Question

1. The Rands are successful professionals with combined AGI of approximately $400,000.

Their household includes two children: Henry (age 16) and Belinda (age 22). Belinda is

not a student and has a job where she earns $15,000. After a short family meeting in

early April, the parties decide that Belinda should claim Henry as her qualifying child.

As a result, Belinda is able to claim a child tax credit and an earned income tax credit for

a tax savings of more than $3,000. Had the Rands claimed Henry on their joint return, no

child tax credit or earned income tax credit would have been available. These credits are

phased out for higher-bracket taxpayers. Has the Rand family acted properly?

a. No, Henry only meets the definition of a qualifying child to his parents not his

sister Belinda. Therefore, Henry may not be reported as a qualifying child on

Belinda’s return.

b. No, the parents have not waived their right to claim Henry on the return;

therefore, Belinda cannot claim Henry until the parents do so.

c. Yes, Belinda’s claim of Henry is entirely proper since Henry meets the definition

of a qualifying child as to both his parents and his sister.

2. Each Saturday morning Ted makes the rounds of the local yard sales. He has developed

a keen eye for bargains, but he cannot use all the items he thinks are “real bargains.” Ted

has found a way to share the benefits of his talent with others. If Ted spots something

priced at $40 that he knows is worth $100, for example, he will buy it and list it on eBay

for $70. Ted does not include his gain in his gross income because he reasons that he is

performing a valuable service for others (both the original sellers and the future buyers)

and sacrificing profit he could receive. “Besides,” according to Ted, “the IRS does not

know about these transactions.” Is Ted justified in his action to not report the gains on

the sale of these items on his return?

a. Since Ted is in compliance with the tax law, Ted is justified in not reporting the

gains on his personal return.

b. It depends if Ted classifies his activities as a trade/business or merely a hobby. If

the activities are a trade/business, then Ted should include these amounts on his

return. If the activities are merely a hobby, then Ted does not have to include

these amounts as part of gross income.

c. Ted should include the gains on the sale of the items in his gross income.

3. The taxpayer was shot in a hunting accident. The person who shot the taxpayer has

admitted to being grossly negligent. The taxpayer estimates that he should receive

$40,000 for the personal injury and $60,000 as punitive damages. The defendant has

offered to pay $80,000 and sign a settlement agreement specifying that all of the payment

is for the physical injury, with no mention of the punitive damages. The defendant

argues that since the taxpayer is in the 35 percent marginal tax bracket, the $80,000 will

yield a greater after-tax award than a $100,000 award with $60,000 specified as being for

punitive damages. Is the defendant correct in his counter-argument?

a. Yes, since the taxpayer is in the 35% tax bracket receiving the $100,000 would

cause the defendant to pay $35,000 in taxes. If the taxpayer accepts the $80,000,

he would only have to pay $28,000 in taxes.

b. No, if the taxpayer accepts the $100,000 reward only $60,000 would have to be

included in gross income thus saving the taxpayer money as opposed to reporting

all $80,000 as gross income.

c. Yes, if the taxpayer accepts the $80,000 none of this amount would need to be

included in gross income since it is for compensatory damages.

4. Ron, who lives in Phoenix, has a chronic heart problem. He flies to Rochester,

Minnesota, several times each year for checkups and treatment at the Mayo Clinic, which

has one of the most highly rated heart treatment programs in the United States. He can

get better medical care at Mayo Clinic than he can get anywhere else. Since he is already

in Rochester, each trip he visits his two children, who live there with his ex-wife. Is Ron

justified in deducting the cost of his airline tickets and his lodging in Rochester as a

medical expense?

a. No, since Ron is making it a personal trip as well, this amount may not be

included as a medical expense.

b. Yes, since Ron’s travel to Rochester is primarily for the medical care he may

deduct the travel costs as a medical expense.

c. Ron may deduct the cost of his airline tickets but not his lodging since he can

easily stay with his ex-wife in Rochester. The expense of lodging is unnecessary

and therefore cannot be included as part of the medical expense.

5. Robert Ryan, a candidate for governor, has released his tax return to the public. As

Ryan’s former tax adviser, you examine the return closely and realize that a considerable

amount of his income was not reported on the return. You confide to a friend in the

tabloid newspaper business that you are aware that a candidate for a high public office

has filed a fraudulent tax return. Your friend assures you that you will be able to sell

your story for at least $25,000 to a tabloid and still remain anonymous. Another friend, a

CPA, argues that you should inform Ryan and give him an opportunity to correct the

problem. You tell your friend that you are concerned that Ryan will be very vindictive if

you approach him about the issue. Which course of action should you choose?

a. The information you obtained while performing services for Robert Ryan is

confidential; therefore, it would be unethical to release this information to the

public. However, you should inform Ryan and give him the opportunity to

correct the problem.

b. You didn’t prepare the tax return and Robert Ryan unethically misstated his

income not you. Therefore, you have no obligation to Ryan and thus are able to

go to the tabloids with this information.

c. Robert Ryan’s information is confidential as a former client. It is not mandatory

to provide him with tax advice regarding this misstatement either since he is just

that a former client. So you should not go to the tabloids or Robert Ryan with

this information. Just keep it to yourself.

Answer 1

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SOL ::-

(1)

(ANS :

The right choice would be option .b. according to me.

Also for Henry to be a qualifying child to Brenda, he must have lived with her for at least 6 months during that tax year.

(2)

ANS ::

This is wrong ethical practice followed by Ted.Gross income is not limited to cash received.It also includes income realised in any form say services,stock,property,accomodations etc.As Ted is providing the service i,e he is buying something at bargain price and again selling it at eBay at higher price therefore the profit received through this business is taxable.If he is hiding this business from IRS,then this seems to be the wrong ethical practice followed by him.

(4)

ANS ::-

answer is option B

b. Yes, since Ron’s travel to Rochester is primarily for the medical care he may deduct the travel costs as a medical expense.

medial medical-related travel and transportation costs are included in the medical expenses. Moreover, the costs for lodging and meals are also included which are incurred while traveling for medical treatment. The medical expenses are included in the itemized deductions by the amount total expenses exceed 10% of AGI for the year.

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