Tax Return Problem
Devon Bishop, age 45, is single. He lives at 1507 Rose Lane, Albuquerque, NM 87131. His Social Security number is 111-11-1112. Devon does not want $3 to go to the Presidential Election Campaign Fund.
Devon’s wife, Ariane, passed away in 2012. Devon’s son, Tom, who is age 16, resides with Devon. Tom’s Social Security number is 123-45-6788.
Devon owns a sole proprietorship for which he uses the accrual method of accounting and maintains no inventory. His revenues and expenses for 2016 are as follows:
Sales revenue$740,000Cost of goods sold (based on purchases for the year)405,000Salary expense88,000Rent expense30,000Utilities8,000Telephone6,500Advertising4,000Bad debts5,000Depreciation21,000Health insurance26,000Accounting and legal fees7,000Supplies1,000
Health Insurance-$8,000 for Devon and $18,000 for the employess; Devon choose the immediate expense election of $21,000 of Office Equipment.
Other income received by Devon includes the following:
Dividend income (qualified dividends): Swan, Inc.$10,000 Wren, Inc.2,000Interest income: First National Bank11,000 Second City Bank2,500 County of Santa Fe, NM bonds17,000
During the year, Devon and his sole proprietorship had the following property transactions:
Sold Blue, Inc. stock for $45,000 on March 12, 2016. He had purchased the stock on September 5, 2013, for $50,000.
Received an inheritance of $300,000 from his uncle, Henry. Devon used $200,000 to purchase Green, Inc. stock on May 15, 2016, and invested $100,000 in Gold, Inc. stock on May 30, 2016.
Received Orange, Inc. stock worth $9,500 as a gift from his aunt, Jane, on June 17, 2016. Her adjusted basis for the stock was $5,000. No gift taxes were paid on the transfer. Jane had purchased the stock on April 1, 2010. Devon sold the stock on July 1, 2016, for $22,000.
On July 15, 2016, Devon sold one-half of the Green, Inc. stock for $40,000.
Devon was notified on August 1, 2016, that Yellow, Inc. stock he purchased from a colleague on September 1, 2015, for $52,500 had become worthless. While he perceived that the investment was risky, he did not anticipate that the corporation would declare bankruptcy.
On August 15, 2016, Devon received a parcel of land in Phoenix worth $220,000 in exchange for a parcel of land he owned in Tucson. Because the Tucson parcel was worth $245,000, he also received $25,000 cash. Devon’s adjusted basis for the Tucson parcel was $210,000. He originally purchased it on September 18, 2013.
On December 1, 2016, Devon sold the condominium in which he had been living for the past 20 years (1844 Lighthouse Lane, Albuquerque, NM 87131) and moved into a rented townhouse. The sales price was $480,000, selling expenses were $28,500, and repair expenses related to the sale were $9,400. Devon purchased the condominium for $180,000.
Devon’s potential itemized deductions, exclusive of the aforementioned information, are as follows:
Medical expenses (before the 10% floor)$ 9,500Property taxes on residence5,800State income taxes4,000Charitable contributions10,000Mortgage interest on residence (First National Bank)9,900Sales taxes paid5,000
During the year, Devon makes estimated Federal income tax payments of $40,000.
Compute Devon’s lowest net tax payable or refund due for 2016 assuming that he makes any available elections that will reduce the tax. You will need Forms 1040, 4562, 8824, and 8949 and Schedules A, B, C, D, and SE. Also attach explanations of all the items in this problem. The explanation should include why each item is taxable, non taxable, deductible or not deductible. Make explanations detailed and site code sections as appropriate. Lastly, compute the tax liability with explanations under Tax Reform assuming the return is filed for the 2018 tax year including application of IRC Section 199A.
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