefer to receive a refund of any overpaid taxes. The taxpayers are preparing their own return (i.e., no preparer is involved). For the past several years, the Mumfords have itemized their deductions from AGI. The taxpayers have the necessary substantiation (e.g., records, receipts) to support all transactions reported on their tax return. Make necessary assumptions for information not given in the problem but needed to complete the return. . . PROBLEM 1-INDIVIDUALS (FORM 1040) Matthew B. (age 42) and Courtney S. (age 41) Mumford are married and live at 11426 W. Antelope Drive, Sioux Falls, SD 57107. Matthew is the manager for The Pour House, a popular bar and grill in Sioux Falls. Courtney is a self-employed architect. They are calendar year, cash basis taxpayers. 1. Matthew's annual salary from The Pour House is $98,000. He also earns an annual bonus. The amount is determined in late December based on performance dur- ing the year and is paid in January of the following year. Matthew's 2018 bonus was $6,000 (received in 2019), and his 2019 bonus was $7,000 (received in 2020). Matthew participates in his employer's group health insurance plan to which he contributed $7,200 in 2019 for medical coverage. These contributions are made with after-tax dollars. The health plan covers Matthew, Courtney, and their two dependent children. The Pour House does not provide any retirement benefits, but it has established a 401(k) plan to enable its employees to save for retire- ment. Matthew contributed $19,000 to the plan in 2019. Matthew commutes to and from work 6 days a week (a roundtrip of 18 miles) in the family SUV. During 2019, Matthew drove the SUV a total of 12,700 miles. 2. Courtney is a licensed architect who works part time as an architectural consult- ant. Her professional activity code is 541310. Her major clients are real estate developers (both residential and commercial) for whom she prepares structural designs and construction plans. She also advises on building code requirements regarding the renovation and remodeling of existing structures. Courtney does some of her work at client locations and the remainder in her office at home (see item 3 below). Courtney collected $72,000 in consulting fees during 2019. This total includes a $3,000 payment for work she performed in 2018 and does not include $5,000 she billed in December for work performed in late 2019. In addition, Courtney has a $6,400 unpaid invoice for work done in 2017. This client was convicted of arson in August 2016 and is now serving a 5-year sentence in a state prison. APPENDIX E Practice Set Assignments-Comprehensive Tax Return Problems 860 250 240 Courtney feels certain that she will never collect the $6,400 she is owed. Her business expenses for 2019 are as follows: Drafting supplies $4,800 Reproduction materials (e.g., molds, models, photos, blueprints, copies) 3,200 On-site work clothing (e.g., hip boots, safety glasses, safety helmet) Professional license fee 400 Subscriptions to professional journals Dues to professional organizations In addition, Courtney drove the family Acura (purchased on June 7, 2018) 940 miles on her job assignments. She uses the standard mileage method to deduct business costs related to the Acura. During 2019, Courtney drove the car a total of 10,000 miles. 3. When the Mumfords purchased their home on February 2, 2017, they set aside 300 square feet (out of a total of 2,400 square feet) of living space for Court- ney's office. The Mumfords do not use the simplified method for computing the home office deduction. As of January 1, 2019, the home had an adjusted basis of $240,000 $40,000 of which is attributable to the land) for purposes of line 37 of Form 8829. The fair market value of the property was $282,000. Relevant information concerning the residence for all of 2019 appears below. Homeowner's insurance $3,200 Repairs and maintenance 1,800 Utilities 6,200 Painting (office area only) 1,250 The cost of Courtney's office furniture and equipment was previously deducted under $ 179 in the years these assets were acquired. On June 29, 2019, she pur- chased a fireproof file cabinet for $800 to safeguard the blueprints of her struc- tural designs and construction plans. Whenever possible, Courtney prefers to avoid depreciating capital expenditures over time. 4. One of Courtney's clients was interested in building a shopping center on a tract of land she owned in Lincoln County. Courtney inherited the property from her uncle when he died on June 6, 1999. At that time, the land was valued at $40,000. It has since been rezoned for commercial use and has a current value of $200,000. On February 10, 2019, Courtney exchanged the Lincoln parcel for a similar tract in Minnehaha County worth $190,000 and cash of $10,000. 5. On September 2, 2019, Courtney sold a tract of land in McCook County to a farmer who owned the adjoining property. The land was inherited from the same uncle who died in 1999 and was valued at $30,000 on June 6, 1999. Under the terms of the sale, Courtney received cash of $20,000 and a note receivable to be paid in four equal installments at 1-year intervals from the date of sale. Each note calls for the payment of $25,000 plus simple interest of 8%. To the extent allowed by law, Courtney wants to defer recognition of gain for as long as possible. 6. In early 2018, Matthew learned that one of the restaura best servers, Mindy Smith, was suffering domestic abuse at the hands of her husband Billy. When Billy started to abuse their 5-year-old daughter as well, Mindy decided it was time to leave. Before they left on April 14, 2018, Matthew loaned Mindy $5,500 to help her relocate with her daughter. Matthew had her sign an interest-free note due in 1 year. Matthew never heard from Mindy again. In late 2019, Matthew learned that Billy tracked Mindy and their daughter down and killed both of them before committing suicide. Given these tragic circumstances, Matthew has no expecta- tion that the loan will ever be repaid. APPENDIX E Practice Set Assignments-Comprehensive Tax Return Problems 7. On August 5, 2017, Matthew purchased 1,000 shares of Farmers' Markets America (FMA) common stock for $16 a share as part of its initial public offering. The corporation was formed to establish and operate farmers' markets in mid-size cities throughout the United States. Although some market locations were profit- able, the venture as a whole proved to be a failure. In November 2019, FMA's remaining assets were seized by its creditors, and FMA stock became worthless. 8. In addition to the items previously noted, the Mumfords had the following receipts for 2019: $1,900 1,400 210 $ 3,510 Interest income from: General Motors corporate bonds City of Sioux Falls, SD bonds Castle Bank certificate of deposit Qualified dividends from MG&E Inc. Refund from HomeStuff Loan repayment by Sarah Mumford-Caine Cash gifts from Courtney's parents 2018 Federal income tax refund 3,100 430 4,500 32,000 290 In December 2018, the Mumfords made a major purchase of household items (e.g., appliances, furniture, etc.) at HomeStuff. They called the manager when they realized they did not receive the advertised sale price. Consequently, the store corrected the mistake and sent a $430 refund to the Mumfords in January 2019. Four years ago, Matthew lent his sister Sarah $4,000 to help pay for a hon- eymoon trip following her wedding to John Caine. Matthew was pleasantly sur- prised when Sarah paid him back (plus interest of $500) on December 20, 2019. On March 20 of each year, Courtney's parents send a generous gift of cash as a birthday present. Just as she has done for the past 7 years, Courtney immediately invested the cash in her children's $ 529 college savings plans. 9. The Mumfords had the following expenditures for 2019: Courtney's contribution to her traditional IRA $ 6,000 Net gambling loss 1,000 Life insurance premiums 2,700 Medical and dental expenses not covered by insurance 16,612 Taxes: Ad valorem taxes on personal residence $4,100 State and local sales taxes from receipts 2,800 6,900 Interest on home mortgage reported on Form 1098 4,000 Cash contributions: Feeding South Dakota (EIN 36-3293534) $1,750 South Dakota governor's election campaign fund 300 2,050 The $1,000 net gambling loss for 2019 is the difference between the Mumfords' gambling winnings of $1,200 and losses of $2,200. The life insurance premiums relate to the universal life insurance policies that Matthew and Courtney own. The first beneficiary on both policies is the other spouse, with the second benefi- ciaries being the children. Included in the medical expenses are $1,200 incurred in 2018, which were paid in early February 2019. While South Dakota does not impose income taxes on individuals, it does impose sales taxes. The Mumfords can substantiate the $2,800 in sales taxes paid based on their purchase receipts for the year. The local sales tax rate in Sioux Falls is 2%. (Hint: Be sure to check to see if the Optional Sales Tax Tables provide the Mumfords with a greater deduction.) Courtney contributed to the governor's campaign fund because she thinks her influence was key in getting the Minnehaha County land rezoned for commercial use (see item 4 above). APPENDIX E Practice Set AssignmentsComprehensive Tax Return Problems 10. The Mumfords maintain a household that includes their two children, Nickolas (age 16) and Kaleigh (age 19). Nickolas is a junior in high school and a talented wrestler. In hopes of competing at the state tournament, all of his free time is consumed with weight training and wrestling practices. Kaleigh graduated from high school on June 7, 2018, and is undecided about college. She is an accom- plished vocalist and during 2019 earned $7,200 performing at various events (e.g., weddings, funerals). Kaleigh placed most of her earnings in a savings account for future use and kept only a small amount to spend on herself. 11. Matthew's Form W-2 from The Pour House shows $15,800 withheld for Federal income tax. The Mumfords also made estimated tax payments to the IRS totaling $5,000 for 2019. 12. Relevant Social Security numbers are noted below. Name Social Security Number Matthew B. Mumford Courtney S. Mumford Kaleigh J. Mumford Nickolas W. Mumford 123-45-6786 123-45-6787 123-45-6788 123-45-6798 . Requirements Prepare an income tax return (with all appropriate forms and schedules) for the Mum- fords for 2019, using the following guidelines: The Mumfords choose to file a joint income tax return. The Mumfords do not wish to contribute to the Presidential Election Campaign Fund. The Mumfords do not own any foreign bank accounts or other investments. In addition, the Mumfords do not have any financial interests in virtual currencies. The Mumfords prefer to receive a refund of any overpaid taxes. The taxpayers are preparing their own return (i.e., no preparer is involved). For the past several years, the Mumfords have itemized their deductions from AGI. The taxpayers have the necessary substantiation (e.g., records, receipts) to support all transactions reported on their tax return. Make necessary assumptions for information not given in the problem but needed to complete the return