Solutions to Develop Research Skills Problems
p p p p p
Taxation for Decision Makers 2017th Edition by Shirley Dennis-
p p p p p p p p
Escoffier, Karen A. Fortin| Chapter 2 to 12
p p p p p p p
Chapter 2-12
p
Chapter 2 T p p
he Tax Practice Environment
p p p
Solutions to Develop Research Skills
p p p p
NoteptopInstructor:pManypofpthepresearchpproblemspcanpbepsolvedpusingpsourcespthatparepavailableponpthepInt
ernetpatpnopcharge.pURLspforpthesepfreepsourcesparepshownpinpFigurep2.1pofpChapterp2pinptheptext.pThepsolutio
npforpeachpproblempindicatespifpitpcanpbepsolvedpusingpfreepInternetpsourcesporpifpitprequirespaccessptopCheckp
oint®porpapsimilarpservice.
76. [LOp2.4]pDeductingpCosmeticpSurgeryp(canpbepsolvedpusingpfreepInternetpsources)
Yourpclient,pMs.pI.M.pGorgeous,pispanpaspiringpactress.pShephaspmanagedptopearnpaplivingpdoingptelevisio
npcommercialspbutpwaspunableptopgetpthepactingppartspshepreallypwanted.pShepdecidedptophavepbotoxpinjec
tionspinpherpforeheadpandpcollagenpenhancementsptopherplips.pAfterpthesepprocedures,pherpcareerpimprove
dpdramaticallypandpshepreceivedpseveralpmoviepoffers.pMs.pGorgeouspispsurepthatpshepshouldpbepableptopde
ductpthepcostpofpthepcosmeticpenhancementspbecausepshepreadpaboutpanotherpactressphavingpapface-
liftpinp1988pandpdeductingpthepcostponpherptaxpreturnpaspapmedicalpexpense.pCanpMs.pGorgeouspdeductpthe
pcostpofpthesepprocedures?
ResearchpAid:pSectionp213(d)(9).
Issue:pCanpMs.pGorgeouspdeductionpthepcostpofpthepbotoxpinjectionspandpcollagenpenhancementspa
spmedicalpexpenses?
Conclusion:pMs.pGorgeouspwillpnotpbepallowedptopdeductpthepcostpofpbotoxpinjectionspandpcollage
npenhancements.
DiscussionpofpReasoningpandpAuthorities:p CodepSectionp213pallowspapdeductionpforpexpensespp
aidpforpmedicalpcarepofptheptaxpayer.pSectionp213(d)(1)(A)pdefinespmedicalpcarepaspamountsppaid
―forpthepdiagnosis,pcure,pmitigation,ptreatment,porppreventionpofpdiseaseporpforptheppurposepofpaffect
ingpanypstructureporpfunctionpofpthepbody.‖
Rev.pRul.p76-332,p1976-2pC.B.p81pallowedpapdeductionpforpcosmeticpsurgerypforpapface-
liftpunderpSectionp213.pHowever,pthepCodepwaspsubsequentlypamendedpbypthepRevenuepReconcili
ationpActpofp1990.
Underp§213(d)(9)(A),pnopdeductionpispallowedpforpcosmeticpsurgeryporpotherpsimilarpprocedures,pu
nlesspthepsurgeryporpprocedurepispnecessaryptopamelioratepapdeformityparisingpfrom,porpdirectlyprela
tedpto,papcongenitalpabnormality,pappersonalpinjurypresultingpfrompanpaccidentporptrauma,porpdisfigu
ringpdisease.p Sectionp213(d)(9)(B)pdefinespcosmeticpsurgerypaspanypprocedurepwhichpispdirectedpa
tpimprovingppersonalpappearancepandpdoespnotpmeaningfullyppromotepthepproperpfunctionpofpthepb
odyporppreventporptreatpillnessporpdisease.pThus,pnopdeductionpwillpbepallowed.
77. [LOp2.4]pDeductingpBadpDebtpLossp(canpbepsolvedpusingpfreepInternetpsources)
Lastpyearpyourpclient,pBarneypBumluck,pworkedppart-
timepforpTimelypTaxpReturnpPreparationpService.pBarneypwasppromisedpanphourlypwageppluspapcommissi
on.pHepworkedpunderpthisparrangementpfrompearlypFebruarypuntilp Aprilp15.pHispaccruedppaypamountedpt
op$900pplusp$120pofpcommissions.pWhenphe
,2p TaxationpforpDecisionpMakerspResearchpSolutions
wentp top collectp hisp pay,p however,p hep foundp onlyp ap vacantp officep withp ap signp onp thep doorp reading
―Nothingp isp surep butp deathp andp taxes.‖p Canp Barneyp takep ap badp debtp deductionp forp thep wagesp andpc
ommissionphepwaspunableptopcollect?
ResearchpAid:pReg.pSectionp1.166-1(e)
Issue:pCanpBarneyptakepapbadpdebtpdeductionpforpthepwagespandpcommissionphepwaspunableptopcoll
ect?pConclusion:pBarneypwillpnotpbeppermittedpapdeductionpsincepthepwagespandpcommissionpwere
pnotppreviouslypincludedpinphispreturnpaspincome.
DiscussionpofpReasoningpandpAuthorities:p UnderpReg.p§1.166-
1(e),pworthlesspdebtsparisingpfrompunpaidpwages,psalaries,pfees,prents,pandpsimilarpitemspofptaxablep
incomepshallpnotpbepallowedpaspapdeductionpunlesspthepincomephaspbeenpincludedpinpthepreturnpofpin
comepforpthepyearpforpwhichpthepdeductionpaspbadpdebtpispclaimedporpforpappriorptaxablepyear.p Beca
usepBarneypdidpnotppreviouslypincludepthepwagesporpcommissionpinpincome,phepispnotpentitledptopap
deductionpforphispinabilityptopcollectpthesepitems.
78. [LOp 2.4]pDeductingpCharitablepContributionsp(canpbepsolvedpusingpCheckpoint®porpapsimilarpservice)p
Yourpclients,pSonnypandphispwifepHoney,pbelievepinpworshipingpTa-
Ra,pthepSunpGod.pToppracticeptheirpreligiouspbeliefs,ptheyptakepapweeklongptripptopHawaiiptopworshippTa-
Ra.pThepcostp ofpthisp pilgrimagep (includingpairfare,photel,pandpmeals)pisp$2,800.pSonnypwantsptopknowpif
phepcanpdeductpthepcostpofpthisp trippaspapcharitablepcontributionptophispreligion.
NoteptopInstructor:pNopresearchpaidpispprovidedpinptheptextbookpforpthispproblem.pThispallowspyouptopc
hoosepwhetherporpnotptopprovidepanyphintsptopyourpstudents.
ResearchpAids:pKessler,p87pT.C.p1285p(1986)
Issue:pCanpSonnypandpHoneypdeductptheirptripptopHawaiipaspapcharitablepcontributionpmadepinptheppracti
cepofptheirpreligion?
Conclusion:pNopdeductionpwillpbepallowedpbecausepnopdonationpwaspmadepdirectlyptopapqualifiedpcharit
ableporganization.
DiscussionpofpReasoningpandpAuthorities:pInpKessler,p87pT.C.p1285p(1986),pthepTaxpCourtpdisall
owedpapcharitablepdeductionpforpthepexpensespincurredpforpaptripptopPuertopRico.p ThepCourtpdeniedp
thepdeductionpbecauseptherepwaspnopdonationpmadeptopapreligiousporganizationpaspdefinedpbypCodep
§170(c)(2)(B).pThepCourtpbasedpitspdecisionponpprecedentpandpCongressionalpintentpstatingpthatpthe
ppurposepofpthepcharitablepcontributionpcanponlypbepfurtheredpifpthepgovernmentpcanpbepassuredpthatp
thepfundsparepappropriatelypexpended.pThispcanpbepdoneponlypifpcontributionsparepmadeptopapqualifi
edporganizationpthatpcanpbepauditedpandpexamined.p SincepSonnypandpHoney‘spexpensespwerepnotpc
ontributionsporpgiftsptopanporganizedpentity,pthepexpensespdopnotpqualifypunder
§170paspapcharitablepcontribution.
79. [LOp 2.4]pTradeporpBusinesspversuspHobbyp(canpbepsolvedpusingpCheckpoint®porpapsimilarpservice)p Fred
p Fisherp isp ap licensedp scubap diverp whop livesp inp Keyp Largo. Hep isp employedp full-
timep asp anpengineer.pFivepyearspagophephadpbeenpemployedpaspapprofessionalpdiverpforpapsalvagepcompan
y.pWhilepworkingpforpthepsalvagepcompanyphepbecamepinterestedpinpmarineparchaeologypandptreasurephu
nting.p Untilp lastp yearp hep gavep divingp lessonsp onp weekendsp andp trainedp individualsp inp thep sportp ofp tr
easurephuntingp underp thep namep ofp ―Fred‘sp Divingp School.‖p Threep ofp thep divingp studentsp hep
taughtpsubsequentlypfoundpshipwrecks.pFredpgenerallypdidpnotpengagepinprecreationalpdiving.
Lastpyear,pFredpbeganpaptreasurephuntingpbusinesspnamedp―TreasurepSeekerspCompany.‖pHepboug
htpapboatpspecificallypdesignedpforptreasurephuntingpandpdidpextensivepresearchponppotentialplocationspofp
shipwrecks.pFredplocatedpseveralpshipwrecks,pbutpnonepwerepofpsubstantialpvalue.pHepdidpretrievepsevera
lpartifactspbutphaspnotpsoldpanypyet.pAlthoughpthesepartifactspmayphavepsomephistoricalpsignificance,ptheyp
havepaplimitedpmarketability.pThus,pFredphaspnotpyetphadpanypgrosspincomepfromphisptreasurephuntingpact
ivities.
Otherpthanpretainingpcheckpstubspandpreceiptspforphispexpensespandpanpencodedplog,pFredpdidpnotpma
intainp formalp recordsp forp Treasurep Seekersp Company.p Fredp maintainsp asp fewp writtenp recordsp as
, SolutionsptopDeveloppResearchpSkillspProblemsp 3
possiblep becausep hep fearsp forp hisp safety.p Hep tookp stepsp top keepp hisp boatp andp equipmentp fromp publicpv
iewp andp tookp precautionaryp measuresp top maintainp thep secrecyp ofp hisp searchp areas.p Fredp incurred
$5,000pofpexpensesprelatingptophisptreasure-
huntingpactivitiesplastpyear.pCanpFredpdeductpthepexpensesp ofphisptreasurephuntingpbusinessporpwillpthepI
RSpclaimpitpispaphobbypandpdisallowpthepexpenses?
NoteptopInstructor:pNopresearchpaidpispprovidedpinptheptextbookpforpthispproblem.pThispallowspyouptopc
hoosepwhetherporpnotptopprovidepanyphintsptopyourpstudents.
ResearchpAids:pRandypR.pReed,pIII,pT.C.pMemop1988-
470,p56pTCM.p363,pPHpT.C.pMemop¶88470pandpReg.p§1.183-2(b)(1)-(9)
Issue:pCanpFredpdeductpthepexpensespofphisptreasurephuntingpaspbusinesspexpenses?
Conclusion:pYes,pFredpshouldpbepableptopdeductphispexpensespasptradeporpbusinesspexpenses.pDiscu
ssionpofpReasoningpandpAuthorities:pSectionp162pallowspapdeductionpforpbusinesspexpensespthatpar
epordinary,pnecessary,pandpreasonablepinpamount.pReg.p§1.183-2(b)(1)-
(9)plistspapnumberpofpfactorspthatpshouldpbepconsideredpinpdeterminingpwhetherpanpactivitypispaptradep
orpbusiness,porpshouldpbepclassifiedpaspaphobby.pThesepinclude:
(1) Mannerpinpwhichptheptaxpayerpcarriesponpthepactivity.
(2) Thepexpertisepofptheptaxpayerporphispadvisors.
(3) Theptimepandpeffortpexpendedpbyptheptaxpayerpinpcarryingponpthepactivity.
(4) Expectationpthatpassetspusedpinpthepactivitypmaypappreciatepinpvalue.
(5) Thepsuccesspofptheptaxpayerpinpcarryingponpotherpsimilarporpdissimilarpactivities.
(6) Theptaxpayer‘sphistorypofpincomeporplossespwithprespectptopthepactivity.
(7) Thepamountpofpoccasionalpprofits,pifpany,pwhichparepearned.
(8) Thepfinancialpstatuspofptheptaxpayer.
(9) Elementspofppersonalppleasureporprecreation.
ThepTaxpCourt‘spdecisionpinpRandypReedpIII,pT.C.pMemop1988-
470,p56pCCHpT.C.M.p363,pPHpT.C.pMemop¶88,470p(1988)pexaminespapsituationpverypsimilarptoptha
tpofpFredpFisher.pInpthispcase,paptreasurephunterpwaspanpexperiencedpdiverpandphadppersonallyptraine
dpotherpdiverspinpthepfieldpofptreasurephunting.pHispdivingpdidpnotpappearpmotivatedpbyprecreationalp
intentions.pHepkeptp apcheckbookpseparatepfromphisppersonalpaccount,pmaintainedpreceiptspandpchec
kpstubspforphispexpenditurespandpkeptpappartialplogpbookpofphispactivitiespuntilphispmapspwerepstolen.p
Reedpsaidpthatphepkeptplimitedprecordspforpsecuritypreasons.pWhilepnotpextensive,ptheseprecordspwer
epheldptopbepadequatepforpapsoleppractitionerpinpthisptypepofpbusinesspwithpaplowpvolumepofptransacti
ons,pandpReedpwaspallowedptopdeductphispexpensespaspthosepofpaptradeporpbusiness.pInpthatpthepfactsp
pertainingptopFisher‘spsituationparepnearlypidenticalptopReed‘s,pFisherpshouldpbepableptopdeductpthepe
xpensespofphisptreasurephuntingpbusinesspaspvalidpbusinesspexpenses.
80. [LOp2.4]pLocatepandpReadpCourtpCasep(canpbepsolvedpusingpfreepInternetpsources)
LocatepandpreadpGregpMcIntosh,pTCpMemop2001-144,p81pTCMp1772,pRIApTCpMemop¶2001-
144p(6/19/2001).pAnswerpthepfollowingpquestions.
a. WhatprequirementspmustpbepmetpforpaptaxpayerptoprecoverplitigationpcostspfrompthepIRS?
b. WasptheptaxpayerpinpthispcasepableptoprecoverphispattorneypfeespfrompthepIRS?pWhyporpwhypnot?
Solution:
a. UnderpCodepSectionp7430(a),papjudgmentpforplitigationpcostspincurredpinpconnectionpwithpapco
urtpproceedingpmaypbepawardedponlypifpaptaxpayer:p(1)pispthep―prevailingpparty‖;p(2)phaspexha
ustedphisporpherpadministrativepremediespwithinpthepIRS;pandp(3)pdidpnotpunreasonablypprotract
pthepcourtpproceeding.pTopbepapprevailingpparty,ptheptaxpayerpmustpsubstantiallypprevailpwithpr
espectptopeitherpthepamountpinpcontroversyporpthepmostpsignificantpissueporpsetpofpissuesppresent
edpandpsatisfypthepapplicablepnetpworthprequirement.
b. TheptaxpayerpwaspnotpableptoprecoverphispattorneypfeespfrompthepIRSpbecausephepwaspnotpfou
ndptopbepthep―prevailing‖pparty.p Inpthispcase,pthepcourtpfoundpthatpthepIRS‘sppositionsponpthep
disputedpissuespwerepreasonableppositionspsufficientlypsupportedpbypthepfactspand
, 4p TaxationpforpDecisionpMakerspResearchpSolutions
circumstancespinptheptaxpayer‘spcasepandpthepexistingplegalpprecedent.p SincepthepIRS‘sppositio
nspwerepfoundptophavepbeenpreasonable,pthepcourtpcouldpnotpfindptheptaxpayerptopbepthe
―prevailing‖p party.
Thispdecisionpwaspaffirmedpinp91pAFTRp2dp2003-1275,p2003-1pUSTC¶50,334p(CA9,p3/7/2003)
81. [LOp2.4]pLocatepandpAnalyzepCourtpCasesp(canpbepsolvedpusingpfreepInternetpsources)
Locatepandpreadpthepfollowingptwopcases:
J.B.S.pEnterprises,pInc.,pT.C.pMemop1991-254,p61pTCM.p2829,p1991pPHpT.C.pMemop¶91,254
SummitpPublishingpCompany,pInc.,pT.C.pMemop1990-
288,p59pTCM.p833,p1990pPHpT.C.pMemop¶90,288pListpthosepfactspthatpyoupfeelpmostpinfluencedpthepjudg
esptopreachpdifferentpconclusionspinptheseptwopcases.
Solution:
Facts J.B.S.pEnterprises SummitpPublishing
Personpwhopreceivedpsalary Formerpspousepofpsolepshareh Spousepofpsolepshareholder
older
Servicespperformedpforpsalar None Extensivepvaluablepservices
y
Dividendphistory Notpmentioned Substantialpdividendsppaid
ThepcourtpallowedpapdeductionpforpexpensespinpSummitpPublishingpforpapportionpofptheppaymentspth
atpthepIRSparguedpwerepunreasonablepcompensation.pThepCourtpnotedphowpvaluablepthepshareholder
‘spspouse‘spservicespwereptopthepfirmpandpthatpdividendsphadpbeenppaidptopthepshareholder.pInpJ.B.S.p
Enterprises,pthepsolepshareholderpseemedptopbepattemptingptopdisguisepsupportppaymentspmadeptophi
spformerpwifepaspsalarypexpense.pHowever,pshepperformedpnopservicespforpwhichpcompensationpwou
ldpnormallypbeppaid.
Chapter 3 D p p
etermining Gross Income
p p
Solutions to Develop Research Skills
p p p p
NoteptopInstructor:pBeginningpwithpthispchapter,pnopresearchpaidsporp―hints‖parepprovidedpinptheptextbook.pB
eforepthepsolutionptopeachpproblem,phowever,psuggestedpresearchpaidsparepprovided.pThispallowspyouptopchoo
sepwhetherporpnotptopprovidepanyphintsptopyourpstudentspforpapparticularpproblem.pForpproblemspthatp canpbeps
olvedpusingpfreepInternetpsources,pyoupmustpprovidepstudentspwithpthepcitationspinpthesephintspandpreferpstude
ntsptopFigurep2.1pofpChapterp2pinptheptextpforpthepURLsptopenablepthemptopsolvepthesepproblemspusingpfreepInt
ernetpsources.pSomepofpthepproblemsprequirepaccessptopCheckpoint®porpapsimilarpservice.
73. [LOp3.2]pYearpGiftpCardpRevenuepispIncludedpinpIncomep(canpbepsolvedpusingpfreepInternetpsourcespifpcit
ationsparepprovidedptopstudents)
GammapCorporation,papcalendar-yearpaccrual-
basisptaxpayer,poperatespdepartmentpstores.pAlphapCorporationpandpBetapCorporationparepwholly-
ownedpdomesticpsubsidiariespofpGammapCorporationp andp filep ap consolidatedp federalp taxp returnp underp
Gammap Corporation‘sp consolidatedp group.p Gamma,
p p p p p
Taxation for Decision Makers 2017th Edition by Shirley Dennis-
p p p p p p p p
Escoffier, Karen A. Fortin| Chapter 2 to 12
p p p p p p p
Chapter 2-12
p
Chapter 2 T p p
he Tax Practice Environment
p p p
Solutions to Develop Research Skills
p p p p
NoteptopInstructor:pManypofpthepresearchpproblemspcanpbepsolvedpusingpsourcespthatparepavailableponpthepInt
ernetpatpnopcharge.pURLspforpthesepfreepsourcesparepshownpinpFigurep2.1pofpChapterp2pinptheptext.pThepsolutio
npforpeachpproblempindicatespifpitpcanpbepsolvedpusingpfreepInternetpsourcesporpifpitprequirespaccessptopCheckp
oint®porpapsimilarpservice.
76. [LOp2.4]pDeductingpCosmeticpSurgeryp(canpbepsolvedpusingpfreepInternetpsources)
Yourpclient,pMs.pI.M.pGorgeous,pispanpaspiringpactress.pShephaspmanagedptopearnpaplivingpdoingptelevisio
npcommercialspbutpwaspunableptopgetpthepactingppartspshepreallypwanted.pShepdecidedptophavepbotoxpinjec
tionspinpherpforeheadpandpcollagenpenhancementsptopherplips.pAfterpthesepprocedures,pherpcareerpimprove
dpdramaticallypandpshepreceivedpseveralpmoviepoffers.pMs.pGorgeouspispsurepthatpshepshouldpbepableptopde
ductpthepcostpofpthepcosmeticpenhancementspbecausepshepreadpaboutpanotherpactressphavingpapface-
liftpinp1988pandpdeductingpthepcostponpherptaxpreturnpaspapmedicalpexpense.pCanpMs.pGorgeouspdeductpthe
pcostpofpthesepprocedures?
ResearchpAid:pSectionp213(d)(9).
Issue:pCanpMs.pGorgeouspdeductionpthepcostpofpthepbotoxpinjectionspandpcollagenpenhancementspa
spmedicalpexpenses?
Conclusion:pMs.pGorgeouspwillpnotpbepallowedptopdeductpthepcostpofpbotoxpinjectionspandpcollage
npenhancements.
DiscussionpofpReasoningpandpAuthorities:p CodepSectionp213pallowspapdeductionpforpexpensespp
aidpforpmedicalpcarepofptheptaxpayer.pSectionp213(d)(1)(A)pdefinespmedicalpcarepaspamountsppaid
―forpthepdiagnosis,pcure,pmitigation,ptreatment,porppreventionpofpdiseaseporpforptheppurposepofpaffect
ingpanypstructureporpfunctionpofpthepbody.‖
Rev.pRul.p76-332,p1976-2pC.B.p81pallowedpapdeductionpforpcosmeticpsurgerypforpapface-
liftpunderpSectionp213.pHowever,pthepCodepwaspsubsequentlypamendedpbypthepRevenuepReconcili
ationpActpofp1990.
Underp§213(d)(9)(A),pnopdeductionpispallowedpforpcosmeticpsurgeryporpotherpsimilarpprocedures,pu
nlesspthepsurgeryporpprocedurepispnecessaryptopamelioratepapdeformityparisingpfrom,porpdirectlyprela
tedpto,papcongenitalpabnormality,pappersonalpinjurypresultingpfrompanpaccidentporptrauma,porpdisfigu
ringpdisease.p Sectionp213(d)(9)(B)pdefinespcosmeticpsurgerypaspanypprocedurepwhichpispdirectedpa
tpimprovingppersonalpappearancepandpdoespnotpmeaningfullyppromotepthepproperpfunctionpofpthepb
odyporppreventporptreatpillnessporpdisease.pThus,pnopdeductionpwillpbepallowed.
77. [LOp2.4]pDeductingpBadpDebtpLossp(canpbepsolvedpusingpfreepInternetpsources)
Lastpyearpyourpclient,pBarneypBumluck,pworkedppart-
timepforpTimelypTaxpReturnpPreparationpService.pBarneypwasppromisedpanphourlypwageppluspapcommissi
on.pHepworkedpunderpthisparrangementpfrompearlypFebruarypuntilp Aprilp15.pHispaccruedppaypamountedpt
op$900pplusp$120pofpcommissions.pWhenphe
,2p TaxationpforpDecisionpMakerspResearchpSolutions
wentp top collectp hisp pay,p however,p hep foundp onlyp ap vacantp officep withp ap signp onp thep doorp reading
―Nothingp isp surep butp deathp andp taxes.‖p Canp Barneyp takep ap badp debtp deductionp forp thep wagesp andpc
ommissionphepwaspunableptopcollect?
ResearchpAid:pReg.pSectionp1.166-1(e)
Issue:pCanpBarneyptakepapbadpdebtpdeductionpforpthepwagespandpcommissionphepwaspunableptopcoll
ect?pConclusion:pBarneypwillpnotpbeppermittedpapdeductionpsincepthepwagespandpcommissionpwere
pnotppreviouslypincludedpinphispreturnpaspincome.
DiscussionpofpReasoningpandpAuthorities:p UnderpReg.p§1.166-
1(e),pworthlesspdebtsparisingpfrompunpaidpwages,psalaries,pfees,prents,pandpsimilarpitemspofptaxablep
incomepshallpnotpbepallowedpaspapdeductionpunlesspthepincomephaspbeenpincludedpinpthepreturnpofpin
comepforpthepyearpforpwhichpthepdeductionpaspbadpdebtpispclaimedporpforpappriorptaxablepyear.p Beca
usepBarneypdidpnotppreviouslypincludepthepwagesporpcommissionpinpincome,phepispnotpentitledptopap
deductionpforphispinabilityptopcollectpthesepitems.
78. [LOp 2.4]pDeductingpCharitablepContributionsp(canpbepsolvedpusingpCheckpoint®porpapsimilarpservice)p
Yourpclients,pSonnypandphispwifepHoney,pbelievepinpworshipingpTa-
Ra,pthepSunpGod.pToppracticeptheirpreligiouspbeliefs,ptheyptakepapweeklongptripptopHawaiiptopworshippTa-
Ra.pThepcostp ofpthisp pilgrimagep (includingpairfare,photel,pandpmeals)pisp$2,800.pSonnypwantsptopknowpif
phepcanpdeductpthepcostpofpthisp trippaspapcharitablepcontributionptophispreligion.
NoteptopInstructor:pNopresearchpaidpispprovidedpinptheptextbookpforpthispproblem.pThispallowspyouptopc
hoosepwhetherporpnotptopprovidepanyphintsptopyourpstudents.
ResearchpAids:pKessler,p87pT.C.p1285p(1986)
Issue:pCanpSonnypandpHoneypdeductptheirptripptopHawaiipaspapcharitablepcontributionpmadepinptheppracti
cepofptheirpreligion?
Conclusion:pNopdeductionpwillpbepallowedpbecausepnopdonationpwaspmadepdirectlyptopapqualifiedpcharit
ableporganization.
DiscussionpofpReasoningpandpAuthorities:pInpKessler,p87pT.C.p1285p(1986),pthepTaxpCourtpdisall
owedpapcharitablepdeductionpforpthepexpensespincurredpforpaptripptopPuertopRico.p ThepCourtpdeniedp
thepdeductionpbecauseptherepwaspnopdonationpmadeptopapreligiousporganizationpaspdefinedpbypCodep
§170(c)(2)(B).pThepCourtpbasedpitspdecisionponpprecedentpandpCongressionalpintentpstatingpthatpthe
ppurposepofpthepcharitablepcontributionpcanponlypbepfurtheredpifpthepgovernmentpcanpbepassuredpthatp
thepfundsparepappropriatelypexpended.pThispcanpbepdoneponlypifpcontributionsparepmadeptopapqualifi
edporganizationpthatpcanpbepauditedpandpexamined.p SincepSonnypandpHoney‘spexpensespwerepnotpc
ontributionsporpgiftsptopanporganizedpentity,pthepexpensespdopnotpqualifypunder
§170paspapcharitablepcontribution.
79. [LOp 2.4]pTradeporpBusinesspversuspHobbyp(canpbepsolvedpusingpCheckpoint®porpapsimilarpservice)p Fred
p Fisherp isp ap licensedp scubap diverp whop livesp inp Keyp Largo. Hep isp employedp full-
timep asp anpengineer.pFivepyearspagophephadpbeenpemployedpaspapprofessionalpdiverpforpapsalvagepcompan
y.pWhilepworkingpforpthepsalvagepcompanyphepbecamepinterestedpinpmarineparchaeologypandptreasurephu
nting.p Untilp lastp yearp hep gavep divingp lessonsp onp weekendsp andp trainedp individualsp inp thep sportp ofp tr
easurephuntingp underp thep namep ofp ―Fred‘sp Divingp School.‖p Threep ofp thep divingp studentsp hep
taughtpsubsequentlypfoundpshipwrecks.pFredpgenerallypdidpnotpengagepinprecreationalpdiving.
Lastpyear,pFredpbeganpaptreasurephuntingpbusinesspnamedp―TreasurepSeekerspCompany.‖pHepboug
htpapboatpspecificallypdesignedpforptreasurephuntingpandpdidpextensivepresearchponppotentialplocationspofp
shipwrecks.pFredplocatedpseveralpshipwrecks,pbutpnonepwerepofpsubstantialpvalue.pHepdidpretrievepsevera
lpartifactspbutphaspnotpsoldpanypyet.pAlthoughpthesepartifactspmayphavepsomephistoricalpsignificance,ptheyp
havepaplimitedpmarketability.pThus,pFredphaspnotpyetphadpanypgrosspincomepfromphisptreasurephuntingpact
ivities.
Otherpthanpretainingpcheckpstubspandpreceiptspforphispexpensespandpanpencodedplog,pFredpdidpnotpma
intainp formalp recordsp forp Treasurep Seekersp Company.p Fredp maintainsp asp fewp writtenp recordsp as
, SolutionsptopDeveloppResearchpSkillspProblemsp 3
possiblep becausep hep fearsp forp hisp safety.p Hep tookp stepsp top keepp hisp boatp andp equipmentp fromp publicpv
iewp andp tookp precautionaryp measuresp top maintainp thep secrecyp ofp hisp searchp areas.p Fredp incurred
$5,000pofpexpensesprelatingptophisptreasure-
huntingpactivitiesplastpyear.pCanpFredpdeductpthepexpensesp ofphisptreasurephuntingpbusinessporpwillpthepI
RSpclaimpitpispaphobbypandpdisallowpthepexpenses?
NoteptopInstructor:pNopresearchpaidpispprovidedpinptheptextbookpforpthispproblem.pThispallowspyouptopc
hoosepwhetherporpnotptopprovidepanyphintsptopyourpstudents.
ResearchpAids:pRandypR.pReed,pIII,pT.C.pMemop1988-
470,p56pTCM.p363,pPHpT.C.pMemop¶88470pandpReg.p§1.183-2(b)(1)-(9)
Issue:pCanpFredpdeductpthepexpensespofphisptreasurephuntingpaspbusinesspexpenses?
Conclusion:pYes,pFredpshouldpbepableptopdeductphispexpensespasptradeporpbusinesspexpenses.pDiscu
ssionpofpReasoningpandpAuthorities:pSectionp162pallowspapdeductionpforpbusinesspexpensespthatpar
epordinary,pnecessary,pandpreasonablepinpamount.pReg.p§1.183-2(b)(1)-
(9)plistspapnumberpofpfactorspthatpshouldpbepconsideredpinpdeterminingpwhetherpanpactivitypispaptradep
orpbusiness,porpshouldpbepclassifiedpaspaphobby.pThesepinclude:
(1) Mannerpinpwhichptheptaxpayerpcarriesponpthepactivity.
(2) Thepexpertisepofptheptaxpayerporphispadvisors.
(3) Theptimepandpeffortpexpendedpbyptheptaxpayerpinpcarryingponpthepactivity.
(4) Expectationpthatpassetspusedpinpthepactivitypmaypappreciatepinpvalue.
(5) Thepsuccesspofptheptaxpayerpinpcarryingponpotherpsimilarporpdissimilarpactivities.
(6) Theptaxpayer‘sphistorypofpincomeporplossespwithprespectptopthepactivity.
(7) Thepamountpofpoccasionalpprofits,pifpany,pwhichparepearned.
(8) Thepfinancialpstatuspofptheptaxpayer.
(9) Elementspofppersonalppleasureporprecreation.
ThepTaxpCourt‘spdecisionpinpRandypReedpIII,pT.C.pMemop1988-
470,p56pCCHpT.C.M.p363,pPHpT.C.pMemop¶88,470p(1988)pexaminespapsituationpverypsimilarptoptha
tpofpFredpFisher.pInpthispcase,paptreasurephunterpwaspanpexperiencedpdiverpandphadppersonallyptraine
dpotherpdiverspinpthepfieldpofptreasurephunting.pHispdivingpdidpnotpappearpmotivatedpbyprecreationalp
intentions.pHepkeptp apcheckbookpseparatepfromphisppersonalpaccount,pmaintainedpreceiptspandpchec
kpstubspforphispexpenditurespandpkeptpappartialplogpbookpofphispactivitiespuntilphispmapspwerepstolen.p
Reedpsaidpthatphepkeptplimitedprecordspforpsecuritypreasons.pWhilepnotpextensive,ptheseprecordspwer
epheldptopbepadequatepforpapsoleppractitionerpinpthisptypepofpbusinesspwithpaplowpvolumepofptransacti
ons,pandpReedpwaspallowedptopdeductphispexpensespaspthosepofpaptradeporpbusiness.pInpthatpthepfactsp
pertainingptopFisher‘spsituationparepnearlypidenticalptopReed‘s,pFisherpshouldpbepableptopdeductpthepe
xpensespofphisptreasurephuntingpbusinesspaspvalidpbusinesspexpenses.
80. [LOp2.4]pLocatepandpReadpCourtpCasep(canpbepsolvedpusingpfreepInternetpsources)
LocatepandpreadpGregpMcIntosh,pTCpMemop2001-144,p81pTCMp1772,pRIApTCpMemop¶2001-
144p(6/19/2001).pAnswerpthepfollowingpquestions.
a. WhatprequirementspmustpbepmetpforpaptaxpayerptoprecoverplitigationpcostspfrompthepIRS?
b. WasptheptaxpayerpinpthispcasepableptoprecoverphispattorneypfeespfrompthepIRS?pWhyporpwhypnot?
Solution:
a. UnderpCodepSectionp7430(a),papjudgmentpforplitigationpcostspincurredpinpconnectionpwithpapco
urtpproceedingpmaypbepawardedponlypifpaptaxpayer:p(1)pispthep―prevailingpparty‖;p(2)phaspexha
ustedphisporpherpadministrativepremediespwithinpthepIRS;pandp(3)pdidpnotpunreasonablypprotract
pthepcourtpproceeding.pTopbepapprevailingpparty,ptheptaxpayerpmustpsubstantiallypprevailpwithpr
espectptopeitherpthepamountpinpcontroversyporpthepmostpsignificantpissueporpsetpofpissuesppresent
edpandpsatisfypthepapplicablepnetpworthprequirement.
b. TheptaxpayerpwaspnotpableptoprecoverphispattorneypfeespfrompthepIRSpbecausephepwaspnotpfou
ndptopbepthep―prevailing‖pparty.p Inpthispcase,pthepcourtpfoundpthatpthepIRS‘sppositionsponpthep
disputedpissuespwerepreasonableppositionspsufficientlypsupportedpbypthepfactspand
, 4p TaxationpforpDecisionpMakerspResearchpSolutions
circumstancespinptheptaxpayer‘spcasepandpthepexistingplegalpprecedent.p SincepthepIRS‘sppositio
nspwerepfoundptophavepbeenpreasonable,pthepcourtpcouldpnotpfindptheptaxpayerptopbepthe
―prevailing‖p party.
Thispdecisionpwaspaffirmedpinp91pAFTRp2dp2003-1275,p2003-1pUSTC¶50,334p(CA9,p3/7/2003)
81. [LOp2.4]pLocatepandpAnalyzepCourtpCasesp(canpbepsolvedpusingpfreepInternetpsources)
Locatepandpreadpthepfollowingptwopcases:
J.B.S.pEnterprises,pInc.,pT.C.pMemop1991-254,p61pTCM.p2829,p1991pPHpT.C.pMemop¶91,254
SummitpPublishingpCompany,pInc.,pT.C.pMemop1990-
288,p59pTCM.p833,p1990pPHpT.C.pMemop¶90,288pListpthosepfactspthatpyoupfeelpmostpinfluencedpthepjudg
esptopreachpdifferentpconclusionspinptheseptwopcases.
Solution:
Facts J.B.S.pEnterprises SummitpPublishing
Personpwhopreceivedpsalary Formerpspousepofpsolepshareh Spousepofpsolepshareholder
older
Servicespperformedpforpsalar None Extensivepvaluablepservices
y
Dividendphistory Notpmentioned Substantialpdividendsppaid
ThepcourtpallowedpapdeductionpforpexpensespinpSummitpPublishingpforpapportionpofptheppaymentspth
atpthepIRSparguedpwerepunreasonablepcompensation.pThepCourtpnotedphowpvaluablepthepshareholder
‘spspouse‘spservicespwereptopthepfirmpandpthatpdividendsphadpbeenppaidptopthepshareholder.pInpJ.B.S.p
Enterprises,pthepsolepshareholderpseemedptopbepattemptingptopdisguisepsupportppaymentspmadeptophi
spformerpwifepaspsalarypexpense.pHowever,pshepperformedpnopservicespforpwhichpcompensationpwou
ldpnormallypbeppaid.
Chapter 3 D p p
etermining Gross Income
p p
Solutions to Develop Research Skills
p p p p
NoteptopInstructor:pBeginningpwithpthispchapter,pnopresearchpaidsporp―hints‖parepprovidedpinptheptextbook.pB
eforepthepsolutionptopeachpproblem,phowever,psuggestedpresearchpaidsparepprovided.pThispallowspyouptopchoo
sepwhetherporpnotptopprovidepanyphintsptopyourpstudentspforpapparticularpproblem.pForpproblemspthatp canpbeps
olvedpusingpfreepInternetpsources,pyoupmustpprovidepstudentspwithpthepcitationspinpthesephintspandpreferpstude
ntsptopFigurep2.1pofpChapterp2pinptheptextpforpthepURLsptopenablepthemptopsolvepthesepproblemspusingpfreepInt
ernetpsources.pSomepofpthepproblemsprequirepaccessptopCheckpoint®porpapsimilarpservice.
73. [LOp3.2]pYearpGiftpCardpRevenuepispIncludedpinpIncomep(canpbepsolvedpusingpfreepInternetpsourcespifpcit
ationsparepprovidedptopstudents)
GammapCorporation,papcalendar-yearpaccrual-
basisptaxpayer,poperatespdepartmentpstores.pAlphapCorporationpandpBetapCorporationparepwholly-
ownedpdomesticpsubsidiariespofpGammapCorporationp andp filep ap consolidatedp federalp taxp returnp underp
Gammap Corporation‘sp consolidatedp group.p Gamma,
