Income Taxation I
Fall 2009
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)
In 2005, Mark buys a single-family
home that he rents out at a fair market rent to an unrelated taxpayer as part
of Mark’s rental business. In purchasing
the home, Mark pays the seller $350,000 for the property – $35,000 out of his
savings, and $315,000 borrowed from a commercial lender, to whom Mark grants a
first mortgage on the property. Mark
also pays $3,000 of transaction costs, including an attorney’s fee, in
connection with the purchase.
In 2005 through 2009, Mark properly
deducts a total of $60,000 of depreciation with respect to the home. He makes no improvements to it, although he
does spend several thousand dollars each year on repairs and maintenance. At the end of 2009, Mark has paid back only
$5,000 of the principal on the mortgage, so that the outstanding principal
balance is $310,000. The property has
appreciated; at the end of 2009, it has a fair market value of $400,000, so
that Mark’s “equity” in the property is $90,000.
At the beginning of 2010, Mark
approaches you, an attorney, for advice about two alternative transactions he
is considering. The first of these is a
proposed exchange with Tina, a local real estate dealer. In the transaction, Mark would transfer the
rental home to Tina, who would assume the mortgage on the home and convey to Mark
her interest as a tenant in a long-term leasehold on a warehouse in a different
state. The lease, which still has 35
years to run, is on terms favorable to the tenant, and Tina’s interest has a
fair market value of $90,000. Mark
intends to sublease the warehouse property to a manufacturing company. Tina would hold the rental house for sale to
one of her customers. No cash would
change hands in the proposed deal between Mark and Tina.
Alternatively, Mark is thinking of
giving the rental home to his daughter, Leila, as a wedding gift. In the proposed gift, Leila would take the
property and assume the mortgage.
What are
the federal income tax consequences to Mark of each of 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 Mark’s basis in the property he holds, at each stage
of the transactions.
Explain.
(End of Question 1)
QUESTION TWO
(One hour)
Amber is employed as the director of
public relations for a large medical clinic, Medco. Her position requires her, among other tasks,
to foster positive relationships with local media. She receives a generous salary but is required
to pay many job-related expenses out of her own pocket.
Amber’s office is in the central
city, and her residence is in the suburbs.
Every working day, Amber drives her car from her residence to her
office. Several times a month, her work
duties require her to drive her car from her office to various media outlets
and satellite clinics around the metropolitan area. Sometimes she leaves these remote locations
and drives directly back to her residence at the end of her working day. Amber keeps meticulous records of all her
work-related auto usage.
One afternoon while at her office,
Amber receives a phone call from Sandy, the editor-in-chief of The Journal,
the largest newspaper in the area.
Medco does not reimburse Amber for
any use of her car, for the cost of the meal and drinks with
Amber’s demanding work schedule
causes her marriage to deteriorate, and she and her husband Henry get a
divorce. The divorce decree requires
Amber to make the mortgage payments on Henry’s residence for the three years
immediately following the effective date of the divorce, even if Henry
remarries during that period. Amber gets
custody of the couple’s 11-year-old daughter, Darla. Following the divorce, Amber pays a
professional nanny a substantial fee to look after Darla after Darla gets out
of school each day, and all day during school vacations.
What are
the federal income tax consequences to Amber of each of 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.
Discuss.
(End of
examination)
Created by:
bojack@lclark.edu
Update: 19 Jan 10
Expires: 31 Aug 10