Income Taxation I
Fall 2010
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)
Carly, a
self-employed physician, specializes in performing
cosmetic surgery. Most of her clients
are aging “baby boomers” who come to her for various
procedures to make them look more youthful. Carly attends a
one-day seminar entitled “Manage Your Time, Your Money, and Your Life for
Greater Success and Happiness.” She pays
tuition for the event of $500.
At the seminar, she strikes up a
conversation with another physician, Duncan.
Several weeks after
After two months of this, Carly sues
Shortly after receiving the
settlement check from
What are
the federal income tax consequences to Carly 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 Carly’s
property, at each stage of the transactions.
Explain.
(End of Question 1)
QUESTION TWO
(One hour)
Jenny, a single woman, lives with
her mother, Marie, in a home that Jenny owns.
Marie is retired, and Marie’s only sources of income are her qualified retirement
plan account and government Social Security benefits; the Social Security
benefits are not taxable under the Code.
Marie has gross income of $4,800 a year, all from the qualified
retirement plan. Jenny provides slightly
more than half of Marie’s support for the year.
Marie gives Jenny the engagement
ring that Marie’s late husband, Floyd, had transferred to her just before they
were married. Floyd had inherited the
ring from his grandmother, Gail, when Gail died decades ago. When Gail died, the ring had a fair market
value of $800; when Floyd transferred it to Marie, it had a fair market value
of $1,200; and when Marie gives it to Jenny, it has a fair market value of
$2,000. Fifteen months after Marie gives
it to Jenny, Jenny sells the ring to a stranger for $1,850 cash.
Jenny’s son, Scott, is 16 years old
and a full-time student away at a boarding school in another state. Scott lives with Jenny during the summers and
during school breaks, but he receives most of his support from his father,
Jenny’s ex-husband, Oscar. Scott visits
Oscar occasionally but rarely stays overnight at Oscar’s residence.
Jenny’s brother, Brook, establishes
an irrevocable trust for the benefit of Jenny and Scott. Brook transfers to the trust a valuable
corporate bond; it has a fair market value of $100,000 and a basis in Brook’s
hands of $90,000 immediately before the transfer. The terms of the trust call for the income
from the bond to be paid annually to Jenny until her death; at that point, the
trust is to terminate and the assets in the trust are to be distributed to
Scott. The trustee, a bank, is given the
power to distribute income to Scott instead of Jenny if Scott needs money for
his education. Since Scott has ample
funds from Oscar, however, the bank never exercises this power. Every year, the bank distributes the income
of the trust to Jenny, as the trust documents require.
In October, Jenny wins a large prize
in a state lottery. The winning numbers
are announced on the internet. Under
the lottery’s rules, payments are made to the winner in cash 30 days after the
winner appears at lottery headquarters and surrenders the winning ticket to
claim the prize. After conferring with
her accountant, Jenny waits until December 15 to turn in her winning ticket. The prize is paid to her in cash on January
14 of the following year.
What are
the federal income tax consequences to Jenny 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 Jenny’s property, at each stage
of the transactions.
Discuss.
(End of examination)
Created by:
bojack@lclark.edu
Update: 18 Jan 11
Expires: 31 Aug 11