Reference no: EM131030299

TAX 4001 Spring 2016 Tax Return Assignment 

Facts:

Scott F. and Meegan M. Koonare married and live at 2723 Brandywine Drive,Ann Arbor, MI 48104. They file a joint return and are calendar year, cash basis taxpayers.

1.     Scott is a self-employed accountant (professional activity code is 541213). He maintains an office at 1001 Oakbrook Way, Suite 400, Ann Arbor, MI 48103. He shares the suite with several other professionals and has no employees. A receptionist handles all calls and is provided by the landlord as part of the services offered to tenants. Scott's work-related expenses for 2015 are as follows:

 

Office rent                                                                                                              $9,800

Utilities                                                                                                                     3,000

Accounting services                                                                                                  1,200

Office expenses (supplies, use of copier, etc.)                                                         1,100

Legal services (see item 9. below)                                                                              300

State and local license fees                                                                                         900

Renter's insurance (covers personal liability, casualty, theft)                                 1,500

Replacement of reception room furnishings (6/5/2015)                                       2,200

Professional dues and subscriptions to trade publications                                      600

Business lunches                                                                                                  1,400

Contribution to H.R. 10(Keogh) plan                                                                   5,000

Medical insurance premiums                                                                               7,000

          The business meals Scott paid for were to entertain various visiting executives from the clients he does business with. As is the case with all of Scott's business transactions, the lunches are properly documented and supported by receipts.  Because the reception room furnishings were looking shabby, Scott and his suite-mates had them replaced.  The $2,200 Scott spent was his share (i.e., a sofa and coffee table) of the cost.  Scott follows a policy of avoiding depreciation by utilizing the Section 179 election to expense assets.  All of Scott's office equipment (e.g., desk, chairs, file cabinets, computer, etc.) has previously been expensed.  Of 16,000 total miles in 2015, Scott drives his car (a Ford Explorer purchased on 6/1/2013) 8,400 miles for business (not including commuting) and has business parking and toll charges of $310.  The Koons use the automatic mileage method of claiming automobile expenses.

2.   Meegan is an occupational therapist employed on a part-time basis by Thompson Consultants, Inc. Her employer does not provide her with an office, and she has no separate office in her home.  She does, however, maintain her business records at home and lists it as her business address.  After receiving her assignments by phone, she drives her cara 2012Mazda 323 (purchased on 7/1/2014for $10,000) directly to the residence of the patient.  Thompson Consultants, Inc. requires all of its therapists to wear uniforms while on duty.  As Meegan is not a full-time employee, she is not covered by her employer's health or retirement plans.  Meegan's work-related expenses for 2015 appear below:

         Mileage (total miles in 2015 = 12,000)                             8,000 miles

         Professional dues and subscriptions                                  $1,280

         Continuing education programs (required to

maintain license)                                                                              440

         Annual license fee                                                                    180

         Therapy supplies                                                                      260

         Uniforms purchased (including $240 for shoes)                     410

         Laundering of uniforms                                                           210 

3.    At a foreclosure sale on May 8, 2015, the Koons purchased a house to be held as a rental investment.  The property cost $400,000 (of which $50,000 is allocated to the land) and is located at 165 Little Lake Drive, Ann Arbor, MI 48103.  After making minor repairs and placing the property in service on June 1, 2015, the Koons were fortunate in that they were able to rent it immediately for $1,650 a month (payable on the first of each month).  They meet the requirements of active participation. Information regarding the rental property expenses for 2015 are summarized below:                                                                 

         Refundable damage deposit                                                               4,000

         Property taxes                                                                                     3,800

         Interest on mortgage                                                                           3,500

         Repairs                                                            4,400

         Insurance                                                                                              2,500

         Street paving assessment                                                                     3,500

 

         Although the property was rented for only seven months, in late December 2015 the tenants prepaid the January 2016 rent because they were going to be out of town on New Year's Day.  The special assessment was levied by the city of Ann Arbor to resurface the street in front of the house.  The Koons plan to use MACRS straight-line depreciation, assuming the mid-month convention.

4.    On her birthday on June 27, 2005, Meegan received as a gift from her father unimproved land located in DumasCounty (TN).  The land cost her father $80,000 in 1975 and had a value of $135,000 on the date of the gift.  No gift tax was due as a result of the transfer.  On July 15, 2015, Meegan sold the land to an adjoining property owner for $175,000. She incurred $10,500 in selling costs.

5.    When Meegan's father died in 2010, he had a life insurance policy issued by John Hancock Insurance Company with a maturity value of $1,000,000.  As the designated beneficiary of the policy, Meegan picked a settlement option of $215,000 annually, payable over five years.  In 2015, she received a check from John Hancock for $215,000.

6.    Based on a tip from a friend who is an investment adviser, on November 6, 2012, Scott purchased 15,000 shares of common stock in Turner Corporation for $14,000, a manufacturer of bicycle shocks, was experiencing financial difficulties and was contemplating bankruptcy.  Nevertheless, the adviser was sure that its liquidation value would far exceed the cost of the stock.  Turner went into receivership in early 2015. OnAugust 15, the receiver indicated that investors could expect to receive $.20 on the dollar.

Scott also bought 200 shares of Intel stock on January 1, 2015 for $50 per share with a brokerage fee of $100. Then, Scott sold all 200 shares for $75 per share on December 12, 2015. The brokerage fee on the sale was $150.

7.    In 2015, a hit-and-run driver totaledMeegan's Mazda while it was parked in front of a grocery store.  Meegan did not carry comprehensive insurance for repairing her car so no insurance reimbursement was applicable. The FMV of the car before and after the incident was $9,000 and $0, respectively.Meegan claimed the casualty loss on her 2015 tax return.

8.    In 2015Scott was involved in an auto accident and received physical injuries due being hit by a drunk driver. He received $60,000 in damage paymentswhich included $10,000 in punitive damages)

9.    Scott has a 25% ownership in Gessum Company EIN 13-333333, an 1120S corporation. In 2015GessumCompany recorded gross receipts of $300,000, Cost of Goods sold of $90,000 and other expenses of $140,000. Scott made cash withdrawals during the year totaling $40,000.

10. Besides those previously noted, the Koon's had the following receipts for 2015:

Payment for services rendered as an accountant

  (as supported on Forms 1099 issued by several

payor client companies)                                                                                  $80,000

 

Therapist wages (Form W-2 issued by Thompson Consultant's Inc.

                                                                                                                        $42,000

 

A vacation package                                                                                          $8,500      

Income tax refunds for tax year 2014

         Federal tax                                                               $1,400

         State tax                                                                       450                    $1,850 

Interest income--

  City of Ann Arborbonds                                                  $1,800

  Interest on SunTrust Bank CD                                         3,600                

                                                                                                                          $5,400

 

Estate saleproceeds                                                                                          $13,600

  

Loan repayment from co-worker                                                           $20,000

The vacation package was a Christmas surprise from a former client as a wayof expressing thanks for previous clients that Scott had referred.

         The estate sale (Note: an estate sale is like an upscale garage sale) involved mostly items that Meegan inherited from her father (e.g., boat and trailer, camper, hunting and fishing equipment).  Meegan has no proof as to the cost of these assets, nor does she know their value at the time of his death (assume that all assets declined in value when comparing inherited value to proceeds from sale of each item).

         Three years ago, Scott had loaned a co-worker, Michael, $15,000 to help start a business.  No note was signed, no interest was provided for, and no due date was specified.  Much to Scott's surprise, Michael repaid the loan at $20,000 in late 2015.

11.    In addition to any items previously noted, the Koons had the following expenses for 2015:

      Medical and dental expenses not covered by

        Insurance                                                                                                   $8,000

 

      Ad valorem property tax on personal residence                                             3,800

 

      Interest-

               Home mortgage                                                                                $3,800

               Interest on home equity loan                              1,400                    5,200

 

      Charitable contributions                                                                            4,000

 

      Tax return preparation fee (60% relates to

      Scott's business)                                                                                          600

 

      Of the $8,000 in medical expenses, $5,000 was used to pay for NancyKoon's cosmetic surgery to smooth over her facial wrinkes.  Nancy is Scott's mother who lives with them and would otherwise qualify as their dependent except for the gross income test.

               During 2015, Meegan borrowed $20,000 under a home equity loan arrangement.  The money was used to help pay family credit card debt and to purchase jet skis for the family to enjoy on weekends. 

12.Besides Nancy, the Koon's' household includes their three children:  Bo, Judy, and John.  All are full-time students and live fulltime at their home. The Koon's provide more than half of their living expenses as well. Bo is very proficient with the bagpipes and during the year earned $4,400 playing at special occasions (i.e., mainly funerals).  Bo is saving his earnings for college.

13.Meegan's Form W-2 from Thompson Consultants, Inc.shows $2,000 withheld for Federal income tax and $941 for state income tax.  Scott made equal quarterly payments of $2,600 (Federal) and $500 (state).  Relevant Social Security numbers are noted below.

                                               Social Security

Name                                          Number                                                    Birth Date

 

Scott L. Koon                       123-45-6789                                      07/01/1967                           

Meegan S. Koon       123-45-6782                                                  06/27/1968             

 

BoKoon                                123-45-6786                                     04/09/1998                             

JudyKoon                            123-45-6783                                     12/06/1999                             

JohnKoon                            123-45-6781                                     07/29/2000                             

NancyKoon                         123-45-6788                                      01/03/1939             

REQUIREMENTS 

Prepare an income tax return by hand in bluepen (no tax software) with appropriate schedules that can be found at the IRS website (irs.gov) for the Koons for 2015.  In doing this, use the following guidelines:

• You may complete assignment individually or in groups up to 5 people. Place all participating student names on cover sheet.
• Make necessary assumptions for information not given in the problem but needed to complete the return. Be aware of the possible application of certain tax credits.
• The taxpayers have the necessary substantiation (e.g., records, receipts) to support the transactions involved.
• If a refund results, the taxpayers want it sent to them.
• The Koons do not wish to contribute to the Presidential Election Campaign fund.
• In the past several years, the Koons have itemized their deductions from AGI (have not claimed the standard deduction option).

Please make sure that you sign the log in sheet there.

Don't forget to use a cover page and put your name on the assignment.

Note: Staple all pages including how you reached an amount if not obvious with backup supporting calculations referenced to the Tax Schedule and information # (i.e.1-12) on the assignment.

Note: Maintain a copy of the tax return project for yourself prior to submission.