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, this set of essay questions and your answers to them will be collected. 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.
 
 

Marcia is a successful self-employed dealer of real estate. Her adjusted gross income exceeds $100,000.

One of the parcels that Marcia sells in 1996 is Blackacre. Marcia's basis in Blackacre is $20,000. She sells it to a customer, Kurt, for a total selling price of $40,000. Kurt makes an immediate $10,000 down payment in 1996 and agrees to pay Marcia an additional $6,000 a year, plus interest at a market rate, in each of the years 1997 through 2001. At the time of the closing, Kurt's promissory note for the $30,000 of deferred payments has a fair market value of $28,000.

Also in 1996, Marcia donates Whiteacre -- another parcel that she has been holding for sale to customers -- to a domestic corporation organized and operated exclusively for charitable purposes. Immediately before the donation, Whiteacre has a basis to Marcia of $15,000 and a fair market value of $22,000. Due to the charity's planned use of Whiteacre, the fair market value of other real estate in the vicinity increases slightly; Marcia owns some of the neighboring real estate.

Later the same year, Marcia buys a used car to commute in. The seller is a used car dealership. Marcia pays $3,000 down and agrees to pay the auto dealership an additional $10,000, plus interest at a market rate, over the following two years. A few weeks after the purchase, Marcia discovers mechanical defects in the car. She files a claim with the dealership and, after several rounds of haggling, the dealership reduces Marcia's debt to it from $10,000 to $8,000.

At year-end, Marcia throws a large party for her real estate customers and their spouses and dates. She spends $500 to rent a hall, $3,000 on catering, and $1,000 for an orchestra to play at the event. At the request of the orchestra leader, Marcia pays the $1,000 in cash.

What are the federal income tax consequences to Marcia in 1996 of the transactions just described? Be sure to discuss the amount, timing and character (ordinary or capital) of each item of income, deduction, loss or credit.

Explain.

Judy and her husband Bill have decided to get a divorce. You are Bill's tax lawyer. Judy's relatively inexperienced family lawyer has proposed a settlement of the couple's affairs, and Bill has asked you for tax advice.

Under the proposed settlement, which would be embodied in the official court decree, Bill would sell Judy a rental house that is his separate property. Bill's adjusted basis in the house is $40,000; its fair market value is $150,000. There are no mortgages on the property. Judy would pay Bill $45,000 for the house out of her separately owned funds. She would be acquiring the property at a bargain price, but the parties would agree that this is an equitable division of property as required by local divorce law.

In addition, Bill would be required to pay Judy a monthly sum over the three years immediately following the divorce. The proposed settlement would require Bill to pay Judy $1,000 a month; if Judy dies or remarries during the three-year period, Bill must make the payments to whomever Judy designates in her will. The agreement and decree would specifically label all of the $1,000 monthly payments "alimony."

The proposed settlement and decree would also grant Judy custody of the couple's eight-year-old son, Scott, and three-year-old daughter, Heather. Bill would receive visitation rights and be required to pay Judy $900 a month for the support of the children. The payments would constitute about 70 percent of the children's support. Judy plans to spend much of the money on child care to enable her to go back to school.

Answer both of the following questions:

A. Advise Bill on the federal income tax consequences to him of the proposed settlement. Be sure to include discussion of the amount, timing and character (capital or ordinary) of all items of potential income, deduction, loss and credit.

B. Would any alternative settlement plans be more favorable to Bill for federal income tax purposes? If so, what are these alternatives and how would they be more favorable?

Explain.

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