TAX RESEARCH PROBLEMS

FEDERAL TAX II
1.

A new member of the San Diego Chargers wants the team to transfer $1,000,000 into an escrow
account, in his name, for later withdrawal. The player suggests this payment in lieu of the
traditional signing bonus. When is this income taxable to him?

2.

Professor Stevens obtained tenure and promotion to full professor status many years ago. Yet, he
continues to publish research papers in scholarly journals to satisfy his own curiosity and to
maintain his professional prestige and status within the academic community. Publications are also
necessary in order for Professor Stevens to receive pay raises at his university. This year, Dr.
Stevens spent $750 of his own funds to travel to southern Utah to collect some critical pieces of data
for his work. What is the tax treatment of this expenditure?

3.

Austin Towers is a convicted former spy for the Soviet Union. Austin received a communication
from a Soviet agent that $2 million had been set aside for him in an account upon which he would
be able to draw. Austin was told that the money was being held by the Soviet Union, rather than in
an independent or third party bank or institution, on petitioners behalf. Over the next few years,
Austin drew approximately $1,000,000 from the account. During that period, Austin filed annual
tax returns with his wife showing taxable income of approximately $65,000 per year. Conduct
appropriate research to determine Austins tax liability for the $1,000,000 in spy fees. Write a client
letter to Austin explaining your findings. His address is Lompoc Federal Prison, Cell #123,
Lompoc, CA 93401.

4.

Kenny had been a waiter at the Burger Pitt for four years. The Pitt treats its employees well,
allowing them a 30 percent discount for any food that they buy and consume on the premises. This
year, the value of this discount for Kenny amounted to $500 for days on which he was working and
$150 for days when he was not assigned to work but still stopped by during mealtimes. How much
gross income must Kenny recognize this year with respect to the discount plan?

5.

Willie was tired of cleaning up the messes that his wife made in their house. One morning, he found
a crumpled Kleenex on the bathroom vanity, so he disgustedly flushed it down the toilet.
Unfortunately, the Kleenex was wrapped around Barbaras engagement ring, which she had
removed the previous evening after cutting her finger while shoveling snow. Is the couple allowed a
deductible casualty loss for Federal income tax purposes under IRC 165?

6.

Louella was born into a poor family that lives in a poor section of town. She recently got a job as
wardrobe consultant at High Fashions, Ltd. A retailer of expensive womens clothing at an Elm
Grove shopping mall. Can Louella claim a 162 business expense deduction on her Federal income
tax return for the cost and upkeep of the expensive Yves St. Laurent outfits that she is required to
wear on the job?

7.

Gardner Toni lent Harry a new $500 lawn mower. Harry ruined the lawn mower, but replaced it
with a $425 model. Later in the same year, Toni lent Harry $5,000 for bail, $3,000 to start a fencing
operation, and $15 for a meal. According to Harrys parole office, none of these items ever will be
paid back. Can Toni deduct any of these losses?

8.

Geraldine bought a Kandinsky for her art collection from a mail-order advertisement for $310,000.
The painting, however, was actually painted by Kanske and, according to Geraldines dealer, was
not worth more than $3,100. What is her deductible loss upon discovery of the forgery?

9.

Phil is a used-car manager. To obtain advanced skills in management and marketing, he enrolls in
the weekend MBA program at Montana State University, twenty miles fro his home. Does Phil
qualify for an educational credit? What items associated with Phils education are deductible,
assuming that he receives no reimbursements for any of them?

10.

Jon and Mary have been married for twenty years. Without Marys knowledge, Jon has been
operating as a bookie at his local pub. This years earnings from the operation were the highest ever.
In fact, if Jon had reported any of the net gambling income, their joint Federal income tax liability
would have increased by $140,000. When Jon finally is nabbed by the FBI, he is taken to jail.
Mary is unable to locate any of Jons earnings in bank or brokerage accounts. Can Mary fend off
the IRSs charge that she should pay the $140,000 in tax, plus interest and penalties, from her salary
as a physician?

11.

Hugo was burying his (dead) dog when he unearthed 100,000 certificates of ITT bearer bonds,
current value $4,000,000. He speculated that they had been placed there by the (also dead) former
owner of Hugos home, at a time when they were worth nearly $400,000. Hugo did not sell the
bonds by the end of the year. Must Hugo recognize any gross income with respect to the bonds?

12.

Bruce wanted to be an Olympic skater. His family paid $12,000 in 1998 and $14,000 in 1999 for
travel and training expenses related to skating practices and competitions. Bruce made the 2000
U.S. Olympic team. The U.S. Olympic Committee is an exempt organization. How much of
Bruces expenses are deductible and when?

13.

Alice, the chair of the School of Accountancy, entertains the faculty at her home each semester and
has a holiday party at the end of December for the faculty and their families. When a faculty
member is promoted or has a paper published in an exceptionally prestigious journal, she has a
social hour at her house. She also sponsors a picnic for the faculty and graduate students at the
start of the fall semester to let them get acquainted. To what extent are these expenses deductible?

14.

Ritas family had a history of heart disease. To reduce Ritas risk of future heart problems, and to
enable her to lose about ten pounds, her physician recommended a rigid running program.
Accordingly, Rita joined the Vic Tanny Health Club. One-fourth of her time at the club was spent
on a supervised running program. How much of her $450 annual fee is deductible as a medical
expense?

15.

HardCo spent $4 million this year on a new graphic design for its product, a yoyo. Under the prior
design, HardCos name and logo only appeared on the box and wrapping paper, which were
discarded by most customers once they started using the product. The new design displayed
HardCos name and newer, flashier logo on both sides of the yo-yo, with a paint that also made it
glow in the dark. When can HardCo deduct the $4 million?

16.

Pete is an engineering professor at State University. Under his contract, Petes inventions while
employed at the university are the property of the Board of Regents, but Pete receives an addition to
his salary equal to one-third of the royalties received by the university on his patents. This year,
Pete received $75,000 on top of his salary, as royalties allocated to him. Does Pete recognize this
amount as ordinary income or capital gain?

17.

Blanche Creek has engaged your firm because she has been charged with failure to file her 2004
Federal form 1040. Blanche maintains that the reasonable cause exception should apply. During
the entire tax filing season in 2005, she was under a great deal of stress at work and in her personal
life. As a result, Blanche developed a sleep disorder, which was treated through a combination of
pills and counseling. Your firm ultimately prepared the 2004 tax return for Blanche, but it was filed
far beyond the due date. Blanche is willing to pay the delinquent tax and related interest. However,
she feels that the failure to pay penalty is unfair as she was ill. Consequently, she could not be
expected to keep to the usual deadlines for filing. Does she have a good argument against paying
the penalty?

18.

Your client, Lee Ann Harkness, has been accused of criminal tax fraud. A high school dropout, she
received hundreds of thousands of dollars over the years from Bentley, an elderly gentleman, in
exchange for love and c companionship. When Bentley died and Harkness was left out of the will,
she sued the estate for compensatory payments earned throughout her years of attending to Bentley.
The government now accuses Harkness of fraud in failing to file income and self-employment tax
returns for the open tax years. Does she have an adequate defense?

19.

Ace High and Lady Luck live together and have pooled their funds for several months to purchase
food and other household necessities and to buy an occasional state lottery ticket. Ace used part of
these pooled funds to buy a lottery ticket that won $3,000,000. When they discovered that the
lottery proceeds could be paid only to one recipient under state law, Ace and Lady executed a
separate ownership agreement. The agreement created an equal interest in the ticket for both Ace
and Lady. Must Ace pay gift tax on the transfer of a one-half interest in the ticket to Lady? What is
the value of the gift?

20.

Jerry Baker and his wife Hammi believe in the worship of the Sea God. This is a very personal
religion to Jerry and Hammi. To practice their beliefs, the Bakers want to take a two-week trip to
Tahiti this year to w worship their deity. The cost (airfare, hotels, etc.) of this religious
pilgrimage is $5250. Jerry wants to know if he can deduct the cost of this trip as a charitable
deduction.