TAX CASE: ACCT 3350 SPRING 2014: FINAL VERSION

Robert T. and Lisa J. Polk (ages 42 and 41) are married and live at 5555 Orange Blossom Trail, Dallas, TX 75080. Robert is the regional manager for a gaming company (MGM), while Lisa is a self-employed CPA. They file a joint return and use the cash basis for tax purposes.

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1. Robert receives a yearly salary of $90,000, plus an annual bonus, from MGM. The annual bonus is determined in December of each year but not paid until January of the following year. Robert’s bonus is $15,000 for 2011 (received in 2012) and $33,000 for 2012 (received in 2012). Robert participates in his employer’s group health insurance plan to which he contributed $6,100 in 2012 for medical coverage. MGM does not provide any retirement benefits, but it has established a § 401(k) plan to enable its employees to make voluntary contributions. Robert did not contribute to the plan in 2012. The company provides an office for Robert’s use that is located at Suite 419, 110 Palm Boulevard, Dallas, TX.

2. Robert’s employment-related expenses (which MGM reimbursed Robert a total of $8,000) for 2012 are as follows:
Airfare $5,100
Lodging: not at a MGM $4,200
Lodging: value of stays at a MGM $3,300
Meals $800
Entertainment $350
Car rentals, limos, taxis $750

While on business trips in his car, Robert was caught in several small-town speed traps and paid fines of $500.

3: Lisa is a licensed CPA who works part-time on a consulting basis. Her major clients are real estate developers (both residential and commercial). Because she limits her engagements, she does not have a separate office but does her work at the client’s premises or in her office at home (see item 5 below). Her business expenses for 2012 are summarized below:
Supplies $4,000
Legal $8,000
CPA license fee $1,500
Subscriptions to professional journals $7500
Dues to professional organizations $250

In addition, she drove the family Acura (purchased on June 7, 2009) 6,000 miles on her job assignments. Regarding the Acura, Lisa uses the automatic mileage method for tax deduction purposes. She drove the car for 20,000 miles during the year.

4. One of Lisa’s clients was interested in building a shopping center on a tract of land she owned in Levy County. Lisa inherited the property from her aunt when she died on June 6, 1990. At that time, the land was worth $400,000. It has since been rezoned for commercial use and has a current value of$700,000. On February 10, 2012, the following exchange took place in the office of an attorney: Lisa exchanged the Levy parcel for a similar tract in Dixie County (worth $500,000) and $200,000 in cash.
5. Home office: Lisa uses 200 sq. feet of a 2,000 sq. foot house as her office. The office has a door and used to be a bedroom. A few times a year when the Polk’s have guests the guests spend the night in the room on a hide a bed sofa. The house has the following expenses:

Ad valorem taxes on personal residence $7,000
Interest on home mortgage $15,000

Repairs to roof $2,000
Utilities $3,000

6. On September 2, 2012, Lisa sold a tract of land in Citrus County to a farmer who owned the adjoining property. The land was inherited from the same aunt and had a value of $200,000 on June 6, 1990. Under the terms of the sale, Lisa received cash of $400,000 and four notes of$125,000 each payable at one-year intervals with simple interest of 8% provided for. To the extent allowed, Lisa wants to defer recognition of gain as long as possible.

7. On August 5, 2008, Robert purchased 5,000 shares of Groupon common stock for $15 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 profitable, as a whole the venture proved to be a failure. By December 2012, Groupon was taken over by creditors, and its stock became worthless.

8. Besides the items previously noted, the Polk’s had the following receipts for 2012:
Lisa’s consulting income $100,000
Interest income:
City of Dallas bonds $8,000
Ford Motor Company bonds $9,000
Loan repayment by Sarah Duval $3,000
Cash gifts from Lisa’s parents $20,000
Federal income tax refund (2010 return) $9,000

Lisa’s consulting income includes a $7,000 payment for work she did in 2011 (collected in 2012) but does not include $15,000 she billed in November for work performed in 2012 (collected in 2013). One client who has owed her $6,000 for work done in 2009 was convicted of arson in 2012 and is serving time in state prison. Lisa feels certain that she will never collect the $6,000.

9. In addition to the items already mentioned, the Polk’s had the following expenditures
for 2012:
Life insurance premiums $4,000
Medical and dental expense not covered by insurance $14,000
Taxes:
State and local sales taxes $7,000
Contributions-
Salvation Army (Tampa branch) $500
Texas governor’s election campaign fund $1,000

During 2012, the Polk’s had gambling winnings of $8,200 and losses of $1,200-all supported by records.

10. The Polk’s maintain a household that includes two children, Anna Marie (age 20) and Tyler (age 17). Anna Marie graduated from high school on May 18, 2011, and is undecided about college. Tyler is a junior in high school. Anna Marie is an accomplished vocalist and during 2012 was able to earn $17,200 performing at various functions (e.g., weddings, funerals). She placed most of her earnings in a savings account and kept only a small amount to spend on herself.

11. Robert’s Form W-2 from MGM shows $35,000 withheld for Federal income tax. The Polk’s also have made 4 quarterly income tax payments of $9,000 each. Lisa’s professional activity code is 541310. Relevant Social Security numbers are noted below:
Social Security
Name Number Birth Date
Robert J. Polk 111-11-1111 07/01/1968
Lisa N. Polk 123-45-6781 03/20/1969
Anna Marie Polk 123-45-6784 05/02/1992
Tyler Polk 123-45-6788 06/30/1995

REQUIREMENTS

Prepare an income tax return (with appropriate schedules) for the Polk’s for 2012. Make necessary assumptions for facts not stated in the problem. If a refund results, the taxpayers want it sent to them. The Polk’s do not wish to contribute to the Presidential Election Campaign Fund. In the past several years, the Polk’s have itemized their deductions from AGI (have not claimed the standard deduction option).

Here is an example of what I am looking for in terms of documentation:

1.1 TAXPAYER BIOGRAPHICAL INFORMATION:
Moira qualifies for 3 exemptions determined as follows:
• Moira qualifies for one personal exemption.
• Moira may also claim the following as dependents:
Oliver Plunkett Ryan. All dependency tests have been satisfied for a qualifying child.
Jane O’Dea Sullivan. She has satisfied all tests as a qualifying relative. Social Security
benefits are not counted in the gross income test. Therefore, her gross income was limited
to dividend and interest income of $1,775, which falls below the $3,650 threshold. She
passed all of the other tests of dependency.
• Moira cannot claim the following as dependent:
Dennis Harrison Ryan. He failed multiple tests as either a qualifying child or as a
qualifying relative.

3.1 Medical Expenses:
The following medical-related expenses are deductible before the 7.5% of AGI limitation on
Schedule A, line 1.
Doctor bills for Moira $1,200
Dentist bills for Oliver $2,000
Total qualifying expenses $3,200

Funeral expenses are not deductible.