Tax Ramifications - Income Tax Law - Solved Exam, Exams of Law

Download Tax Ramifications - Income Tax Law - Solved Exam and more Exams Law in PDF only on Docsity! ID: FedIncTax_LSN_Stanley_2010UL ID: Name: Exam Name: Instructor: Grade: Number) FedincTax_LSN_Stanley_2010UL Stanley a\xK Page 1 of 4 Exam taken with SofTesl v8.9 Stanley ID: FedIncTax_LSN_Stanley_2010UL Stanley 1) Tax implications for Jerry Employee fringe benefits Jerry's company granted its executive employees use of one of the company jets. It is indicated that the employee was to fly on a space available basis, so normally this benefit would be excludable under §132(a)(1), which deals with no-additiona-cost services. Unfortunately for Jerry, there is a nondiscrimination rule (Reg. §1.132-8) that bars highly compensated employees from taking advantage of these benefits if they are not offered to all employees. Since Jerry is the CEO of the parent company, he is definitely highly compensated and barred from excluding from his gross income the cost of the benefit. Since the trip would have cost him $12,000 otherwise, he will have to report that amount as income. The flights on Bali Air for the children and the nanny will likewise not be excluded from income for the same reason. Although Bali has a reciprocal agreement that Jerry would be eligible for, the facts state that it is on the same terms as Canadian Air's policy, so the nondiscrimination rule is in effect here as well. If the nondiscrimination rule was not in effect, the value of children's airfare could be excluded because these fringe benefits extend to spouses and children. The nanny's airfare likely would not be covered, so Jerry would have to pay for that. Most likely, do to the nondiscrimination rule, Jerry will have to include in his gross income the amount of the benefit - $15,000. Page 1 of 6 (Question 1 continued) ID: FedIncTax_ LSN_Stanley_. -2020UL Stanley He aiso cannot claim the children as dependents for the dependent exemption (see explanation, below). Dorothy Business Travel Deductions Four of the 12 days Dorothy was in Bali were spent working (she is an art buyer, and part of her job is scouting for art to buy). Therefore, under §274, some of her costs will be deductible. Since Bali is NOT in the U. Sy pony ras can only depuct apropogion of her transportation expenses (1/3 to be“exact). Further, he Posed 1/3 of the final lodging bill, and 50% of the cost of the meals she at on those four days she worked. 17 TE Zo Purchase of Paintings Gtewsdim cott= baw, If she was purchasing the paintings for work, the cost would be deductible under §162 (trade or business deductions). If she was simply buying them for the production of income, she could deduct the $5,000 spent under §212. The “trade or business" test is enumerated in Groetzinger. According to the court, someone's activity qualifies as a trade or business if that is their full-time activity, they are involved on a continual and regular basis, and they intend the activity to the source of their livelihood. Here, Dorothy is an independent contractor art buyer. That is her full-time job, which she seems to do on a regular basis and as the source of her livelinood (although she might not actually need to work seeing as her husband is a CEO of a huge corporation). Therefore, under Groetzinger, Dorothy is engaged in a trade or business and can Page 4 of 6 (Question t continued} ID: FedincTax_LSN_Stanley_2010UL Stanley Ss PR Le —— TE rnin err deduct the cosf of the intings ($5,000) sft Jad bud She can tpl deguct ine Pee deduct the cost of { auventrce. !Sher the license agreement as well, at least unde [uh as the cost‘s for the "management, conservation, or maintenance of property.” Regardless of which statute it comes under, ue Cg aN . the entire $8,000 is deductible as a business expense. — When she sold the paintings, she realized a gain of $40,500 ($900 each). Basis = ? cd $100/painting, sold for $1000/each. Orku-are < : Startup Dorothy spent $100,000 investigating the feasibility of starting a printing company. (e Normally, this sort of investigation would be deduotible as a startup expense under § 20 195, but because she abandoned the endevour before starting the business, she cannot take any deduction. House Same lack of deduction as Jerry (see above). Although Jerry paid for the house ten years ago, it is mostly community property at this point. Her stake in the house is moot, because it was sold at a loss, which cannot be deducted (except for the maintenance costs, see above, a part of which she should be able to deduct as well). Dependent Exemption A custodial parent can take a deduction for a qualfiying child under §152(c) (Dorothy's qualify because they are her blood daughters) if: the parent has legal custody for more than V2 the year, provides more than We of the - Support, the parents do not file a joint | Paga 5 of 6 (Question 1 continued) ID: FedIncTax_LSN_Stanley_2010UL Stanley return, and the child is not subject of a multiple support agreement. Here, because (presumably) Jerry provides more than 1/2 of the support for the child, the conditions are not met and Dorothy cannot claim the exemption. Jerry cannot claim it either because he does not have custody of the girls at all. Dorothy's $50,000 pain and suffering award is not excludable from gross income Damage Award because it did not arise from a personal physical injury (see §1041). Emotional distress | injuries, like Dorothy's depression, are only excludabie if they arose from a physical injury, which was not the case here. Therefore, under §1041(a)(2), the $50,000 award is part of Dorothy's gross income. Unfortunately, the chunk her attorney took is still considered part of Dorothy's income, so the whole $50,000 must be included. 8 ¢ Conclusion Dorothy can deduct some of her business-related travel expenses and the cost of purchasing the paintings and getting the licensing agreement, but she cannot deduct the startup investigation, the loss on the house, or the damage award. Page 6 of 6 ENwD of EXOW\