Set Assignments- Comprehensive Tax Return Problems PROBLEM 1-INDIVIDUALS (FORM 1040) inturt proconnect Roger R. and Michelle N. Stewart (ages 45 and 46) are marred and live at 641 Cody Way Casper, WY 82609. Roger is a consulting engineer, and Michelle is a paralegal. They file a joint return and use the cash basis for tax purposes. 1. Trained as a mining engineer, Roger has developed considerable expertise in the treatment and disposition of waste material. He is also well versed in the Federal and state requirements for land reclamation projects. Roger operates a consulting business through which he advises clients on these matters. Roger's business activity code is 541990. Most of his clients are small and me dium-size mine owners/operators located in Wyoming and contiguous states (e.g., Montana, daho, Utah). Usually, Roger is retained by a client on a contract fee basis and is reimbursed for all out-of-pocket expenses. In performing his services, Roger usually visits the job site and later submits his recommendations in a written report along with a statement for his services and expenses. Roger received the following amounts from his consulting business in 2018: Fees for services rendered 92,800 Expense reimbursements: Airfare $8,200 Meals 6,100 Lodging Transportation (taxis, airport limos, carrentals) 5,200 920 Subtotal for expense reimbursement Total received 20,420 $113,220 2. Roger also provided services for the following companies from his office; there fore, there are no travel expenses. These fees are not included in the receipts listed in item 1 above Echo Mining: Work done in December 2018, payment received. Jan uary 2019 Sesa Mining: Work done in December 2017: payment received January 2018 Cormorant Mining:Work done in March 2018 no payment received to date $5,100 4400 3,700 Since Cormorant Mining is currently in bankruptey, Roger does not expect to collect any of this fee E-1 3Other expenses paid by Roger in 2018 relating to his practice are as follows Contribution to H.R.10 (Keogh) retirement plan Premiums on medical insurance (covering self spouse, and dependents) Supplies-landscape models purchased from to pog ra pher for projects Advertising in tradejournals Office expense $9,000 3,00 3,200 2,400 1,200 Business phone and Internet service State occupation li cense Subscriptions to trade journals Membership dues to trade associations 860 300 240 180 4 Roger operates his consulting business out of an office in his home. Twenty per- cent of the 3,000-square-foot living area is devoted to the office. Roger inherited the home on Cody Way from his father who died on June 6, 2011. At that time the home had a fair market value of $400,000 ($40,000 of which was allocated to the land). The Stewarts moved into the home in autumn of 2011, and Roger immediately set up his home office. The home's current fair market value is $500,000 ($50,000allocated to the land). County land records reflect that Roger's father bought the land in 1972 for $6,000 and built the house in 1976 at a cost of $60,000. Roger depreciates the business use of his home using MACRS. Additional 2018 costs related to the home are as follows $4,800 Utilities Repairs and maintenance 2,900 Insurance 2,300 The 2018 property taxes and mortgage interest are listed in item 15. In addi tion to the repairs and maintenance noted above, Roger had the office repainted at a total cost of $1,200 Over the years, Roger has properly deducted the cost of all the furniture and equipment used in his office either as 179 expense or bonus depreciation in the year those assets were placed in service. On March 5, 2018, Roger purchased a heavy-duty, fire-resistant file cabinet with security-vault features for $4,800. He made the acquisition to safeguard and maintain the privacy of client data. Con sistent with past years, Roger prefers to avoid capitalizing and depreciating the cabinet if the law allows 5 On February 4, 2017, Roger paid $41,000 (including sales tax) for an Infiniti crossover SUv (gross weight under 6,000 pounds). No trade-in was involved, and he did not claim any $ 179 expense or bonus depreciation on the cost last year Under the actual operating cost method, he depreciates the SUV using MACRS. (Hint See Table 3 in the instructions to Form 4562.) His operating expenses for the Infiniti for 2018 are as follows: Gasoline $3,300 Auto insurance 1,600 Repairs Auto club dues 240 180 Ol changes and lubrication License and registration 120 60 Roger drove the Infiniti a total of 14,500 miles during 2018, 13,050 of which were diven for business purposes. During business use, Roger received three moving traffic violations for which he paid $680 in fines. He also incurred tolls and parking charges of $440 6. Michelle is a licensed paralegal and is employed on a part-time basis by several local attorneys. She works in their different offices between the hours of 9 AM and 3 PM, three days a week. She commuted to work in the family Suburban and drove a total of 813 miles and paid parking fees of $310. Her 2018 earnings and job-related expenses are summarized as follows: Combined wages from three employers $58,000 Subscriptions and dues to professional organ izations 180 Continuing education correspondence course 120 Occupational license fee 80 Since Michelle is a part-time employee, her employers do not cover her job related expenses. The correspondence course is required continuing education so that she can retain her license. Michelle is thinking about applying to law school, which would require her to sit for the LSAT Exam. During 2018, she spent $350 on an LSAT preparation course Because Michelle is a part-time employee, she is not covered by any of her employers' medical or retirement plans. During 2018, she contributed $5,500 to a traditional IRA that she had established several years ago. The Stewarts use the automatic mileage method to calculate any tax deductions to which they are entitled for use of the Suburban 7. With funds received from the settlement of his father's estate, Roger purchased rental property at 4620 Cottonwood Lane. Of the $250,000 purchase price $30,000 was allocated to the land. After an $80,000 renovation to the house (e.g. replaced the roof, installed new flooring throughout the house, and installed a new furnace), the property was rented beginning February 1, 2012. In 2016, the Stewarts decided their investment would be more marketable if the house was fully furnished. Consequently, they spent $38,000 on new furniture, drapes, and appliances. All of the furnishings were placed in service May 1, 2016. The Stew arts did not claim 179 expense or bonus depreciation for the year those assets were placed in service. Under the current lease agreement, the property rents for $2,200 a month. Rent is due the first day of each month. Utilities are not included in the rent. Information regarding the property for 2018 is as follows $28,600 Rent received 3,100 Property/casualty insurance premiums paid Property taxes paid Yard maintenance paid 2400 1,200 Repairs 800 The rent received includes $2,200 for January 2019. The tenants prepaid the rent in mid-December because they went on vacation during the Christmas/New Year holidays. In addition to the poperty taxes listed above, Roger paid a special tax assessment of $1,300 to the City of Casper for repaving the street in front of the property. The Stewarts use MACRS to depreciate the rental home and the furnishings within it The Stewarts acquired 1,000 shares of common stock in Cormorant Mining on March 7, 2017, to hold for investment purposes. Roger performed services for the company in late 2016, submitting a bill for $3,900. Because Cormorant was expe riencing cash flow problems at the time, Roger accepted the stock as payment for his services. Unfortunately, Cormorant is currently in bankruptcy (see item 2 above). In late 2018, the bankruptey judge announced that creditors will receive a fraction of what they are owed and shareholders will recover nothing with respect to their equity investments in the company. The stock is not publicly traded 8. On March 10, 1997, Roger's father gave the Stewarts a plot of land located in Teton County as an anniversary gift. It had a value of $150,000 at the time of the gift, and no gift tax was required to be paid on the trans fer. The land had been purchased by Rogr's father on June 1, 1987, for $50,000. In December 2017, a real estate developer contacted the Stewarts and made an offer to buy the prop erty. After considerable negotiations, the Stewarts agreed to transfer the Teton plot in return for $8,000 in cash and four city lots in Laramie (WY) worth $792,000 from the developer. The Stewarts considered the city lots to be a good invest- ment because they are located in a part of the city that is experiencing significant growth. The exchange occurred on March 4, 2018. The real estate developer paid for all closing costs and legal fees related to the exchange Roger inherited an antique gun collection from his father when he died. Ahthough Roger has no idea what his father's cost basis was in these guns, the collection had a date-of-death value of $22,000. Concerned about the maintenance and security of the collection, Roger sold it to a dealer for $29,000 on July 10, 2018. 9 10 On July 12, 2004, using $50,000 of funds she had received from an aunt's life 11. insurance policy, Michelle purchased grazing land in Converse County (WY). On August 2, 2017, she sold the land to a local rancher for $75,000. Under the terms of the sale, Michelle received a down payment of $15,000 and 10 annual notes of $6,000 each. Michelle will also receive simple interest of 8% on the outstand ing principal balance each year. Michelle negotiated the 8 % interest rate since she is taking on the risk of financing this acquisition for the rancher. Michelle collected $10,800 on August 2, 2018, from the rancher: $6,000 on the note and interest of $4,800. 12 The Stewarts had several Schedule D transactions during 2017 that netted to a short-term capital loss of $7,000. Of this loss, $3,000 was deducted in 2017, and $4,000 caried over to 2018 Vivian Olson, Michelle's widowed mother, has lived with the Stewarts for several years and has been claimed by them as a dependent. On December 30, 2017, Vivian suffered a heart attack. After a few days in the ICU of a local hospital, Vivian died on January 5, 2018. In early February 2018, the Stewarts paid the following expenses related to Vivian 13. Burial expenses $17400 Medical expenses incurred in 2017 not covered by Medicare Medical expenses incured in 2018 not covered by Medicare Remainder of church pledge for 2018 2,800 6,500 900 Besides persoal and household effects, Vivian's major asset was a life insur- ance policy. As the sole beneficiary of the policy, Michelle received $45,000 of death benefits on March 30, 2018 death benefits on March 30, 2018 14. In addition to the items already noted, the Stewarts had the following receipts during 2018 Interest income City of Cheyenne general purpose bonds Certificate of deposit at Wells Fargo Ban k $1,900 1,100 Money market account at Bank of America 400 Yard sale proceeds Qualified dividends on Mead owl ark Corporation common stock 950 700 Jury duty pay 420 At their yard sale, the Stewarts sold used furniture, books, toys, and other household goods having an estimated original cost of $1,800. In connection with her jury duty assignment in June, Michelle drove the Suburban 40 miles and incurred expenses of $30 for parking and $45 for meals 15. In addition to the items already noted, the Stewarts had the following expendi tures for 2018 Medical and dental bls for the Stewarts lother than those relating to Vivian, see item 13) Charitable contributions (not including Vivian's pled ge, see item 13) Advalorem property taxes on personal residen ce Interest on home equity lo an used to finance the purchase of a recreation al vehicle in April 2018 $7,800 8,700 5,800 1,090 The Stewarts drove the Suburban 420 miles to various medical and dental appointments. Wyoming has no state or local income tax but does impose a general sales tax. The county in which they live imposes an additional local sales tax of 1% Although they do not keep track of their sales taxes, the Stewarts paid $1,600 of sales tax on the recreational vehicle they purchased in April 2018. 16. Besides Vivian (see item 13), the Stewarts' household inc ludes two daughters, McKenna (age 19) and Kayleigh (age 16), and one son, Jared (age 14. McKenna graduated from high school in 2017. She earned $19,000 during 2018, al of which she put into her college savings account. She heads off to college in fall 2019. Kayleigh and Jared are full-time students in high school and middle school respectively. Kayleigh earned $1,800 from a summer job, which she put into her college savings account 17. For tax year 2017, the Stewarts had a Federal income tax overpayment of $150, which they applied toward their 2018 income tax. Michellle's income tax with holdings for the year are $5,100, and the Stewarts made Federal quarterly tax payments totaling $12,000 ( 3,000 each installment) 18. Relevant Social Security numbers are as follows SocialSecurity Number Name Roger Stewart Michelle Stewart 111-11-1112 123-45-6785 Vivian Olson 123-45-6786 McKenna Stewart 123-45-6787 123-45-6788 Kayleigh Stewart Jared Stewart 123-45-6798 Requirements Prepare a 2018 Federal income tax return with appropriate supporting forms and sched- ules for the Stewarts. In doing this, follow these guidelines Make necessary assumptions for information not given but needed to complete the return The Stewarts are preparing their own return The Stewarts have the necessary written substantiation (e.g., records, receipts) to support the transactions reported in their tax return If the Stewarts have an overpayment of tax, they want it applied to their 2019 estimated taxes The Stewarts do not wish to contribute to the Presidential Election Campaign Fund Set Assignments- Comprehensive Tax Return Problems PROBLEM 1-INDIVIDUALS (FORM 1040) inturt proconnect Roger R. and Michelle N. Stewart (ages 45 and 46) are marred and live at 641 Cody Way Casper, WY 82609. Roger is a consulting engineer, and Michelle is a paralegal. They file a joint return and use the cash basis for tax purposes. 1. Trained as a mining engineer, Roger has developed considerable expertise in the treatment and disposition of waste material. He is also well versed in the Federal and state requirements for land reclamation projects. Roger operates a consulting business through which he advises clients on these matters. Roger's business activity code is 541990. Most of his clients are small and me dium-size mine owners/operators located in Wyoming and contiguous states (e.g., Montana, daho, Utah). Usually, Roger is retained by a client on a contract fee basis and is reimbursed for all out-of-pocket expenses. In performing his services, Roger usually visits the job site and later submits his recommendations in a written report along with a statement for his services and expenses. Roger received the following amounts from his consulting business in 2018: Fees for services rendered 92,800 Expense reimbursements: Airfare $8,200 Meals 6,100 Lodging Transportation (taxis, airport limos, carrentals) 5,200 920 Subtotal for expense reimbursement Total received 20,420 $113,220 2. Roger also provided services for the following companies from his office; there fore, there are no travel expenses. These fees are not included in the receipts listed in item 1 above Echo Mining: Work done in December 2018, payment received. Jan uary 2019 Sesa Mining: Work done in December 2017: payment received January 2018 Cormorant Mining:Work done in March 2018 no payment received to date $5,100 4400 3,700 Since Cormorant Mining is currently in bankruptey, Roger does not expect to collect any of this fee E-1 3Other expenses paid by Roger in 2018 relating to his practice are as follows Contribution to H.R.10 (Keogh) retirement plan Premiums on medical insurance (covering self spouse, and dependents) Supplies-landscape models purchased from to pog ra pher for projects Advertising in tradejournals Office expense $9,000 3,00 3,200 2,400 1,200 Business phone and Internet service State occupation li cense Subscriptions to trade journals Membership dues to trade associations 860 300 240 180 4 Roger operates his consulting business out of an office in his home. Twenty per- cent of the 3,000-square-foot living area is devoted to the office. Roger inherited the home on Cody Way from his father who died on June 6, 2011. At that time the home had a fair market value of $400,000 ($40,000 of which was allocated to the land). The Stewarts moved into the home in autumn of 2011, and Roger immediately set up his home office. The home's current fair market value is $500,000 ($50,000allocated to the land). County land records reflect that Roger's father bought the land in 1972 for $6,000 and built the house in 1976 at a cost of $60,000. Roger depreciates the business use of his home using MACRS. Additional 2018 costs related to the home are as follows $4,800 Utilities Repairs and maintenance 2,900 Insurance 2,300 The 2018 property taxes and mortgage interest are listed in item 15. In addi tion to the repairs and maintenance noted above, Roger had the office repainted at a total cost of $1,200 Over the years, Roger has properly deducted the cost of all the furniture and equipment used in his office either as 179 expense or bonus depreciation in the year those assets were placed in service. On March 5, 2018, Roger purchased a heavy-duty, fire-resistant file cabinet with security-vault features for $4,800. He made the acquisition to safeguard and maintain the privacy of client data. Con sistent with past years, Roger prefers to avoid capitalizing and depreciating the cabinet if the law allows 5 On February 4, 2017, Roger paid $41,000 (including sales tax) for an Infiniti crossover SUv (gross weight under 6,000 pounds). No trade-in was involved, and he did not claim any $ 179 expense or bonus depreciation on the cost last year Under the actual operating cost method, he depreciates the SUV using MACRS. (Hint See Table 3 in the instructions to Form 4562.) His operating expenses for the Infiniti for 2018 are as follows: Gasoline $3,300 Auto insurance 1,600 Repairs Auto club dues 240 180 Ol changes and lubrication License and registration 120 60 Roger drove the Infiniti a total of 14,500 miles during 2018, 13,050 of which were diven for business purposes. During business use, Roger received three moving traffic violations for which he paid $680 in fines. He also incurred tolls and parking charges of $440 6. Michelle is a licensed paralegal and is employed on a part-time basis by several local attorneys. She works in their different offices between the hours of 9 AM and 3 PM, three days a week. She commuted to work in the family Suburban and drove a total of 813 miles and paid parking fees of $310. Her 2018 earnings and job-related expenses are summarized as follows: Combined wages from three employers $58,000 Subscriptions and dues to professional organ izations 180 Continuing education correspondence course 120 Occupational license fee 80 Since Michelle is a part-time employee, her employers do not cover her job related expenses. The correspondence course is required continuing education so that she can retain her license. Michelle is thinking about applying to law school, which would require her to sit for the LSAT Exam. During 2018, she spent $350 on an LSAT preparation course Because Michelle is a part-time employee, she is not covered by any of her employers' medical or retirement plans. During 2018, she contributed $5,500 to a traditional IRA that she had established several years ago. The Stewarts use the automatic mileage method to calculate any tax deductions to which they are entitled for use of the Suburban 7. With funds received from the settlement of his father's estate, Roger purchased rental property at 4620 Cottonwood Lane. Of the $250,000 purchase price $30,000 was allocated to the land. After an $80,000 renovation to the house (e.g. replaced the roof, installed new flooring throughout the house, and installed a new furnace), the property was rented beginning February 1, 2012. In 2016, the Stewarts decided their investment would be more marketable if the house was fully furnished. Consequently, they spent $38,000 on new furniture, drapes, and appliances. All of the furnishings were placed in service May 1, 2016. The Stew arts did not claim 179 expense or bonus depreciation for the year those assets were placed in service. Under the current lease agreement, the property rents for $2,200 a month. Rent is due the first day of each month. Utilities are not included in the rent. Information regarding the property for 2018 is as follows $28,600 Rent received 3,100 Property/casualty insurance premiums paid Property taxes paid Yard maintenance paid 2400 1,200 Repairs 800 The rent received includes $2,200 for January 2019. The tenants prepaid the rent in mid-December because they went on vacation during the Christmas/New Year holidays. In addition to the poperty taxes listed above, Roger paid a special tax assessment of $1,300 to the City of Casper for repaving the street in front of the property. The Stewarts use MACRS to depreciate the rental home and the furnishings within it The Stewarts acquired 1,000 shares of common stock in Cormorant Mining on March 7, 2017, to hold for investment purposes. Roger performed services for the company in late 2016, submitting a bill for $3,900. Because Cormorant was expe riencing cash flow problems at the time, Roger accepted the stock as payment for his services. Unfortunately, Cormorant is currently in bankruptcy (see item 2 above). In late 2018, the bankruptey judge announced that creditors will receive a fraction of what they are owed and shareholders will recover nothing with respect to their equity investments in the company. The stock is not publicly traded 8. On March 10, 1997, Roger's father gave the Stewarts a plot of land located in Teton County as an anniversary gift. It had a value of $150,000 at the time of the gift, and no gift tax was required to be paid on the trans fer. The land had been purchased by Rogr's father on June 1, 1987, for $50,000. In December 2017, a real estate developer contacted the Stewarts and made an offer to buy the prop erty. After considerable negotiations, the Stewarts agreed to transfer the Teton plot in return for $8,000 in cash and four city lots in Laramie (WY) worth $792,000 from the developer. The Stewarts considered the city lots to be a good invest- ment because they are located in a part of the city that is experiencing significant growth. The exchange occurred on March 4, 2018. The real estate developer paid for all closing costs and legal fees related to the exchange Roger inherited an antique gun collection from his father when he died. Ahthough Roger has no idea what his father's cost basis was in these guns, the collection had a date-of-death value of $22,000. Concerned about the maintenance and security of the collection, Roger sold it to a dealer for $29,000 on July 10, 2018. 9 10 On July 12, 2004, using $50,000 of funds she had received from an aunt's life 11. insurance policy, Michelle purchased grazing land in Converse County (WY). On August 2, 2017, she sold the land to a local rancher for $75,000. Under the terms of the sale, Michelle received a down payment of $15,000 and 10 annual notes of $6,000 each. Michelle will also receive simple interest of 8% on the outstand ing principal balance each year. Michelle negotiated the 8 % interest rate since she is taking on the risk of financing this acquisition for the rancher. Michelle collected $10,800 on August 2, 2018, from the rancher: $6,000 on the note and interest of $4,800. 12 The Stewarts had several Schedule D transactions during 2017 that netted to a short-term capital loss of $7,000. Of this loss, $3,000 was deducted in 2017, and $4,000 caried over to 2018 Vivian Olson, Michelle's widowed mother, has lived with the Stewarts for several years and has been claimed by them as a dependent. On December 30, 2017, Vivian suffered a heart attack. After a few days in the ICU of a local hospital, Vivian died on January 5, 2018. In early February 2018, the Stewarts paid the following expenses related to Vivian 13. Burial expenses $17400 Medical expenses incurred in 2017 not covered by Medicare Medical expenses incured in 2018 not covered by Medicare Remainder of church pledge for 2018 2,800 6,500 900 Besides persoal and household effects, Vivian's major asset was a life insur- ance policy. As the sole beneficiary of the policy, Michelle received $45,000 of death benefits on March 30, 2018 death benefits on March 30, 2018 14. In addition to the items already noted, the Stewarts had the following receipts during 2018 Interest income City of Cheyenne general purpose bonds Certificate of deposit at Wells Fargo Ban k $1,900 1,100 Money market account at Bank of America 400 Yard sale proceeds Qualified dividends on Mead owl ark Corporation common stock 950 700 Jury duty pay 420 At their yard sale, the Stewarts sold used furniture, books, toys, and other household goods having an estimated original cost of $1,800. In connection with her jury duty assignment in June, Michelle drove the Suburban 40 miles and incurred expenses of $30 for parking and $45 for meals 15. In addition to the items already noted, the Stewarts had the following expendi tures for 2018 Medical and dental bls for the Stewarts lother than those relating to Vivian, see item 13) Charitable contributions (not including Vivian's pled ge, see item 13) Advalorem property taxes on personal residen ce Interest on home equity lo an used to finance the purchase of a recreation al vehicle in April 2018 $7,800 8,700 5,800 1,090 The Stewarts drove the Suburban 420 miles to various medical and dental appointments. Wyoming has no state or local income tax but does impose a general sales tax. The county in which they live imposes an additional local sales tax of 1% Although they do not keep track of their sales taxes, the Stewarts paid $1,600 of sales tax on the recreational vehicle they purchased in April 2018. 16. Besides Vivian (see item 13), the Stewarts' household inc ludes two daughters, McKenna (age 19) and Kayleigh (age 16), and one son, Jared (age 14. McKenna graduated from high school in 2017. She earned $19,000 during 2018, al of which she put into her college savings account. She heads off to college in fall 2019. Kayleigh and Jared are full-time students in high school and middle school respectively. Kayleigh earned $1,800 from a summer job, which she put into her college savings account 17. For tax year 2017, the Stewarts had a Federal income tax overpayment of $150, which they applied toward their 2018 income tax. Michellle's income tax with holdings for the year are $5,100, and the Stewarts made Federal quarterly tax payments totaling $12,000 ( 3,000 each installment) 18. Relevant Social Security numbers are as follows SocialSecurity Number Name Roger Stewart Michelle Stewart 111-11-1112 123-45-6785 Vivian Olson 123-45-6786 McKenna Stewart 123-45-6787 123-45-6788 Kayleigh Stewart Jared Stewart 123-45-6798 Requirements Prepare a 2018 Federal income tax return with appropriate supporting forms and sched- ules for the Stewarts. In doing this, follow these guidelines Make necessary assumptions for information not given but needed to complete the return The Stewarts are preparing their own return The Stewarts have the necessary written substantiation (e.g., records, receipts) to support the transactions reported in their tax return If the Stewarts have an overpayment of tax, they want it applied to their 2019 estimated taxes The Stewarts do not wish to contribute to the Presidential Election Campaign Fund