Question

I had lunch today with our client retired Judge John Marshall. The Judge operates a popular bar review course called Marshall Bar Review, a sole proprietorship, in addition to his position as an adjunct law professor at the local law school.

Our firm is in the process of preparing Judge Marshall’s 2019 individual income tax return which is due July 15, 2020. I discussed with him the following issues that may impact his 2019 tax return:

1. Judge Marshall charges $5,000 tuition to each student who takes his bar review course. Beginning in 2019, the Judge guarantees a full refund of the tuition if the student passes an in-course test but does not pass the actual bar test on the first try. Judge Marshall is bold enough to do this because the first-time pass rate on the bar test is more than 80% (as opposed to approximately 25% on the CPA test). He collected $260,000 for the fall 2019 review class that he deposited in the sole proprietorship’s checking account in 2019. He stated that he will report the gross receipts on his 2020 Form 1040 because the grades for those taking the fall review course were not released until February 2020. The Judge uses the cash method of accounting to compute his taxable income from the sole proprietorship. Thus, Judge Marshall is asserting that he had no rights to the tuition until February 2020.

2. In August 2019, Judge Marshall purchased a 2020 Bentley Mulsanne for $320,000. In order to purchase the Bentley, the Judge made a 25% down payment and signed a note to finance the balance of the purchase price over 4 years at a 5% rate of interest. According to his mileage log the business usage for the Bentley in 2019 was 80%. All of his business usage related to his bar review course sole proprietorship.

I need you to research the tax issued associated with the above. Specifically, is the bar review course revenue included in the Judge’s 2019 or 2020 gross income; and what is the amount of depreciation, if any, the Judge can claim on his Bentley in 2019? You will need to draft a memorandum explaining the proper tax treatment and citing the tax law authorities for the two tax issues.