Solutions to Develop Research Skills Problems – Taxation for Decision Makers 2017 Edition Chapter 2

Solutions to Develop Research Skills Problems – Taxation
for Decision Makers 2017 Edition | Chapters 2–12 | 2026–
2027
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❖ Taxation for Decision Makers 2017 Edition


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❖ Taxation for Decision Makers Chapters 2–12


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❖ Research Skills Problems solutions

,Solutions to Develop Research Skills Problems l l l l l




Taxation for Decision Makers 2017thEdition byShirleyDennis-Escoffier, Karen
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A. Fortin| Chapter 2 to 12
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Chapter 2-12 l




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l TheTax Practice Environment l l l




SolutionstoDevelopResearchSkills l l l l




Note to Instructor: Many of the research problems can be solved using sources that are available on the Internet
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at no charge. URLs for these free sources are shown in Figure 2.1 of Chapter 2 in the text. The solution for each
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problem indicates if it can be solved using free Internet sources or if it requires access to Checkpoint® or a
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similar service.
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76. [LO2.4] Deducting Cosmetic Surgery (can be solved using free Internet sources)
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Your client, Ms. I.M. Gorgeous, is an aspiring actress. She has managed to earn a living doing television
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commercials but was unable to get the acting parts she really wanted. She decided to have botox injections in
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her forehead and collagen enhancements to her lips. After these procedures, her career improved
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dramatically and she received several movie offers. Ms. Gorgeous is sure that she should be able to deduct
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the cost of the cosmetic enhancements because she read about another actress having a face-lift in 1988 and
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deducting the cost on her tax return as a medical expense. Can Ms. Gorgeous deduct the cost of these
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procedures?
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Research Aid: Section 213(d)(9). l l l




Issue: Can Ms. Gorgeous deduction the cost of the botox injections and collagen enhancements as
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medical expenses? l l




Conclusion: Ms. Gorgeous will not be allowed to deduct the cost of botox injections and collagen l l l l l l l l l l l l l l l




enhancements. l




Discussion of Reasoning and Authorities: Code Section 213 allows a deduction for expenses paid l l l l l l l l l l l l l




for medical care of the taxpayer. Section 213(d)(1)(A) defines medical care as amounts paid
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—forthediagnosis,cure,mitigation,treatment,orpreventionofdiseaseorforthepurposeof affecting
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any structure or function of the body.‖
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Rev. Rul. 76-332, 1976-2 C.B. 81 allowed a deduction for cosmetic surgery for a face-lift under
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Section 213. However, the Code was subsequently amended by the Revenue Reconciliation Act of
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1990. l




Under §213(d)(9)(A), no deduction is allowed for cosmetic surgery or other similar procedures, unless
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the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a
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congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.
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Section 213(d)(9)(B) defines cosmetic surgery as any procedure which is directed at improving
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personal appearance and does not meaningfully promote the proper function of the body or prevent or
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treat illness or disease. Thus, no deduction will be allowed.
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77. [LO2.4] Deducting Bad Debt Loss (can be solved using free Internet sources)
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Last year your client, Barney Bumluck, worked part-time for Timely Tax Return Preparation Service.
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Barney was promised an hourly wage plus a commission. He worked under this arrangement from early
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February until April 15. His accrued pay amounted to $900 plus $120 of commissions. When he
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,
, 2 Taxation for Decision Makers Research Solutions
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went to collect his pay, however, he found only a vacant office with a sign on the door reading
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—Nothing is sure but death and taxes.‖ Can Barney take a bad debt deduction for the wages and
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commission he was unable to collect?
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Research Aid: Reg. Section 1.166-1(e) l l l l




Issue: Can Barney take a bad debt deduction for the wages and commission he was unable to collect?
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Conclusion: Barney will not be permitted a deduction since the wages and commission were not
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previously included in his return as income.
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Discussion of Reasoning and Authorities: Under Reg. §1.166-1(e), worthless debts arising from l l l l l l l l l l l




unpaid wages, salaries, fees, rents, and similar items of taxable income shall not be allowed as a
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deduction unless the income has been included in the return of income for the year for which the
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deduction as bad debt is claimed or for a prior taxable year. Because Barney did not previously include
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the wages or commission in income, he is not entitled to a deduction for his inability to collect these
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items. l




78. [LO 2.4] Deducting Charitable Contributions (can be solved using Checkpoint® or a similar service) Your
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clients, Sonny and his wife Honey, believe in worshiping Ta-Ra, the Sun God. To practice their religious
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beliefs, they take a weeklong trip to Hawaii to worship Ta-Ra. The cost of this pilgrimage (including
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airfare, hotel, and meals) is $2,800. Sonny wants to know if he can deduct the cost of this trip as a charitable
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contribution to his religion.
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Note to Instructor: No research aid is provided in the textbook for this problem. This allows you to choose
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whether or not to provide any hints to your students.
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Research Aids: Kessler, 87 T.C. 1285 (1986) l l l l l l




Issue: Can Sonny and Honey deduct their trip to Hawaii as a charitable contribution made in the practice of
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their religion?
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Conclusion: No deduction will be allowed because no donation was made directly to a qualified charitable l l l l l l l l l l l l l l l




organization.
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Discussion of Reasoning and Authorities: In Kessler, 87 T.C. 1285 (1986), the Tax Court l l l l l l l l l l l l l




disallowed a charitable deduction for the expenses incurred for a trip to Puerto Rico. The Court denied
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the deduction because there was no donation made to a religious organization as defined by Code
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§170(c)(2)(B). The Court based its decision on precedent and Congressional intent stating that the
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purpose of the charitable contribution can only be furthered if the government can be assured that the
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funds are appropriately expended. This can be done only if contributions are made to a qualified
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organization that can be audited and examined. Since Sonny and Honey‘s expenses were not
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contributions or gifts to an organized entity, the expenses do not qualify under
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§170 as a charitable contribution. l l l l




79. [LO 2.4] Trade or Business versus Hobby (can be solved using Checkpoint® or a similar service) Fred
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Fisher is a licensed scuba diver who lives in Key Largo.
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engineer. Five years ago he had been employed as a professional diver for a salvage company. While
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working for the salvage company he became interested in marine archaeology and treasure hunting. Until
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last year he gave diving lessons on weekends and trained individuals in the sport of treasure
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hunting under the name of —Fred‘s Diving School.‖ Three of the diving students he
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ltaught subsequently found shipwrecks. Fred generally did not engage in recreational diving.
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Last year, Fred began a treasure hunting business named —Treasure Seekers Company.‖ He bought a
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boat specifically designed for treasure hunting and did extensive research on potential locations of
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shipwrecks. Fred located several shipwrecks, but none were of substantial value. He did retrieve several
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artifacts but has not sold any yet. Although these artifacts may have some historical significance, they have a
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limited marketability. Thus, Fred has not yet had any gross income from his treasure hunting activities.
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Other than retaining check stubs and receipts for his expenses and an encoded log, Fred did not maintain
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formal records for Treasure Seekers Company. Fred maintains as few written records as
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