Income Tax I - Bogdanski - Fall 2015

Income Taxation I

Fall 2015

John A. Bogdanski

Douglas K. Newell Faculty Scholar

and Professor of Law

Lewis & Clark Law School

Practice problems

Here are some problems I’ve written to help you check your knowledge of some (but by no means all) of the topics covered in Chapters 1 through 5. These problems are completely optional.

Suggested answers to these questions will eventually be posted on the course internet page. Please try the questions yourself (and ideally, discuss them with someone else) before looking at the suggested answers!

Also, keep in mind that there are problems (and answers) in the Chirelstein handbook, at pages 106–115 (gross income), 241–248 (deductions), 298–303 (income splitting), 345-349 (accounting), 404–409 (recognition), and 476–482 (capital gain and loss).

A. Gifts

In each problem (except problem 10), the facts are:

A transfers $100 cash to B.

In each problem, the questions are:

-- How much (if any) gross income does B have?

-- How much (if anything) is A entitled to deduct?

1. A is B’s parent; the $100 is transferred out of detached and disinterested generosity (on B’s birthday).

2. A is B’s employer; the two people are unrelated. The $100 is transferred on payday as compensation for B’s services.

3. A is B’s employer; the two people are unrelated. The $100 is transferred completely out of detached and disinterested generosity.

4. A is B’s employer; the two people are unrelated. The $100 is transferred in part out of detached and disinterested generosity, and in part as compensation for B’s services.

5. A is B’s employer, and also B’s parent. The $100 is transferred completely out of detached and disinterested generosity on B’s birthday.

6. A is B’s employer, and also B’s parent. The $100 is transferred completely out of detached and disinterested generosity on payday.

7. A and B are business associates (but not in an employer-employee relationship). The $100 is transferred out of detached and disinterested generosity.

8. A and B are business associates (but not in an employer-employee relationship). The $100 is transferred as a reward to B for past business referrals.

9. A and B are business associates (but not in an employer-employee relationship). The $100 is transferred in part out of detached and disinterested generosity, and in part as a reward to B for past business referrals.

10. B is a waiter at a restaurant; A is B’s customer. A leaves B a $5 tip, in part because B gave good service and in part because A likes B personally.

B. Gain, loss and basis

1. Jay owns 1,000 shares of Acme Corp. common stock. His basis in the shares is 50 cents per share, for a total basis of $500. The stock has a fair market value of $1.20 per share. Acme declares a stock dividend, whereby Jay receives 1,000 additional shares of Acme common stock, with a fair market value of 60 cents a share. How much gain or loss does Jay realize on his receipt of the 1,000 new shares? What is his basis in the 1,000 new shares? What is his basis in his original 1,000 shares following the stock dividend?

2. Terri buys an antique sofa for $500. A few months later, she sells the sofa to Sarah for $600. How much gain or loss does Terri realize on the sale of the sofa? What is Sarah’s basis in the sofa?

3. Same facts and questions as Question 2, except that Terri sells the sofa to Sarah for $425.

4. Dan buys Blackacre, a parcel of real estate, in year 1 for $30,000. In year 9, when the real estate has a fair market value of $40,000, Dan gives the land to his brother, Curtis, as a gift. How much gain or loss do Dan and Curtis realize at the time of the gift? In year 10, Curtis sells Blackacre for $55,000. How much gain or loss does Curtis realize as a result of the sale?

5. Same facts and questions as Question 4, except that at the time of the gift in year 9, Blackacre is worth (i.e., has a fair market value of) $20,000. (As in Question 4, Curtis sells it in year 10 for $55,000.)

6. Same facts and questions as Question 4, except that at the time of the gift in year 9, Blackacre is worth $20,000, and Curtis sells it in year 10 for $15,000.

7. Same facts and questions as Question 4, except that at the time of the gift in year 9, Blackacre is worth $20,000, and Curtis sells it in year 10 for $25,000.

8. Janice buys 1,000 shares of Nike stock in year 1 for $20 per share. In year 5, she dies, leaving the stock to her niece, Kay. At the time of her death, and for purposes of the estate tax on Janice’s estate, the fair market value of the Nike stock is $80 per share. How much gain or loss do Janice and Kay realize as the result of Janice’s death? In year 9, Kay sells all of the 1,000 shares for $85 a share. How much gain or loss does Kay realize on the sale of the stock?

9. Eddie owns Greenacre, a 20-acre tract of real estate, with a basis of $100,000 and a fair market value of $200,000. He sells an easement across Greenacre to a neighbor for $25,000. How much gain or loss does Eddie realize on the sale of the easement? What is Eddie’s basis in Greenacre immediately after the easement transaction?

10. Same as Question 9, except that, instead of selling an easement to the neighbor, Eddie sells her a fee simple absolute interest in 2½ acres for $25,000. How much gain or loss does Eddie realize on the sale of the acreage? What is Eddie’s basis in Greenacre immediately after the sale?

11. In her will, the late Yolanda created a trust, to which her Voltco common stock was transferred upon her death. She had purchased the stock some years before her death at a price of $10,000; at the time of her death in year 1, and for estate tax purposes, the stock had a fair market value of $30,000. The trust provides that income from the stock shall be paid to Yolanda’s daughter, Denise, for Denise’s life, with the remainder to Denise’s son, Gilbert. In year 3 the stock earns a dividend of $2,500, which the trustee of the trust pays to Denise. How much income does Denise have as a result of the dividend? In year 8, Denise sells her life interest to Zeke, a speculator, for $18,000; Gilbert retains his remainder interest. How much gain or loss does Denise realize on the sale of her interest? Would the answer be different if, along with Denise, Gilbert sold his remainder interest to Zeke?

12. Doris, a doctor reporting income on the cash method, performs services for a patient in October of year 1 and sends the patient a bill for $200 that same month. In November of year 1, Doris dies. For purposes of the estate tax, the account receivable from the patient has a fair market value of $200. In March of year 2, the patient pays the bill and Doris’s estate receives the $200 cash. How much gain or loss do Doris and her estate have when Doris dies? When the patient pays the bill?

C. Debt

1. Ben borrows $5,000 from a bank to pay medical school tuition. How much income does Ben have when he borrows the $5,000?

2. Wally borrows $18,000 from a bank and uses it to buy a new car. How much income does Wally have when he borrows the $18,000? Assuming Wally does not use any of his own funds to buy the car — that is, the total price is $18,000 — what is Wally’s basis in the new car? What if Wally chips in $4,000 of his own funds, along with the $18,000 borrowed from the bank, to buy the car?

3. Stuart borrows $3,500 from his father, Frank. The following year, on Stuart’s birthday, Frank forgives the entire loan, which at that point had an outstanding balance of $3,000. What are the income tax consequences to Stuart of the making of the loan, its partial repayment, and its cancellation?

4. Connie buys a piece of computer equipment from a dealer. She agrees to pay the dealer a total of $5,000 for the equipment over a two-year period, along with interest on the unpaid balance at 11 percent a year. A few weeks after she gets the equipment home, Connie discovers that it does not work as well as the dealer had promised. When she complains, the dealer reduces Connie’s debt from $5,000 to $4,200. What are the income tax consequences of these transactions to Connie?

5. Leonora borrows $500,000 from a bank to start a business. The loan is a long-term loan at a fixed interest rate. A few years later, when Leonora owes the bank $450,000 of principal, interest rates rise sharply, and she offers the bank $420,000 in exchange for her entire obligation. The bank accepts the $420,000 and cancels the other $30,000 of her debt. Leonora is solvent both before and after these transactions. What are the income tax consequences of these transactions to Leonora?

6. Same facts and question as in Question 5, except that the cancellation of the debt takes place in Leonora’s Chapter 7 bankruptcy proceeding in the U.S. Bankruptcy Court.

7. Same facts and question as in Question 5 (with no bankruptcy), except that immediately before the cancellation takes place, Leonora has assets with an aggregate fair market value of $455,000, and total debts (including the debt to the bank) of $465,000.

8. Edna owes her housekeeper, Hank, $100. Edna satisfies this obligation by transferring to Hank a widget worth $100. Edna’s adjusted basis in the widget immediately before the transfer is $55. What are the income tax consequences of these transactions to Edna? By way of review of another topic, what are the tax consequences to Hank (including Hank’s basis in the widget)?

9. Melissa transfers a parcel of land as a holiday gift to her son, Sean. The fair market value of the land is $100,000; Melissa’s adjusted basis in it immediately before the gift is $20,000. As a condition of the gift, Sean agrees to (and promptly does) pay a $25,000 debt that Melissa owes to her ex-husband. No gift tax is owing as a result of the transaction. What are the tax consequences to Melissa of these transactions? What is Sean’s basis in the land?

10. Same facts and questions as in Question 9, except that Melissa is insolvent both before and after her transaction with Sean.

11. Same facts and questions as in Question 9 (with Melissa solvent), except that Melissa’s adjusted basis in the land immediately before the gift is $28,000.

12. Randy borrows $200,000 and uses it to buy a duplex for use as a rental property. Randy grants a first mortgage to the lender to secure the $200,000 loan, which is a recourse loan (i.e., Randy is personally liable for the entire amount). The total price of the duplex is $200,000.

Three years later, having taken $15,000 of depreciation on the property, Randy’s adjusted basis in it is $185,000. The outstanding principal balance of the loan at this point is $195,000. Randy sells the duplex to Whitney, who pays Randy $15,000 and agrees to assume the mortgage. What are the tax consequences to Randy of these transactions? What is Whitney’s basis in the duplex?

13. What difference (if any) would it have made in Question 12 if the mortgage had been nonrecourse rather than recourse?

14. What difference (if any) would it have made in Question 12 if Randy had been in bankruptcy at the time of the sale?

15. Teresa borrows $580,000 and uses it buy commercial real estate. Teresa grants a first mortgage to the lender to secure the $580,000 loan, which is a nonrecourse loan (i.e., Teresa is not personally liable for the unpaid balance). Teresa adds $20,000 of her own funds to make up the rest of the purchase price for the property, which totals $600,000.

Four years later, having taken $60,000 of depreciation on the property, Teresa’s adjusted basis in it is $540,000. The outstanding principal balance of the loan at this point is $570,000. The value of the property is only $545,000. Teresa abandons the property, surrendering it to the lender in full satisfaction of the mortgage. What are the tax consequences to Teresa of these transactions?

16. What difference (if any) would it have made in Question 15 if the mortgage had been recourse rather than nonrecourse?

17. What difference (if any) would it have made in Questions 15 and 16 if Teresa had been in bankruptcy at the time of the abandonment?

18. Howard owns his own home, which he bought 10 years ago. His adjusted basis in the house is $70,000, and there is a first mortgage on it, securing a loan in the amount of $45,000. The fair market value of the property is $160,000; therefore, Howard’s “equity” in the home is $115,000 (the $160,000 fair market value less the $45,000 first mortgage).

Howard takes out a home equity loan, borrowing $25,000. He uses the money to add a den in his attic. The permanent improvement to the house increases Howard’s adjusted basis to $95,000. Howard grants a second mortgage to the bank making the home equity loan. A short time later, Howard sells the home to a buyer, Barb. Barb agrees to pay Howard $115,000 cash, and to assume both the $45,000 first mortgage and the $25,000 second mortgage. What are the tax consequences to Howard of these transactions? What is Barb’s basis in the home?

19. Irv owns his own home, which he bought 10 years ago. His adjusted basis in the house is $70,000, and there is a first mortgage on it, securing a loan in the amount of $45,000. The fair market value of the property is $160,000; therefore, Irv’s “equity” in the home is $115,000 (the $160,000 fair market value less the $45,000 first mortgage).

Irv takes out a home equity loan, borrowing $25,000. He uses the money to pay his children’s college tuition. Irv grants a second mortgage to the bank making the home equity loan. A short time later, Irv sells the home to a buyer, Paula. Paula agrees to pay Irv $90,000 cash, and to assume both the $45,000 first mortgage and the $25,000 second mortgage. What are the tax consequences to Irv of these transactions? What is Paula’s basis in the home?

D. Chapter 2 — general essay question

Arnold is a former Olympic athlete who runs his own health spa and gymnasium in Beverly Hills. He is highly successful in setting up and supervising fitness programs for entertainers such as movie stars and rock stars. His annual income from his instruction is about $500,000.

One of Arnold’s clients is Jane, an aging actress. After several months of training with Arnold, Jane falls in love with him. The two begin dating extensively, and Arnold sometimes spends the night at Jane’s home. A few months after their relationship begins, Jane says to Arnold, “Why don’t you sell the spa and become my personal fitness trainer? You could come and live in my mansion and give me personalized fitness workouts every day. I’d take good care of you financially. You’ll never want for anything as long as I’m alive, and I’ll make generous provision for you in my will.”

Arnold accepts Jane’s offer, sells the spa, and moves into Jane’s mansion. For two years, he devotes himself entirely to Jane’s fitness needs, abandoning all other professional opportunities. Arnold invests the proceeds from the sale of the spa in a long-term speculative venture, and lives entirely off Jane’s funds for the two years. The two do not marry.

On day in the mansion, Jane is accidentally crushed and killed when she drops a huge barbell onto her abdomen. Arnold, heartbroken by the incident, is further horrified when Jane’s only surviving relative, a son named Dweezil, produces what purports to be Jane’s last will and testament, dated a week before her death. This document makes no provision for Arnold; in fact, it specifically leaves him nothing while leaving Jane’s entire estate, valued at more than $50 million after estate taxes, to Dweezil. About 18 months earlier, Jane had signed a will leaving Arnold half of the estate, with the other half going to Dweezil. Dweezil claims the later will was meant to supersede the earlier will.

Dweezil calls a nationally televised press conference at which he states: “This Arnold is nothing but a bloodsucker. He used my mother, and now he’s trying to take me to the cleaners. She never loved him. And besides, he’s always been a lousy fitness trainer.” When Arnold unexpectedly appears at the door of the press conference, Dweezil angrily hurls a microphone stand at Arnold, hitting him on the mouth and breaking his two front teeth.

Arnold files a claim in the probate court proceeding in which Jane’s estate is being administered. He makes two alternative assertions in the probate court: First, that he is entitled to $25 million under the first will, which he claims is the only valid will; and second, that even if the second will is valid, he is entitled to $5 million, being his allegation of the fair market value of his services over the two years in which he worked exclusively for Jane.

Arnold also sues Dweezil on two counts: (1) for libel, alleging damage to Arnold’s personal and professional reputation on account of the statements Dweezil made at his press conference, and (2) for assault. The suit seeks $5 million in compensatory damages and $10 million in punitive damages.

Several months later, Dweezil and Arnold sign a settlement agreement. In it, Arnold agrees to drop all claims against the estate and against Dweezil, so long as the estate pays Arnold $10 million. Shortly after the settlement agreement is signed, the estate pays $10 million to Arnold, and all the court cases are closed. The rest of Jane’s estate is distributed to Dweezil.

How must Arnold treat, for federal income tax purposes, the $10 million he receives from the estate? Explain.

E. Nonrecognition provisions

1. A, a dealer in real estate, swaps Blackacre, with an adjusted basis of $20 and a fair market value of $100, for Whiteacre, also with a value of $100. How much gain must A recognize in the year of the exchange? What is A’s basis in Whiteacre immediately following the exchange?

2. B, a lawyer, trades stock held for investment for stock of the same kind. B’s basis in the old stock was $40; its fair market value (and that of the like stock B acquires) is $70. How much gain must B recognize in the year of the exchange? What is B’s basis in the new stock?

3. C has a truck she uses for productive use in her business. The truck has a basis of $30 and a fair market value of $80. C trades the truck for a different used truck, also to be used in her business, with a fair market value of $80. How much gain must C recognize in the year of the exchange? What is C’s basis in the new truck?

4. Same as Question 3, except that C receives a different truck with a value of $60 and $20 cash.

5. Same as Question 3, except that C receives a different truck with a value of $20 and $60 cash.

6. D holds Greenacre for investment. Greenacre has a basis of $15 and a fair market value of $85. D trades Greenacre for Redacre, also to be held for investment, with a fair market value of $65, plus a truck worth $20. How much gain does D recognize in the year of the exchange? What is D’s basis in Redacre? In the truck?

7. Same as Question 6, except that Greenacre is transferred subject to a mortgage of $5, and the truck has a value of only $15.

8. Same as Question 6, except that Greenacre has a value of only $75, and D takes Redacre subject to a mortgage of $10.

9. Same as Question 6, except that Greenacre is transferred subject to a mortgage of $5, D assumes a $25 mortgage on Redacre, and the truck is worth $40.

10. Y has a computer that he uses in his trade or business. It has a basis of $45 and a fair market value of $35. Y trades the computer in at a local dealership. For the old computer and $40 cash, Y gets a new computer worth $75. The new computer is to be held by Y for use in Y’s trade or business. How much gain or loss does Y recognize in the year of the trade-in? What is Y’s basis in the new computer?

11. Z owns investment real estate with a fair market value of $200, basis of $80. Z trades it for like-kind property worth $350, taking the new property subject to a mortgage of $150. The new property is to be held for productive use in Z’s trade or business. How much gain or loss does Z recognize on the exchange? What is Z’s basis in the new property?

12. E has investment real property with a basis of $60 and a value of $100. The property is encumbered by a $30 bank debt, so that E’s “equity” is $70. The property is condemned (or destroyed) and the condemning authority (or insurance company) pays E $100. E takes $30 of the $100 and pays off the bank; within 2 years later, he reinvests $70 in other property similar in use to the property lost. What results (gain/loss and basis) to E? What if E is a real estate dealer?

13. In 2011, F sells Oldacre, his principal residence for the previous three years (basis $50,000, mortgage $10,000), for $70,000 cash plus assumption of his $10,000 debt. Within two years of the sale (before or after), he buys a new principal residence, Newacre, for $75,000 — $55,000 cash and a $20,000 note. How much gain is recognized on the sale? What is F’s basis in the new home?

14. Same facts and questions as in Question 13, except that F, tired of home ownership, sells Oldacre and does not buy a new home.

15. Same facts and questions as in Question 13, except that F sells Newacre. The buyer pays F $65,000 cash and assumes F’s obligation on his note, which has an outstanding principal balance at the time of the sale of $18,000.

F. Installment sales

In each problem, assume that the buyer’s installment note bears interest at a market rate, and that such interest is payable, and actually paid, by the buyer monthly or quarterly.

1. Stan, a real estate dealer, sells Betty a parcel of real estate on which Betty intends to build an office building. Stan’s adjusted basis in the parcel immediately before the sale is $60. Betty agrees to pay Stan a total of $100 for the property: $40 down and $10 of principal each year for six years. At the time of the closing, the fair market value of Betty’s promissory note for the six deferred payments is $58. How much gain does Stan have when the sale closes and Betty delivers her check for the $40 down payment and her promissory note? How much gain does Stan have when the note is paid off?

2. Susan, an attorney, sells 750 shares of Chrysler Corp. stock to Bob. Bob agrees to pay Susan a total of $1,000 for the stock: $800 down and $200 on January 5 of the following year. Susan’s adjusted basis in the stock immediately prior to the sale is $250. How much gain does Susan have when the transaction closes and she receives Bob’s $800 check and $200 promissory note? How much gain does Susan have when Bob makes the $200 deferred payment the next year?

3. Steve, a physician, sells a piece of investment real estate to Barbara. Steve’s adjusted basis in the parcel immediately prior to the transaction is $10,000. The total selling price of the parcel is $100,000. Barbara agrees to pay $20,000 down and $20,000 a year for four years. Barbara’s obligation to make the deferred payments to Steve is guaranteed by Barbara’s wealthy mother and additionally secured by a first mortgage on the property. How much gain does Steve have when the transaction closes and he receives Barbara’s $20,000 check and $80,000 promissory note? How much gain does Steve have when Barbara makes each of the four deferred $20,000 payments of principal on the note?

4. Same facts and questions as in Question 3, but Steve makes an election under section 453(d) of the Code. Assume the fair market value of Barbara’s note at the time of the closing is $75,000.

5. Same facts as in Question 3, but immediately after the closing, Steve gives Barbara’s note to his son, Manny, as a birthday gift. (For this Question 5, assume that no election under section 453(d) is made.) How much gain does Steve have upon receipt of Barbara’s check and note at the closing? Is the gift of the installment note a taxable event to Steve? To Manny? If so, how much gain does Steve or Manny recognize at the time of the gift? Can you think of a better way to structure this transaction?

6. Same facts as in Question 3 (with no election and no gift), but after collecting the $20,000 down payment and two of the four $20,000 payments due on the note, Steve sells the note (now with a face amount of $40,000) to a bank for $37,500. How much gain does Steve have at the closing of the original sale? When he collects the two $20,000 payments? When he sells the note to the bank?

7. Same facts as in Question 6, but instead of selling the note to the bank, Steve pledges it as collateral for a $37,500 loan. How much gain, if any, does Steve have when he borrows the money and pledges the note to the bank as collateral? When he collects the final $40,000 on the note?

8. Samantha, an accountant, owns a parcel of vacant land that she has held for investment. The property has a fair market value of $100,000, but it is encumbered by a mortgage securing a loan that Samantha took out years ago to buy the property. The outstanding balance on the mortgage loan is $10,000. Samantha sells the property to Brian for a total price of $100,000: $50,000 down; assumption by Brian of the $10,000 mortgage; and Brian’s promissory note, obligating him to pay Samantha $10,000 a year for the next four years. Samantha’s basis in the land is $40,000 immediately prior to the sale. How much gain does Samantha have at the closing? How much gain does she have on the receipt of each of the four payments from Brian? How much gain does she have when Brian pays off the mortgage?

9. Same questions as Question 8, except that the outstanding balance on the mortgage at the time of the sale is $30,000; Samantha’s basis in the land is $20,000; and the terms of the sale are $50,000 down, assumption by Brian of the $30,000 mortgage and payments by Brian to Samantha of $5,000 a year for the next four years.

G. Travel, meals, and entertainment

1. On her day off, A takes a drive in the country. Her round trip from her home to the country and back runs 80 miles. Does A get a deduction for the transportation, and if so, how much does she get to deduct?

2. B is a partner in a law firm. B gets in his car in the morning and drives to the firm’s office, five miles away. B pays $200 a month for a parking space near his office. At the end of the day, B drives back home. The firm does not reimburse B for any transportation-related costs. Does B get a deduction for the transportation, and if so, how much does he get to deduct?

3. C works as an employee at a company in Portland. C and her family live in Bend, which is 175 miles from Portland. C drives her car to Portland every Sunday evening and stays in Portland until late Friday afternoon, when she drives back to Bend for the weekend. C rents a room in a friend’s house in Portland, in addition to the home she owns in Bend. Her employer does not reimburse C for any costs. Does C get a deduction for the travel, and if so, how much does she get to deduct?

4. D is an employee of an accounting firm. D gets in her car in the morning and drives to the firm’s office, eight miles away. D pays $10 a day for parking near her office. One day, D’s employer sends her out of the office to meet with a client. D’s drives her own car 15 miles each way to and from the client’s office, where parking is free. After meeting with the client, D returns to her office. At the end of the day, D drives back home. The firm does not reimburse D for any transportation-related costs. Does D get a deduction for the transportation, and if so, how much does she get to deduct?

5. Same as Question 4, except that upon request from D, the firm reimburses D $15 for her use of her car.

6. Same as Question 4, except that rather than driving back to her office, D drives directly home from the client meeting. The distance from the client’s office to D’s residence is 21 miles. The firm reimburses D $18 for her use of her car.

7. E is a self-employed construction contractor who works out of an office in his residence. Each morning, E drives his truck from his residence to his current job site; at the end of each day, he drives the truck back to the residence. During the day, E sometimes drives away from the current job site to pick up supplies and visit prospective clients. E’s projects rarely last more than three months. Does E get a deduction for the transportation, and if so, how much does he get to deduct?

8. F is an employee and officer of a corporation. F is involved in negotiating a contract with a customer in a city 500 miles away. F takes a day trip to the customer’s premises. F leaves her residence and takes a taxi to the airport, flying from there to the customer’s headquarters city. Upon arrival there, F takes another taxi to the customer’s premises. After a five-hour meeting, F takes a taxi back to the airport, flies home to her home city, and takes another taxi from the airport to her residence. F’s contract with the corporation requires her to pay her own expenses for the trip. Does F get a deduction for the transportation costs, and if so, how much does she get to deduct?

9. Same as Question 8. On the trip, F eats breakfast in one airport and a late lunch in the other. Does F get a deduction for the cost of the meals, and if so, how much does she get to deduct?

10. G, a self-employed attorney, is engaged in an intense settlement negotiation with opposing counsel in a major lawsuit. To keep momentum going in the discussions, the two lawyers order lunch brought in to the conference room, and they keep negotiating while they eat together. G pays for both his own food and the other lawyer’s food. Does G get a deduction for the meal costs, and if so, how much does he get to deduct? Does the other lawyer have gross income?

11. A law firm holds a firm-wide business meeting at lunchtime every working day. H, a lawyer in the firm, regularly attends the meetings and pays for her own lunches at the restaurant. Does H get a deduction for the meal costs, and if so, how much does she get to deduct?

12. I, a marketing executive for a large company, leaves the company’s headquarters and heads out on a long-distance trip to visit a major account. She flies to the customer’s headquarters city and stays there for three nights while she meets with the customer’s personnel at great length over the course of two days. All of I’s ground transportation is by taxi. Does I get a deduction for her travel costs, and if so, which expenses does she get to deduct? What if I’s employer reimburses her for the costs?

13. Same as Question 12, except that I takes her husband along on the trip, which increases the air fare and meal costs, but not the hotel bill. I works all day on both days in the foreign city, while her husband visits museums as part of researching his master’s thesis in art history.

14. Same as Question 13, except that I joins her husband for all of the second day on his tour of the museums.

15. J, a scientist employed by a drug company, leaves his employer’s headquarters on a special assignment. J flies to another city, 2,000 miles away, and works with other personnel of the employer there for six months. While in the other city, J rents an apartment, where he prepares some of his meals, although he frequently patronizes restaurants. At the end of the six months, J flies back to headquarters and resumes working there. Does J get a deduction for his airfare, rent, and meals while gone on special assignment, and if so, how much does he get to deduct? What if J’s employer reimburses him for the costs?

16. Same as Question 15, except that the special assignment is for 15 months.

17. K, a full-time graduate student in Portland, gets a job teaching summer school at a college in San Francisco. K drives her car to San Francisco and spends the summer teaching there. While in San Francisco, K rents an apartment, where she prepares most of her own meals. At the end of the summer, K drives back to Portland and resumes her studies here. Does K get a deduction for the auto travel, rent, and meals, and if so, how much does she get to deduct? What if K’s San Francisco school reimburses her for the costs?

18. L, a physician who owns her own practice, attends a conference of health care professionals at a resort. Meetings are held for most of the day over three days, but the participants also take some time off for the beach, the spa, the golf course, and the bar. Does L get a deduction for her travel costs, and if so, which expenses does she get to deduct? What if L was an American physician, and the resort was in Europe?

19. M, a self-employed political consultant, takes his client, a political figure, out to a major league sporting event, immediately followed by a trip to a fancy restaurant for dinner. The two travel by limousine and sit in the front row at the game. In order to keep the spirit of the evening light, M does not discuss politics with the client except for a brief mention as they are putting on their coats in the restaurant. M picks up all of the expenses for the evening, which are substantial. Does M get a deduction for these costs, and if so, which expenses does he get to deduct?

20. Same as Question 19, except that M is an employee of a political consulting firm, which reimburses M for the expenses.

21. Same as Question 19, except that M is an employee of a political consulting firm, which does not reimburse M for the expenses.

22. N’s employer, Corp, pays N’s monthly dues at a downtown businesspersons’ club near Corp’s business headquarters. N uses the club membership solely to entertain customers, employee prospects, financiers, investors, and other business contacts. Corp also reimburses N for her meal expenses at the club, which are substantial. What are the federal income tax consequences to N of these arrangements?

23. What kinds of documentation must a taxpayer maintain to prove expenses for (a) business transportation, (b) meals, (c) lodging, and (d) entertainment?

Created by: bojack@lclark.edu
Update: 17 Nov 15
Expires: 31 Aug 16