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CHAPTER 8
DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION
SOLUTIONS TO PROBLEM MATERIALS
Status: Q/P
Question/ Learning Present in Prior
Problem Objective Topic Edition Edition
1 LO 1 Cost recovery New

2 LO 1 Cost recovery “allowable” Unchanged 2
3 LO 1 Cost recovery of land improvements Unchanged 3
4 LO 2 Eligibility for cost recovery Unchanged 4
5 LO 2 Mid-quarter convention: placed in service New
6 LO 2 Half-year convention Unchanged 6
7 LO 2 Mid-quarter convention: year placed in New
service
8 LO 2 Property eligible for additional first-year New
depreciation
9 LO 2 Mid-quarter convention: year of sale Unchanged 9
10 LO 2 Mid-month convention Unchanged 10
11 LO 2 Straight-line method: applicable convention Unchanged 11
12 LO 2 Farm property Unchanged 12
15 LO 2 Leasehold property owned by lessor Unchanged 15
16 LO 2 Qualified leasehold property owned by lessee Modified 16
17 LO 2 Leasehold property owned by lessee Unchanged 17
18 LO 3 Section 179 expensing New
19 LO 3 Section 179 expensing: effect on MACRS Updated 19
cost recovery
20 LO 3 Section 179 expensing: carryforward Updated 20
21 LO 3 Section 179 expensing: taxable income Unchanged 21
limitation
22 LO 2, 3 Section 179 expensing: eligibility Unchanged 22
23 LO 3, 4 Listed property: passenger auto Unchanged 23
24 LO 4 Listed property: passenger auto and cost Unchanged 24
recovery limit
25 LO 4 Leased passenger automobiles and lease Unchanged 25
inclusion amount
26 LO 7 Amortization: § 197 intangibles Unchanged 26
27 LO 7 Covenant not to compete Unchanged 27
28 LO 7 Start-up expenditures Unchanged 28
8-1
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8-2 2013 Individual Income Taxes/Solutions Manual
Status: Q/P
Question/ Learning Present in Prior
Problem Objective Topic Edition Edition
29 LO 7 Start-up expenditures Unchanged 29

30 LO 8 Cost depletion New
*31 LO 1, 2 Cost recovery allowed and allowable Unchanged 31
32 LO 1, 2 Personal residence converted to rental Unchanged 32
property
*33 LO 2 MACRS for personalty Modified 33
*34 LO 2 MACRS for personalty Modified 34
*35 LO 2 MACRS for personalty: half-year convention Unchanged 35
*36 LO 2 MACRS for personalty: mid-quarter Modified 36
convention
*37 LO 2 MACRS for realty Unchanged 37
41 LO 2 Farm property Modified 41
42 LO 2 Farm property Modified 42
43 LO 2 Leasehold improvement property Modified 43
44 LO 2 Leasehold improvement property Modified 44
*45 LO 2, 3, 10 MACRS and § 179 expensing Modified 45
*46 LO 2, 3 MACRS and § 179 expensing Modified 46
*47 LO 2, 3, 10 MACRS and § 179 expensing New
*48 LO 3, 4 Listed property and § 179 deduction: not Unchanged 48
passenger automobile
*49 LO 2, 4 Listed property: luxury auto Updated 49
*50 LO 4 Listed property: luxury auto Modified 50
*51 LO 2, 3, 4 Listed property: not passenger automobile Unchanged 51
*52 LO 2, 4 Listed property: recapture and luxury auto Unchanged 52
*53 LO 2, 4, 10 Listed property Unchanged 53
*54 LO 2, 4, 10 Listed property: lease versus purchase for Modified 54
luxury auto
55 LO 2, 5 Alternative minimum tax cost recovery Unchanged 55
*56 LO 2, 5, 10 Alternative depreciation system versus Unchanged 56
MACRS
*57 LO 2, 7, 10 Amortization of goodwill versus MACRS Unchanged 57
on building
*58 LO 7 Start-up expenditures Unchanged 58
*59 LO 7 Start-up expenditures Unchanged 59
*60 LO 8 Depletion: cost versus percentage Unchanged 60
*61 LO 8, 10 Intangible drilling costs: capitalized versus Unchanged 61
expensed
*62 Cumulative Updated 62
*63 Cumulative Modified 63
*The solution to this problem is available on a transparency master.
Depreciation, Cost Recovery, Amortization, and Depletion 8-3
Status: Q/P
Research Present in Prior
Problem Topic Edition Edition
1 Depreciation of aircraft parts Unchanged 1

2 Leasing and luxury auto limits Unchanged 2
3 Cost recovery: asset class Unchanged 3
4 Cost recovery availability Unchanged 4
5 Amortization of intangibles New
6 Internet activity Unchanged 6
7 Internet activity Unchanged 7
CHECK FIGURES
31. Loss $11,515. 47. $202,431.

32. $250,000 basis; $7,198 cost 48. $35,000.
recovery. 49. $1,000.
33. $74,289. 50. $11,060 in 2012; $3,200 in 2013.
34.a. $38,839. 51.a. $47,200.
34.b. $6,457. 51.b. $32,400.
35.a. $30,000. 52. Deduction in 2012 $2,448; deduction
35.b. $24,000. in 2013 $2,800; recapture in 2013
36. $83,320. $848.
37.a. $17,120. 53. $174.
37.b. $44,443. 54. Leasing provides a greater tax benefit.
38. $38,640. 55. Regular tax deduction $3,200; AMT
39. 2012 $44,940; 2022 $71,792. deduction $2,400.
40.a. $25,610. 56. $3,192.
40.b. $41,360. 57. The first option produces a $12,617
41. $16,065. greater deduction.
42. $42,000. 58. $3,944.
43. $150,803. 59. $5,828.
44. $65,980 loss. 60. $4,360,000 taxable income.
45.a. $162,007. 61. Capitalized $1,880,000; expensed
45.b. $167,717. $1,024,000.
45.c. Allocate to 7-year class property. 62. Refund due for 2011 $1,992.
46. Cost recovery $155,000; § 179 63. AGI without purchase $393,400; AGI
carryforward $15,593. with purchase $411,340.
DISCUSSION QUESTIONS
1. Property that is classified as personal use property is not used in a trade or business or a
transaction entered into for profit and hence, is not subject to cost recovery. p. 8-3
2. The basis of the property must be reduced by the amount of cost recovery that should have
been deducted (i.e., the cost recovery “allowable”). p. 8-4
3. Land improvements have a class life of 15 years. p. 8-6
4. The relevant issues for Henry are:
• Can a portion of the purchase costs of a ski resort, which are allocated to the construction
costs of the resort’s mountain roads, trails, and slopes, be depreciated?
• If such costs can be depreciated, what is the correct recovery period?

• Can costs incurred subsequent to the purchase, attributable to maintenance of such
mountain roads, trails, and slopes, be depreciated?
pp. 8-3 and 8-4
5. The “placed in service date” and not the purchase date is the critical date in determining
whether the mid-quarter or half-year convention applies. pp. 8-7 and 8-9
6. The actual recovery period is a year longer than the MACRS recovery period (i.e., the cost of
three-year property is recovered over four years). This results from the use of the half-year
convention (i.e., a half-year in the first year and a half-year in the final year). p. 8-7
7. The asset is treated as if it were placed in service in the middle of the quarter. The factors in
the table take this into account and hence, the cost of the asset is multiplied by the factor to
determine the first year’s cost recovery. p. 8-9
8. Qualified property for additional first-year depreciation includes most types of new property
other than buildings. p. 8-7
9. The asset is treated as if it were sold in the middle of the quarter, and hence, one-half quarter
of cost recovery is allowed in the quarter of the sale. If the sale is in the first quarter, the
fraction is 0.5/4; in the second quarter 1.5/4; in the third quarter 2.5/4; and in the fourth
quarter 3.5/4. p. 8-10
10. The mid-month convention applies to real property. The convention provides for a half
month of cost recovery in the month the asset is placed in service and a half month of cost
recovery in the month the asset is sold or otherwise disposed of. p. 8-11
11. Even if MACRS straight-line is elected for the 7-year class assets, the cost recovery on the 5-
year class assets will be computed using regular MACRS with a mid-quarter convention
unless a separate election is made to use MACRS straight-line for the 5-year class assets.
With respect to the mid-quarter convention, the assumption is made that Robert is a calendar
year taxpayer. pp. 8-9 and 8-11
12. The general cost recovery method for new farming equipment is the 150% declining-balance
method. However, the straight-line method is required for any tree or vine bearing fruits or
nuts. The recovery period is 7 years. p. 8-11
13. If an election is made to not have the uniform capitalization rules apply, the straight-line
method is required, but it does not affect the determination of the applicable convention.
p. 8-12
14. The following issues are relevant for Jim:
• What is the cost of a self-produced animal for purposes of computing its cost recovery?
• What is the proper placed in service date relating to self-produced breeding animals?
p. 8-12
15. The recovery methods and periods for lessor owned leasehold improvement property
generally are the same as those used for non-leasehold property. pp. 8-12 and 8-13
16. The cost of qualified leasehold improvement real property can be recovered using additional
first-year depreciation. The remainder of the cost can be recovered using MACRS with the
same recovery method and period as non-leasehold property. pp. 8-12 and 8-13
17. Any unrecovered basis in the leasehold improvement property is written off at the
termination of the lease. p. 8-13
18. Section 179 can only be taken on property used in a trade or business. p. 8-13
19. The basis of the asset is reduced by the § 179 limited expensing deduction (after applying the
$560,000 limitation and before the taxable income limitation) before computing additional
first-year depreciation and MACRS cost recovery. pp. 8-13 and 8-14
20. The § 179 amount eligible for expensing in a carryforward year is limited to the lesser of (1)
the statutory dollar amount of $139,000 (2012) reduced by the cost of § 179 property placed
in service in excess of $560,000 (2012) in the carryforward year or (2) the business income
limitation in the carryforward year. p. 8-14
21. Taxable income, for § 179 purposes, is defined as the aggregate amount of taxable income of
any trade or business of the taxpayer without regard to the amount expensed under § 179.
Therefore, the taxable income computation for purposes of the § 179 limit includes the
deduction for additional first-year depreciation and MACRS. p. 8-14
22. The following issues are relevant to John:
• Is John entitled to a § 179 deduction?

• How much, if any, can John deduct under § 179 on his own tax return?
pp. 8-13 and 8-14
23. An automobile is listed property and consequently must pass the predominantly business use
test to be eligible for MACRS statutory percentage cost recovery. However, by weighing
more than 6,000 pounds, the automobile is not subject to the statutory dollar limits on cost
recovery. However, legislation enacted in 2004 provides that SUVs with a GVW between
6,000 pounds and 14,000 pounds are subject to a $25,000 ceiling in calculating the § 179
expense rather than the normal ceiling for 2012 of $139,000. p. 8-18
24. The cost of listed property that does not pass the more-than-50% business usage test must be
recovered using the straight-line method. If the listed property is an automobile, the cost
recovery is further limited by the cost recovery limitations. pp. 8-17 and 8-19
25. The purpose of the lease inclusion amount is to prevent taxpayers from circumventing the
cost recovery dollar limitations by leasing instead of purchasing an automobile. The dollar
amount is taken from an IRS table and is prorated for the number of days of the lease term
included in the taxable year. This amount is then adjusted to reflect the business and income
producing use of the automobile. p. 8-20
26. The amortization period for a § 197 intangible is 15 years regardless of the actual useful life.
p. 8-23
27. The following issues are relevant for Orange Motors:
• Does the noncompete agreement come under § 197 for intangibles?

• Was the noncompete agreement in connection with the acquisition of a trade or business?
• Can the cost of the noncompete agreement be amortized over a period other than the
normal statutory period if the noncompete agreement is legally enforceable for a shorter
period of time?
• What is the normal statutory period for amortizing intangibles?
p. 8-23
28. The elective treatment for start-up expenditures allows the taxpayer to deduct the lesser of:
(1) the amount of start-up expenditures with respect to the trade or business or (2) $5,000,
reduced, but not below zero, by the amount by which the start-up expenditures exceed
$50,000. Any start-up expenditures not deducted may be amortized ratably over a 180-month
period beginning in the month in which the trade or business begins. pp. 8-24 and 8-25
29. The following issues are relevant for George.
• Are all of the expenditures qualifying expenditures?

• Which of the expenditures must be capitalized?
• Which of the expenditures will qualify for amortization under § 195?
• What is the amount that may be deducted under § 195 for the year 2012?
pp. 8-24 and 8-25
30. The cost basis is divided by the estimated recoverable units of the asset to arrive at the
depletion per unit. The depletion per unit then is multiplied by the number of units sold
during the year to arrive at the cost depletion allowed. p. 8-27
PROBLEMS
31. Cost of asset $200,000
Less: Greater of allowed and allowable cost recovery:

2010 $ 910
2011 7,272 (8,182)
Basis at the end of 2011 $191,818
Less: Cost recovery for 2012 ($200,000 × 3.636% × .5/12) (303)
Basis on date of sale $191,515
Loss on sale of asset ($180,000 – $191,515) ($11,515)

p. 8-4 and Table 8.6
32. José’s basis for cost recovery is $250,000 because the fair market value of the house at the
date of the conversion from personal use to rental property ($250,000) is less than the
$300,000 adjusted basis. The cost recovery is $7,198 [$250,000 × 2.879% (Table 8.6)].
p. 8-4
33. The office furniture qualifies for additional first-year depreciation. So part of the $130,000
cost can be deducted as additional first-year depreciation. The property is 7-year class
property. Recovery would be calculated as follows:
Additional first-year depreciation
($130,000 × .50) $65,000
MACRS cost recovery
[($130,000 – $65,000) × .1429 (Table 8.1)] 9,289
Total cost recovery $74,289
pp. 8-5 to 8-8
34. a. The mid-quarter convention must be used. The office machine is 7-year class
property.
2012
($75,000 × .50) $37,500
MACRS cost recovery
[($75,000 – $37,500) × .0357 (Table 8.2)] 1,339
b. 2013
MACRS cost recovery {$37,500 × [.2755 × (2.5/4)]} $6,457
pp. 8-5 to 8-9
35. a. 2012
MACRS cost recovery ($150,000 × 20%) (Table 8.1) $30,000
b. 2013
MACRS cost recovery [$150,000 × 32% (Table 8.1) × 1/2] $24,000
pp. 8-5 to 8-8
36. The mid-quarter convention must be used because the cost of the computers acquired in the
4th quarter exceeds 40% of the cost of all the personal property acquired during the year
($70,000/$150,000 = 47%).
Furniture (7-year class)
($40,000 × .50) $20,000
MACRS cost recovery
[($40,000 – $20,000) × .1785 (Table 8.2)] 3,570
Trucks (5-year class)
($40,000 × .50) 20,000
MACRS cost recovery
[($40,000 – $20,000) × .15 (Table 8.2)] 3,000
Computers (5-year class)
($70,000 × .50) 35,000
MACRS cost recovery
[($70,000 – $35,000) × .05 (Table 8.2)] 1,750
pp. 8-5 to 8-9
37. a. The building was placed in service in October.
2012: $3,200,000 × .00535 (Table 8.6) = $17,120
b. 2016: $3,200,000 × [.02564 × (6.5/12)] = $44,443
p. 8-10
38. The building meets the 80% gross receipts from dwelling units test. Therefore, it is classified
as residential real property. The building’s depreciable basis is $1,500,000 [$2,000,000 (cost)
– $500,000 (land)].
$1,500,000 × 2.576% (Table 8.6) = $38,640
pp. 8-10 and 8-11
39. 2012: $2,800,000 × .01605 (Table 8.6) = $44,940
2022: $2,800,000 × .02564 (Table 8.6) = $71,792
pp. 8-10 and 8-11
40. The building’s depreciable basis is $1,300,000 [$1,600,000 (cost) – $300,000 (land)].
a. 2012: $1,300,000 × .0197 (Table 8.6) = $25,610
b. 2018: $1,300,000 × .03636 (Table 8.6) × 10.5/12 = $41,360

pp. 8-10 and 8-11
41. The 150% declining-balance method must be used under these circumstances with a 7-year
cost recovery period.
MACRS cost recovery ($150,000 × .1071) (Table 8.4) $16,065
p. 8-11
42. Additional first-year depreciation ($80,000 × .50) $40,000
MACRS cost recovery (straight-line method)
[($80,000 – $40,000) × .05 (Table 8.5)] 2,000
pp. 8-11 and 8-12
43. This is a qualified leasehold improvement.

Additional first-year depreciation ($300,000 × .50) $150,000
MACRS cost recovery
[($300,000 – $150,000) × .00535 (Table 8.6)] 803
pp. 8-12 and 8-13
44. Cost of leasehold improvement $80,000

Less: Cost recovery
2006 (.02247 × $80,000) (1,798)
2007-2011 (.02564 × $80,000 × 5) (10,256)
2012 [.02564 × (11.5/12) × $80,000] (1,966)
Loss (unrecovered cost) $65,980
pp. 8-12, 8-13, and Table 8.6
45. a. 5-year class property

Immediate expense deduction under § 179 $100,000
7-year class property

Immediate expense deduction under § 179 39,000
($139,000 – $100,000)
MACRS cost recovery
[($200,000 – $39,000) × .1429] 23,007
Total deduction $162,007
b. 7-year class property
Immediate expense deduction under § 179 $139,000
MACRS cost recovery [($200,000 – $139,000) × .1429] 8,717
5-year class property
Immediate expense deduction under § 179 –0–
MACRS cost recovery ($100,000 × .20) 20,000
c. The deduction for the year would be $5,710 ($167,717 – $162,007) larger if § 179
expense is first allocated to the 7-year class property (i.e., the longer lived asset).
pp. 8-5 to 8-14 and Table 8.1
46. Section 179 limit [$139,000 – ($600,000 – $560,000)] $99,000

Cost recovery for 7-year class assets
[($600,000 – $99,000) × .1429] $71,593
Income limitation
Income before § 179 and cost recovery $250,000
Cost recovery ($95,000 + $71,593) (166,593)
Income before § 179 amount $ 83,407
Section 179 amount of $99,000 (limited to $83,407) 83,407

Total deduction with respect to the 7-year assets in 2012 $155,000
Section 179 carryforward ($99,000 – $83,407) $15,593
pp. 8-13 and 8-14
47. Section 179 expense $139,000
[($250,000 – $139,000) × .50] 55,500
MACRS cost recovery
[($250,000 – $139,000 – $55,500) × .1429] 7,931
pp. 8-8 to 8-14
48. Hoffman and Smith, CPAs
5191 Natorp Boulevard
Mason, OH 45040
December 20, 2011
Mr. John Johnson
100 Morningside Drive
Clinton, MS 39058
Dear Mr. Johnson:

I am responding to your inquiry concerning the amount of cost recovery you may deduct in
the first year of operation of a new taxi. If the automobile is purchased at the beginning of
2012 for $35,000, the total recovery in the first year would be $35,000.
Because the car will be used as a taxi, it is not subject to the cost recovery limitations
imposed on passenger automobiles. This $35,000 recovery assumes that your income from
your taxi business before considering this recovery would be at least $35,000 and an election
is made under § 179 to expense the maximum allowable amount.
If you need additional information or need clarification of our calculations, please contact me.
Sincerely yours,
John J. Jones, CPA

Partner
TAX FILE MEMORANDUM
December 20, 2011
FROM: John J. Jones
SUBJECT: John Johnson: Calculations for cost recovery in year of acquisition
Facts. John Johnson is considering purchasing an automobile at the beginning of 2012 to be

used 100% as a taxi. The cost of the automobile is $35,000. John wants to know the total
recovery for the year of acquisition of the car.
Calculations. Because the automobile will be used as a taxi, it is not subject to the cost
recovery limitations for passenger automobiles. Therefore, John can elect § 179 expensing.
In deducting the §179 amount of $35,000, the assumption is made that John’s income from
the taxi business before considering the § 179 expense will equal or exceed $35,000.
pp. 8-16 to 8-18
49. Since the car is a used car, it is not eligible for additional first-year depreciation.
MACRS cost recovery:
Cost $25,000
Statutory percentage (mid-quarter convention) × 5%
Cost recovery but subject to the limitation $ 1,250
Recovery limit (limited to $3,060*) $ 1,250

Less: Personal usage (20% × $1,250) (250)
Cost recovery $ 1,000
*These cost recovery limits are indexed annually. The 2011 amounts are used.
pp. 8-16 to 8-18 and Table 8.2
50. Deduction for 2012

Additional first-year depreciation ($20,000 × 50%) $10,000
MACRS cost recovery [($20,000 – $10,000) × 20%] 2,000
Limited to $11,060* ($3,060 + $8,000) $12,000
Deduction for 2013
($10,000 × 32%) = $3,200 (limited to $4,900*) $3,200
So the deduction for 2012 is $11,060 and for 2013 is $3,200.
pp. 8-15 to 8-17, Example 6, and Table 8.1
51. a. Because the Escalade has a GVW rating in excess of 6,000 pounds, it is not a
passenger automobile and hence is not subject to the cost recovery limitations.
However, since the vehicle is an SUV with a GVW between 6,000 and 14,000
pounds, the § 179 expense amount is limited to $25,000.
§ 179 expense $25,000

Additional first-year depreciation [($62,000 – $25,000) × 50%] 18,500
MACRS cost recovery [$62,000 – $25,000 – $18,500) × .20] 3,700
b. If Helen elected not to take additional first-year depreciation, the total deductions
would be as follows:
§ 179 expense $25,000
MACRS cost recovery [($62,000 – $25,000) × 20%] 7,400
p. 8-18
52. Deduction for 2012
MACRS cost recovery ($20,000 × 20%) = $4,000
(limited to $3,060*) × 80% $2,448
Deduction for 2013
Straight-line ($20,000 × 20%) = $4,000 (limited to $4,900*) × 70% $2,800
Cost recovery recapture in 2013
2012 deduction $2,448
Straight-line ($20,000 × 10%) = $2,000
(limited to $3,060*) × 80% (1,600)
Excess $ 848
pp. 8-19, 8-20, and Tables 8.1 and 8.5
53. 100% business use
[$4,000 × 20% (Table 8.1)] × 100% $800
45% business use
[($4,000 × 10%) (Table 8.5)] × 45% (180)
Reduced cost recovery if personal use occurs $620
Tax cost ($620 × 28%) $174
pp. 8-16 to 8-19
Mason, OH 45040
December 20, 2011
Mr. Dennis Harding
150 Avenue I
Memphis, TN 38112
Dear Mr. Harding:
I am writing in response to your request concerning the tax consequences of purchasing
versus leasing an automobile. Our calculations are based on the data you provided in our
telephone conversation.
If the automobile is purchased, the total cost recovery deductions for the five years would be
$14,460. If the automobile is leased, lease payment deductions would total $22,500. In
addition, you also would have to include $286 in your gross income.
If you need additional information or need clarification of our calculations, please contact us.
Sincerely yours,
John J. Jones, CPA

Partner
TAX FILE MEMORANDUM
December 20, 2011
FROM: John J. Jones
SUBJECT: Dennis Harding: Calculation of lease versus purchase
Facts. Dennis Harding is considering purchasing or leasing an automobile on January 1,
2012. The purchase price of the automobile is $35,000. The lease payments for five years
would be $375 per month. The inclusion dollar amounts for the next five years would be $19,
$42, $63, $75, and $87. Dennis wants to know the effect on his adjusted gross income for the
purchase versus the lease of the automobile for five years.
Calculations
Purchase: cost recovery deductions
2012 ($35,000 × 20%) = $7,000 (limited to $3,060*) $ 3,060
2013 [$35,000 × 32% (limited to $4,900*)] 4,900
2014 [$35,000 × 19.2% (limited to $2,950*)] 2,950
2015 [$35,000 × 11.52% (limited to $1,775*)] 1,775
2016 [$35,000 × 11.52% (limited to $1,775*)] 1,775
Total cost recovery deductions $14,460
Lease:
Lease payments ($375 × 60) $22,500
Inclusion dollar amounts ($19 + $42 + $63 + $75 + $87) $ 286
pp. 8-16 to 8-21
55. For regular income tax liability
MACRS cost recovery ($16,000 × .20) $3,200
For AMT liability
($16,000 × .15) $2,400
pp. 8-22, 8-23, and Tables 8.1 and 8.4
56. MACRS:
Year 1 [$100,000 × 14.29% (Table 8.1)] $14,290
Year 2 ($100,000 × 24.49%) 24,490
Year 3 ($100,000 × 17.49%) 17,490
ADS:
Year 1 [$100,000 × 10.71% (Table 8.4)] $10,710
Year 2 ($100,000 × 19.13%) 19,130
Year 3 ($100,000 × 15.03%) 15,030
Total cost recovery (44,870)
Cost recovery lost by electing ADS $11,400
Tax cost of election ($11,400 × 28%) $ 3,192
pp. 8-5 to 8-7, 8-22, 8-23, and Tables 8.1 and 8.4
Mason, OH 45040
October 15, 2012
Mr. Mike Saxon
200 Rolling Hills Drive
Shavertown, PA 18708
Dear Mr. Saxon:
This letter is in response to your request concerning the tax consequences of allocating the
purchase price of a business between the two assets purchased: a warehouse and goodwill.
If the purchase price of $2,000,000 is allocated $1,200,000 to the warehouse and $800,000 to
goodwill, the total recovery in the first year of operations would be $82,865. Cost recovery
on the warehouse would be $29,532 and amortization of the goodwill would be $53,333. If
the purchase price is allocated $1,500,000 to the warehouse and $500,000 to goodwill, the
total recovery in the first year of operations would be $70,248. Cost recovery on the
warehouse would be $36,915 and amortization of the goodwill would be $33,333.
Therefore, under the first option, your deductions in the first year would be $12,617 greater
($82,865 – $70,248). The building is written off over 39 years, while the goodwill is written
off over 15 years. Thus, the higher the allocation to goodwill, the faster the write-off will be.
Should you need more information or clarification of calculations, please contact us.
Sincerely yours,
John J. Jones, CPA
Partner
TAX FILE MEMORANDUM
October 15, 2012
FROM: John J. Jones
SUBJECT: Mike Saxon: Calculations of amount of recovery depending on the allocation of
purchase price between a warehouse and goodwill
Facts. Mike is negotiating the purchase of a business. The final purchase price ($2 million)
has been determined, but the allocation of the purchase price between a warehouse and
goodwill is still subject to discussion. Two alternatives are being considered. The first
alternative would allocate $1,200,000 to the warehouse and $800,000 to goodwill. The
second alternative would allocate $1,500,000 to the warehouse and $500,000 to goodwill.
Mike wants to know the total recovery during the first year of operations from the two
alternatives.
Calculations
Alternative 1
Warehouse [$1,200,000 × 2.461% (Table 8.6)] $29,532
Goodwill ($800,000/15 years) 53,333
Total recovery $82,865
Alternative 2
Warehouse [$1,500,000 × 2.461% (Table 8.6)] $36,915
Goodwill ($500,000/15 years) 33,333
Total recovery $70,248
Additional deductions in first year under alternative 1
($82,865 – $70,248) $12,617
pp. 8-10, 8-22, and 8-23
58. Deductible amount ($5,000 – $4,000) $1,000
Amortizable amount [($53,000/180) × 10 months] 2,944
Total deduction for startup expenditures $3,944
pp. 8-23 and 8-24
59. Deductible amount [$5,000 – ($51,000 – $50,000)] $4,000
Amortizable amount {[($51,000* – $4,000)/180] × 7 months} 1,828
Total deduction for startup expenditures $5,828
*Startup expenses do not include interest expense.
pp. 8-23 and 8-24
60. Gross income $12,000,000
Less: Expenses (5,000,000)
Taxable income before depletion $ 7,000,000
Cost depletion ($10,000,000/250,000 × 45,000) = $1,800,000
Percentage depletion (22% × $12,000,000 = $2,640,000, limited
to 50% × $7,000,000 = $3,500,000) (2,640,000)
Taxable income $ 4,360,000
pp. 8-25 to 8-28
61. Not expensed
Gross income $3,840,000
Less: Expenses (1,240,000)
Taxable income before depletion $2,600,000
Cost depletion ($6* × 120,000) $720,000
Percentage depletion (15% × $3,840,000) $576,000
Greater of cost or percentage depletion (720,000)
Taxable income $1,880,000
Expensed
Gross income $3,840,000
Less: Expenses, including IDC (2,240,000)
Taxable income before depletion $1,600,000

Cost depletion ($4** × 120,000) $480,000
Percentage depletion (15% × $3,840,000) $576,000
Greater of cost or percentage depletion (576,000)
Taxable income $1,024,000
*Oil interest cost plus IDC ($2,000,000 plus $1,000,000) ÷ 500,000 equals $6.
**Oil interest cost of $2,000,000 ÷ 500,000 equals $4.
pp. 8-25 to 8-27 and Example 39
CUMULATIVE PROBLEMS
62. Net income from Writers Anonymous (Note 1) $60,471
Interest income 5,000
Self-employment tax (Note 2) (4,271)
Adjusted gross income $61,200
Less: Itemized deductions (Note 3) (11,700)
Personal exemption (3,700)
Taxable income $45,800
Tax on $45,800 from 2011 Tax Table $ 7,581
Self-employment tax 7,427
Less: Estimated tax payments (17,000)
Net tax payable (or refund due) for 2011 ($ 1,992)
See the tax return solution beginning on page 8-23 of the Solutions Manual.
Notes
(1) The net income of Writers Anonymous is calculated as follows:
Income from sales $105,000
Less: Rent $16,500
Utilities 7,900
Supplies 1,800
Insurance 5,000
Travel excluding meals ($3,500 – $1,200) 2,300
Meals ($1,200 – $600) 600
Depreciation (Note 4) 10,429 (44,529)
Net income $ 60,471
(2) The self-employment tax is calculated as follows (see Ch. 13):
1. Net earnings from self-employment $60,471
2. Multiply line 1 by 92.35% 55,845
3. If the amount on line 2 is $106,800 or less,
multiply the line 2 amount by 13.3%.
This is the self-employment tax. $ 7,427
Part of the self-employment tax, or $4,271 ($7,427 × 57.51%), is a

deduction for AGI.
(3) The itemized deductions are as follows:

State income tax $ 3,000
Home mortgage interest 6,000
Property taxes on home 1,500
Charitable contributions 1,200
Total itemized deductions $11,700
(4) Furniture and fixtures:
MACRS [$17,000 × 14.29% (Table 8.1)] $ 2,429
Computer equipment:
MACRS [$40,000 × 20% (Table 8.1)] 8,000
Mason, OH 45040
December 21, 2012
Mr. John Smith
1045 Center Street
Lindon, UT 84042
Dear Mr. Smith:
I am writing in response to your request concerning the effects on your 2012 adjusted gross
income of selling IBM stock and using some of the proceeds to purchase an automobile to be
used in your business.
If the stock is not sold and the car is not purchased, your adjusted gross income would be
$393,400. If the stock is sold and the car purchased, your adjusted gross income would be
$411,340. The supporting calculations follow:
No sale of stock and no purchase of car
Fees for services $912,000
Less: Business expenses
Building rental $ 36,000
Office furniture and equipment rental 9,000
Office supplies 2,500
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Cost recovery (Note 3):
Front-end loaders 216,600
Dump truck 27,000
Total business expenses (399,100)
Business income before § 179 deduction $512,900
Less: § 179 deduction (Note 1) (139,000)
Business income $373,900
Dividend income 9,500
Notes
(1) Section 179 deduction of $139,000.
(2) The inheritance of IBM stock worth $110,000 from Aunt Mildred is excludible under
§ 101.
(3) Cost recovery
Front-end loaders
[($500,000 – $139,000) × .50] $180,500
MACRS cost recovery
[($500,000 – $139,000 – $180,500) × .20] 36,100
Dump truck
($45,000 × .50) $22,500
MACRS cost recovery
[($45,000 – $22,500) × .20] 4,500
Sale of stock and purchase of car

Building rental $36,000
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Cost recovery (Note 3):
Front-end loaders 252,600
Dump truck 27,000
Car 11,060
Total business expenses (446,160)
Business income before § 179 deduction $465,840
Less: § 179 deduction (Note 1) (79,000)
Business income $386,840
Dividend income 9,500
Gain on stock sale (Note 2) 5,000
Notes
(1) Section 179 deduction of $79,000 {$139,000 – [($500,000 + $45,000 + $75,000) –
$560,000]}.
(2) The inheritance of IBM stock worth $110,000 from Aunt Mildred is excludible under
§ 101. John’s recognized gain on the sale of the IBM stock is $5,000 ($115,000 amount
realized – $110,000 adjusted basis) and is automatically classified as a long-term
capital gain.
(3) Cost recovery

Front-end loaders
[($500,000 – $79,000) × .50] $210,500
MACRS cost recovery
[($500,000 – $79,000 – $210,500) × .20] 42,100
Dump truck
($45,000 × .50) $22,500
MACRS cost recovery
[($45,000 – $22,500) × .20] 4,500
Total $27,000
Car
($75,000 × .50) $37,500
MACRS cost recovery
[($75,000 – $37,500) × .20] 7,500
Total potential deduction $45,000
Limited to ($3,060* + $8,000) $11,060
*The cost recovery limits are indexed annually. The 2011 amounts are used.
Should you need more information or need for us to clarify our calculations, please contact us.
Sincerely,
John J. Jones, CPA
Partner
TAX FILE MEMORANDUM
December 20, 2012
FROM: John J. Jones
SUBJECT: John Smith: Calculation of adjusted gross income for (1) no sale of stock or
purchase of car versus (2) sale of stock and purchase of car
Facts. John is considering selling inherited IBM stock with an adjusted basis to him of
$110,000 for $115,000 on December 29, 2012. He would use $75,000 of the proceeds to
purchase a car that would be used 100% for business. John wants to know the effect these
transactions would have on his adjusted gross income.
No sale of stock and no purchase of car
Building rental $ 36,000
Utilities 4,000
Another random document with
no related content on Scribd:
That evening, as the clock told the hour of seven, William Jordan,
Junior, was honoured by the most signal act of condescension on
the part of his mentor that had as yet been vouchsafed to him.
“Luney,” said Mr. Dodson, “your best way to Milton Street, E.C., is to
go down the Strand and to take a ’bus from Ludgate Circus. I am
going down the Strand myself; if you like we will toddle down
together.”
A few minutes later William Jordan, Junior, might have been
discerned walking down the Strand in association with his mentor.
The eminent worldling had his arm within that of his protégé.
“Luney,” he said, “out of office hours you can call me Jimmy.”
As they went their way, with the whole of the conversation furnished
entirely by one only of the parties to it, Mr. Dodson produced an
elaborate silver case.
“Smoke?” he said.
“Oh n-n-no,” said the boy, startled in much the same way as he
would have been had he been asked whether he committed
murders.
“Pity,” said Mr. Dodson, as he selected a cigarette from the silver
case with the unmistakable air of the connoisseur. “Ought to. Great
thing for the nerves. Though perhaps you are not troubled with ’em. I
shouldn’t say myself that you lived at very high pressure.”
At the end of Fleet Street master and pupil parted company.
“Ta ta, old boy,” said Mr. Dodson, with a genial wave of the hand. “I
go round the corner to the station. Nice time for the 7.50 to
Peckham. That’s your ’bus—the green one. Ta ta; one of these days
we will do a music-hall together.”
Mr. Dodson stood to watch the frail figure enter the green ’bus.
“Absolutely the rummest kid I ever struck,” said he. “Fancy a thing
like that able to read Homer in the original! Well, I will say this—he
don’t put on side about it like most chaps would.”
With this reflection the philosopher turned the corner, immediately to
engage in a war of words, in which he did not come off second best,
with the driver of a “growler,” who nearly ran over him as he stepped
somewhat unwarily off the pavement.
XXI
In the course of the following week an announcement was made
which marked an epoch in the history of the great publishing house
of Crumpett and Hawker.
However, before this event had burgeoned forth upon the counting-
house staff, Mr. M. Arnold Dodson, with whose individual destiny it
was concerned, continued to live in that condition of soul-distraction,
to which it would seem even the most philosophic minds are
susceptible, which is known as hope deferred.
All the week Mr. Dodson had waited in vain to be summoned into the
presence of authority, to receive the seal of official recognition to
which he felt his mature talents were unquestionably entitled. He had
set his heart upon the dethronement of young Davis. To that other
accomplished worldling, who in mere point of age was a year older
than himself, he never referred without the prefix “young.” But the
misdemeanour of which that successful adventurer had been
convicted, of smoking in the room of the head of the firm, had not as
yet borne the fruit that Mr. Dodson had confidently predicted. Mr.
Davis was still enthroned in high places, triumphant still in his
original deceit; every morning he appended his signature in the time-
book, G. Eliot Davis, 9.15, not the least among the Olympians whose
seat was on the second storey; while Mr. M. Arnold Dodson, in every
way his superior in moral and mental attainment, still languished in
the comparative obscurity of the counting-house below.
On two occasions during that week had Mr. Dodson walked into the
Strand during the luncheon hour, and had purchased an extremely
pungent cigar, for which he had disbursed the sum of one penny.
Armed with this implement he had stolen up-stairs in the absence of
the staff during the hour of luncheon, and had smoked it grimly and
relentlessly in the middle of the sanctuary of Mr. Octavius Crumpett.
Melancholy to relate, however, in spite of the physical pangs
endured by the heroic Mr. Dodson, who in the very act of informing
William Jordan, Junior, that “that young Davis had been smoking
again in Octavius’s room,” had to make a sudden and somewhat
undignified exit to the back of the building—in spite of such
tribulations as these the wicked, in the person of G. Eliot Davis,
continued to flourish in that time-honoured fashion which has been
celebrated by Holy Writ.
“Luney,” said Mr. Dodson, with an unaffected pathos in his voice,
when the second of these heroic efforts to dethrone the unrighteous
had been fraught with no other compensation than that of suffering
of a purely physical kind, which is too often the reward of human
nature’s disinterestedness, “Luney, it fairly turns me sick to see that
young Davis walk up those stairs. I shouldn’t mind, you know, I
shouldn’t mind at all if he had played the game. But he got where he
is by a trick, and it is doing him no kindness to try to gloss it over.”
Upon the delivery of this altogether admirable piece of morality
touched by emotion, Mr. M. Arnold Dodson, for the second time that
afternoon, retired to the back of the building with a haste which
scarcely harmonized with his natural dignity.
As he returned with an unwonted pallor upon a countenance which
as a rule bore evidence of being soundly nourished, whom should he
meet, as if by the irony of circumstance, but Mr. G. Eliot Davis
descending the stairs. For once the eminent philosopher and man of
the world seemed to lack the moral strength to encounter one whom
he could only regard in the light of a successful adventurer.
Therefore he strove to escape without attempting to outface a
demeanour, which in his view was flown to an exaggerated degree
with the insolence of office. This afternoon, however, he was not able
to control the fates.
“Dodson,” said Mr. G. Eliot Davis, in the tone which Mr. Dodson
made a point of describing as “insufferable”; “Dodson,” said Mr.
Davis, “perhaps it may interest you to know that Mr. Octavius’s
personal translation of Homer’s Odyssey will be issued to the Trade
on Monday next.”
“Thank you, Davis,” said Mr. Dodson, with the self-command that the
great display on great occasions. “I am glad to know that, very glad
indeed.”
Mr. Dodson’s official duties should have led him there and then into
the counting-house of Crumpett and Hawker; but as he stood to
watch the small but stout, erect, and prosperous form of Mr. G. Eliot
Davis saunter out of the front entrance of No. 24 Trafalgar Square,
an idea flashed across that Napoleonic brain.
Therefore, instead of returning to admonish William Jordan, Junior,
for omitting to inscribe the courtesy prefix to the name of a peer’s
daughter in returning the manuscript copy of her verses, Mr. Dodson
also sauntered forth of No. 24 Trafalgar Square. He turned the first
corner and entered the refreshment buffet of the Brontë Hotel.
Presiding over that hall of public entertainment was the lady of the
scarlet blouse and yellow earrings. This afternoon the blouse was
heliotrope, and she wore no earrings.
“Chrissie,” said Mr. Dodson, “I want something to pull me together. It
must be up to proof, but it must leave no odour.”
“I always say you can’t do better than brandy,” said Chrissie, with the
assured yet quiet air of the unmistakable expert. “Of course, some
prefer a John Collins, or an American, or a Dog Toby, but I am not
partial to so much fancy work myself.”
“Same here,” said Mr. Dodson. “But there must be no odour—none
whatever.”
“You shall have a toothful of the Waterloo, as your face seems
familiar,” said Chrissie benignly.
“You are a good sort, Chrissie,” said Mr. Dodson, with a small display
of emotion that became him perfectly. “I shall not forget you.”
“My size is nine and a quarter,” said the lady, as with extreme
precision she measured out a small quantity of a curiously-coloured
liquid from a very mysterious-looking bottle. “Jimmy, I must say you
do look a bit below yourself. Has the moon come up yet?”
“Not yet,” said Mr. Dodson in a tone of amiable deprecation. He was
greatly indebted to the kindness of the lady in the heliotrope blouse,
but her question was alien to his dignity, as was also the situation in
which he found himself. Even at this period of his career all those
attributes were clearly developed which in after years brought him so
much distinction in political life.
“Well, if you will smoke El Destinkers at one and fourpence a
hundred,” said the lady in the heliotrope blouse.
“Chrissie,” said Mr. Dodson impressively, after swallowing the brandy
at a single gulp, “you should know that I am physically incapable of
doing anything of the kind.”
“I can smell it from here,” said the lady in the heliotrope blouse.
“I know it is not considered the thing to contradict a lady,” said Mr.
Dodson, withdrawing two steps from the buffet, “but you appear to
have paid me the compliment of forgetting the commercial traveller
who has just gone out. So long. Be good.”
Mr. Dodson sauntered out of the refreshment buffet of the Brontë
Hotel with the inimitable nonchalance of bearing which many,
besides the lady in the heliotrope blouse, never failed to admire.
Before returning to his official duties at No. 24 Trafalgar Square, Mr.
Dodson went in quest of a chemist, whom he found a few doors up
the street. Of him he purchased a pennyworth of pungent pink
lozenges, which immediately he proceeded to suck. He then re-
entered the premises of the eminent publishing house; but instead of
going forthwith to admonish William Jordan, Junior, he proceeded to
wash his face, to part his hair in the middle with much care, and to
re-adjust his necktie.
These preliminaries accomplished, Mr. Dodson walked very slowly
and erectly up to the second storey. He entered the small ante-
chamber at the head of the stairs, which was dedicated to the sole
use of the vigilant guardian of these Olympian altitudes, one G. Eliot
Davis.
“Davis,” said Mr. Dodson, peering within, “is Mr. Octavius in his
room?”
“Yes, Dodson, he is,” said Mr. Davis.
“Alone, Davis?”
“Alone, Dodson.”
“Thank you, Davis.”
“Don’t mention it, Dodson.”
Upon the conclusion of this exchange of courtesies, which an
impartial observer might have considered as a trifle elaborated on
both sides, Mr. Dodson knocked smartly and boldly, yet withal
respectfully, upon the portals of Mr. Octavius Crumpett. Mr. Dodson
entered the august presence briskly, but closed the door after him
with delicacy and with self-possession.
Mr. Octavius Crumpett was seated at the table in close proximity to
the fire. Every letter and document, every book, every small article
was arranged upon it with scrupulous nicety. The head of the firm
was enjoying the academic pleasure of running a paper-knife
through the close-pressed leaves, within a chaste and scholarly
binding, of his personal translation of the Odyssey, which was to be
issued to an expectant world upon the following Monday.
Mr. Octavius Crumpett looked up urbanely from his insidious and
alluring occupation. A slight frown of perplexity almost seemed to
cloud for a moment that serene brow. In his boundless
conscientiousness Mr. Octavius Crumpett conceived it to be his duty
to be able to remember the name of each individual member of his
staff, however lowly or obscure his station. For an instant he almost
feared that he had forgotten the name of the individual before him.
But this moment of doubt, of almost tremulous perplexity, which did
him such credit as a man, as the head of a house of eminent
publishers, as an enlightened patron of labour, passed almost as
soon as it appeared, for a weak wet glint of the afternoon sun
suddenly illumined the wizened countenance of the young
gentleman who stood before him; and as if touched by inspiration Mr.
Octavius Crumpett remembered that the name of the young
gentleman was Matthew Arnold Dodson.
“Well, Mr. Dodson?” said Mr. Octavius Crumpett, in that tone and
manner which were ever the despair and admiration of his staff.
Mr. M. A. Dodson, who had already shown his consummate breeding
by waiting for his chief to speak first, as though he were a royalty
incarnate, bowed slightly from his full height, which was hardly more
than four feet ten inches, and said in a very carefully modulated
voice, “I apologize, sir, for my intrusion, but I learn that your personal
translation of the Odyssey is to be issued to the Trade on Monday
next.”
“That is in accord with existing arrangements, I believe,” said Mr.
Octavius Crumpett, with a masterly implication that his well-cut
diction dealt merely with human nature’s daily food.
“Well now, sir,” said Mr. M. A. Dodson, whose mellifluous accent
might have sounded a little ingratiating had it been used by a less
able practitioner, “I am taking the freedom of asking you, sir, whether
I might purchase my own private copy this evening. The fact is, sir,”
Mr. M. A. Dodson added, in a burst of humble yet half-whimsical self-
revelation, “I can hardly possess my soul in patience until Monday
next. May I ask, sir, would it be infra dignitatem if I were to obtain my
own copy this evening? I am particularly anxious to have the
opportunity of studying the entire achievement—I feel sure, sir, I am
justified in applying beforehand that much-abused word—before the
journals of professional criticism, which are very excellent in their
way, which I needn’t tell you, sir, I read every week, have had the
opportunity of swaying my private judgment.”
Mr. Octavius Crumpett paused, with his solid silver paper-knife
suspended in the air, to listen to this masterful piece of elocution on
the part of Mr. M. A. Dodson. As the delicately enunciated phrases
fell from those gently simpering lips, quite as they would have
proceeded from those of the listener himself, an emotion of pleasure
and gratitude percolated through the entire being of this good and
benign gentleman. That portion of his being which was arrayed in a
waistcoat of immaculate whiteness rose and fell in visible accord
with the internal harmony. The traditions of the house of Crumpett
and Hawker were never so secure as in the keeping of even one of
the latest additions to its clerical staff. By some mysterious means
the rarefied air of that establishment had wrought already upon one
of the least considerable of its members.
“Mr. Dodson,” said Mr. Octavius Crumpett, speaking with obvious
emotion, “it will—ah, give me immense pleasure if you will accept the
first copy of my—ah, little book.”
“It will delight me, sir, of course, to accept the first copy,” said Mr. M.
A. Dodson, speaking with a quiet dignity and a mature reserve which
became him superbly; “it will overwhelm me with honour, but if my
acceptance of the first copy could in any way be misconstrued—that
is, sir, I mean to say, the freedom I have been guilty of in coming
here this afternoon to speak to you on the subject could be
misconstrued—I should greatly prefer to obtain the first copy by
purchase in the usual manner. And after all, sir,” Mr. M. A. Dodson
concluded, with an arch smile, “if you will permit me to say it, sir, the
labourer is worthy of his hire. If this custom, sir, became in any sense
general of an author giving away his own works, every author, sir,
would either have to become his own publisher, or every publisher
would have to become his own author.”
The glow behind the immaculate waistcoat of Mr. Octavius Crumpett
was heightened to such a degree by these scruples, and by the
cultivated terms in which they gained expression, that the good man
was fain to embody it by beaming like a seraph.
“Pray, my dear Mr. Dodson,” purred his august employer, “do not vex
a nice conscience with scruples that are not in the least necessary. I
shall be charmed if you will allow me to present you with the first
copy of my—ah, little book. Will you kindly ask Mr. Davis to give you
one of the copies set apart for review? and if, Mr. Dodson, you will
take an early opportunity of telling me precisely what you think about
it I shall be honoured indeed, for I perceive, Mr. Dodson, that you
have a real and deep love of letters.”
The manner in which Mr. M. A. Dodson took leave of Mr. Octavius
Crumpett was entirely worthy, in the amplest sense, of two such
ornaments of their age. As the head of the firm watched the close-
knit figure of Mr. M. A. Dodson recede through the door of his room,
he said for his own private delectation: “This house undoubtedly has
an atmosphere of its own. It seems to exude an aroma. That is a
very remarkable youth; a youth of precocious attainment. He talks
like a book.”
Mr. M. Arnold Dodson, with his hand on the door of Mr. G. Eliot
Davis, said to himself, “I never talk to Octavius without wanting to run
straight out into the street to beat out the brains of a little boy in a
sailor suit.”
“Davis,” said Mr. Dodson, entering modestly the sanctum of that
worthy, “Mr. Octavius’s compliments, and will you have the kindness
to give M. Arnold Dodson a review copy of his translation of Homer?”
“Have you a signed order, Dodson, to that effect?” said Mr. Davis,
who cloaked his profound astonishment somewhat ineffectually in a
display of officialdom.
“As you appear to doubt my bona fides, Davis,” said Mr. Dodson,
with leisurely dignity, “perhaps you will have the condescension to
verify them for yourself.”
“Very good, Dodson,” said Mr. Davis, who by now had regained his
own natural self-possession, which was not inconsiderable. “Excuse
me for one moment. Take a chair. Make yourself quite at home.”
“I shall make myself quite at home a good deal sooner than you
think, you young swine,” said Mr. Dodson through clenched teeth, as
Mr. Davis betook himself to the presence of Mr. Octavius Crumpett.
“Jack in office! But your days are numbered, my son, your days are
numbered!”
The bewildered Mr. G. Eliot Davis returned and handed a copy of Mr.
Octavius Crumpett’s translation of the Odyssey to Mr. M. Arnold
Dodson.
“Davis,” said Mr. Dodson, placing the handsome volume
ostentatiously under his arm, “you are a youth of intellectual gifts, but
unfortunately, like many others of your type, your gifts don’t take you
quite far enough. You will understand a little better what I mean
about this time on Monday. Good afternoon, Davis.”
“Good afternoon, Dodson. Mind the stairs!” said Mr. Davis, as Mr.
Dodson picked his way delicately down them.
“What does Octavius mean, I wonder, by giving him an advance
copy?” mused Mr. Davis, pale with anger. “He knows what two and
two make, does James Dodson. I shouldn’t mind a bit if only he
played the game. I wish Octavius was not such a d——d old fool.”
With this reflection, which it must be conceded was in somewhat
questionable taste, upon the mental attainments and general calibre
of his august employer, Mr. G. Eliot Davis put on his hat, and went
his virtuous way to that hall of public entertainment, the annexe to
the Brontë Hotel, and accepted a cup of tea from the hands of the
lady in the heliotrope blouse.
“Chrissie,” said Mr. Davis, stirring his tea apprehensively, “that young
cad, Jimmy Dodson, cut me out with you, and now he’s trying to cut
me out with Octavius.”
“Well, Percy,” said the lady in the heliotrope blouse, “if that is so you
can go home to mamma. Whatever Jimmy Dodson tries to do he
does.”
XXII
“Luney, my son,” said the mellifluous accents of Mr. M. A. Dodson,
ascending upwards to the high stool on which was perched the
assiduous form of William Jordan, Junior, “I want you to do me a
personal favour. I’ve got here an advance copy of Octavius’s
translation of the Odyssey. Now, my good and virtuous boy, I want
you to take it home with you to-night, read it carefully, and criticize it
for all you are worth. Just make a note, like a good chap, of any
particular points that strike you. If any of his truck strikes you as
better than the truck of the other johnnies, you had better underline
it. Or if you think some of his truck is worse than the truck of the
other johnnies, put a bit of blue pencil round it. If you can suggest
any improvements, so much the better. I want an expert like yourself
to handle this by Monday next, before the reviews come out, see?
Do this for me, Luney, old boy, and about the end of next week we’ll
do a music-hall together.”
The brand new volume that the boy carried home reverently under
his arm, was a source of great bewilderment to him that evening in
the little room. Again and again he scanned the virgin pages with
wondering eyes. Great names were there, great events, things and
men who had been his constant companions all his life long, but one
and all were envisaged in an alien tongue. A strange metamorphosis
had taken place. He was filled with despair. An acute sense of
mystery oppressed him. He compared this new and shining tome
with the old black volumes that were his priceless treasures. The
mystery deepened. The letter was there in almost its original
integrity; but an incommunicable something had passed away.
On the following day during the luncheon hour, William Jordan,
Junior, resigned the new volume to the care of Mr. M. Arnold
Dodson.
“It has not taken you long to go through it,” said that gentleman, with
a light of admiration in his eye, for he himself was prosecuting
researches into the subject which were fraught with pain. “Let me
see your notes, my son. They will help me a good deal.”
William Jordan, Junior, was fain to confess that he had not thought fit
to commit to paper the result of his own researches.
“You had better do so at once,” said Mr. Dodson, whose stern
countenance showed plainly that it would brook no trifling. “I want to
take ’em to-night to the British Museum. They will help me no end.”
“B-b-but,” said the boy nervously, “it is n-n-not Homer.”
For the moment the attitude of horror adopted by Mr. M. Arnold
Dodson seemed designed to suggest that the heavens were about to
fall.
“Not Homer!” exclaimed Mr. Dodson. “Not Homer!”
He appeared to gather up each particular unit of his four feet ten
inches, to lend emphasis to a reply which somehow refused to come
forth.
“Not Homer!” he said after a pause whose length had ceased to
make it dramatic. “Now look here, my son, I have only one word of
advice to give you. You have only to let that come to the ears of
Octavius, and you will be fired out of this old-established publishing
house with one week’s salary and no character.”
In spite, however, of the total failure of this source, to which he
looked chiefly for sustenance and inspiration in his arduous
undertaking, Mr. Dodson was of far too considerable a mental and
moral calibre to relinquish his self-imposed task. Thus early in his
career he had adopted the saying of a compatriot, for he too, like so
many of our national heroes, claimed the blood of Caledonia stern
and wild, upon his mother’s side, “genius is an infinite capacity for
taking pains,” and had made it his own. Therefore in a crisis where
one of other clay would have been daunted indeed, Mr. M. A.
Dodson girt his loins like a veritable giant, and re-addressed himself
to his labours with the greatest possible valour. Luney had failed him,
as it was only reasonable to expect such a lunatic to do. It was a
Napoleonic visage that crossed the threshold of a monumental
building in Bloomsbury Square, immediately opposite the Hotel
Thackeray, on three consecutive evenings at the hour of seven-thirty,
and stayed there with its nose pinned to unaccustomed documents
until it was turned out.
Upon the afternoon of that Monday which was made memorable in
the national life by the fact that upon that day, Mr. Octavius
Crumpett’s version of Homer was issued to the Trade, towards five
o’clock on that epoch-making afternoon, the calm and self-contained
right hand of Mr. M. A. Dodson smote the portal of the sanctum
sanctorum of Mr. Octavius Crumpett, while in his equally calm and
self-contained left hand he bore the sacred volume upon which he
had been concentrating the whole of his critical faculty, which was
not inconsiderable, for three days past.
“Ah, Mr. Dodson, good-morning,” said Mr. Octavius Crumpett, with a
benign beam in his mild eyes, as he looked up from the perusal of
the list of books received by his favourite Journal of English and
Foreign Literature, Science, the Fine Arts, Music and the Drama. It is
to be observed inter alia that the seeming inconsistency of which this
great and good man was guilty of ascribing the name of morning to
five o’clock in the afternoon, was in strict accordance with the higher
usage.
“Good-morning, sir,” said Mr. M. Arnold Dodson, with a slightly
austere but perfectly amiable self-possession.
“Is it to be my privilege, Mr. Dodson, to hear the first verdict which
has been passed upon—ah, my little book?” said Mr. Octavius
Crumpett, with the expansive pleasantness of one who had received
already that morning, at his favourite hall of physical and mental
refreshment, the sonorously-tendered compliment of a stalwart of the
Episcopal Bench, upon its long-expected-and-eagerly-looked-for
appearance.
“Well, sir,” said Mr. Dodson, opening at a leisure which conferred an
adventitious weight upon an utterance which stood not in the least
need of it; “well, sir, it is not my intention to enter into petty details
nor into the minutiæ and fine points of scholarship. I think, sir, those
can be resigned with every propriety into more competent hands. But
what I would like to do, sir, with your kind indulgence, is to view this
work as a whole. I do not know, sir, that I have any special claim to
do this, but I would like to say just in what manner your—ah,
achievement strikes me——”
“Pray proceed, Mr. Dodson, pray proceed,” said Mr. Octavius
Crumpett, as Mr. M. A. Dodson inserted one of those masterful
pauses in his oratory which in after days were likely to stand him in
such good stead in both houses of parliament, and on political
platforms in the United Kingdom far too numerous to mention.
“My survey of your achievement as a whole, sir,” Mr. M. A. Dodson
continued at a forensically magnificent leisure, “can be summed up
in one word. That word is the word consummate. To my mind, sir, the
word consummate alone envisages in any adequate sense that
which you have achieved. I say, sir, I do not propose to go into fine
points of scholarship, which even under the most favourable
auspices are apt to be vexed and over-nice. I speak merely as an
amateur, sir, as a humble, but ardent lover of letters. And in that
capacity, sir, and in no other, as I hope, sir, you will please
understand, I have been unable to refrain from underlining certain
passages of your—ah, rendering which to my mind are in-
comparably fe-lic-i-tous.”
Mr. M. A. Dodson paused to take from his pocket a slip of paper on
which was set forth a collocation of mystic numerals. Mr. Octavius
Crumpett lay back in his revolving chair with closed eyes, and with
his hands folded over that portion of his being that was embellished
by his waistcoat of immaculate whiteness; and he seemed to vibrate
internally with that large content which it is only given to the good
and great to feel.
“Page sixty-four, the line beginning, ‘Behold the deep-shaking
thunder,’” Mr. M. A. Dodson continued as he ran his fingers through
the pages with that precision which is the fruit of a long and loving
intercourse with books. “Now, sir, to my mind, the whole passage as
far as ‘all-fostering Zeus’ could not be improved. To my mind, it is an
incomparable advance upon Pope and upon Chapman, and even
upon the extremely skilful version of the late Lord Derby. If I may be
permitted to say it, sir, to my mind, the manner in which you have
surmounted the well-nigh in-superable difficulties of metre is worthy
of the highest praise; and yet, sir, you do not appear to have
sacrificed one iota of the sense or the spirit of the peerless original.
Then, sir, page seventy-two, beginning with line eighteen, ‘Treads
the waves of the many-tremulous seas.’ Or page ninety-one, that
matchless rendering of—— But I must not pause to enumerate.”
As Mr. M. A. Dodson ran his fingers with extreme rapidity through
one after another of these underlined passages, a kind of generous
enthusiasm communicated itself to his wizened countenance. His
diction, ever touched by Attic grace, seemed presently to glow with a
little of the Promethean fire. Yet never for a moment did it fall into
incoherence, nor lapse from the ideal of style in spoken diction,
however rapidly uttered, which was ever before him.
“In fact, sir,” Mr. M. A. Dodson concluded as he came to the last
passage he had underlined, “language fails me, as, sir, it has failed
me from the first, to say in precisely what manner your consummate
achievement has addressed my critical sense.”
With this striking peroration, Mr. M. A. Dodson made as if to
withdraw, but suddenly he appeared to think better of his resolution,
for he returned again to the near proximity of his great and good
master, and said in a modest voice, from which all traces of his
infinitely creditable mental excitement had been removed, “If I dare,
sir, I would ask of the author one small boon. I feel, sir, I have no
right to ask it, but if it were granted to me, it would mean the
overflowing of the cup. I should cherish beyond expression, sir, and I
think I can vouch for it, that in after life my children also will do the
same; I should cherish beyond expression, sir, the autograph of one
who is at once the author of this great book, and who is at the same
time the head of this great house.”
Immediately Mr. Octavius Crumpett dipped his pen in the ink and
inscribed upon the first page of the volume, Mr. Matthew Arnold
Dodson, with the Author’s good wishes.
“Mr. Dodson,” said Mr. Octavius Crumpett, after handing back the
volume to that gentleman, and curtailing in some measure a
gratitude that already had been choicely expressed; “Mr. Dodson,
when you go down-stairs, I shall be obliged if you will have the
goodness to ask Mr. Walkinshaw to have the kindness to come and
see me.”
As Mr. M. A. Dodson pursued his meritorious way towards the
basement of the famous building, he took occasion to knock at the
door of the adjoining room.
“Enter,” said a clear official tone.
“Mr. Davis,” said Mr. Dodson, with a formidable politeness as he
entered, and laying an unmistakable stress upon the prefix, “I have
the honour to inform you that your goose is already cooked. Perhaps
you will have the condescension to look at this.”
With immemorial calm Mr. M. Arnold Dodson disclosed for the
edification of Mr. G. Eliot Davis, the fly-leaf of the volume he carried.
A short exclamation of surprise and incredulity escaped the lips of
that young gentleman, which Mr. Dodson did not pause to elucidate.
As the thin, tall, melancholy but intellectual form of Mr. Walter Pater
Walkinshaw wended its way up-stairs, Mr. Dodson turned to William
Jordan, Junior, with a Napoleonic air.
“Luney,” he said, “you can fetch me the time-book.”
William Jordan, Junior, descended from his stool obediently. Mr.
Dodson, with the aid of a ruler and some red ink, crossed out the
name of M. Arnold Dodson from the current page of that work, and
wrote thereunder, G. Eliot Davis 8.30, vice M. Arnold Dodson gone
up-stairs.
No sooner had Mr. Dodson performed this operation than Mr. W. P.
Walkinshaw returned to that sphere over which he presided with so
much distinction, and said in his kind but cultivated voice, “Mr.
Dodson, Mr. Octavius will be glad if you will go up and see him.”
“I will, sir,” said Mr. Dodson in a tone which, subdued as it was,
resounded through the counting-house.
As for the second time within a very short period Mr. Dodson took his
meritorious way up the familiar stairs to Mount Olympus, he knocked
again on the door of Mr. G. Eliot Davis.
“Mr. Davis,” said Mr. Dodson, thrusting in his head, “prepare to
receive cavalry.”
Before Mr. Davis could demand the meaning of this enigmatic
injunction, Mr. Dodson had entered the august presence yet again.
Mr. Octavius Crumpett was seated in pontificalibus with the glass in
his benign right eye, and the tips of his white and beautifully-kept
hands pressed together.
“Mr. Dodson,” said Mr. Octavius Crumpett, “I learn from Mr.
Walkinshaw that during the four years you have been associated
with this house, your conduct has been exemplary in the highest
degree. I learn that your attainments are entirely worthy of the—ah,
traditions of this house. It gives me more pleasure, Mr. Dodson, than
I can express to ask you to accept an increase of honorarium from
£90 per annum, which I understand you enjoy at present, to the sum
of £200 per annum, which will date from to-day. Further, it is my
intention to ask you to take up your duties to-morrow morning in the
next room, which at present is in the occupation of Mr. Davis. I think I
may say that I concur entirely with Mr. Walkinshaw in the opinion to
which he has given recent expression, that your considerable natural
talent marks you out for a higher destiny than that which you enjoy at
present. I shall be obliged, Mr. Dodson, if you will ask Mr. Davis to
come here.”
“Mr. Davis,” said Mr. Dodson, projecting a somewhat sinister
countenance into the ante-room, whose accomplished occupant was
studying the Sporting Times, “Mr. Octavius will be obliged if you will
have the condescension to go next door.”
XXIII
As the weeks passed it was as if by a miracle that the young William
Jordan found himself still deriving pieces of silver from his
mysterious association with the counting-house of Messrs. Crumpett
and Hawker. Yet for some occult reason the impending sword never
fell. Perhaps it was that after a while he learned to assimilate his
painful and slow-wrung experience; at least in the process of time his
growth of knowledge in the practical sciences intervened to save him
from some of the dire pitfalls to which he was exposed.
Twelve months went by, twelve months fraught for the boy with
infinite vicissitude, but he still retained the occupation of the stool at
No. 24 Trafalgar Square. There could be no doubt that he owed
much to the early supervision and the sagacious counsel, diversified
on occasion by the eminent practice, of Mr. James Dodson. Even
after the elevation of that accomplished worldling and philosopher to
a higher sphere of influence, he retained an almost paternal interest
in his humble pupil. It is true that the association of William Jordan,
Junior, with one of Mr. Dodson’s calibre was apt on occasion to
diminish the number of pieces of silver which he was able to
dedicate to the cause that was never out of his thoughts. But on the
other hand, there can be no doubt that William Jordan, Junior,
gained a first-hand acquaintance with the practical sciences that he
could never have hoped otherwise to obtain.
At the end of his first year of servitude his pieces of silver were
augmented to the number of fifteen shillings per week. When he first
carried home this increase to his father in the little room, he was no
longer delirious with joy as was the case a year ago.
He spread them out on the table after supper with a curious
melancholy. During the few months previous to this event, his chief
characteristic, his eager, almost infantile, simplicity, had become
tinged with a quietude which seemed to be a foreshadowing of a
sombre ripening to maturity. He had been strangely silent and
thoughtful of late. He had given up in a great measure, even on
Sundays, those thrice-blessed days, his habit of reading constantly
in the ancient authors.
“My father,” he said, as he arranged the pieces of silver upon the
table, “it is hard to believe that the same heart propels these fingers
that first laid these pieces of silver upon this table before you, a long,
long year ago. I think that year must have been an age, an epoch. Or
is it that during that time, my father, I have been reading over-much
in the Book of the Ages?”
“Ah, my beloved Achilles,” said his father, “may it not be that your
existence is entering upon a new phase? You know that the mortal
life of heroes has three phases. May not this be the second phase
upon which you are now entering?”
“Yes, my father,” said the young man thoughtfully, “I believe that to
be true. Things are not so mysterious to me as they once were.
During the past year I seem to have won knowledge that is great and
strange and rare.”

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South Western Federal Taxation 2012 Individual Income

South-Western Federal Taxation 2017 Individual Income

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DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION

SOLUTIONS TO PROBLEM MATERIALS

1 LO 1 Cost recovery New

29 LO 7 Start-up expenditures Unchanged 29

*The solution to this problem is available on a transparency master.

1 Depreciation of aircraft parts Unchanged 1

31. Loss $11,515. 47. $202,431.

3. Land improvements have a class life of 15 years. p. 8-6

4. The relevant issues for Henry are:

• If such costs can be depreciated, what is the correct recovery period?

pp. 8-3 and 8-4

14. The following issues are relevant for Jim:

• Is John entitled to a § 179 deduction?

27. The following issues are relevant for Orange Motors:

• Does the noncompete agreement come under § 197 for intangibles?

29. The following issues are relevant for George.

• Are all of the expenditures qualifying expenditures?

31. Cost of asset $200,000

Less: Greater of allowed and allowable cost recovery:

Loss on sale of asset ($180,000 – $191,515) ($11,515)

b. 2018: $1,300,000 × .03636 (Table 8.6) × 10.5/12 = $41,360

43. This is a qualified leasehold improvement.

44. Cost of leasehold improvement $80,000

pp. 8-12, 8-13, and Table 8.6

45. a. 5-year class property

7-year class property

46. Section 179 limit [$139,000 – ($600,000 – $560,000)] $99,000

Section 179 amount of $99,000 (limited to $83,407) 83,407

Dear Mr. Johnson:

John J. Jones, CPA

TAX FILE MEMORANDUM

December 20, 2011

FROM: John J. Jones

SUBJECT: John Johnson: Calculations for cost recovery in year of acquisition

Facts. John Johnson is considering purchasing an automobile at the beginning of 2012 to be

Recovery limit (limited to $3,060*) $ 1,250

50. Deduction for 2012

So the deduction for 2012 is $11,060 and for 2013 is $3,200.

pp. 8-15 to 8-17, Example 6, and Table 8.1

§ 179 expense $25,000

John J. Jones, CPA

Taxable income before depletion $1,600,000

Part of the self-employment tax, or $4,271 ($7,427 × 57.51%), is a

(3) The itemized deductions are as follows:

Sale of stock and purchase of car

(3) Cost recovery

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