Income Taxation I

Fall 2004

Bogdanski

 

 

 

FINAL EXAMINATION B PART TWO

(Two hours)

 

INSTRUCTIONS

 

This second part of the examination consists of two essay questions, each of which will be given equal weight in determin­ing grades.  Two hours will be permitted for this part.  At the end of the two hours, you must turn in both this set of essay questions and your answers in the original envelope in which this set came.

 

All answers must be entered in the bluebooks you have been provided (or, for those typing or operating com­puters, on separate sheets of plain white paper or a computer floppy disk).  No credit will be given for anything written on this set of questions.

 

Pay close attention to the final portion, or Acall,@ of each question.  Failure to respond to the matters called for will result in a low score for the question.  On the other hand, discussion of matters outside the scope of the call of the question will not receive credit.

 

Be sure to explain as thoroughly as possible your answers to the questions posed.  Your reasoning, discussion, and analysis are often as important as any particular conclusion you reach.

 

The suggested time limit for each question is one hour.  Experience has shown that failure to budget one's time according to this limit can result in a drastic lowering of one's overall grade on this examination.

 

Unless otherwise expressly instructed, assume that all taxpayers described in the ques­tions are individuals, and that they report their income on the cash method and the calendar year for federal income tax pur­poses.  Any references to the ACode@ mean the Internal Revenue Code of 1986, as amended.

 

 

QUESTION ONE

(One hour)

 

Ursula takes a new job as the chief executive officer of Healco, a nonprofit hospital corporation.  Healco pays the expenses of moving Ursula and her belongings 3,000 miles across the United States to start work in her new position.

 

Under Ursula=s employment contract, she is required to live, rent-free, in a large and luxurious home that Healco owns, directly across the street from the hospital.  The roomy house and convenient location enable Ursula to hold several fund-raising dinners there each year for members of the Healco board of directors and wealthy residents of the surrounding community whom Healco considers to be prospective donors.  (Healco pays for the catering at these functions.)  The house also contains a separate basement apartment in which two nurses live on a rent-free basis; these employees of Healco are frequently on call for emergencies at the hospital.

 

A few years into her tenure at Healco, Ursula and her new husband, Bill, travel to Asia.  On the trip, they fly first class, stay at a four-star hotel, and eat in fine restaurants.  In Asia, Ursula attends a convention, at which she represents Healco.  The convention, entitled AWe Are the World of Medicine,@ is sponsored by an international association of health care and drug manufacturing executives.  The event lasts four days.  Ursula and Bill spend an additional four days in Asia sightseeing, and then return home.  Healco pays for all of the couple=s transportation, meals, and lodging expenses while on the trip.  Ursula keeps meticulous records of all of the couple=s substantial ex­penses, which she submits to Healco in order to get reimbursement.

 

Upon their return, Ursula sponsors a barbecue on the grounds of her residence, to which all of the hospital=s employees and their families are invited.  Several hundred people attend.  The bills for catering, decoration, and musical entertainment are large; Ursula pays them out of her own pocket and does not seek reimbursement.  AThis is my way of thanking the little people,@ she tells Bill.

 

What are the federal income tax consequences to Ursula of each of the transactions just described, with and without all available elections?  Be sure to discuss the amount, timing, and character (ordinary or capital) of each item of income, gain, deduction, loss, or credit.

 

Discuss.

 

(End of Question 1)

 

 

QUESTION TWO

(One hour)

 

Joe is a dentist.  For many years, he has owned vacant land, Blackacre, on the outskirts of City A in the State of X; he has been holding the land as an investment.  Joe=s adjusted basis in Blackacre is $100,000, but its fair market value is much higher than that.

 

A new X state law is passed under which owners of land are entitled to be compensated if they can prove that local land use regulations diminish the value of their property.  Joe files a claim under the new law regarding Blackacre, and he is awarded $250,000, which City A is required to, and does, pay him in cash.  Joe pays $25,000 to the attorney who represented him in the legal proceeding.  This amount covers the attorney=s fee and all of the expenses of bringing the claim.

 

A few years later, City A condemns Blackacre as a site on which to build a public market.  It pays Joe $500,000, which is the fair market value of the land at the time.  Joe puts most of this cash in the bank, but he uses $150,000 of it to purchase Greenacre, another parcel of land, which he plans to hold for investment.

 

In his spare time, Joe writes a journal, which he posts on a daily basis on the internet.  The internet journal, known as a weblog, or Ablog,@ discusses Joe=s hobbies and interests, and politics in City A; it never mentions the fact that he is a dentist.  Joe pays an internet service provider $120 a year to host his blog.  He also pays his cable television company $40 a month for high-speed internet access to his home.  Of the time he spends on the internet, Joe spends 20 percent of the time writing and posting to his blog.  On his blog, Joe provides a link whereby appreciative readers can make a donation to his writing endeavors.  In the first year of blogging, he receives $150 of donations, but his hope is that these will increase as his blog becomes better known.

 

What are the federal income tax consequences to Joe of each of the transactions just described, with and without all available elections?  Be sure to discuss the amount, timing, and character (ordinary or capital) of each item of income, gain, deduction, loss, or credit, and Joe=s basis in his assets, at each stage of the transactions discussed.

 

Explain.

 

(End of examination)