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Chapter I:9
Employee Expenses and Deferred Compensation
Discussion Questions
I:9-1 It is important to distinguish whether an individual is an employee or an independent

contractor (self-employed) because some expenses are only partially deductible by employees or not
deductible at all. A self-employed individual who incurs a business-related expenditure may deduct,
under Section 162, the expense for determining AGI on Schedule C, Form 1040. In addition,
employers pay certain payroll taxes on behalf of their employees. On the other hand, an individual's
employment-related activities, such as travel and transportation, are deductible from AGI and are
subject to different tax rules and regulations. Individuals may prefer to be classified as employees
because the employee portion of the social security tax rate in 2012 of 5.65% (7.65% after 2012) is
less than the self-employment tax rate of 13.3% (15.3% after 2012). This difference is mitigated
somewhat because self-employed individuals receive an income tax deduction equal to 50% of their
self-employment tax. Consideration should also be given to the hospital insurance portion of the
FICA tax, which continues to apply without limit at a 1.45% rate for both employees and employers
and at a 2.90% rate for self-employed individuals. p. I:9-3.
I:9-2 The deductibility and classification of Matt's transportation and unreimbursed travel
expenses depends upon the nature of the expenditure. The transportation and unreimbursed travel
expenses incurred in Matt's employment are deductible from AGI as an itemized deduction subject
to the 2% nondeductible floor for miscellaneous itemized deductions. The transportation and travel
expenses incurred in his CPA practice are business-related and are deductible for AGI and are not
subject to the aforementioned limitations. pp. I:9-2 through I:9-4.
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

I:9-1
I:9-3
2%
Deductible For Non- Nondeductible 50%
From AGI AGI Deductible Floor Deductible
a. Reimbursed business meals Xa

b. Auto expenses going to and X
from work
c. Legal expenses in preparation X X
of the taxpayer's tax return
d. Unreimbursed employee travel X X Xb
and transportation expenses X X X
e. Unreimbursed employee X X
entertainment expenses
f. Qualified moving expense of X X
an employee
a
Since pursuant to an accountable plan, the reimbursement is not included in gross income and the
expense is not deductible. The 50% reduction is applied at the employer level.
b
Business meals are subject to the 50% deduction limit. pp. I:9-2 through I:9-23.
I:9-4
Are subject to Not subject to

2% nondeductible floor 2% nondeductible floor
a. Investment counseling fees X
b. Tax return preparation fees X
c. Unreimbursed professional dues
for an employee X
d. Gambling losses (to extent of X
winnings)
e. Interest on a personal residence X
f. Unreimbursed employee travel X
expense
g. Reimbursed employee travel X
expenses
h. Safe deposit box rental expenses X
for an investor
pp. I:9-3 and I:9-4.

I:9-2
I:9-5 a. Marilyn may deduct the travel expenses including airfare, lodging, and meals for AGI
assuming that the trips are necessary and not personal in nature. (Note: the business meal portion of
this expense is reduced by 50%.)
b. Reimbursed travel expenses are generally deductible for AGI. However, since the
reimbursements are made pursuant to an accountable plan, Marc will not report the reimbursement
or the deductions on his return.
c. Marc may deduct unreimbursed expenses as a miscellaneous itemized deduction
subject to the 2% nondeductible floor.
d. Kay may deduct travel expenses for AGI. Any business meals are reduced by 50%.
pp. I:9-4 through I:9-8, I:9-16 through I:9-18.
I:9-6 Kelly may deduct $750 before applying the 2% nondeductible floor. The deduction is
computed as follows:
Total business meal expenses $2,000

Minus: lavish and extravagant expenses ( 500)
Balance of meal expenses $1,500
Times: Allowable percentage of expenses x 0.50
Deductible amount $ 750
pp. I:9-14 and I:9-15.
I:9-7 a. All expenses except personal clothing (e.g., transportation, meals and lodging) are
deductible from AGI and are subject to the 2% nondeductible floor. The meal costs of $1,000 must
be reduced by 50%. Thus, the total deductible amount is $8,500 ($9,000 - $500) (subject to the 2%
nondeductible floor). The expenses are deductible because her assignment is temporary in nature.
b. Same as a. Latoya could deduct the expenses for the nine-month assignment, as that
employment would be considered temporary under Rev. Rul. 93-86. None of her expenses incurred
in Texas after the nine-month assignment would be deductible. pp. I:9-4 through I:9-7.
I:9-8 The travel expenses related to attending the seminars are not deductible since they are related
to the production of rental income under Sec. 212. The registration fees of $1,000 are deductible for
AGI since they are not travel expenses and are related to the rental activity under Sec. 212.
pp. I:9-8 and I:9-9.
I:9-9 It is necessary to allocate a portion of the total reimbursement to each expense category
because the various unreimbursed amounts would be subject to various limitations such as the 2%
floor and 50% business meal rule. Reimbursed expenses are fully includible in gross income and are
deductible for AGI subject to the accountable plan rules. Unreimbursed employee business
expenses are deductible as a miscellaneous itemized deduction subject to the 2% floor. Meals and
entertainment expenses must be reduced by 50%. pp. I:9-16 through I:9-18.

I:9-3
I:9-10 An employee may deduct the difference between the standard mileage rate and the
reimbursed rate as a miscellaneous itemized deduction subject to the 2% nondeductible floor. An
alternative way of claiming the deduction would be for the employee to record actual automobile
expenses and deduct those in excess of reimbursed expenses. Taxpayers have limited ability to
change methods. See the chapter coverage for more details. pp. I:9-11 and I:9-12.
I:9-11 The actual expense method may be used in subsequent years. However, MACRS under the
regular method may not be used for computing depreciation (straight-line method is required) and
the basis of the automobile must be reduced by 23 cents in 2012, 22 cents in 2011, 23 cents in 2010,
and 21 cents per mile in 2008 and 2009. p. I:9-11.
I:9-12 The taxpayer may not switch to the standard mileage rate method for the third year or
beyond. If a taxpayer depreciates an automobile under MACRS or expenses all or part of the
automobile under Sec. 179, a change to the standard mileage rate method is not permitted.
pp. I:9-11.
I:9-13 a. The employee must submit a detailed statement on the tax return of the
reimbursements and expense items. The reimbursements are included in gross income and the
expenses are deductible from AGI as miscellaneous itemized deductions (subject to the 2%
nondeductible floor rule) under a nonaccountable plan.
b. No reporting is required under an accountable plan by the employee.
c. No reporting is required for expenses equal to the reimbursement under the
accountable plan rules. The excess expenses are deductible from AGI as miscellaneous itemized
deductions. A proration of the reimbursement against the various expenses is required.
d. No reporting is required under an accountable plan assuming that the excess amount
is repaid to the employer. pp. I:9-16 through I:9-18.
I:9-14 Distance and time requirements were imposed to differentiate employment-related moves
from non-deductible personal motivated moves. The underlying rationale for the deduction is that
such moves are similar to a business expenditure because the move is often necessary to obtain
employment or is an employment-related job transfer. p. I:9-19.
I:9-15 Yes, qualifying moving expenses are not deductible if they are incurred by an unemployed or
a retired individual. To be deductible, qualifying moving expenses must be incurred by an employee
or a self-employed individual. In addition, the required time period to remain in the new location is
longer for self-employed taxpayers (78 weeks) than for employees (39 weeks). If the unemployed
individual incurred moving expenses to accept a job in the new location, the moving expenses would
be deductible assuming the other requirements are met. p. I:9-19.
I:9-16 a. Len’s moving expenses are deductible for AGI so that it does not matter whether Len
uses the standard deduction. The $2,000 reimbursement would offset the $2,000 of moving
expenses. Thus, no amount would be reported on Len's tax return.
b. The reimbursement for nondeductible moving expenses of $800 ($2,000 - $1,200)
must be included in Len’s gross income. pp. I:9-19 and I:9-20.

I:9-4
I:9-17 The record-keeping requirements are strict due to the perceived widespread abuse of
entertainment expense deductions. Code Sec. 274 and the related Treasury Regulations include
classification rules, restrictive tests, and specific record-keeping requirements to prove that the
expenditures are business-related and not lavish or extravagant. p. I:9-12.
I:9-18 a. These amounts are reported on Louis's return as follows:

Since the reimbursement is pursuant to an accountable plan, neither the $3,000 reimbursement is
included in gross income nor are expenses of $3,000 deductible. They are netted together and not
reported on Louis's return. Of the remaining $1,000 of expenses, $500 [($4,000 - $3,000) x 0.50] is
deductible from AGI as a miscellaneous itemized deduction (subject to 2% non-deductible floor).
b. If Louis is unable to provide adequate documentation of the expenditures during the
course of an IRS audit on his tax return, all of the deductions will be disallowed. This disallowance
is due to the strict substantiation rules enacted by Congress and the IRS for entertainment expenses
under Sec. 274. pp. I:9-14, I:9-16 and I:9-17.
I:9-19 a. To be deductible the expenditure must be either (1) "directly related to" the active
conduct of a trade or business or (2) "associated with" the active conduct of a trade or business.
b. If there is some direct business benefit expected to be received, the entertainment of
clients should be classified as "directly related" expenses. Entertainment of potential clients
constitutes "associated with" entertainment. “Associated with” entertainment expenses must be
incurred prior to or after a bona fide business meeting. pp. I:9-13 and I:9-14.
I:9-20 a. $3,000 ($6,000 x 0.50) is deductible as a miscellaneous itemized deduction and

subject to the 2% nondeductible floor. Such amounts are classified as deductions from AGI.
b. Liz would not include the $6,000 in gross income nor deduct the $6,000 of expense
since an adequate accounting is made and the reimbursement procedures constitute an accountable
plan. Her employer can deduct $3,000 of the expenses ($6,000 x 0.50), as a trade or business
expense. pp. I:9-12 through I:9-18.
I:9-21 No, they are business fringe benefits under Sec. 132 and are not subject to the 50% limit.
p. I:9-13.
I:9-22 No, the business meal expenditure does not qualify as entertainment expenses. Even though
there is a reasonable expectation of business benefit, no business is discussed prior to, during, or
after the meal. Neither the “directly related” nor the “associated with” tests for deductibility of
entertainment expenses have been met. pp. I:9-14 and I:9-15.
I:9-23 None, the club dues are considered to be a personal, nondeductible expense despite the fact
that the use of the facility is primarily for business. Specific business expenses (e.g., meals with
customers) incurred at the club are deductible subject to the 50% disallowance rule. p. I:9-15.

I:9-5
I:9-24 Bass may deduct $450 in 2012. The deduction is computed as follows:
$ 900 (The deduction is limited to the face value of the tickets)

x 0.50 (Then the 50% limit is applied)
$ 450 Deduction.
p. I:9-16.
I:9-25 a. An employee reimbursement plan is treated as an accountable plan if it meets the

following two requirements:
1. The employee must make an adequate accounting of expenses to his employer.
An adequate accounting is simply the substantiation of expenses by the
employee to his employee via an expense report or some other reporting
method, and
2. Within a reasonable period of time, the employee is required to return to the
employer any portion of the reimbursement in excess of the substantiated
expenses.
b. Under an accountable plan, neither the reimbursement nor the expenses are reported
on the employee's return. However, because the expenses are substantiated to the employer, this
treatment for accountable plans is intended to simplify the reimbursed expense area for employees
and employers. The general treatment of reimbursed expenses is to include the reimbursement in the
employee's gross income and the expenses are deductible by the employee as a deduction for AGI.
c. Under a nonaccountable plan, the employee expenses are treated as unreimbursed
expenses. Therefore, the reimbursement must be included in the employee's gross income and the
expenses are deductible by the employee as a miscellaneous itemized deduction subject to the 2%
nondeductible floor. pp. I:9-16 through I:9-18.
I:9-26 $400 expense incurred for the CPA review course is nondeductible because these expenses
were incurred to meet minimum standards for entry into the profession. The $4,000 incurred for law
school tuition and books is nondeductible because these expenses qualify the taxpayer for a new
trade or business. $500 [$400 + (0.50 x $200)] of continuing education expenses are deductible from
AGI, subject to the 2% nondeductible floor. The $200 of travel related to meals is subject to the
50% deduction limit. pp. I:9-21 through I:9-23.
I:9-27 Public school teachers may generally deduct educational expenses from AGI as a
miscellaneous itemized deduction because the expenditures are incurred to meet the requirements
imposed by law for retention of employment. In addition, the expenditures are incurred to maintain
or improve skills required by the individual in his employment, trade, or business and are deductible.
p. I:9-23.
I:9-28 a. Yes, Maggie is entitled to an office-in-home deduction because the office is used
exclusively on a regular basis as the principal place of business for a trade or business, and it is used
as a place for meeting or dealing with patients, clients, or customers in the normal course of
business. Additionally, her office is the most significant place for the conduct of her business
activities.

I:9-6
b. No, Marty must prove that working at home is for the convenience of his employer
and that it is not merely helpful or appropriate to work at home. An employee must also meet the
other requirements described in part a.
c. For years after 1998, an office in home qualifies as a taxpayer’s principal place of
business if (1) the office is used by the taxpayer for administrative or management activities of the
taxpayer’s trade or business, and (2) there is no other fixed location of the trade or business where
the taxpayer conducts substantial administrative or management activities of the trade or business.
Since Bobby does not have an office at another location and he conducts substantially all of his
administrative and management activities from his office in his home, he will be able to deduct
office in home expenses. pp. I:9-24 through I:9-26.
I:9-29 Employer contributions to a qualified plan are immediately deductible (subject to specific
limitations upon annual contribution amounts) and such amounts are not taxable to an employee
until the pension payments are received. If an employee contributes to the qualified plan, such
amounts may be made on either a pre-tax or after-tax basis. Currently, most employees contribute to
qualified plans on a pre-tax basis. Thus, when pension payments are received upon retirement, the
amounts received are fully taxable. Under a nonqualified deferred compensation plan (such as a
restricted property plan), the employee is taxed upon the FMV of the property contributed at the
earliest date when the property is no longer subject to risk of forfeiture or when the property is
transferable. The employer receives a corresponding compensation deduction at that time. Clearly,
substantial tax benefits are available in qualified plans over nonqualified plans . However, qualified
plans must meet highly restrictive rules and, in some situations, may not be permitted. pp. I:9-27
through I:9-32.
I:9-30 In a defined contribution plan, fixed amounts (e.g., 8% of each participant's salary) are
contributed for each participant to a separate account. The retirement benefits for that participant are
based on the value of the participant's account at the time of retirement. Defined benefit plans
establish in advance the value of the retirement benefits and a contribution amount is established
based on actuarial tables to fund this amount (e.g., 40% of an employee's average salary for the five
years prior to retirement). A distinguishing feature of a defined benefit plan is that forfeitures of
nonvested amounts (e.g., due to employee resignations) must be used to reduce the employer
contributions that would otherwise be made under the plan. In a defined contribution plan, however,
the forfeitures may either be reallocated to the other participants in a nondiscriminatory manner or
used to reduce future employer contributions. p. I:9-28.
I:9-31 The plan is discriminatory because it favors highly-compensated employees. As a result the
plan should be considered to be a nonqualified plan by the IRS. The employer should not be able to
receive the immediate tax deduction for pension contributions. Under a nonqualified plan the
employer's deduction is generally deferred until the employee recognizes income from the plan.
p. I:9-29.
I:9-32 No, generally employer-provided benefits must be 100% vested after five years of service.
p. I:9-29.

I:9-7
I:9-33 a. Fully taxable when the payment is received.
b. The taxability of payments received depends on whether the employee contributions
were made on a pre-tax or after-tax basis. If the employee contributions were made on a pre-tax
basis, all amounts received are fully taxable. If the employee contributions were made on an after-
tax basis, amounts received are taxed under the Sec. 72 annuity rules. The employee’s contributions
are considered the employee’s investment in the contract. pp. I:9-29 and I:9-30.
I:9-34 Limitations for the year 2012 include:
• Defined contribution plan contributions are limited to the smaller of $50,000 (in
2012) or 100% of the employee's compensation.
• Defined benefit plans are restricted to an annual benefit to an employee equal to the
greater of $200,000 (2012) or 100% of the participant's average compensation for the
highest three years.
• An overall maximum annual employer deduction of 25% of compensation paid or
accrued to plan participants is placed upon profit sharing and stock bonus plans.
p. I:9-31.
I:9-35 Nonqualified deferred compensation plans are particularly well-suited for use in executive
compensation arrangements because they are not subject to the same restrictions which are imposed
upon qualified plans such as the nondiscrimination and vesting rules. pp. I:9-31 and I:9-32.
I:9-36 Yes, he should make the Sec. 83(b) election because he will pay a higher tax when the
restrictions lapse due to the substantial appreciation. If the employee does not make the Sec. 83(b)
election the tax consequences from the stock transfer are deferred for both the employee and the
corporation until the lapse of the nontransferability or forfeiture restrictions.
If the election is made, the employee will be taxed on the fair market value of the stock today and
the corporation will receive a deduction for the same amount immediately. The capital gain rates at
a maximum of 15% may increase the attractiveness of this option because capital gain treatment is
accorded upon the eventual sale of the stock, and the marginal tax rate for high-income taxpayers is
35% when taxable income is in excess of $388,350 for 2012. pp. I:9-31 through I:9-33.
I:9-37 ISO requirements include:
• The option price must be equal to or greater than the FMV of the stock on the
option's grant date.
• The option must be granted within 10 years of the date the plan is adopted and the
employee must exercise the option within 10 years from the grant date.
• The option must be exercisable only by the employee and is nontransferable except
in the event of death.
• The employee cannot own more than 10% of the voting power of the employer
corporation's stock immediately prior to the option's grant date.
• The total FMV of the stock options that become exercisable in any one year to an
employee may not exceed $100,000 (e.g., an employee can be granted ISOs to

I:9-8
acquire $200,000 of stock in one year provided that no more than $100,000 is
exercisable in any one year).
• Other procedural requirements must be met (e.g., shareholder approval of the plan,
etc).
If an employee meets the requirements of an ISO, no tax consequences occur on the grant date
(except that the excess of the stock’s FMV over the option price is a tax preference item) and LTCG
or loss is recognized when the stock is sold. Under a nonqualified stock option arrangement,
ordinary income is recognized either on the grant date or on the exercise date (depending upon
whether the option has a readily ascertainable FMV). LTCG treatment should favor the ISO for the
employee's tax consequences because of the spread between the maximum 15% capital gain rate and
the highest rate on ordinary income (i.e., 35%). However, the employer is more favorably treated
under the nonqualified stock option rules because the employer receives a tax deduction for the
amount of compensation that is recognized by the employee. pp. I:9-34 and I:9-35.
I:9-38 If a nonqualified stock option has a readily ascertainable FMV on the grant date, the
employee recognizes ordinary income on the grant date equal to the difference between FMV and
the option price. The employer receives a compensation deduction on the grant date equal to the
same amount that is recognized by the employee. In such case, no tax consequences occur on the
date the option is exercised and the employee recognizes capital gain or loss upon the sale or
disposition of the stock. If a nonqualified stock option has no readily ascertainable FMV, no tax
consequences occur on the grant date. On the exercise date, the employee recognizes ordinary
income equal to the spread between the FMV and the option price and the employer receives a
corresponding compensation deduction. pp. I:9-35 and I:9-36.
I:9-39 Yes, a self-employed individual who is covered by an employer's qualified pension plan is
eligible to establish an H.R. 10 or an SEP plan relative to his or her self-employment income.
p. I:9-37.
I:9-40 For a defined contribution H.R. 10 plan, a self-employed individual may contribute the lesser
of $50,000 or 25% of earned income for 2012 (before the H.R. 10 plan contribution but after the
deduction for one-half of self-employment taxes paid) from the self-employment activity. The
full-time employees must be covered, as required in the rules for qualified plans. p. I:9-37.
I:9-41 Most tax advisers would be more favorably inclined to advise the 50-year old to establish a
traditional deductible IRA since he could take advantage of the IRA deduction and would only have
to wait 9 1/2 years to withdraw from the IRA without penalty. The 30-year old would have to wait
considerably longer. The same applies to nondeductible IRAs only that such contribution amounts
are nontaxable when withdrawn because such amounts were previously subject to tax. However, the
benefit for a 30-year-old individual is that the funds in the IRA have a much longer investment
horizon. Unless a specific hardship provision applies, distributions made before age 59 ½ are subject
to regular taxation and to a 10% premature distribution penalty. Obviously, a 30-year old has a long
period of time without access to the IRA funds. pp. I:9-37 through I:9-41.

I:9-9
I:9-42 The essential differences between a traditional IRA and a Roth IRA are, first, amounts
contributed to a traditional IRA are tax-deductible whereas amounts contributed to a Roth IRA are
not tax-deductible. However, upon withdrawal of amounts from the IRA at retirement, the
withdrawn amounts are fully taxable from a traditional IRA but not taxable from a Roth IRA.
Second, Roth IRAs are available to many more taxpayers as the AGI limits are much higher for Roth
IRAs than for traditional IRAs. pp. I:9-37 through I:9-41.
I:9-43 It is generally advisable for a 30-year old individual to invest in a Roth IRA rather than a
traditional deductible IRA. This is because of the tremendous growth potential of the funds in the
Roth IRA and the ability to withdraw the funds tax-free at retirement. Further, tax rates are
anticipated to be higher in future years than now. pp. I:9-37 through I:9-41.
I:9-44 If Charley rolls his traditional IRA into a Roth IRA, he must include the rollover in his gross
income and pay income taxes on such amount. The principal benefit of doing the rollover is that
when Charley withdraws amounts from his Roth IRA at retirement, no further taxes will be due.
While a precise analysis should be performed, since Charley’s marginal tax rate at retirement will be
no higher than his present rate and he has the funds outside of his IRA to pay the tax, most analysts
conclude that Charley will be better off to do the rollover and pay the tax now. The principal
economic benefit is that the rollover funds in the Roth IRA are able to grow tax-free and be
ultimately withdrawn tax-free. Thus, in Charley’s case, he should be advised to rollover his
traditional IRA into a Roth IRA. Charley is permitted to rollover amounts from his traditional IRA to
a Roth IRA because there are no AGI restrictions after December 31, 2009. pp. I:9-40 and I:9-41.
I:9-45 While Sally’s AGI of $70,000 is still too high to deduct contributions to a deductible
traditional IRA (maximum AGI of $68,000 (2012) for single taxpayers who are active participants in
an employer-sponsored plan), she is certainly eligible to contribute up to $5,000 to a Roth IRA as
the Roth IRA AGI limit is $105,000 before the phase-out begins. She also is eligible to contribute to
a nondeductible IRA, but the Roth IRA is much superior to the nondeductible IRA. pp. I:9-37
through I:9-41.
I:9-46 The Coverdale Education Savings Account (CESA) has several important features, including:
(1) the annual contribution into such plans is $2,000, (2) CESAs may be used for elementary and
secondary education expenses, and (3) a distribution from a CESA may be excluded even if the Hope
credit or lifetime learning credit was claimed in the same year. Of course, the same expenses cannot be
used for both the CESA exclusion and one of the two credits. pp. I:9-41 and I:9-42.
I:9-47 a. An SEP offers small business owners the opportunity to provide retirement benefits
for its employees that are comparable with qualified pension and profit sharing plans with reduced
administrative compliance costs (i.e., reduced paperwork and need for actuaries and CPA tax
specialists in the pension area to assure that the plan qualification requirements are met).
b. A sole proprietor of a small business may establish an SEP for himself rather than
using an H.R. 10 plan. p. I:9-43.

I:9-10
Issue Identification Questions
I:9-48 The principal issue is whether Georgia is entitled to deduct travel expenses for the 11 month
away-from-home time period. To be deductible, she must be away from her tax home. The IRS's
position in Rev. Rul. 93-86 is that the initial realistic expectation of a 15-month assignment controls
despite the fact that the assignment lasts only 11 months. Therefore, the assignment was for an
indefinite period (more than one year) and the expenses are not deductible because her tax home
shifts to the new location. Another ancillary issue is the classification of the expenses, if deductible,
as for AGI or from AGI expenses. pp. I:9-6 and I:9-7.
I:9-49 The tax issues related to the possible relocation include the following:
1. The treatment of reimbursements, in particular for any reimbursements in excess of

allowable moving expenses.
2. The types of moving expenses (i.e., direct and indirect) which are deductible.
3. The reporting of the reimbursements on Jeremy's form W-2 and any state or federal
withholding requirements.
4. The classification of deductible moving expenses and the reporting of excess
reimbursements on Jeremy's tax return. pp. I:9-19 and I:9-20.
I:9-50 The primary tax issue is whether the office-in-home qualifies as a deduction under the tax
law. To make this determination, the office must meet several tests. First of all, the office must be
used exclusively and on a regular basis as the principal place of business for a trade or business.
Juan does not meet with patients, so the office must be the principal place of business. Second, the
exclusive use of the office must be for the convenience of the employer. Since Juan is self-
employed, he meets this test. Third, for tax years beginning after December 31, 1998, an office
meets the definition of “principal place of business” if (1) the office is used by the taxpayer for
administrative or management activities of the taxpayer’s trade or business, and (2) there is no other
fixed location of the trade or business where the taxpayer conducts substantial administrative or
management activities of the trade or business. pp. I:9-24 through I:9-26.
I:9-51 The major issues that David must address are as follows:
1. Does the education qualify David for a new trade or business? If so, the education
expense would be nondeductible. However, the courts have generally ruled favorably
on the deductibility of education expenses incurred to obtain an MBA degree.
2. Is the education directly connected with David's employment or trade or business?
Since David is not employed, the IRS may attempt to assert that the education
expenses are not deductible because the taxpayer does not have a current trade or
business. However, some courts have held that education expenses are deductible if
the education is deemed to be only a temporary cessation of a business activity.
pp. I:9-21 through I:9-23.

I:9-11
Problems
I:9-52 a. Mike's deduction for employment-related expenses is computed as follows:

Subject to 2% floor:
Automobile expenses $2,500
Entertainment ($1,500 x 0.50) 750
Travel (excluding meals) 2,000
Meals ($500 x 0.50) 250
Professional dues 500
Total $6,000
The moving expenses are deductible for AGI, thus Mike's AGI is $116,000 ($120,000 -
$4,000).
$116,000 AGI x 0.02 = $2,320 nondeductible expense floor
$6,000 - $2,320 = $3,680 miscellaneous itemized deductions from AGI
+ 4,000 moving expenses for AGI not subject to any limit
$7,680 total deductible expenses
b. Moving expenses are deducted for AGI whereas the remaining items are deducted
from AGI on Schedule A. pp. I:9-4, I:9-5, I:9-13 and I:9-14, I:9-19 and I:9-20.
I:9-53 a. Travel $4,000

Business meals ($1,000 x 0.50) 500
Transportation 2,000
Entertainment ($2,000 x 0.50) 1,000
Total deductible expenses $7,500
Commuting expenses are not deductible. For the local transportation expenses, Monique can
compute her deductible expense under either the actual or standard mileage rate method.
b. Each of these items are classified as a for AGI deduction because she is self-
employed.
c. If Monique is an employee, then these employment-related expenses are deductible

from AGI (subject to the 2% limitation on miscellaneous itemized deductions). pp. I:9-4 and I:9-5,
I:9-9 and I:9-10, I:9-13 and I:9-14, I:9-19 and I:9-20.

I:9-12
I:9-54 a. The total amount of Mary's deductible expenses is $3,050.
The deduction is computed as follows:
Subject to 2% nondeductible floor:

Air fare $1,500
Taxi (transportation) 100
Meals while traveling ($300 x 0.50) 150
Laundry 50
Lodging 650
Business meals ($500 x 0.50) 250
Entertainment ($500 x 0.50) 250
Investment counseling fees 1,000
Tax return preparation fees 500
Total deductible amounts $4,450
Minus: 2% of $70,000 AGI ( 1,400)
b. The deductible expenses are classified as a from AGI deduction.

I:9-55 a. Since Marilyn is on a temporary assignment of less than one year, her tax home is
still considered to be Cleveland and she is “away from home” while in Atlanta. Thus, all of her
expenses are considered travel expenses and she can deduct the following expenses:
Airfare ($800 + 8,000) $ 8,800
Apartment Rent 10,000
Meals ($8,500 x 0.50) 4,250
Total $24,050
b. Expenses are classified as from AGI and are subject to the 2% of AGI nondeductible
floor.
c. $21,650 is deductible computed as follows:
$120,000 x 0.02 = $2,400 nondeductible floor
$24,050 - $2,400 = $21,650 deductible.
d. The airfare for weekend trips, apartment rent and meals would be personal
nondeductible expenses. A portion of the airfare might qualify as a moving expense under Sec. 217.
e. Only the expenses associated with the first ten months would be deductible if the
position of the IRS is upheld by the courts. The $10,000 of expenses for the last seven months is not
deductible because the move lasts more than one year and is considered indefinite for the extended
period. pp. I:9-4 through I:9-16.

I:9-13
I:9-56 a. Mike may only deduct his expenses that are related to business. Since Mike's
business-related employee expenses are fully reimbursed, the reimbursed expenses are deductible for
AGI and are offset by the reimbursement. Therefore, assuming the employer reimbursement is
pursuant to an accountable plan, Mike reports nothing on his individual return related to the trip.
The business-related expenses of $1,400 ($450 + $150 + $300 + $500) and the reimbursement of
$1,400 are treated as a wash. The airfare of $450 is not prorated because Mike’s trip was primarily
for business. The personal expenses of meals (2 days x $50 = $100) and hotel (2 days x $100 =
$200) are not deductible. If Mike were able to obtain excursion airfare rates due to travel extending
over Saturday night because of the vacation, the incremental expenses of one night's lodging and one
day's meals would be deductible as an unreimbursed employee expense (subject to the employer
reimbursement).
b. No amount of income or expense is reported by Mike (assuming that an adequate
accounting has been made) because the employee expenses were fully reimbursed pursuant to an
accountable plan.
c. Mike’s employer may deduct $1,075 ($450 + $75 + $300 + $250). Only 50% of the
meals (3 X $50 per day x 0.50 = $75) and 50% of the entertainment ($500 x 0.50 = $250) are
deductible by Mike's employer. pp. I:9-4 through I:9-18.
I:9-57 a. Since the reimbursement is less than the expenses, an allocation is required. The
$3,000 reimbursement is prorated to the various expenses based upon the amount reimbursed to the
total expenditures (3,000/5,000 = 60%). The deductible amounts are shown below.
Expense Total For From

AGI (60%) AGI (40%)
Professional dues and subscriptions $1,000 600 400
Airfare and lodging 2,000 1,200 800
Local transportation 1,000 600 400
Entertainment 1,000 600 200 (400 x 50%)
Totals $5,000 $3,000 $1,800
b. The $3,000 of reimbursed expenses is deductible for AGI and the $1,800 of
unreimbursed expenses are from AGI subject to the 2% of AGI nondeductible floor. Since the
reimbursement is pursuant to an accountable plan, the $3,000 of for AGI expenses and the $3,000
reimbursement are netted together and are not reported on Maxine’s return. Because Maxine has
other miscellaneous itemized deductions of $1,000, a total of $1,600 of miscellaneous itemized
deductions are deductible ($2,800 miscellaneous itemized deductions - [0.02 x $60,000 AGI] =
$1,600).
c. If Maxine received a $6,000 reimbursement, the $5,000 of employment-related
expenses is fully deductible for AGI and Maxine must return the $1,000 excess amount to her
employer. Since the reimbursement is pursuant to an accountable plan, the $5,000 of for AGI
expenses and the $5,000 reimbursement is netted together and is not reported on Maxine’s return. If
she does not return the $1,000 excess amount, the $1,000 is includible in her gross income.

I:9-14
I:9-58 a. $5,240 miscellaneous itemized deductions are computed as follows:
Subject to 2% nondeductible floor:
Safety deposit box rental $ 100
Tax return preparation fees 500
Unreimbursed employee expenses 6,000
Unreimbursed employee expenses (for business meals)($1,200 x 0.50) 600
Miscellaneous itemized deductions $7,200
Minus: 0.02 x $98,000a (1,960)
Total $5,240
a
Melissa’s moving expenses are deductible for AGI. Thus, Melissa’s AGI is $98,000
($100,000 - $2,000).
b. Total itemized deductions are computed as follows:

Other itemized deductions: Mortgage interest $12,000
Real estate taxes 1,800 $ 13,800
Plus: Miscellaneous itemized deductions 5,240
Total itemized deductions $ 19,040
c. Miscellaneous itemized deductions (before 2% floor) $ 7,200
Minus: 0.02 x $190,000 AGI ( 3,800)
Miscellaneous itemized deductions $ 3,400
Other itemized deductions 13,800
Total itemized deductions $ 17,200
pp. I:9-4 and I:9-5.
I:9-59 a. $5,000. The transportation expenses for trips within the metropolitan area are
deductible because Cassady has a regular work location at her employer’s office.
b. From AGI as a miscellaneous itemized deduction.
c. $5,000 for AGI. The transportation expenses from Cassady's home to clients within
the metropolitan area are deductible because her residence is her principal place of business (i.e.,
office in home). pp. I:9-9 and I:9-10.
I:9-60 a. $3,820 of the unreimbursed expenses are deductible from AGI, computed as follows:
24,000 miles unreimbursed x $.555 (per mile in 2012) $13,320

Plus: parking and tolls + 100
Total expenditures $13,420
Minus: Reimbursement (24,000 miles x $.40 per mile) ( 9,600)
Deductible from AGI $ 3,820

I:9-15
b. Under the actual cost method, $340 is deductible from AGI, computed as follows:
Expenses (excluding parking and tolls) $16,400

Business use x 0.60
$ 9,840
Parking and tolls 100
Total expenses $ 9,940
Minus: employer's reimbursement ( 9,600)
Deduction $ 340
c. Although taxpayers are permitted to change from one method to another, there are
specific requirements that must be met. A change from the mileage method to the
actual method must reduce the basis of the automobile by a mileage rate and the
straight-line method must be used in subsequent years. A change from the actual
method to the mileage method is only permitted if the taxpayer used the straight-line
method of depreciation.
pp. I:9-11 and I:9-12.
I:9-61 a. Deductible expenses include:

Dues to the local chamber of commerce $1,000
Entertainment of clients ($1,500 x 0.50) 750
Total $2,750
The business meals are not deductible because bona fide business discussions must be
conducted. The country club dues are not deductible despite the fact that the club was used
exclusively for business. Dues to the chamber of commerce are not subject to the club disallowance
rules.
b. For AGI, since Milt is self-employed.
I:9-62 $5,400 is deductible in the current year computed as follows:
Football tickets (100 x $36 each) $ 3,600 (limited to face value)

Skybox tickets (20 x $60/seats for each of six games) 7,200
Total outlay $10,800
Percentage limitation by IRS x 0.50
Deduction $ 5,400
p. I:9-16.

I:9-16
I:9-63 a. 1. Since the Cooper Company maintains an accountable plan and the
reimbursement is equal to the expenses, Latrisha will not report the reimbursement nor deduct the
expenses. Cooper Company may deduct the amount of $9,450 on its return, computed as follows:
Airfare $5,850
Lodging 1,800
Meals ($1,200 x 50%) 600
Entertainment ($2,400 x 50%) 1,200
Total deductible outlays $9,450
2. The reimbursement is less than the expenses, so a proration of expenses is

required. The reimbursement is equal to 80% of the expenses ($9,000/11,250).
EXPENSES TOTAL 80% 20%

FOR AGI FROM AGI
Airfare $ 5,850 $4,680 $1,170
Lodging 1,800 1,440 360
Meals 1,200 960 120 (240 x 50%)
Entertainment 2,400 1,920 240 (480 x 50%)
$11,250 $9,000 $1,890
Latrisha will not report the $9,000 reimbursement or the $9,000 of deductions for AGI (accountable
plan). She will report the $1,890 as miscellaneous itemized deductions. Cooper Company may
deduct $7,560 on its return [$4,680 + 1,440 + (960 x 50%) + (1,920 x 50%)].
3. Since the reimbursement is greater than the expenses, Latrisha is required to
return the excess ($14,000 - 11,250 = 2,750) to Cooper Company. In addition, she will not report
the $11,250 reimbursement as gross income or deduct the expenses. If Latrisha does not return the
excess reimbursement (even though she is required to under the plan), she must report the excess of
$2,750 as gross income. Assuming Latrisha reimburses Cooper Company the $2,750, the company
can deduct $11,250.
b. Under a nonaccountable plan, any reimbursement is included in gross income and the
deductions are treated as miscellaneous itemized deductions. Thus, Latrisha would include the
reimbursements ($11,250, $9,000, or $14,000) in her gross income and deduct the following as
miscellaneous itemized deductions:
Airfare $5,850
Lodging 1,800
Meals ($1,200 x 50%) 600
Entertainment ($2,400 x 50%) 1,200
Total miscellaneous itemized deductions $9,450
Cooper Company could deduct $11,250, $9,000, or $14,000 respectively.

I:9-17
I:9-64 a. Only direct moving expenses are deductible. Thus, Michael's moving expense
deduction is $4,200 computed as follows:
Direct Moving Expenses
Automobile expenses $ 230
Moving van expenses 3,970
None of the other expenses qualify as moving expenses under Sec. 217. Specifically, no
deduction for meals en route to Chicago is allowed. The points paid to acquire the new
residence should qualify as interest expense if Michael itemizes his deductions.
b. The moving expenses are deductible for AGI.

c. $4,200 of the reimbursement is used to offset the otherwise deductible moving
expenses. The excess reimbursed amount of $6,900 ($11,100 - $4,200) is included in Michael's
gross income. pp. I:9-19 and I:9-20.
I:9-65 a. Not deductible, the education qualifies the taxpayer for a new trade or business
b. Yes, deductible for AGI (except that only $100 of meals [$200 x 0.50] is deductible)
c. Yes, deductible from AGI (assuming the business executive is an employee)
d. Yes, deductible from AGI
e. Not deductible
I:9-66 Anne’s education expenses will qualify for the American Opportunity tax (AOTC) and
lifetime learning credits. (See Chapter I14 for a more in-depth discussion of education credits). She
qualifies for the AOTC scholarship credit as the credit now applies to four years of college study.
Her college expenses are not deductible under Reg. Sec. 1.162-5 as the courses will qualify her for a
new trade or business. Only the tuition and fees qualify for the tuition deduction or the lifetime
learning or AOTC credits. Books and supplies do not qualify. pp. I:9-21.
I:9-67 a. Total deductible expenses are $1,200. The for AGI deduction is computed as follows:
Real estate taxes and mortgage interest:
Real estate taxes $2,000
Plus: Mortgage interest 5,000
$7,000
Percent of house used for business x 0.10a
Allocable to the office $ 700
a
Only the studio qualifies for the office-in-home deduction. The den is not allowed because it is not
used exclusively as the principal place of business.

I:9-18
Other Office-in-Home Expenses
Insurance $ 500
Depreciation 3,500
Repairs and utilities 1,000
$5,000
Percent of house used for business x 0.10
Other expenses $ 500
Nancy's home office expenses (other than mortgage interest and real estate taxes) are limited
to $37,300 [$40,000 gross income – ($700 mortgage interest and real estate taxes + $2,000 of
expenses directly related to the business)].
Thus, the full amount of $1,200 ($700 + $500) deductible expenses is allowed. In addition,
$1,800 of real estate taxes ($2,000 - $200) and $4,500 ($5,000 - $500) of mortgage interest are
deductible as itemized deductions.
b. Yes, because Nancy’s home office expenses exceed the gross income from the
business, her deductions are limited. Using the ordering rules under Reg. Sec. 1.280A-2, Nancy’s
deductions for the year are computed as follows:
Gross Income $2,500

1. Mortgage interest and real estate taxes ( 700)
$1,800
2. Expenses directly related to the business

other than home office expenses. $2,000
Limited to ($1,800)
-0-
Thus, Nancy will be allowed $700 of mortgage interest and real estate taxes and $1,800 of
the direct expenses. The other $200 of direct expenses and the $500 of insurance, repairs and
utilities, and depreciation are not allowed because of the gross income limitation. However, the
disallowed expenses may be carried over to next year subject to the gross income limitation in the
later year. pp. I:9-24 through I:9-26.
I:9-68 a. His total deductions for 2012 are $8,400, as follows:
Directly-related expenses $6,000

Indirect expenses (15% x $18,000) 2,700
Total $8,700
Darrell’s indirect expenses are deductible because the office in home qualifies as his
principal place of business. His office is used for administrative or management activities and there
is no other fixed location of the trade or business where the taxpayer conducts substantial
administrative or management activities of the trade or business. Further, since his gross income
derived from the business is higher than his deductions, no limitation applies. Since Darrell is self-
employed, the deductions would be for AGI.

I:9-19
b. Darrell could only deduct the $6,000 as the other expenses would not qualify because
the office in home does not qualify as his principal place of business. The office in home is not used
exclusively on a regular basis as the principal place of business nor does he regularly meet with
clients or customers in the normal course of business. Further, since Darrell has an office at the
consulting company, he does not meet the exceptions to claim deductions for an office in the home.
Also, Darrell maintains the office for his convenience and does not meet the “convenience of the
employer” test. Assuming the direct expenses are not reimbursed by Darrell’s employer, the
expenses would be deductible from AGI, subject to the 2% of AGI floor. pp. I:9-24 through I:9-26.
I:9-69 a. qualified profit sharing plan

b. qualified pension plan
c. defined benefit plan
d. nonqualified plan
e. employee stock ownership plan. pp. I:9-26 through I:9-32.
I:9-70 a. The entire $12,000 would be taxable to Pat in 2012 because she made the pension
contributions on a pre-tax (deferred) basis. Most employees make their pension
contributions on a pre-tax basis.
b. Since the pension contributions were made on an after-tax basis and relates to a
qualified retirement plan, the $12,000 pension payments will be taxed under the
simplified method for qualified retirement plan annuities. (For a discussion of the
simplified method, see Chapter I:3.) The taxation of the $12,000 is determined as
follows:
Investment in contract: $30,000

Number of anticipated payments: 260
Exclusion amount per month: $30,000/260 months = $115.38 per month
Exclusion amount for the year: $115.38 x 12 months = $1,384.56
Includible amount for the year:
Amount received $12,000.00
Excluded amount ( 1,384.56)
Includible amount $10,615.44
c. Pat’s final return in 2013 will include $10,615.44 of income from the pension
payments and an itemized deduction for the unrecovered investment in the contract of $27,230.88
[$30,000 – (24 months x $115.38)]. pp. I:9-29 and I:9-30.
I:9-71 a. The tax consequences from the stock transfer are deferred for both employee Patrick
and Bear Corporation until the lapse of the nontransferability and forfeiture restrictions in year 2017.
Thus, Patrick recognizes no compensation income on the receipt of the stock in 2012 and Bear
receives no deduction.
b. Patrick would recognize $1,000 (100 shares x $10) of ordinary income subject to tax.
Bear Corporation receives a $1,000 deduction.

I:9-20
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The Project Gutenberg eBook of His darling sin
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Title: His darling sin
Author: M. E. Braddon
Release date: September 13, 2023 [eBook #71631]
Language: English
Original publication: United Kingdom: Simpkin, Marshall, Hamilton,

Kent & Co. Ltd, 1899
Credits: Peter Becker, Graeme Mackreth and the Online Distributed

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*** START OF THE PROJECT GUTENBERG EBOOK HIS

DARLING SIN ***
HIS DARLING SIN
BY
M.E. BRADDON
Author of "LADY AUDLEY'S SECRET." Etc.
ALL RIGHTS RESERVED
Copyright in the United States

of America, 1899
London
SIMPKIN, MARSHALL, HAMILTON,

KENT & CO. Ltd.
Stationers' Hall Court
Printed for the Author by

Wm. Clowes & Sons, Ltd.
London and Beccles.
HIS DARLING SIN.
CHAPTER I.
"That small, small, imperceptible
Small talk! that cuts like powdered glass
Ground in Tophana,—who can tell
Where lurks the power the poison has?"
There is the desolation of riches as well as the desolation of poverty
—the empty splendour of a large house in which there is no going
and coming of family life, no sound of light footsteps and youthful
laughter—only spacious rooms and fine furniture, and one solitary
figure moving silently amidst the vacant grandeur. This sense of
desolation, of a melancholy silence and emptiness, came upon Lady
Perivale on her return to the mansion in Grosvenor Square, which
was among the numerous good things of this world that had fallen
into her lap, seven years ago, when she made one of the best
matches of the season.
She had not sold herself to an unloved suitor. She had been
sincerely attached to Sir Hector Perivale, and had sincerely mourned
him when, after two years of domestic happiness, he died suddenly,
in the prime of life, from the consequences of a chill caught on his
grouse moor in Argyleshire, where he and his young wife, and a few
chosen pals, made life a perpetual picnic, and knew no enemy but
foul weather.
This time the enemy was Death. A neglected cold turned to
pneumonia, and Grace Perivale was a widow.
"It does seem hard lines," whispered Hector, when he knew that he
was doomed. "We have had such a good time, Grace; and it's rough
on me to leave you."
No child had been born of that happy union, and Grace found herself
alone in the world at one and twenty, in full possession of her
husband's fortune, which was princely, even according to the modern
standard by which incomes are measured—a fortune lying chiefly
underground, in Durham coalfields, secure from change as the earth
itself, and only subject to temporary diminution from strikes, or bad
times. She needed a steady brain to deal with such large
responsibilities, for she had not been born or reared among the
affluent classes. In her father's East Anglian Rectory the main
philosophy of life had been to do without things.
Her husband had none but distant relations, whom he had kept at a
distance; so there were no interfering brothers or sisters, no prying
aunts or officious uncles to worry her with good advice. She stood
alone, with a castle on the Scottish border, round whose turrets the
seamews wheeled, and at whose base the German Ocean rolled in
menacing grandeur, one of the finest houses in Grosvenor Square,
and an income that was described by her friends and the gossiping
Press at anything you like between twenty and fifty thousand a year.
So rich, so much alone, Lady Perivale was naturally capricious. One
of her caprices was to hate her castle in Northumberland, and to love
a hill-side villa on the Italian Riviera, two or three miles from a small
seaport, little known to travellers, save as a ragged line of
dilapidated white houses straggling along the sea front, past which
the Mediterranean express carried them, indifferent and
unobservant, on their journey between Marseilles and Genoa.
It was Lady Perivale's whim to spend her winters in a spot unknown
to Rumpelmeyer and fashion—a spot where smart frocks were out of
place; where royalty-worship was impossible, since not the smallest
princeling had ever been heard of there; and where for the joy of life
one had only the sapphire sea and the silvery grey of the olive
woods, perpetual roses, a lawn carpeted with anemones, sloping
banks covered with carnations, palms, and aloes, orange and lemon
trees, hedges of pale pink geranium, walls tapestried with the dark
crimson of the Bougainvilliers, the delicate mauve of the wistaria;
and balmy winds which brought the scent of the flowers and the
breath of the sea through the open windows.
Lady Perivale came back to London in April, when the flower-girls
were selling bunches of purple lilac, and Bond Street seemed as full
of lemon-coloured carriages and picture-hats as if it were June. It
was the pleasant season after Easter, the season of warm sunshine
and cold winds, when some people wore sables and others wore
lace, the season of bals blancs and friendly dinners, before the May
Drawing Room and the first State concert, before the great
entertainments which were to be landmarks in the history of the year.
How empty the three drawing-rooms looked, in a perspective of
white and gold; how black and dismal the trees in the square, as
Grace Perivale stood at one of the front windows, looking out at the
smooth lawns and well-kept shrubbery, in the pale English sunlight.
She thought of the ineffable blue of the Mediterranean, the grey and
green and gold and purple of the olive wood, and the orange and
lemon grove sloping down to the sea from her verandah, where the
Safrano roses hung like a curtain of pale yellow blossom over the
rustic roof.
"And yet there are people who like London better than Italy," she
thought.
Two footmen came in with the tables for tea.
"In the little drawing-room," she said, waving them away from the
accustomed spot.
The spaciousness of the room chilled her. The Louis Seize furniture
was all white and gold and silvery blue—not too much gold. An adept
in the furniture art had made the scheme of colour, had chosen the
pale blues and greys of the Aubusson carpet, the silvery sheen of
the satin curtains and sofa-covers. It was all pale and delicate, and
intensely cold.
"My letters?" she asked, when the men were retiring.
She had slept at Dover, and had come to London by an afternoon
train. She liked even the hotel at Dover better than this great house
in Grosvenor Square. There she had at least the sea to look at, and
not this splendid loneliness.
"Well," she thought, with a long-drawn sigh, "I must plunge into the
vortex again, another mill-round of lunches and dinners, theatres and
dances, park and Princes', Ranelagh and Hurlingham—the same
things over and over and over and over again. But, after all, I enjoy
the nonsense while I am in it, enjoy it just as much as the other
people do. We all go dancing round the fashionable maypole, in and
out, left hand here, right hand there, smiling, smiling, smiling, and
quite satisfied while it lasts. We only pretend to be bored."
The little drawing-room—twenty feet by fifteen—looked almost
comfortable. There was a bright fire in the low grate, reflected
dazzlingly in turquoise tiles, and the old-fashioned bow window was
filled with a bank of flowers, which shut out the view of the chimneys
and the great glass roof over the stable-yard.
Lady Perivale sank into one of her favourite chairs, and poured out a
cup of tea.
"Toujours cet azur banal," she said to herself, as she looked at the
pale blue china, remembering a line of Coppée's. "Poor Hector
chose this turquoise because he thought it suited my complexion,
but how ghastly it will make me look when I am old—to be
surrounded by a child-like prettiness—vouée au bleu, like a good
little French Catholic!"
The butler came in with her letters. Three, on a silver salver that
looked much too large for them.
"These cannot possibly be all, Johnson," she said; "Mrs. Barnes
must have the rest."
"Mrs. Barnes says these are all the letters, my lady."
"All! There must be some mistake. You had better ask the other
servants."
Her butler and her maid had been with her in Italy—no one else; the
butler, elderly and devoted, a man who had grown up in the Perivale
family; her maid, also devoted, a native of her father's parish, whom
she had taught as a child in the Sunday school, when scarcely more
than a child herself, not a very accomplished attendant for a woman
of fashion, but for a parson's daughter, who wore her own hair and
her own eyebrows, the country-bred girl was handy enough, nature
having gifted her with brains and fingers that enabled her to cope
with the complicated fastenings of modern frocks, changing every
season.
Lady Perivale's letters had been accumulating for nearly a fortnight,
and her intended arrival in London had been announced in the
Times and a score of papers. She expected a mountain of letters
and invitations, such as had always greeted her return to civilization.
Of the three letters, two were circulars from fashionable milliners.
The third was from her old friend and singing mistress, Susan
Rodney:—
"So glad you are coming back to town, my dear Grace. I shall
call in Grosvenor Square on Wednesday afternoon on the
chance of finding you.
"Ever yours affectionately,
"Sue."
Miss Rodney answered every correspondent by return of post, and

never wrote a long letter.
Wednesday was Lady Perivale's afternoon at home, and this was
Wednesday. A double knock resounded through the silence of the
hall and staircase; and three minutes later the butler announced
Miss Rodney.
"My sweet old Sue," cried Grace, "now this is really too good of you.
Words can't say how glad I am to see you."
They kissed each other like sisters, and then Susan seated herself
opposite her friend, and looked at her with a countenance that
expressed some strong feeling, affection mingled with sorrow—or
was it pity?
She was Grace's senior by more than ten years. She was good-
looking in her strong and rather masculine way—her complexion of a
healthy darkness, unsophisticated by pearl-powder, her features
rugged, but not ugly, her eyes bright and shrewd, but capable of
tenderness, her gown and hat just the right gown and hat for a
woman who walked, or rode in an omnibus or a hansom.
"Well, Sue, what's the news?" asked Grace, pouring out her visitor's
tea. "Is it a particularly dull season? Is nobody entertaining?"
"Oh, much as usual, I believe. I can only answer for my own friends
and patronesses—mostly Bayswater way—who are as anxious as
ever to get a little after-dinner music for nothing. They have to ask
me to dinner, though. No nonsense about that!"
"It isn't the songs only, Sue. They want an agreeable woman who
can talk well."
"Oh, I can chatter about most things; but I don't pretend to talk. I can
keep the ball rolling."
"Do you know, Sue, you find me in a state of profound mystification. I
never was so puzzled in my life. When I was leaving Italy I wired to
my people to keep back all my letters. I was ten days on the way
home; and instead of the usual accumulation of cards and things I
find one letter—yours."
"People don't know you are in town," Sue suggested slowly.
"Oh, but they do; for I sent the announcement to the Times and the
Post a fortnight ago. I really meant to be back sooner, but the
weather was too lovely. I stopped a couple of days at Bordighera and
at St. Raphael, and I was three days in Paris buying frocks. Not a
single invitation—not so much as a caller's card. One would think
London was asleep. Isn't it strange?"
"Yes," answered Sue, looking at her with an earnest, yet somewhat
furtive, scrutiny, "it is—very—strange."
"Well, dear, don't let us be solemn about it. No doubt the invitations
will come pouring in now I am at home. People have been too busy
to notice my name in the papers. There are always new women for
the town to run after. Wives of diamond men from Africa or oil men
from America. One cannot expect to keep one's place."
"No," assented Sue. "Society is disgustingly fickle."
"But I am not afraid of being forgotten by the people I like—the really
nice people, the pretty girls I have cultivated, and who make a
goddess of me, the clever women, worldly but large-minded—all the
people I like. I am not afraid of African competitors there. They will
stick to me," said Grace, with emphasis.
Her friend could see that she was troubled, though she affected to
take the matter easily. There was trouble in both faces, as the friends
sat opposite each other, with only the spindle-legged Louis Seize
tea-table between them; but the trouble in Susan Rodney's face was
graver than in Lady Perivale's.
"Tell me about your winter," said Grace, after a pause, during which
tea-cups had been refilled, and dainty cakelets offered and declined.
"Oh, the usual dull mechanic round; plenty of pupils, mostly
suburban; and one duchess, five and fifty, who thinks she has
discovered a magnificent contralto voice of which she was unaware
till quite lately, and desires me to develop it. We bawl the grand duet
from Norma till we are both hoarse, and then my duchess makes me
stop and lunch with her, and tells me her troubles."
"What are they?"
"I should have put it in the singular. When she talks of her troubles
she means her husband."
"Sue, you're trying to be vivacious; but there's something on your
mind. If it's any bother of your own, do tell me, dear, and let me help
you if I can."
"My tender-hearted Grace! You always wanted to help people. I
remember your coming to me with all your little pocket-money that
dreadful morning at the Rectory when I had a wire to say my mother
was dying, and had to rush back to town. And my dear Gracie
thought I should be hard up, and wanted to help me. That's nearly
ten years ago. Well, well! Such things live in one's memory. And your
father, how kind, how courteous he always was to the holiday music-
mistress, and what a happy time my summer holidays were in the
dear old Rectory!"
"And what a lucky girl I was to get such a teacher and such a dear
friend for nothing!"
"Do you call bed and board, lavender-scented linen, cream à
discrétion, pony-cart, lawn tennis, luncheon parties, dinner at the
Squire's, a dance at the market town—do you call that nothing? Well,
the bargain suited us both, I think, and it was a pleasure to train one
of the finest mezzo-sopranos I know. And now, Gracie," slowly,
hesitatingly even, "what about your winter?"
"Five months of books, music, and idleness. My lotus land was never
lovelier. But for a January storm, that tore my roses and spoilt a
Bougainvilliers that covers half the house, I should hardly have
known it was winter."
"And were you quite alone all the time? No visitors?"
"Not a mortal! You know I go to my villa to read and think. When I am
tired of my own thoughts and other people's—one does tire
occasionally even of Browning, even of Shakespeare—I turn to my
piano, and find a higher range of thought in Beethoven. You know I
go the pace all through the London season, never shirk a dance, do
three cotillons a week, go everywhere, see everything."
"Yes, I know you have gone the pace, since your three years'
mourning."
"After Cowes comes the reaction, a month or so in Northumberland,
just to show myself to my people, and see that the gardeners are
doing their duty; and then when the leaves begin to fall, away to my
olive woods and their perpetual grey. For half the year I revel in
solitude. If you would spend a winter with me I should be charmed,
for you like the life I like, and it would be a solitude à deux. But the
common herd are only good in cities. I come back to London to be
sociable and amused."
Miss Rodney rose and put on her mantle.
"Can't you stop and dine? I'll send you snugly home in my
brougham."
Home was a villa facing Regent's Park.
"Alas! dear, it's impossible! I am due in Cadogan Square at half-past
six—Islington and Chelsea 'bus from Regent-circus."
"A lesson?"
"Two lessons—sisters, and not an iota of voice between them. But I
shall make them sing. Give me a scrap of intelligence, and I can
always manage that. Good-bye, Grace. Ask me to dinner some other
night, when you are alone."
"Come to-morrow night, or the night after. I have no engagement, as
you know. Let us see a lot of each other before the rush begins."
"Friday night, then. Good-bye."
They kissed again. Lady Perivale rang the bell, and then followed
her friend towards the drawing-room door; but on her way there Miss
Rodney stopped suddenly, and burst into tears.
"Sue, Sue, what is it? I knew you had something on your mind. If it's
a money trouble, dear, make light of it, for it needn't plague you
another minute. I have more money than I know what to do with."
"No, no, no, dear; it's not money," sobbed Sue. "Oh, what a fool I am
—what a weak-minded, foolish fool!"
A footman opened the door, and looked with vacant countenance at
the agitated group. Early initiation in his superiors' domestic troubles
had taught him to compose his features when storms were raging.
"The door, James—presently," his mistress said, confusedly,
watching him leave the room with that incredible slowness with
which such persons appear to move when we want to get rid of
them.
"Very foolish, if you won't trust your old friend Gracie!" she said,
making Sue sit down, and seating herself beside her, and then in
caressing tones, "Now, dear, tell me all your troubles. You know
there is no sorrow of yours—no difficulty—no complication—which
would find me unsympathetic. What is it?"
"Oh, Gracie, Gracie, my darling girl, it's not my trouble. It's yours."
"Mine?" with intense surprise.
"Yes, dear. I meant to have kept silence. I thought it was the only
course, in such a delicate matter. I meant to leave things alone—and
let you find out for yourself."
"Find out! What?"
"The scandal, Grace—a scandal that touches you."
"What scandal can touch me? Scandal! Why, I have never done
anything in my life that the most malignant gossip in London could
turn to my disadvantage."
Her indignant eyes, her full, strong voice, answered for her truth.
"Oh, Grace, I knew, I knew there couldn't be anything in it. A wicked
lie, a cowardly attack upon a pure-minded woman—a woman of
spotless character; the last woman upon this earth to give ground for
such a story."
"Oh, Sue, if you love me, be coherent! What is the story? Who is the
slanderer?"
"Heaven knows how it began! My Duchess told me. I spoke of you
the other day at our tête-à-tête luncheon. I told her about your lovely
voice, your passion for music. She nodded her old wig in a
supercilious way. 'I have heard her sing,' she said curtly. She waited
till the servants left the room, and then asked me if it was possible I
had not heard the scandal about Lady Perivale."
"What scandal? Oh, for pity's sake come to that, Sue. Never mind
your Duchess."
"Well, I'll tell you in the most brutal way. It seems that three or four
people, whose names I haven't discovered, declare they met you in
Algiers, and in Corsica and Sardinia, travelling with Colonel Rannock
—travelling with Colonel Rannock—passing as his wife, under a nom
de guerre—Mr. and Mrs. Randall."
"How utterly disgusting and absurd! But what on earth can have
made them imagine such a thing?"
"People say you were seen—seen and recognized—by different
people who knew you, in one or the other of those places."
"Travelling with Colonel Rannock, as his wife! My God! A man I
refused three times. Three times," laughing hysterically. "Why, I have
had him on his knees in this room; kneeling, Sue, like a lover in an
old comedy; and I only laughed at him."
"That's rather a dangerous thing to do, Grace, with some men."
"Oh, Colonel Rannock is not the kind of man to start a vendetta for a
woman's laughter. He is a laughing philosopher himself, and takes
everything lightly."
"Does he? One never knows what there is behind that lightness.
What if Colonel Rannock has set this scandal on foot with a view to
proposing a fourth time, and getting himself accepted?"
"How could he make people swear they saw me—me!—at Algiers,
when I was in Italy? It is all nonsense Sue; an absurd malentendu;
my name substituted for some other woman's. Now I am in London,
the matter will be put straight in an hour. People have only to see me
again to be sure I am not that kind of woman. As for Colonel
Rannock, he may be dissipated, and a spendthrift; but he is well-
born, and he ought to be a gentleman."
"Who said he was ill-born? Surely, you know that there are good
races and bad. Who can tell when the bad blood came in, and the
character of the race began to degenerate? Under the Plantagenets,
perhaps. Colonel Rannock comes of a bad race—everybody knows
that. His grandfather, Lord Kirkmichael, was notorious in the
Regency. He left his memoirs, don't you know, to be published fifty
years after his death—an awful book—that had a succès de
scandale six or seven years ago. He was bosom friend of Lord
Hertford, and that set."
"I did not trouble myself about his grandfather."
"Ah! but you ought! A man's family history is the man. Lord
Kirkmichael's grandson would be capable of anything infamous."
"The whole thing is too preposterous for consideration," Lady
Perivale said angrily. "I wonder at your taking it tragically."
And then, recalling that empty salver instead of the usual pile of
letters and cards, she cried, distractedly—
"It is shameful—atrocious—that any one upon earth could believe
such a thing of me. It makes me hate the human race. Yes, and I
shall always hate those horrid wretches I called friends, however
they may try to make amends for this insolent neglect."
There was no question of taking the matter lightly now, for Grace
Perivale burst into a passion of sobs, and was quite as tragic as her
friend.
"My dearest Grace, pray, pray be calm! Don't stay in this odious
London, where people have no hearts. Why not go to your Northern
castle, and live there quietly till the mystery clears itself, as no doubt
it will soon?"
"Go?" cried Lady Perivale, starting up out of the drooping attitude in
which she had given way to her distress. "Beat a retreat? Why, if
Grosvenor Square were a fiery furnace I would stay and face those
wretches—those false, false friends—till I made them know the kind
of woman I am!"
"Well, dear, perhaps that is best—if you can stand it," Susan
answered, rather sadly.
"But where is Colonel Rannock? Surely he has not been dumb! It is
his business to bring the slanderers to book!"
"That's what I told the Duchess. But Rannock has not been seen in
London since the autumn, and is said to be shooting something in
the Rockies. And now, I must rush off to my lessons. Good-bye,
again, dear. Don't forget that I am to dine with you on Friday!"
"Shall I invite a party of twenty to meet you—an impromptu party,
asked by telegraph, such as I had last year to welcome me home?"
Grace asked, bitterly. "Go, dear! Don't be too sorry for me. I shall
weather the storm. I ought to be more amused than distressed by
such nonsense."
Miss Rodney dried her tearful eyes, and composed her agitated
features, on her way downstairs. The footman stood ready to open
the door, stifling a yawn behind his hand. Miss Rodney gave a quick
glance round the hall, taking in all its spaciousness and splendour,
the marble group at the foot of the double staircase, the bronze and
ormolu candelabra, the crimson carpets, softer than forest moss.
"Rich beyond the dreams of avarice—and so unhappy!" she thought,
as she hurried off to catch the Chelsea 'bus.
CHAPTER II.
"How blest he names, in love's familiar tone,
The kind fair friend by nature marked his own;
And, in the waveless mirror of his mind,
Views the fleet years of pleasure left behind,
Since when her empire o'er his heart began—
Since first he called her his before the holy man."
It was not often in the London season that Lady Perivale could taste
the pleasures of solitude, a long evening by her own fireside,
unbroken by letters, messages, telegrams, sudden inroads of friends
breaking in upon her at eleven o'clock, between a dinner and a
dance, wanting to know why she had not been at the dinner, and
whether she was going to the dance, or dances, of the evening, what
accident or caprice had eclipsed their star. But on this night of her
return the visitor's bell sounded no more after Susan Rodney left her.
The quiet of her house was so strange a thing that it almost scared
her.
"I begin to understand what a leper must feel in his cavern in the
wilderness," she said to herself with a laugh. "The thing is almost
tragic, and yet so utterly absurd. It is tragic to discover what society
friendships are made of—ropes of sand that fly away with the first
wind that blows unkindly."
She pretended to dine, for the servants might have heard of the
scandal, and she did not want them to think her crushed by
unmerited slights. They, of course, knew the truth, since she had two
witnesses among them to prove an alibi, Johnson the butler, and her
devoted maid, Emily Scott.
She did not know that the first footman and the cook had both
laughed off Johnson's indignant statement that his mistress had
never left Porto Maurizio.
"You're not the man to give her away if she had gone off for a bit of a
scamper. You and Miss Scott would look the other way when her
boxes were being labelled."
"And she'd take a courier maid instead of Emily," said the cook.
"After all, it's only finn der seecle."
"Why don't she marry him, and ha' done with it?" said the footman.
Butler and maid were goaded into a fury by talk of this kind, and it
was only the force of esprit de corps, and the fact that James was six
foot one, and a first rate plate-cleaner, that prevented Mr. Johnson
sacking him on the instant.
"Did you ever know me tell a lie?" he asked indignantly.
"Or me?" sobbed Emily.
"Not on your own account," said the cook; "but you'd tell a good big
one to screen your mistress."
"And so I might perhaps," said the girl, "if she wanted screening; but
she don't, and, what's more, she never will."
"Well, all I can say is it's all over London," said James, "and it's made
it very unpleasant for me at the Feathers, for, of course, I stand up
for my lady in public, and swear it's a pack of lies. But here we're
tiled in, and I'm free to confess I don't believe in smoke without fire."
They went on wrangling till bedtime, while Grace sat by the fire in the
little drawing-room with her brown poodle lying on the lace flounces
of her tea-gown, and tried to read.
She tried book after book, Meredith, Hardy, Browning, Anatole
France, taking the volumes at random from a whirligig book-stand,
twisting the stand about impatiently to find a book that would calm
her agitation, and beguile her thoughts into a new channel. But
literature was no use to her tonight.
"I see it is only happy people who can read," she thought. She
opened no more books, and let her mind work as it would. There had
been sorrows in her life, deep and lasting sorrow, in the early death
of a husband to whom she had been fondly attached, and in the
previous loss of a father she had adored. But in spite of these
losses, which had darkened her sky for a long time, her life had been
happy; she had a happy disposition, the capacity for enjoyment, the
love of all that was bright and beautiful in the world, art, music,
flowers, scenery, horses, dogs—and even people. She loved
travelling, she loved the gaiety of a London season, she loved the
quiet of her Italian villa. Her childhood had been spent in a rustic
solitude, and all her girlish pleasures had been of the simplest. The
only child of a father who had done with the world when he read the
burial service over his young wife, and who had lived in almost
unbroken retirement in an East Anglian Rectory. He was a student,
and could afford a curate to take the burden of parish work, in a
sparsely populated parish, where distance, not numbers, had to be
considered. He kept good horses, mounted his curate, and drove or
rode about among his flock, and was beloved even by the roughest
of them.
That girl-child was the one human thing he had to love, and he
lavished love upon her. He taught her, trained her to appreciate all
that is best in literature, yet kept her simple as a child, and thought of
her as if she were still a child after her eighteenth birthday, and so
was taken by surprise when Sir Hector Perivale, who had met her at
friendly parties in the neighbourhood, came to him at the end of the
shooting season, and asked to be accepted as her future husband.
He had offered himself to Grace, and Grace had not said no. Grace
had allowed him to call upon the rector.
Mr. Mallandine looked up from his book like a man in a dream.
"Marry my Grace!" he cried. "Why, she has hardly done with her
dolls. It seems only yesterday she was sitting on the carpet over

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Employee Expenses and Deferred Compensation

I:9-1 It is important to distinguish whether an individual is an employee or an independent

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

a. Reimbursed business meals Xa

Are subject to Not subject to

pp. I:9-3 and I:9-4.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Total business meal expenses $2,000

pp. I:9-14 and I:9-15.

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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

I:9-18 a. These amounts are reported on Louis's return as follows:

I:9-20 a. $3,000 ($6,000 x 0.50) is deductible as a miscellaneous itemized deduction and

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$ 900 (The deduction is limited to the face value of the tickets)

I:9-25 a. An employee reimbursement plan is treated as an accountable plan if it meets the

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

I:9-34 Limitations for the year 2012 include:

I:9-37 ISO requirements include:

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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

1. The treatment of reimbursements, in particular for any reimbursements in excess of

pp. I:9-21 through I:9-23.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

I:9-52 a. Mike's deduction for employment-related expenses is computed as follows:

I:9-53 a. Travel $4,000

c. If Monique is an employee, then these employment-related expenses are deductible

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The deduction is computed as follows:

Subject to 2% nondeductible floor:

b. The deductible expenses are classified as a from AGI deduction.

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Expense Total For From

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b. Total itemized deductions are computed as follows:

pp. I:9-4 and I:9-5.

24,000 miles unreimbursed x $.555 (per mile in 2012) $13,320

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Expenses (excluding parking and tolls) $16,400

pp. I:9-11 and I:9-12.

I:9-61 a. Deductible expenses include:

pp. I:9-12 through I:9-16.

I:9-62 $5,400 is deductible in the current year computed as follows:

Football tickets (100 x $36 each) $ 3,600 (limited to face value)

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2. The reimbursement is less than the expenses, so a proration of expenses is

EXPENSES TOTAL 80% 20%