Individual Tax Return Problem 1

Individual Tax Return Problem 1 in $17 only (Instant Download)

• Using the information provided below, complete Arlington Building Supply’s (ABS) 2010 Form 1065 and Schedule D. Also complete Jerry Johnson and Steve Stillwell’s Schedule K-1.
• Form 4562 for depreciation is not required. Use the amount of tax depreciation and §179 expense provided in the income statement and the C-14 Appendix C information in #4 below to complete the appropriate lines on the first page and on Schedule K of the Form 1065.
• Form 4797 for the sale of trade or business property is not required. Use the amount of gain and loss from the sale of the truck and forklifts in the income statement and the information provided in #4 and #5 below to complete the
appropriate lines on the first page and on Schedule K of the Form 1065.
• If any information is missing, use reasonable assumptions to fill in any gaps.
• The forms, schedules, and instructions can be found at the IRS Web site ( The instructions can be helpful in completing the forms.


Comprehensive Tax Return Problems
• Use the following information to complete Paul and Judy Vance’s 2010 federal income tax return. If information is missing, use reasonable assumptions to fill in the gaps.
• You may need the following forms and schedules to complete the project: Form 1040, Schedule A, Schedule B, Schedule C, Schedule D, Schedule E, Schedule SE, Form 2106-EZ, Form 4562 (for the dental practice), Form 4562
(for the rental property), Form 4797, and Form 8863. The forms, schedules, and instructions can be found at the IRS Web site ( The instructions can be helpful in completing the forms.
1. Paul J. and Judy L. Vance are married and file a joint return. Paul is selfemployed as a dentist, and Judy is a college professor. Paul and Judy have three children. The oldest is Vince who lives at home. Vince is a law student
at the University of Cincinnati and worked part-time during the year, earning $1,500, which he spent for his own support. Paul and Judy provided $6,000 toward Vince’s support (including $4,000 for Vince’s fall tuition). They also
provided over half the support of their daughter, Joan, who is a full-time student at Edgecliff College in Cincinnati. Joan worked part-time as an independent contractor during the year, earning $3,200. Joan lived at home until
she was married in December 2010. She filed a joint return with her husband, Patrick, who earned $20,000 during the year. Jennifer is the youngest and lived in the Vances’ home for the entire year. The Vances provide you with the
following additional information:
• Paul and Judy would like to take advantage on their return of any
educational expenses paid for their children.
• The Vances do not want to contribute to the presidential election
• The Vances live at 621 Franklin Avenue, Cincinnati, OH 45211.
• Paul’s birthday is 3/5/1956 and his Social Security number is 333-45-6666.
• Judy’s birthday is 4/24/1959 and her Social Security number is 566-77-8888.
• Vince’s birthday is 11/6/1987 and his Social Security number is 576-18-7928.
• Joan’s birthday is 2/1/1991 and her Social Security number is 575-92-4321.
• Jennifer’s birthday is 12/12/1998 and her Social Security number is
• The Vances do not have any foreign bank accounts or trusts.
2. Judy is a lecturer at Xavier University in Cincinnati, where she earned $30,000.
The university withheld federal income tax of $3,375, state income tax of

Appendix C

$900, Cincinnati city income tax of $375, $1,860 of Social Security tax and $435 of Medicare tax. She also worked part of the year for Delta Airlines. Delta paid her $10,000 in salary, and withheld federal income tax of $1,125, state income tax of $300, Cincinnati city income tax of $125, Social Security tax of $620 and Medicare tax of $145.
3. The Vances received $800 of interest from State Savings Bank on a joint account. They received interest of $1,000 on City of Cincinnati bonds they bought in January with the proceeds of a loan from Third National Bank of
Cincinnati. They paid interest of $1,100 on the loan. Paul received a dividend of $540 on General Bicycle Corporation stock he owns. Judy received a dividend of $390 on Acme Clothing Corporation stock she owns. Paul and Judy received a dividend of $865 on jointly owned stock in Maple Company. All of
the dividends received in 2010 are qualified dividends.
4. Paul practices under the name “Paul J. Vance, DDS.” His business is located at 645 West Avenue, Cincinnati, OH 45211, and his employer identification number is 01-2222222. Paul’s gross receipts during the year were $111,000. Paul uses the cash method of accounting for his business. Paul’s business expenses are as follows:
Professional dues
Professional journals
Contributions to employee benefit plans
Malpractice insurance
Fine for overbilling State of Ohio for work
performed on welfare patient
Insurance on office contents
Interest on money borrowed to refurbish office
Accounting services
Miscellaneous office expense
Office rent
Dental supplies
Utilities and telephone
Payroll taxes

$ 1,200

In June, Paul decided to refurbish his office. This project was completed and the assets placed in service on July 1. Paul’s expenditures included $8,000 for new office furniture, $6,000 for new dental equipment (seven-year recovery period), and $2,000 for a new computer. Paul elected to compute his cost recovery allowance using MACRS. He did not elect to use §179 immediate expensing, and he chose to not claim any bonus depreciation.
5. Judy’s mother, Sarah, died on July 2, 2005, leaving Judy her entire estate. Included in the estate was Sarah’s residence (325 Oak Street, Cincinnati, OH 45211). Sarah’s basis in the residence was $30,000. The fair market value of the residence on July 2, 2005, was $155,000. The property was distributed to Judy on January 1, 2006. The Vances have held the property as rental property and have managed it themselves. From January 1, 2006, until June 30, 2010, they rented the house to the same tenant. The tenant was transferred to a branch office in California and moved out at the end of June. Since they did not want to bother finding a new tenant, Paul and Judy sold the house on June 30, 2010.
They received $140,000 for the house and land ($15,000 for the land and $125,000 for the house), less a 6 percent commission charged by the broker. They had



Appendix C

depreciated the house using the MACRS rules and conventions applicable to residential real estate. To compute depreciation on the house, the Vances had allocated $15,000 of the property’s basis to the land on which the house is
located. The Vances collected rent of $1,000 a month during the six months the house was occupied during the year. They incurred the following related expenses during this period:

Property insurance
Property taxes
Depreciation (to be computed)


6. The Vances sold 200 shares of Capp Corporation stock on September 3, 2010, for $42 a share (minus a $50 commission). The Vances received the stock from Paul’s father on June 25, 1979, as a wedding present. Paul’s
father originally purchased the stock for $10 per share in 1966. The stock was valued at $14.50 per share on the date of the gift. No gift tax was paid on the gift.
7. Judy is required by Xavier University to visit several high schools in the Cincinnati area to evaluate Xavier University students who are doing their practice teaching. However, she is not reimbursed for the expenses she incurs in doing this. During the spring semester (January through April 2010), she drove her personal automobile 6,800 miles in fulfilling this obligation. Judy drove an additional 6,700 personal miles during 2010. She has been using the car since June 30, 2009. Judy uses the standard mileage method to calculate her car expenses.
8. Paul and Judy have given you a file containing the following receipts for expenditures during the year:

Prescription medicine and drugs (net of insurance reimbursement)
Doctor and hospital bills (net of insurance reimbursement)
Penalty for underpayment of last year’s state income tax
Real estate taxes on personal residence
Interest on home mortgage (paid to Home State Savings & Loan)
Interest on credit cards (consumer purchases)
Cash contribution to St. Matthew’s church
Payroll deductions for Judy’s contributions to the United Way
Professional dues (Judy)
Professional subscriptions (Judy)
Fee for preparation of 2009 tax return paid April 14, 2010

$ 376

9. The Vances filed their 2009 federal, state, and local returns on April 14, 2010. They paid the following additional 2009 taxes with their returns:  federal income taxes of $630, state income taxes of $250, and city income taxes of $75.
10. The Vances made timely estimated federal income tax payments of $1,500 each quarter during 2010. They also made estimated state income tax payments of $300 each quarter and estimated city income tax payments of $160 each quarter.
The Vances made all fourth-quarter payments on December 31, 2010. They would like to receive a refund for any overpayments.

Appendix C

• Use the following information to complete Paige Turner’s 2010 federal income tax return. If information is missing, use reasonable assumptions to fill in the gaps.
• You may need the following forms and schedules to complete the project:
Form 1040, Schedule A, Schedule B, Schedule C, Schedule D, Schedule E, Schedule SE, Form 2106, Form 4562, Form 4684, and Form 8283. The forms, schedules, and instructions can be found at the IRS Web site (
The instructions can be helpful in completing the forms.
1. Paige Turner is single and has two children from her previous marriage. Ali lives with Paige, and Paige provides more than half of her support. Leif lives with his father, Will (Lief lived with Will for all of 2010). Will provides more
than half of Leif’s support. Paige pays “alimony” of $400 per month to Will.
The payments are to continue until Leif reaches age 18, when they will be reduced to $150. Paige provides you with the following additional information:
• She uses the cash method of accounting and a calendar year for reporting.
• She wishes to contribute to the presidential election campaign.
• Paige lives at 523 Essex Street, Bangor, ME 04401.
• Paige’s birthday is May 31, 1972.
• Ali’s birthday is October 5, 2001.
• Leif’s birthday is December 1, 1999.
• Paige’s Social Security number is 007-16-4727.
• Ali’s Social Security number is 005-61-7232.
• Leif’s Social Security number is 004-23-3419.
• Will’s Social Security number is 006-45-6333.
• She does not have any foreign bank accounts or trusts.
2. Paige is employed as a nuclear engineer with Atom Systems Consultants, Inc. (ASCI). Her annual salary is $70,000. ASCI has an extensive fringe benefits program for its employees. Paige’s pay stubs indicate that she had $7,230 withheld in federal taxes, $4,987 in state taxes, $4,495 in Social Security taxes, and $1,051 in Medicare taxes. Her compensation includes the following:
Salary (before subtracting her 401(k) and flexible
spending plan contributions)
Personal contribution to 401(k) account
Flexible spending plan contributions
Whole life insurance
Payment of educational costs
Free parking
Health club dues
Disability pay (see #7 below)

See a below
See b below

Paige furnishes you with the following description of the fringe benefits she received from ASCI in 2010.
a. Taking advantage of ASCI’s educational assistance program, during the fall
Paige enrolled in two graduate engineering classes at a local college. ASCI
paid her tuition, fees, and other course-related costs of $2,300.



Appendix C

b. Paige also received free parking in the company’s security garage that would normally cost $200 per month.
3. Paige manages the safety program for ASCI. In recognition of her superior handling of three potential crises during the year 2010, Paige was awarded the Employee Safety Award on December 15, 2010. The cash award
was $500.
4. On January 15, 2010, Paige’s father died. From her father’s estate, she received stock valued at $30,000 (his basis was $12,000) and her father’s house valued at $90,000 (his basis in the house was $55,000).
5. Paige owns several other investments and in February 2011 received a statement from her brokerage firm reporting the interest and dividends earned on the investments for 2010. (See Exhibit A.)


Forms 1099 and 1098

This is important tax information and is being furnished to the Internal Revenue Service.
1099-Div Dividends & Distributions


General Dynamics

Gross qualified dividends


1099-Int Interest


New Jersey Economic Development bonds
IBM bonds
State of Nebraska bonds

Gross interest
Gross interest
Gross interest


1098-Mortgage Interest Statement

Mortgage interest
Home-equity loan interest

Sunbelt Credit Union
Northeast Bank


Grubstake Mining & Development: preliminary report (preliminary K-1) to Paige for the 2010 tax year
Distribution to shareholder
Ordinary income (1% of $200,000)


6. In addition to the investments discussed above, Paige owns 1,000 shares of Grubstake Mining & Development common stock. Grubstake is organized as an S corporation and has 100,000 shares outstanding (S corp. ID number 454567890). Grubstake reported taxable income of $200,000 and paid a distribution of $1.00 per share during the current year. Paige tells you that Grubstake typically does not send out its K-1 reports until late April. However, its preliminary report has been consistent with the K-1 for many years. (See Exhibit A.) Paige does not materially participate in Grubstake’s activities.
7. Paige slipped on a wet spot in front of a computer store last July. She broke her ankle and was unable to work for two weeks. She incurred $1,300 in medical costs, all of which were paid by the owner of the store. The store also gave her $1,000 for pain and suffering resulting from the injury. ASCI continued to pay her salary during the two weeks she missed because of the accident. ASCI’s plan also paid her $1,200 in disability pay for the time she was unable to work. Under this plan ASCI pays the premiums for the disability insurance. (See #2.)

Appendix C

8. Paige received a Form 1099-B from her broker for the sale of the following securities during 2010.




Paid on Sale


Nebraska bonds
Cassill Corp (500 shares)






9. In addition to the taxes withheld from her salary, she also made timely estimated federal tax payments of $175 per quarter and timely estimated state income tax payments of $150 for the first three quarters. The $150 fourth-quarter
state payment was made on December 28, 2010. Paige would like to receive a
refund for any overpayment.
10. Because of her busy work schedule, Paige was unable to provide her accountant with the tax documents necessary for filing her 2009 state and federal income tax returns by the due date (April 15, 2010). In filing her extension on April 15, 2010, she made a federal tax payment of $750. Her return was eventually filed on June 25, 2010. In August 2010, she received a federal refund of $180 and a state tax refund of $60. Her itemized deductions for 2009 were $12,430.
11. Paige found a renter for her father’s house on August 1. The monthly rent is $400, and the lease agreement is for one year. The lease requires the tenant to pay the first and last months’ rent and a $400 security deposit. The security deposit is to be returned at the end of the lease if the property is in good condition. On August 1, Paige received $1,200 from the tenant per the terms of the lease agreement. In November, the plumbing froze and several pipes burst. The tenant had the repairs made and paid the $300 bill. In December, he reduced his rental payment to $100 to compensate for the plumbing repairs. Paige provides you with the following additional information for the
rental in 2010.
Property taxes
Other maintenance expenses
Insurance expense
Management fee
Depreciation (to be computed)


The rental property is located at 35 Harvest Street, Orono, ME 04473. Local practice is to allocate 12 percent of the fair market value of the property to the land. (See #4.) Paige makes all decisions with respect to the property.
12. Paige paid $2,050 in real estate taxes on her principal residence. The real estate tax is used to pay for town schools and other municipal services.
13. Paige drives a 2009 Acura TL. Her car registration fee (based on the car year) is $50 and covers the period 1/1/10 through 12/31/10. In addition, she paid $280 in property tax to the town based on the book value of the car.
14. In addition to the medical costs presented in #7, Paige incurred the following unreimbursed medical costs:
Prescription drugs
Over-the-counter drugs
Emergency room charges
LASIK eye surgery

$ 310



Appendix C

15. On March 1, Paige took advantage of low interest rates and refinanced her $75,000 home mortgage with her original lender. The new home loan is for 15 years. She paid $215 in closing costs and $1,500 in discount points (prepaid interest) to obtain the loan. The house is worth $155,000 and Paige’s basis in the house is $90,000. As part of the refinancing arrangement, she also obtained a $10,000 home-equity loan. She used the proceeds from the home-equity loan to reduce the balance due on her credit cards. Paige received several Form 1098 statements from her bank for interest paid by her in 2010. Details appear below.
(See also Exhibit A on page C-4.)
Primary home mortgage
Home-equity loan
Credit cards
Car loan


16. On May 14, 2010, Paige contributed clothing to the Salvation Army. The original cost of the clothing was $740. She has substantiation valuing the donation at $360. The Salvation Army is located at 350 Stone Ridge Road, Bangor, ME 04401. In addition, she made the following cash contributions and received a statement from each of the following organizations acknowledging her contribution:
Larkin College
United Way
First Methodist Church
Amos House (homeless shelter)
Local Chamber of Commerce


17. On April 1, 2010, Paige’s house was robbed. She apparently interrupted the burglar because all that’s missing is an antique brooch she inherited from her grandmother (June 12, 2003) and $300 in cash. Unfortunately, she didn’t have a separate rider on her insurance policy covering the jewelry. Therefore, the insurance company reimbursed her only $500 for the brooch. Her basis in the brooch was $6,000 and its fair market value was $7,500. Her insurance policy also limits to $100 the amount of cash that can be claimed in a theft.
18. Paige sells real estate in the evening and on weekends. She runs her business from a rental office she shares with several other realtors (692 River Road Bangor, ME 04401). The name of her business is Turner Real Estate and the Federal identification number is 05-8799561. Her business code is 531210. Paige has been operating in a business-like way since 2000 and has always shown a profit. She had the following income and expenses from her business:
Commissions earned
Real estate license


She has used her Acura TL in her business since June 1, 2009. During 2010, she properly documented 6,000 business miles (500 miles each month). The total mileage on her car (i.e., business- and personal-use miles) during the year was 15,000 miles (including 200 miles commuting to and from the real estate office). In 2010, Paige elects to use the standard mileage method to calculate her car expenses. She spent $45 on tolls and $135 on parking related to the real estate business.

Appendix C

19. Paige’s company has an accountable expense reimbursement plan for employees from which Paige receives $12,000 for the following expenses:
Car rentals


20. During 2010, Paige also paid $295 for business publications other than those paid for by her employer and $325 for a local CPA to prepare her 2009 tax return.

• Use the following information to complete Rhonda Hill’s 2010 federal income tax return. If information is missing, use reasonable assumptions to fill in the gaps.
• You may need the following forms and schedules to complete the project:
Form 1040, Schedule A, Schedule B, and Schedule D. The forms, schedules, and instructions can be found at the IRS Web site ( The instructions can be helpful in completing the forms.
1. Rhonda Hill (unmarried) is employed as an office manager at the main office of Carter and Associates CPA firm. Rhonda lives in a home she purchased 20 years ago. Rhonda’s older cousin Mabel lives with Rhonda in the home.
Mabel is retired and receives $2,400 of Social Security income each year. Mabel is able to save these funds because Rhonda provides all of Mabel’s support.
Rhonda also provided the following information:
• Rhonda does not want to contribute to the presidential election campaign.
• Rhonda lives at 1234 Blue Ridge Way, Tulsa, OK.
• Rhonda’s birthday is 12/18/1957 and her Social Security number is 335-67-8910.
• Mabel’s birthday is 11/2/1949 and her Social Security number is 566-77-8899.
• Rhonda does not have any foreign bank accounts or trusts.
2. Rhonda received a Form W-2 from Carter and Associates (her employer) that contained the following information:
Line 1 Wages, tips, other compensation:

  • Line 2 Federal income tax withheld:
  • Line 3 Social Security wages:
  • Line 4 Social Security tax withheld:
  • Line 5 Medicare wages and tips:
  • Line 6 Medicare tax withheld:
  • Line 17 State income tax:


3. Rhonda received $250 in interest from Tulsa City bonds, $120 interest from IBM bonds, and $15 from her savings account at UCU Credit Union. She also received a $460 dividend from Huggies Company and $500 from Bicker Corporation. Both dividends were qualified dividends.



Appendix C

4. Rhonda sold 200 shares of DM stock for $18 a share on June 15, 2010. She purchased the stock on December 12, 2005, for $10 a share. She also sold 50 shares of RSA stock for $15 on October 2, 2010. She purchased the stock
for $65 a share on February 2 of this year.
5. The following is a record of the medical expense that Rhonda paid for herself during the year. The amounts reported are amounts she paid in excess of insurance reimbursements.
Insurance premiums
Prescription medications
Over-the-counter medications
Doctor and dentist visits
Physical therapy


6. Rhonda paid $2,800 in mortgage interest during the year. She also paid $1,200 in real property taxes during the year.
7. Rhonda contributed $2,350 to her church during the year.

• Complete Alvin’s Music Inc.’s (AMI) 2011 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below.
• Neither Form 4562 for depreciation nor Form 4797 for the sale of the equipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given
in the problem) on the appropriate lines on the first page of Form 1120.
• Assume that AMI does not owe any alternative minimum tax.
• If any information is missing, use reasonable assumptions to fill in the gaps.
• The forms, schedules, and instructions can be found at the IRS Web site ( The instructions can be helpful in completing the forms.
Alvin’s Music Inc. (AMI) was formed in 2006 by Alvin Jones and Theona Smith. Alvin and Theona officially incorporated their store on June 12, 2007. AMI sells (retail) all kinds of music-related products including musical instruments, sheet music, CDs, and DVDs. Alvin owns 60 percent of the outstanding common stock of AMI and
Theona owns the remaining 40 percent.
• AMI is located at 355 Music Way, East Palo Alto, CA 94303.
• AMI’s Employer Identification Number is 29-5748859.
• AMI’s business activity is retail sales of music-related products. Its business activity code is 451140.
• Officers of the corporation are as follows:
• Alvin is the chief executive officer and president (Social Security number 123-45-6789).
• Theona is the executive vice president (Social Security number 978-65-4321).
• Gwen Givens is the vice president over operations (Social Security number 789-12-3456).
• Carlson Bannister is the secretary (Social Security number 321-54-6789).

Appendix C

• All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
• Neither Gwen nor Carlson owns any stock in AMI.
• AMI uses the accrual method of accounting and has a calendar year-end.
• AMI made four equal estimated tax payments of $70,000 each. Its tax liability last year was $175,000. If it has overpaid its federal tax liability, AMI would like to receive a refund.
• AMI paid a dividend of $80,000 to its shareholders on December 1. AMI had ample earnings and profits (E&P) to absorb the distribution.
The following is AMI’s audited income statement for 2010:

Income Statement
For year ending December 31, 2010
Revenue from sales
Sales returns and allowances

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