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). 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.
 
 

Howie and Wynona are husband and wife. They have two children, Charlie and Chelsea, ages 3 and 8, respectively. Howie, an attorney, owns some of the stock of a communications corporation named Bigco. Bigco's stock is traded on a national stock exchange.

Howie owes $100,000 to a stock broker. Early in 2000, Howie transfers some of his Bigco stock to the broker in satisfaction of the debt. At the time of the transfer, the stock has a fair market value of $100,000; its basis to Howie immediately before the transfer is $10,000. Also at that time, Howie has assets with a total fair market value of $500,000 and liabilities of $560,000, but he is not in bankruptcy.

Later in 2000, Howie and Wynona separate and are divorced. Wynona, a stay-at-home mother, gets custody of Charlie and Chelsea. As part of the written divorce settlement, Howie transfers some of his Bigco stock to Wynona. Howie purchased the transferred stock many years ago for $1,500; the fair market value of the stock at the time of the transfer to Wynona is $15,000.

In addition, the settlement provides that Howie must transfer to Wynona more Bigco stock -- $15,000 worth each year -- over the three years immediately following the divorce. Under the settlement, if Wynona dies within the three-year period, Howie's obligation to transfer the stock terminates. Howie makes the stock transfers, as scheduled, in 2001, 2002, and 2003; each time, his basis in the $15,000 block transferred is $1,500.

Other provisions of the written settlement require Howie to pay $1,000 a month in cash to Wynona until the earlier of (a) Wynona's death, (b) Wynona's remarriage, or (c) Charlie's 18th birthday. Howie faithfully makes the payments as specified by the settlement.

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

Discuss.

Tammi, an unmarried individual, is an executive with XYZ.com. As an employee of that corporation, Tammi has historically been entitled to purchase at a discount from XYZ.com goods of the type that the company sells to the public. The discount is equal to the company's entire profit margin on the goods. XYZ.com performs a study showing that the average employee takes advantage of $500 per year in cost savings from the discount program each year. In 2000, XYZ.com changes the plan to allow each employee to take $500 cash in lieu of the discounts. The new plan, like the old plan, covers the company's entire work force. Tammi elects to take the discounts and forgo the cash; in 2000, she purchases goods worth $2,000 for only $1,400.

Tammi has owned her own home for many years. She pays $14,000 in interest, along with a tiny amount of principal, on a home equity loan in 2000. Tammi took out the loan in 1999 to pay off her credit card debt and car loan, and to make routine repairs on the home. The principal balance on the loan during 2000 is approximately $200,000. Property taxes on the home, which Tammi pays in November 2000, come to $5,000.

Tammi gives some of her property to charity late in 2000. Among the donated items is a valuable collection of books, sound recordings, and movie memorabilia from the 1970's. Tammi's original cost for the items in the collection is $1,000; however, in the opinion of an independent expert appraiser, the collection has a fair market value at the time of the donation of $4,500. The charitable donee, a corporation organized and operated exclusively for religious purposes, sells the collection at an auction early in 2001 for $4,000.

Toward the end of 2000, a crisis develops at XYZ.com, and Tammi is required to put in grueling 70-hour work weeks for two months straight. During this period, Tammi takes co-workers out to lunch four days a week. Tammi and her co-workers spend their entire lunch period talking about XYZ.com business while they are eating. Tammi pays for the lunches by credit card, and she keeps meticulous records of whom she dined with and what they discussed. The total charges for the lunches comes to $2,100. Tammi pays her credit card bill, and submits a request for reimbursement to XYZ.com. XYZ.com reimburses Tammi the full $2,100 in cash in December 2000.

What are the federal income tax consequences to Tammi of each of the transactions just described? Be sure to discuss the amount, timing, and character (ordinary or capital) of each item of income, gain, deduction, loss, or credit.

Explain.

Created by: bojack@lclark.edu
Update: 07 Mar 02
Expires: 31 Aug 03