Devry Course Project

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David R. and Sheri N. Johnson (ages 45 and 46) are married and live at 641 Cody
Way, Casper, WY 82609. David is a consulting engineer, while Sheri is a paralegal.
They file a joint return and use the cash basis for tax purposes.
1. Trained as a mining engineer, David has developed considerable expertise in the
treatment and disposition of waste material. He also is well versed in the federal
and state requirements for land reclamation projects. David maintains a
consulting practice through which he advises clients on these matters. David’s
business activity code is 541990. Most of his clients are small and medium-size
mine owner/operators located in Wyoming and contiguous states (e.g., Montana,
Idaho, Utah). Usually, David is retained by a client on a contract-fee basis and is
reimbursed for all out-of-pocket expenses. In performing his services, David usually
visits the job site and later submits his recommendations in a written report along with a statement for his services and expenses.
David received the following amounts from his consulting business in 2012:
Fees for services rendered
$ 92,800
Expense reimbursements:
Airfare
$8,200
Meals
6,100
Lodging
5,200
Transportation (taxis, airport limos, car rentals)
920
Subtotal for expense reimbursement
20,420
Total received
$113,220
2. The following fees for services rendered to mining companies are not included in
the
receipts listed in item 1 above:
Echo Mining: Payment received January 2013; work done December 2012
$5,100
Sesa Mining: Payment received January 2012; work done December 2011
4,400
Cormorant Mining: No payment received; work done March 2012
3,700
David did not incur travel expenses in any of these engagements (i.e., the work was
done in his office). As Cormorant Mining is in bankruptcy, David does not expect to
collect any of this fee.
3. Other expenses paid by David in 2012 relating to his practice are listed below.
Contribution to H.R. 10 (Keogh) retirement plan
$9,000
Premiums on medical insurance (covering self, spouse, and dependents)
3,800
Landscape models purchased from topographer for reclamation
projects
$3,200
Advertising in trade journals
2,400
Office supplies (including drafting materials)
1,200
Business phone and Internet service
860
State occupation license
300
Subscriptions to trade journals
240
Membership dues to trade associations
180

4. David operates his consulting business out of an office in his home. Twenty
percent of
the 3,000-square-foot living area is devoted to the office. David inherited the home
on
Cody Way from his father, who died on June 6, 2003, when it had a fair market value
of
$400,000 ($40,000 of which was allocated to the land). The Johnsons moved into
the
home in 2003, and David began using his home office in the same year. The home’s
current fair market value is $500,000 ($50,000 allocated to the land). County
land
records reflect that David’s father bought the land in 1969 for $6,000 and built the
house in 1973 at a cost of $60,000. David depreciates the business use of his home
using
MACRS, treating the home as 39-year nonresidential reality.
Additional information regarding the property for 2012 follows:
Utilities
$4,800
Repairs and maintenance 2,900
Property/casualty insurance
2,300
The property taxes and mortgage interest paid in 2012 on the home are listed in
item
15 below. In addition to the repairs and maintenance noted above, David had the
office
repainted at a cost of $1,200. The furniture in the office, including business
equipment
(e.g., computer, fax machine, copier), was properly expensed in the year bought
and
has a zero basis. However, on March 5, 2012, David purchased a heavy-duty, fireresistant
file cabinet with security-vault features for $4,800. He made the acquisition to
safeguard
and maintain the privacy of client data. If possible, David prefers to avoid
capitalizing
and depreciating the cabinet.
5. On February 4, 2011, David paid $41,000 (including sales tax) for an Infiniti
crossover
SUV (gross weight under 6,000 pounds), which he uses 90% of the time for
business.
No trade-in was involved, and he did not claim any § 179 expensing of the cost.
Under
the actual operating cost method, he depreciates the SUV using MACRS (half-year
convention). [Hint: See Table 3 in the Instructions to Form 4562.] His operating
expenses
for the Infiniti for 2012 are as follows:

Gasoline
$3,300
Auto insurance
1,600
Repairs
240
Auto club dues
180
Oil changes and lubrication
120
License and registration
60
During business use, David received three moving traffic violations (total fines of
$680)
and incurred tolls and parking charges of $440. The Infiniti was driven a total of
14,500
miles during 2012 (mileage was incurred evenly during the year).
6. Sheri is a licensed paralegal and is employed on a part-time basis by several
local attorneys. She commuted to work using the family Suburban for a total of 813 miles and
paid
parking fees of $310. Her earnings and job-related expenses are summarized below.
Salary (from four employers)
$38,000
Laptop computer
1,200
Subscriptions and dues to professional organizations
Continuing education correspondence course
120
Occupational license fee
80

180

Sheri purchased the laptop computer on March 12 and uses it 80% of the time for
business. The correspondence course is required continuing education so she can
retain her license. Sheri is considering going to law school, so she attended a series
of LSAT preparation sessions at a cost of $350. Because Sheri is a part-time
employee, she is not covered by any of her employers’ medical or retirement plans.
During 2012, however, she contributed $5,000 to a traditional IRA that she
established several years ago. The Johnsons use the automatic mileage method to
calculate any tax deductions to which they are entitled for use of the Suburban.
7. With funds received from the settlement of his father’s estate, David purchased
rental property at 4620 Cottonwood Lane. Of the $250,000 purchase price, $30,000
was allocated to the land. After an $80,000 renovation to the house (e.g., new
flooring, roof, heating unit), the property was rented beginning February 1, 2006. In
2010, the Johnsons decided that their investment would be more marketable if the
house was rentedas furnished. Consequently, in May of that year, they spent
$38,000 on new furniture (including drapes, carpeting, and appliances). Under the
current lease agreement, the
property rents for $2,200 a month (payable at the beginning of each month) with
utilities not included. Information regarding the property for 2012 appears below.
Rent received
$28,600
Property/casualty insurance premiums paid 3,100
Property taxes paid
2,400
Yard maintenance paid
1,200

Repairs

800

The rent received includes $2,200 for January 2013. The tenants prepaid the rent in
mid-December because they went on vacation during the Christmas/New Year
holidays. In addition to the property taxes listed above, David paid a special tax
assessment of $2,400 to the city of Casper for repaving the street in front of the
property. The Johnsons use MACRS to depreciate the rental home and the
furnishings within it (assume half-year convention for the personalty).
8. The Johnsons acquired 1,000 shares of common stock in Cormorant Mining on
March 7, 2011, to hold for investment purposes. David performed services for the
company in late 2010, submitting a bill for $3,900. Because Cormorant was
experiencing cash-flow problems at the time, David accepted the stock as payment
for his services. Unfortunately, Cormorant is currently in bankruptcy (see item 2
above), and expectations are that the shareholders will not recover anything on
their stock investments. The stock is
not publicly traded.
9. On March 10, 1994, David’s father gave the Johnsons a plot of land located in
Teton County (WY) as an anniversary present. It had a value of $150,000 at the time
of the gift (no gift tax was due on the transfer). The land had been purchased by
David’s father on June 1, 1984, for $50,000. In December 2011, a real estate
developer contacted the Johnsons and offered $800,000 for the property. After
considerable negotiation, the following transaction took place on March 4, 2012: the
Johnsons transferred the Teton plot in return for $8,000 in cash and four city lots in
Laramie (WY) worth $792,000. The Johnsons considered the city lots to be a good
investment because they are located near the state university. All closing costs and
legal fees were absorbed by the real estate developer.
10. David inherited an antique gun collection from his father when he died—mainly
large caliber rifles used for buffalo hunting. Although David has no idea what his
father’s cost basis was in these guns, the collection had a date-of-death value of
$22,000. Concerned about the maintenance and security of the collection,
David sold it to a dealer for $29,000 on July 10, 2012.
11. On July 12, 1998, using $50,000 of funds she had received from an aunt’s life
insurance policy, Sheri purchased grazing land in Converse County (WY). On August
2, 2011, she sold the land to a local rancher for $75,000. Under the terms of the
sale, Sheri received a down payment of $15,000 and 10 annual notes of $6,000
each. Sheri is also to receive simple interest of 8% on the outstanding principle
balance each year. On August 4, 2012, Sheri collected $10,800 ($6,000 on the note
and $4,800 of interest) on the maturity of the first note.
12. Although the Johnsons had several Schedule D transactions during 2011, they
ended up with a net short-term capital loss of $7,000. Of this loss, $3,000 was
deducted in 2011, and $4,000 carried over to 2012.
13. For several years, Sheri’s widowed mother, Vivian Olson, has lived with the
Johnsons and has been claimed by them as a dependent. On December 30, 2011,
Vivian suffered a heart attack. After six days in the ICU of a local hospital, Vivian

died. In early February 2012, the Johnsons paid the following expenses related to
Vivian:
Burial expenses
$4,400
Medical expenses incurred in 2011
4,200
Medical expenses incurred in 2012
3,100
Remainder of church pledge for 2012 600
Fortunately, the balance of Vivian’s medical expenses ($11,900) was covered by
insurance. Besides personal and household effects, Vivian’s major asset was life
insurance. As the designated beneficiary of the policy, Sheri received $20,000 of
death benefits on March 13, 2012.
14. Besides the items already mentioned, the Johnsons had the following receipts
during 2012:
interest income—
City of Cheyenne general purpose bonds
$1,900
CD at Wells Fargo Bank
1,100
Money market account at Bank of America
400
Yard (garage) sale
950
Qualified dividends on Meadowlark Corporation common stock
700
Jury duty fees
420
The yard sale involved used furniture, appliances, books, toys, and other
household goods, having an estimated original cost value of $1,800. In connection
with her jury duty assignment in June, Sheri drove the Suburban 40 miles and
incurred expenses of $30 for parking and $45 for meals.
15. In addition to the items already noted, the Johnsons had the following
expenditures for 2012:
Interest on home equity loan used to finance the purchase of personal items (e.g.,
camper)
$4,400
Charitable contributions (not including Vivian’s pledge)
3,200
Ad valorem property taxes on personal residence
3,100
Medical and dental bills (including prescription drugs of $400)
other than those relating to Vivian (see item 13)
1,800
The Johnsons drove the Suburban 420 miles to various medical and dental
appointments. Wyoming has no state or local income tax but does impose a general
sales tax.
The county in which they live imposes an additional local sales tax of 1%. Although
they do not keep track of their sales taxes, they purchased a camper for $40,000 in
May 2012. The sales tax on this purchase was $1,600.
16. Besides Vivian (see item 13), the Johnsons’ household includes two daughters,
Meredith (age 19) and Kirby (age 18), and one son, Toby (age 17). Kirby and Toby

are full-time students in high school. Meredith graduated a year ago and earned
$9,000 working part-time during 2012. She deposited these earnings in a savings
account, hoping someday to attend college.
17. For tax year 2011, the Johnsons had an overpayment of $150, which they
applied toward their 2012 income tax. Sheri’s income tax withholdings for the year
are $5,100, and the Johnsons made federal quarterly tax payments totaling $16,000
($4,000 each installment).
18. Relevant Social Security numbers are noted below.
Name Social Security Number
David Johnson
111-11-1111
Sheri Johnson
123-45-6785
Vivian Olson
123-45-6786
Meredith Johnson 123-45-6787
Kirby Johnson
123-45-6788
Toby Johnson
123-45-6789

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