Income Taxation I

Fall 2008

Bogdanski

FINAL EXAMINATION – 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 on an approved type of computer disk or on separate sheets of plain white paper (or for those writing answers by hand, in the bluebooks you have been provided). No credit will be given for anything written on this set of questions.

Pay close attention to the final portion, or “call,” 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 “Code” mean the Internal Revenue Code of 1986, as amended.

QUESTION ONE

(One hour)

Erika is employed as a news reporter at NewsChannel, a broadcast television station in the city of Polis. Among the items of compensation she receives from her job is a tuition reimbursement plan offered by NewsChannel to all of its staff after they have worked at the station for more than two years. Under the plan, NewsChannel will reimburse up to $15,000 a year of tuition for education relating to broadcasting. Erika takes several college courses on video editing, at a tuition cost of $12,250, and NewsChannel reimburses her for the entire amount.

NewsChannel also offers employees the option to have a portion of what would otherwise be their salary designated for health insurance premiums and day care expenses. Erika opts to take medical insurance; at her request, NewsChannel pays $6,000 in medical insurance premiums for her during the year instead of paying her that much cash.

The next year, NewsChannel sends Erika off on a new assignment, covering events at the state capital, which is 200 miles away from her previous work at the station’s headquarters. Erika sells her personal residence in Polis and makes the move. Although real estate prices fell in the year leading up to the sale, Erika had owned the home for many years and thus was able to sell it for a great deal more than her original cost. At the closing, property taxes on the home are prorated, and Erika receives from the buyer a reimbursement of part of the property taxes she had paid in the fall of the previous year.

While working in the state capital, Erika lives in a rented townhouse. NewsChannel reimburses her for her entire rent, and it pays the cost of her transportation between the state capital and Polis, both in the original move and at various times during her assignment. Erika makes several trips back to Polis; on these trips, she attends NewsChannel staff meetings and retreats, and visits with her friends and family. Erika’s assignment in the capital lasts about 16 months, after which she rejoins the NewsChannel staff in Polis.

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

Explain.

(End of Question 1)

QUESTION TWO

(One hour)

Howard, a dentist who lives in a northerly climate, spends a lot of his winter weekends snowmobiling. He regularly enters snowmobile races, and he wins cash prizes in several such contests. These sporting pursuits are expensive. Howard spends substantial amounts on fuel, insurance, and maintenance for his snowmobiles, as well as the costs of the snowmobiles themselves and the expenses of transporting himself and his gear to races. Nonetheless, last year, for the first time, the prizes Howard won exceeded his out-of-pocket expenses from racing.

Howard’s fastest snowmobile is getting old and requires repairs. Rather than continuing to performing routine maintenance on the aging components, Howard overhauls the vehicle, completely replacing the engine, exhaust system, seat, tracks, and skis. The new equipment makes the snowmobile more fuel-efficient and quieter than it was when it was new. To pay for the work, Howard withdraws money from his account in a qualified retirement plan.

Howard places illegal side bets on some of his races. In one such transaction, he and another racer, Todd, agree that whoever runs the slower race will pay the other $1,000. Todd wins, and to make good on the bet, Howard transfers to Todd shares of corporate stock, with a fair market value of $1,000. Howard had received the stock from his mother, Mamie, as a birthday present several years previously. Mamie’s original cost for the stock was $1,500; at the time of her gift to Howard, the stock had a fair market value of $1,300.

What are the federal income tax consequences to Howard of all the transactions just discussed, with and without any available elections? Be sure to discuss the amount, timing, and character (ordinary or capital) of each item of income, gain, loss, deduction, or credit; and the basis of Howard’s property at each stage of the transactions.

Discuss.

(End of examination)

Created by: bojack@lclark.edu
Update:  18 Jan 09
Expires:  31 Aug 09