Solutions to Develop Research Skills Problems
v v v v v
Taxation for Decision Makers 2017th Edition by Shirley Dennis-
v v v v v v v v
Escoffier, Karen A. Fortin| Chapter 2 to 12
v v v v v v v
Chapter 2-12
v
Chapter 2 T v v
he Tax Practice Environment
v v v
Solutions to Develop Research Skills
v v v v
NotevtovInstructor:vManyvofvthevresearchvproblemsvcanvbevsolvedvusingvsourcesvthatvarevavailablevonvthevInt
v
ernetvatvnovcharge.vURLsvforvthesevfreevsourcesvarevshownvinvFigurev2.1vofvChapterv2vinvthevtext.vThevsolutio
nvforveachvproblemvindicatesvifvitvcanvbevsolvedvusingvfreevInternetvsourcesvorvifvitvrequiresvaccessvtovCheckp
oint®vorvavsimilarvservice.
76. [LOv2.4]vDeductingvCosmeticvSurgeryv(canvbevsolvedvusingvfreevInternetvsources)
Yourvclient,vMs.vI.M.vGorgeous,visvanvaspiringvactress.vShevhasvmanagedvtovearnvavlivingvdoingvtelevisio
nvcommercialsvbutvwasvunablevtovgetvthevactingvpartsvshevreallyvwanted.vShevdecidedvtovhavevbotoxvinjec
tionsvinvhervforeheadvandvcollagenvenhancementsvtovhervlips.vAftervthesevprocedures,vhervcareervimprove
dvdramaticallyvandvshevreceivedvseveralvmovievoffers.vMs.vGorgeousvisvsurevthatvshevshouldvbevablevtovde
ductvthevcostvofvthevcosmeticvenhancementsvbecausevshevreadvaboutvanothervactressvhavingvavface-
liftvinv1988vandvdeductingvthevcostvonvhervtaxvreturnvasvavmedicalvexpense.vCanvMs.vGorgeousvdeductvthe
vcostvofvthesevprocedures?
ResearchvAid:vSectionv213(d)(9).
Issue:vCanvMs.vGorgeousvdeductionvthevcostvofvthevbotoxvinjectionsvandvcollagenvenhancementsva
svmedicalvexpenses?
Conclusion:vMs.vGorgeousvwillvnotvbevallowedvtovdeductvthevcostvofvbotoxvinjectionsvandvcollage
nvenhancements.
DiscussionvofvReasoningvandvAuthorities:v CodevSectionv213vallowsvavdeductionvforvexpensesvp
aidvforvmedicalvcarevofvthevtaxpayer.vSectionv213(d)(1)(A)vdefinesvmedicalvcarevasvamountsvpaid
―forvthevdiagnosis,vcure,vmitigation,vtreatment,vorvpreventionvofvdiseasevorvforvthevpurposevofvaffect
ingvanyvstructurevorvfunctionvofvthevbody.‖
Rev.vRul.v76-332,v1976-2vC.B.v81vallowedvavdeductionvforvcosmeticvsurgeryvforvavface-
liftvundervSectionv213.vHowever,vthevCodevwasvsubsequentlyvamendedvbyvthevRevenuevReconcili
ationvActvofv1990.
Underv§213(d)(9)(A),vnovdeductionvisvallowedvforvcosmeticvsurgeryvorvothervsimilarvprocedures,vu
nlessvthevsurgeryvorvprocedurevisvnecessaryvtovamelioratevavdeformityvarisingvfrom,vorvdirectlyvrela
tedvto,vavcongenitalvabnormality,vavpersonalvinjuryvresultingvfromvanvaccidentvorvtrauma,vorvdisfigu
ringvdisease.v Sectionv213(d)(9)(B)vdefinesvcosmeticvsurgeryvasvanyvprocedurevwhichvisvdirectedva
tvimprovingvpersonalvappearancevandvdoesvnotvmeaningfullyvpromotevthevpropervfunctionvofvthevb
odyvorvpreventvorvtreatvillnessvorvdisease.vThus,vnovdeductionvwillvbevallowed.
77. [LOv2.4]vDeductingvBadvDebtvLossv(canvbevsolvedvusingvfreevInternetvsources)
Lastvyearvyourvclient,vBarneyvBumluck,vworkedvpart-
timevforvTimelyvTaxvReturnvPreparationvService.vBarneyvwasvpromisedvanvhourlyvwagevplusvavcommissi
on.vHevworkedvundervthisvarrangementvfromvearlyvFebruaryvuntilvAprilv15.vHisvaccruedvpayvamountedvt
ov$900vplusv$120vofvcommissions.vWhenvhe
,2v TaxationvforvDecisionvMakersvResearchvSolutions
wentv tov collectv hisv pay,v however,v hev foundv onlyv av vacantv officev withv av signv onv thev doorv reading
―Nothingv isv surev butv deathv andv taxes.‖v Canv Barneyv takev av badv debtv deductionv forv thev wagesv andvc
ommissionvhevwasvunablevtovcollect?
ResearchvAid:vReg.vSectionv1.166-1(e)
Issue:vCanvBarneyvtakevavbadvdebtvdeductionvforvthevwagesvandvcommissionvhevwasvunablevtovcoll
ect?vConclusion:vBarneyvwillvnotvbevpermittedvavdeductionvsincevthevwagesvandvcommissionvwere
vnotvpreviouslyvincludedvinvhisvreturnvasvincome.
DiscussionvofvReasoningvandvAuthorities:v UndervReg.v§1.166-
1(e),vworthlessvdebtsvarisingvfromvunpaidvwages,vsalaries,vfees,vrents,vandvsimilarvitemsvofvtaxablev
incomevshallvnotvbevallowedvasvavdeductionvunlessvthevincomevhasvbeenvincludedvinvthevreturnvofvin
comevforvthevyearvforvwhichvthevdeductionvasvbadvdebtvisvclaimedvorvforvavpriorvtaxablevyear.v Beca
usevBarneyvdidvnotvpreviouslyvincludevthevwagesvorvcommissionvinvincome,vhevisvnotventitledvtovav
deductionvforvhisvinabilityvtovcollectvthesevitems.
78. [LOv 2.4]vDeductingvCharitablevContributionsv(canvbevsolvedvusingvCheckpoint®vorvavsimilarvservice)v
Yourvclients,vSonnyvandvhisvwifevHoney,vbelievevinvworshipingvTa-
Ra,vthevSunvGod.vTovpracticevtheirvreligiousvbeliefs,vtheyvtakevavweeklongvtripvtovHawaiivtovworshipvTa-
Ra.vThevcostv ofvthisv pilgrimagev (includingvairfare,vhotel,vandvmeals)visv$2,800.vSonnyvwantsvtovknowvif
vhevcanvdeductvthevcostvofvthisv tripvasvavcharitablevcontributionvtovhisvreligion.
NotevtovInstructor:vNovresearchvaidvisvprovidedvinvthevtextbookvforvthisvproblem.vThisvallowsvyouvtovc
hoosevwhethervorvnotvtovprovidevanyvhintsvtovyourvstudents.
ResearchvAids:vKessler,v87vT.C.v1285v(1986)
Issue:vCanvSonnyvandvHoneyvdeductvtheirvtripvtovHawaiivasvavcharitablevcontributionvmadevinvthevpracti
cevofvtheirvreligion?
Conclusion:vNovdeductionvwillvbevallowedvbecausevnovdonationvwasvmadevdirectlyvtovavqualifiedvcharit
ablevorganization.
DiscussionvofvReasoningvandvAuthorities:vInvKessler,v87vT.C.v1285v(1986),vthevTaxvCourtvdisall
owedvavcharitablevdeductionvforvthevexpensesvincurredvforvavtripvtovPuertovRico.v ThevCourtvdeniedv
thevdeductionvbecausevtherevwasvnovdonationvmadevtovavreligiousvorganizationvasvdefinedvbyvCodev
§170(c)(2)(B).vThevCourtvbasedvitsvdecisionvonvprecedentvandvCongressionalvintentvstatingvthatvthe
vpurposevofvthevcharitablevcontributionvcanvonlyvbe vfurtheredvifvthevgovernmentvcanvbevassuredvthatv
thevfundsvarevappropriatelyvexpended.vThisvcanvbevdonevonlyvifvcontributionsvarevmadevtovavqualifi
edvorganizationvthatvcanvbevauditedvandvexamined.v SincevSonnyvandvHoney‘svexpensesvwerevnotvc
ontributionsvorvgiftsvtovanvorganizedventity,vthevexpensesvdovnotvqualifyvunder
§170vasvavcharitablevcontribution.
79. [LOv 2.4]vTradevorvBusinessvversusvHobbyv(canvbevsolvedvusingvCheckpoint®vorvavsimilarvservice)v Fred
v Fisherv isv av licensedv scubav diverv whov livesv inv Keyv Largo. Hev isv employedv full-
timev asv anvengineer.vFivevyearsvagovhevhadvbeenvemployedvasvavprofessionalvdivervforvavsalvagevcompan
y.vWhilevworkingvforvthevsalvagevcompanyvhevbecamevinterestedvinvmarinevarchaeologyvandvtreasurevhu
nting.v Untilv lastv yearv hev gavev divingv lessonsv onv weekendsv andv trainedv individualsv inv thev sportv ofv tr
easurevhuntingv underv thev namev ofv ―Fred‘sv Divingv School.‖v Threev ofv thev divingv studentsv hev
taughtvsubsequentlyvfoundvshipwrecks.vFredvgenerallyvdidvnotvengagevinvrecreationalvdiving.
Lastvyear,vFredvbeganvavtreasurevhuntingvbusinessvnamedv―TreasurevSeekersvCompany.‖vHevboug
htvavboatvspecificallyvdesignedvforvtreasurevhuntingvandvdidvextensivevresearchvonvpotentialvlocationsvofv
shipwrecks.vFredvlocatedvseveralvshipwrecks,vbutvnonevwerevofvsubstantialvvalue.vHevdidvretrievevsevera
lvartifactsvbutvhasvnotvsoldvanyvyet.vAlthoughvthesevartifactsvmayvhavevsomevhistoricalvsignificance,vtheyv
havevavlimitedvmarketability.vThus,vFredvhasvnotvyetvhadvanyvgrossvincomevfromvhisvtreasurevhuntingvact
ivities.
Othervthanvretainingvcheckvstubsvandvreceiptsvforvhisvexpensesvandvanvencodedvlog,vFredvdidvnotvma
intainv formalv recordsv forv Treasurev Seekersv Company.v Fredv maintainsv asv fewv writtenv recordsv as
, SolutionsvtovDevelopvResearchvSkillsvProblemsv 3
possiblev becausev hev fearsv forv hisv safety.v Hev tookv stepsv tov keepv hisv boatv andv equipmentv fromv publicvv
iewv andv tookv precautionaryv measuresv tov maintainv thev secrecyv ofv hisv searchv areas.v Fredv incurred
$5,000vofvexpensesvrelatingvtovhisvtreasure-
huntingvactivitiesvlastvyear.vCanvFredvdeductvthevexpensesv ofvhisvtreasurevhuntingvbusinessvorvwillvthevI
RSvclaimvitvisvavhobbyvandvdisallowvthevexpenses?
NotevtovInstructor:vNovresearchvaidvisvprovidedvinvthevtextbookvforvthisvproblem.vThisvallowsvyouvtovc
hoosevwhethervorvnotvtovprovidevanyvhintsvtovyourvstudents.
ResearchvAids:vRandyvR.vReed,vIII,vT.C.vMemov1988-
470,v56vTCM.v363,vPHvT.C.vMemov¶88470vandvReg.v§1.183-2(b)(1)-(9)
Issue:vCanvFredvdeductvthevexpensesvofvhisvtreasurevhuntingvasvbusinessvexpenses?
Conclusion:vYes,vFredvshouldvbevablevtovdeductvhisvexpensesvasvtradevorvbusinessvexpenses.vDiscu
ssionvofvReasoningvandvAuthorities:vSectionv162vallowsvavdeductionvforvbusinessvexpensesvthatvar
evordinary,vnecessary,vandvreasonablevinvamount.vReg.v§1.183-2(b)(1)-
(9)vlistsvavnumbervofvfactorsvthatvshouldvbevconsideredvinvdeterminingvwhethervanvactivityvisvavtradev
orvbusiness,vorvshouldvbevclassifiedvasvavhobby.vThesevinclude:
(1) Mannervinvwhichvthevtaxpayervcarriesvonvthevactivity.
(2) Thevexpertisevofvthevtaxpayervorvhisvadvisors.
(3) Thevtimevandveffortvexpendedvbyvthevtaxpayervinvcarryingvonvthevactivity.
(4) Expectationvthatvassetsvusedvinvthevactivityvmayvappreciatevinvvalue.
(5) Thevsuccessvofvthevtaxpayervinvcarryingvonvothervsimilarvorvdissimilarvactivities.
(6) Thevtaxpayer‘svhistoryvofvincomevorvlossesvwithvrespectvtovthevactivity.
(7) Thevamountvofvoccasionalvprofits,vifvany,vwhichvarevearned.
(8) Thevfinancialvstatusvofvthevtaxpayer.
(9) Elementsvofvpersonalvpleasurevorvrecreation.
ThevTaxvCourt‘svdecisionvinvRandyvReedvIII,vT.C.vMemov1988-
470,v56vCCHvT.C.M.v363,vPHvT.C.vMemov¶88,470v(1988)vexaminesvavsituationvveryvsimilarvtovtha
tvofvFredvFisher.vInvthisvcase,vavtreasurevhuntervwasvanvexperiencedvdivervandvhadvpersonallyvtraine
dvothervdiversvinvthevfieldvofvtreasurevhunting.vHisvdivingvdidvnotvappearvmotivatedvbyvrecreationalv
intentions.vHevkeptv avcheckbookvseparatevfromvhisvpersonalvaccount,vmaintainedvreceiptsvandvchec
kvstubsvforvhisvexpendituresvandvkeptvavpartialvlogvbookvofvhisvactivitiesvuntilvhisvmapsvwerevstolen.v
Reedvsaidvthatvhevkeptvlimitedvrecordsvforvsecurityvreasons.vWhilevnotvextensive,vthesevrecordsvwer
evheldvtovbevadequatevforvavsolevpractitionervinvthisvtypevofvbusinessvwithvavlowvvolumevofvtransacti
ons,vandvReedvwasvallowedvtovdeductvhisvexpensesvasvthosevofvavtradevorvbusiness.vInvthatvthevfactsv
pertainingvtovFisher‘svsituationvarevnearlyvidenticalvtovReed‘s,vFishervshouldvbevablevtovdeductvtheve
xpensesvofvhisvtreasurevhuntingvbusinessvasvvalidvbusinessvexpenses.
80. [LOv2.4]vLocatevandvReadvCourtvCasev(canvbevsolvedvusingvfreevInternetvsources)
LocatevandvreadvGregvMcIntosh,vTCvMemov2001-144,v81vTCMv1772,vRIAvTCvMemov¶2001-
144v(6/19/2001).vAnswervthevfollowingvquestions.
a. WhatvrequirementsvmustvbevmetvforvavtaxpayervtovrecovervlitigationvcostsvfromvthevIRS?
b. WasvthevtaxpayervinvthisvcasevablevtovrecovervhisvattorneyvfeesvfromvthevIRS?vWhyvorvwhyvnot?
Solution:
a. UndervCodevSectionv7430(a),vavjudgmentvforvlitigationvcostsvincurredvinvconnectionvwithvavco
urtvproceedingvmayvbevawardedvonlyvifvavtaxpayer:v(1)visvthev―prevailingvparty‖;v(2)vhasvexha
ustedvhisvorvhervadministrativevremediesvwithinvthevIRS;vandv(3)vdidvnotvunreasonablyvprotract
vthevcourtvproceeding.vTovbevavprevailingvparty,vthevtaxpayervmustvsubstantiallyvprevailvwithvr
espectvtoveithervthevamountvinvcontroversyvorvthevmostvsignificantvissuevorvsetvofvissuesvpresent
edvandvsatisfyvthevapplicablevnetvworthvrequirement.
b. ThevtaxpayervwasvnotvablevtovrecovervhisvattorneyvfeesvfromvthevIRSvbecausevhevwasvnotvfou
ndvtovbevthev―prevailing‖vparty.v Invthisvcase,vthevcourtvfoundvthatvthevIRS‘svpositionsvonvthev
disputedvissuesvwerevreasonablevpositionsvsufficientlyvsupportedvbyvthevfactsvand
, 4v TaxationvforvDecisionvMakersvResearchvSolutions
circumstancesvinvthevtaxpayer‘svcasevandvthevexistingvlegalvprecedent.v SincevthevIRS‘svpositio
nsvwerevfoundvtovhavevbeenvreasonable,vthevcourtvcouldvnotvfindvthevtaxpayervtovbevthe
―prevailing‖v party.
Thisvdecisionvwasvaffirmedvinv91vAFTRv2dv2003-1275,v2003-1vUSTC¶50,334v(CA9,v3/7/2003)
81. [LOv2.4]vLocatevandvAnalyzevCourtvCasesv(canvbevsolvedvusingvfreevInternetvsources)
Locatevandvreadvthevfollowingvtwovcases:
J.B.S.vEnterprises,vInc.,vT.C.vMemov1991-254,v61vTCM.v2829,v1991vPHvT.C.vMemov¶91,254
SummitvPublishingvCompany,vInc.,vT.C.vMemov1990-
288,v59vTCM.v833,v1990vPHvT.C.vMemov¶90,288vListvthosevfactsvthatvyouvfeelvmostvinfluencedvthevjudg
esvtovreachvdifferentvconclusionsvinvthesevtwovcases.
Solution:
Facts J.B.S.vEnterprises SummitvPublishing
Personvwhovreceivedvsalary Formervspousevofvsolevshareh Spousevofvsolevshareholder
older
Servicesvperformedvforvsalar None Extensivevvaluablevservices
y
Dividendvhistory Notvmentioned Substantialvdividendsvpaid
ThevcourtvallowedvavdeductionvforvexpensesvinvSummitvPublishingvforvavportionvofvthevpaymentsvth
atvthevIRSvarguedvwerevunreasonablevcompensation.vThevCourtvnotedvhowvvaluablevthevshareholder
‘svspouse‘svservicesvwerevtovthevfirmvandvthatvdividendsvhadvbeenvpaidvtovthevshareholder.vInvJ.B.S.v
Enterprises,vthevsolevshareholdervseemedvtovbevattemptingvtovdisguisevsupportvpaymentsvmadevtovhi
svformervwifevasvsalaryvexpense.vHowever,vshevperformedvnovservicesvforvwhichvcompensationvwou
ldvnormallyvbevpaid.
Chapter 3 D v v
etermining Gross Income
v v
Solutions to Develop Research Skills
v v v v
NotevtovInstructor:vBeginningvwithvthisvchapter,vnovresearchvaidsvorv―hints‖varevprovidedvinvthevtextbook.vB
eforevthevsolutionvtoveachvproblem,vhowever,vsuggestedvresearchvaidsvarevprovided.vThisvallowsvyouvtovchoo
sevwhethervorvnotvtovprovidevanyvhintsvtovyourvstudentsvforvavparticularvproblem.vForvproblemsvthatv canvbevs
olvedvusingvfreevInternetvsources,vyouvmustvprovidevstudentsvwithvthevcitationsvinvthesevhintsvandvrefervstude
ntsvtovFigurev2.1vofvChapterv2vinvthevtextvforvthevURLsvtovenablevthemvtovsolvevthesevproblemsvusingvfreevInt
ernetvsources.vSomevofvthevproblemsvrequirevaccessvtovCheckpoint®vorvavsimilarvservice.
73. [LOv3.2]vYearvGiftvCardvRevenuevisvIncludedvinvIncomev(canvbevsolvedvusingvfreevInternetvsourcesvifvcita
tionsvarevprovidedvtovstudents)
GammavCorporation,vavcalendar-yearvaccrual-
basisvtaxpayer,voperatesvdepartmentvstores.vAlphavCorporationvandvBetavCorporationvarevwholly-
ownedvdomesticvsubsidiariesvofvGammavCorporationv andv filev av consolidatedv federalv taxv returnv underv
Gammav Corporation‘sv consolidatedv group.v Gamma,
v v v v v
Taxation for Decision Makers 2017th Edition by Shirley Dennis-
v v v v v v v v
Escoffier, Karen A. Fortin| Chapter 2 to 12
v v v v v v v
Chapter 2-12
v
Chapter 2 T v v
he Tax Practice Environment
v v v
Solutions to Develop Research Skills
v v v v
NotevtovInstructor:vManyvofvthevresearchvproblemsvcanvbevsolvedvusingvsourcesvthatvarevavailablevonvthevInt
v
ernetvatvnovcharge.vURLsvforvthesevfreevsourcesvarevshownvinvFigurev2.1vofvChapterv2vinvthevtext.vThevsolutio
nvforveachvproblemvindicatesvifvitvcanvbevsolvedvusingvfreevInternetvsourcesvorvifvitvrequiresvaccessvtovCheckp
oint®vorvavsimilarvservice.
76. [LOv2.4]vDeductingvCosmeticvSurgeryv(canvbevsolvedvusingvfreevInternetvsources)
Yourvclient,vMs.vI.M.vGorgeous,visvanvaspiringvactress.vShevhasvmanagedvtovearnvavlivingvdoingvtelevisio
nvcommercialsvbutvwasvunablevtovgetvthevactingvpartsvshevreallyvwanted.vShevdecidedvtovhavevbotoxvinjec
tionsvinvhervforeheadvandvcollagenvenhancementsvtovhervlips.vAftervthesevprocedures,vhervcareervimprove
dvdramaticallyvandvshevreceivedvseveralvmovievoffers.vMs.vGorgeousvisvsurevthatvshevshouldvbevablevtovde
ductvthevcostvofvthevcosmeticvenhancementsvbecausevshevreadvaboutvanothervactressvhavingvavface-
liftvinv1988vandvdeductingvthevcostvonvhervtaxvreturnvasvavmedicalvexpense.vCanvMs.vGorgeousvdeductvthe
vcostvofvthesevprocedures?
ResearchvAid:vSectionv213(d)(9).
Issue:vCanvMs.vGorgeousvdeductionvthevcostvofvthevbotoxvinjectionsvandvcollagenvenhancementsva
svmedicalvexpenses?
Conclusion:vMs.vGorgeousvwillvnotvbevallowedvtovdeductvthevcostvofvbotoxvinjectionsvandvcollage
nvenhancements.
DiscussionvofvReasoningvandvAuthorities:v CodevSectionv213vallowsvavdeductionvforvexpensesvp
aidvforvmedicalvcarevofvthevtaxpayer.vSectionv213(d)(1)(A)vdefinesvmedicalvcarevasvamountsvpaid
―forvthevdiagnosis,vcure,vmitigation,vtreatment,vorvpreventionvofvdiseasevorvforvthevpurposevofvaffect
ingvanyvstructurevorvfunctionvofvthevbody.‖
Rev.vRul.v76-332,v1976-2vC.B.v81vallowedvavdeductionvforvcosmeticvsurgeryvforvavface-
liftvundervSectionv213.vHowever,vthevCodevwasvsubsequentlyvamendedvbyvthevRevenuevReconcili
ationvActvofv1990.
Underv§213(d)(9)(A),vnovdeductionvisvallowedvforvcosmeticvsurgeryvorvothervsimilarvprocedures,vu
nlessvthevsurgeryvorvprocedurevisvnecessaryvtovamelioratevavdeformityvarisingvfrom,vorvdirectlyvrela
tedvto,vavcongenitalvabnormality,vavpersonalvinjuryvresultingvfromvanvaccidentvorvtrauma,vorvdisfigu
ringvdisease.v Sectionv213(d)(9)(B)vdefinesvcosmeticvsurgeryvasvanyvprocedurevwhichvisvdirectedva
tvimprovingvpersonalvappearancevandvdoesvnotvmeaningfullyvpromotevthevpropervfunctionvofvthevb
odyvorvpreventvorvtreatvillnessvorvdisease.vThus,vnovdeductionvwillvbevallowed.
77. [LOv2.4]vDeductingvBadvDebtvLossv(canvbevsolvedvusingvfreevInternetvsources)
Lastvyearvyourvclient,vBarneyvBumluck,vworkedvpart-
timevforvTimelyvTaxvReturnvPreparationvService.vBarneyvwasvpromisedvanvhourlyvwagevplusvavcommissi
on.vHevworkedvundervthisvarrangementvfromvearlyvFebruaryvuntilvAprilv15.vHisvaccruedvpayvamountedvt
ov$900vplusv$120vofvcommissions.vWhenvhe
,2v TaxationvforvDecisionvMakersvResearchvSolutions
wentv tov collectv hisv pay,v however,v hev foundv onlyv av vacantv officev withv av signv onv thev doorv reading
―Nothingv isv surev butv deathv andv taxes.‖v Canv Barneyv takev av badv debtv deductionv forv thev wagesv andvc
ommissionvhevwasvunablevtovcollect?
ResearchvAid:vReg.vSectionv1.166-1(e)
Issue:vCanvBarneyvtakevavbadvdebtvdeductionvforvthevwagesvandvcommissionvhevwasvunablevtovcoll
ect?vConclusion:vBarneyvwillvnotvbevpermittedvavdeductionvsincevthevwagesvandvcommissionvwere
vnotvpreviouslyvincludedvinvhisvreturnvasvincome.
DiscussionvofvReasoningvandvAuthorities:v UndervReg.v§1.166-
1(e),vworthlessvdebtsvarisingvfromvunpaidvwages,vsalaries,vfees,vrents,vandvsimilarvitemsvofvtaxablev
incomevshallvnotvbevallowedvasvavdeductionvunlessvthevincomevhasvbeenvincludedvinvthevreturnvofvin
comevforvthevyearvforvwhichvthevdeductionvasvbadvdebtvisvclaimedvorvforvavpriorvtaxablevyear.v Beca
usevBarneyvdidvnotvpreviouslyvincludevthevwagesvorvcommissionvinvincome,vhevisvnotventitledvtovav
deductionvforvhisvinabilityvtovcollectvthesevitems.
78. [LOv 2.4]vDeductingvCharitablevContributionsv(canvbevsolvedvusingvCheckpoint®vorvavsimilarvservice)v
Yourvclients,vSonnyvandvhisvwifevHoney,vbelievevinvworshipingvTa-
Ra,vthevSunvGod.vTovpracticevtheirvreligiousvbeliefs,vtheyvtakevavweeklongvtripvtovHawaiivtovworshipvTa-
Ra.vThevcostv ofvthisv pilgrimagev (includingvairfare,vhotel,vandvmeals)visv$2,800.vSonnyvwantsvtovknowvif
vhevcanvdeductvthevcostvofvthisv tripvasvavcharitablevcontributionvtovhisvreligion.
NotevtovInstructor:vNovresearchvaidvisvprovidedvinvthevtextbookvforvthisvproblem.vThisvallowsvyouvtovc
hoosevwhethervorvnotvtovprovidevanyvhintsvtovyourvstudents.
ResearchvAids:vKessler,v87vT.C.v1285v(1986)
Issue:vCanvSonnyvandvHoneyvdeductvtheirvtripvtovHawaiivasvavcharitablevcontributionvmadevinvthevpracti
cevofvtheirvreligion?
Conclusion:vNovdeductionvwillvbevallowedvbecausevnovdonationvwasvmadevdirectlyvtovavqualifiedvcharit
ablevorganization.
DiscussionvofvReasoningvandvAuthorities:vInvKessler,v87vT.C.v1285v(1986),vthevTaxvCourtvdisall
owedvavcharitablevdeductionvforvthevexpensesvincurredvforvavtripvtovPuertovRico.v ThevCourtvdeniedv
thevdeductionvbecausevtherevwasvnovdonationvmadevtovavreligiousvorganizationvasvdefinedvbyvCodev
§170(c)(2)(B).vThevCourtvbasedvitsvdecisionvonvprecedentvandvCongressionalvintentvstatingvthatvthe
vpurposevofvthevcharitablevcontributionvcanvonlyvbe vfurtheredvifvthevgovernmentvcanvbevassuredvthatv
thevfundsvarevappropriatelyvexpended.vThisvcanvbevdonevonlyvifvcontributionsvarevmadevtovavqualifi
edvorganizationvthatvcanvbevauditedvandvexamined.v SincevSonnyvandvHoney‘svexpensesvwerevnotvc
ontributionsvorvgiftsvtovanvorganizedventity,vthevexpensesvdovnotvqualifyvunder
§170vasvavcharitablevcontribution.
79. [LOv 2.4]vTradevorvBusinessvversusvHobbyv(canvbevsolvedvusingvCheckpoint®vorvavsimilarvservice)v Fred
v Fisherv isv av licensedv scubav diverv whov livesv inv Keyv Largo. Hev isv employedv full-
timev asv anvengineer.vFivevyearsvagovhevhadvbeenvemployedvasvavprofessionalvdivervforvavsalvagevcompan
y.vWhilevworkingvforvthevsalvagevcompanyvhevbecamevinterestedvinvmarinevarchaeologyvandvtreasurevhu
nting.v Untilv lastv yearv hev gavev divingv lessonsv onv weekendsv andv trainedv individualsv inv thev sportv ofv tr
easurevhuntingv underv thev namev ofv ―Fred‘sv Divingv School.‖v Threev ofv thev divingv studentsv hev
taughtvsubsequentlyvfoundvshipwrecks.vFredvgenerallyvdidvnotvengagevinvrecreationalvdiving.
Lastvyear,vFredvbeganvavtreasurevhuntingvbusinessvnamedv―TreasurevSeekersvCompany.‖vHevboug
htvavboatvspecificallyvdesignedvforvtreasurevhuntingvandvdidvextensivevresearchvonvpotentialvlocationsvofv
shipwrecks.vFredvlocatedvseveralvshipwrecks,vbutvnonevwerevofvsubstantialvvalue.vHevdidvretrievevsevera
lvartifactsvbutvhasvnotvsoldvanyvyet.vAlthoughvthesevartifactsvmayvhavevsomevhistoricalvsignificance,vtheyv
havevavlimitedvmarketability.vThus,vFredvhasvnotvyetvhadvanyvgrossvincomevfromvhisvtreasurevhuntingvact
ivities.
Othervthanvretainingvcheckvstubsvandvreceiptsvforvhisvexpensesvandvanvencodedvlog,vFredvdidvnotvma
intainv formalv recordsv forv Treasurev Seekersv Company.v Fredv maintainsv asv fewv writtenv recordsv as
, SolutionsvtovDevelopvResearchvSkillsvProblemsv 3
possiblev becausev hev fearsv forv hisv safety.v Hev tookv stepsv tov keepv hisv boatv andv equipmentv fromv publicvv
iewv andv tookv precautionaryv measuresv tov maintainv thev secrecyv ofv hisv searchv areas.v Fredv incurred
$5,000vofvexpensesvrelatingvtovhisvtreasure-
huntingvactivitiesvlastvyear.vCanvFredvdeductvthevexpensesv ofvhisvtreasurevhuntingvbusinessvorvwillvthevI
RSvclaimvitvisvavhobbyvandvdisallowvthevexpenses?
NotevtovInstructor:vNovresearchvaidvisvprovidedvinvthevtextbookvforvthisvproblem.vThisvallowsvyouvtovc
hoosevwhethervorvnotvtovprovidevanyvhintsvtovyourvstudents.
ResearchvAids:vRandyvR.vReed,vIII,vT.C.vMemov1988-
470,v56vTCM.v363,vPHvT.C.vMemov¶88470vandvReg.v§1.183-2(b)(1)-(9)
Issue:vCanvFredvdeductvthevexpensesvofvhisvtreasurevhuntingvasvbusinessvexpenses?
Conclusion:vYes,vFredvshouldvbevablevtovdeductvhisvexpensesvasvtradevorvbusinessvexpenses.vDiscu
ssionvofvReasoningvandvAuthorities:vSectionv162vallowsvavdeductionvforvbusinessvexpensesvthatvar
evordinary,vnecessary,vandvreasonablevinvamount.vReg.v§1.183-2(b)(1)-
(9)vlistsvavnumbervofvfactorsvthatvshouldvbevconsideredvinvdeterminingvwhethervanvactivityvisvavtradev
orvbusiness,vorvshouldvbevclassifiedvasvavhobby.vThesevinclude:
(1) Mannervinvwhichvthevtaxpayervcarriesvonvthevactivity.
(2) Thevexpertisevofvthevtaxpayervorvhisvadvisors.
(3) Thevtimevandveffortvexpendedvbyvthevtaxpayervinvcarryingvonvthevactivity.
(4) Expectationvthatvassetsvusedvinvthevactivityvmayvappreciatevinvvalue.
(5) Thevsuccessvofvthevtaxpayervinvcarryingvonvothervsimilarvorvdissimilarvactivities.
(6) Thevtaxpayer‘svhistoryvofvincomevorvlossesvwithvrespectvtovthevactivity.
(7) Thevamountvofvoccasionalvprofits,vifvany,vwhichvarevearned.
(8) Thevfinancialvstatusvofvthevtaxpayer.
(9) Elementsvofvpersonalvpleasurevorvrecreation.
ThevTaxvCourt‘svdecisionvinvRandyvReedvIII,vT.C.vMemov1988-
470,v56vCCHvT.C.M.v363,vPHvT.C.vMemov¶88,470v(1988)vexaminesvavsituationvveryvsimilarvtovtha
tvofvFredvFisher.vInvthisvcase,vavtreasurevhuntervwasvanvexperiencedvdivervandvhadvpersonallyvtraine
dvothervdiversvinvthevfieldvofvtreasurevhunting.vHisvdivingvdidvnotvappearvmotivatedvbyvrecreationalv
intentions.vHevkeptv avcheckbookvseparatevfromvhisvpersonalvaccount,vmaintainedvreceiptsvandvchec
kvstubsvforvhisvexpendituresvandvkeptvavpartialvlogvbookvofvhisvactivitiesvuntilvhisvmapsvwerevstolen.v
Reedvsaidvthatvhevkeptvlimitedvrecordsvforvsecurityvreasons.vWhilevnotvextensive,vthesevrecordsvwer
evheldvtovbevadequatevforvavsolevpractitionervinvthisvtypevofvbusinessvwithvavlowvvolumevofvtransacti
ons,vandvReedvwasvallowedvtovdeductvhisvexpensesvasvthosevofvavtradevorvbusiness.vInvthatvthevfactsv
pertainingvtovFisher‘svsituationvarevnearlyvidenticalvtovReed‘s,vFishervshouldvbevablevtovdeductvtheve
xpensesvofvhisvtreasurevhuntingvbusinessvasvvalidvbusinessvexpenses.
80. [LOv2.4]vLocatevandvReadvCourtvCasev(canvbevsolvedvusingvfreevInternetvsources)
LocatevandvreadvGregvMcIntosh,vTCvMemov2001-144,v81vTCMv1772,vRIAvTCvMemov¶2001-
144v(6/19/2001).vAnswervthevfollowingvquestions.
a. WhatvrequirementsvmustvbevmetvforvavtaxpayervtovrecovervlitigationvcostsvfromvthevIRS?
b. WasvthevtaxpayervinvthisvcasevablevtovrecovervhisvattorneyvfeesvfromvthevIRS?vWhyvorvwhyvnot?
Solution:
a. UndervCodevSectionv7430(a),vavjudgmentvforvlitigationvcostsvincurredvinvconnectionvwithvavco
urtvproceedingvmayvbevawardedvonlyvifvavtaxpayer:v(1)visvthev―prevailingvparty‖;v(2)vhasvexha
ustedvhisvorvhervadministrativevremediesvwithinvthevIRS;vandv(3)vdidvnotvunreasonablyvprotract
vthevcourtvproceeding.vTovbevavprevailingvparty,vthevtaxpayervmustvsubstantiallyvprevailvwithvr
espectvtoveithervthevamountvinvcontroversyvorvthevmostvsignificantvissuevorvsetvofvissuesvpresent
edvandvsatisfyvthevapplicablevnetvworthvrequirement.
b. ThevtaxpayervwasvnotvablevtovrecovervhisvattorneyvfeesvfromvthevIRSvbecausevhevwasvnotvfou
ndvtovbevthev―prevailing‖vparty.v Invthisvcase,vthevcourtvfoundvthatvthevIRS‘svpositionsvonvthev
disputedvissuesvwerevreasonablevpositionsvsufficientlyvsupportedvbyvthevfactsvand
, 4v TaxationvforvDecisionvMakersvResearchvSolutions
circumstancesvinvthevtaxpayer‘svcasevandvthevexistingvlegalvprecedent.v SincevthevIRS‘svpositio
nsvwerevfoundvtovhavevbeenvreasonable,vthevcourtvcouldvnotvfindvthevtaxpayervtovbevthe
―prevailing‖v party.
Thisvdecisionvwasvaffirmedvinv91vAFTRv2dv2003-1275,v2003-1vUSTC¶50,334v(CA9,v3/7/2003)
81. [LOv2.4]vLocatevandvAnalyzevCourtvCasesv(canvbevsolvedvusingvfreevInternetvsources)
Locatevandvreadvthevfollowingvtwovcases:
J.B.S.vEnterprises,vInc.,vT.C.vMemov1991-254,v61vTCM.v2829,v1991vPHvT.C.vMemov¶91,254
SummitvPublishingvCompany,vInc.,vT.C.vMemov1990-
288,v59vTCM.v833,v1990vPHvT.C.vMemov¶90,288vListvthosevfactsvthatvyouvfeelvmostvinfluencedvthevjudg
esvtovreachvdifferentvconclusionsvinvthesevtwovcases.
Solution:
Facts J.B.S.vEnterprises SummitvPublishing
Personvwhovreceivedvsalary Formervspousevofvsolevshareh Spousevofvsolevshareholder
older
Servicesvperformedvforvsalar None Extensivevvaluablevservices
y
Dividendvhistory Notvmentioned Substantialvdividendsvpaid
ThevcourtvallowedvavdeductionvforvexpensesvinvSummitvPublishingvforvavportionvofvthevpaymentsvth
atvthevIRSvarguedvwerevunreasonablevcompensation.vThevCourtvnotedvhowvvaluablevthevshareholder
‘svspouse‘svservicesvwerevtovthevfirmvandvthatvdividendsvhadvbeenvpaidvtovthevshareholder.vInvJ.B.S.v
Enterprises,vthevsolevshareholdervseemedvtovbevattemptingvtovdisguisevsupportvpaymentsvmadevtovhi
svformervwifevasvsalaryvexpense.vHowever,vshevperformedvnovservicesvforvwhichvcompensationvwou
ldvnormallyvbevpaid.
Chapter 3 D v v
etermining Gross Income
v v
Solutions to Develop Research Skills
v v v v
NotevtovInstructor:vBeginningvwithvthisvchapter,vnovresearchvaidsvorv―hints‖varevprovidedvinvthevtextbook.vB
eforevthevsolutionvtoveachvproblem,vhowever,vsuggestedvresearchvaidsvarevprovided.vThisvallowsvyouvtovchoo
sevwhethervorvnotvtovprovidevanyvhintsvtovyourvstudentsvforvavparticularvproblem.vForvproblemsvthatv canvbevs
olvedvusingvfreevInternetvsources,vyouvmustvprovidevstudentsvwithvthevcitationsvinvthesevhintsvandvrefervstude
ntsvtovFigurev2.1vofvChapterv2vinvthevtextvforvthevURLsvtovenablevthemvtovsolvevthesevproblemsvusingvfreevInt
ernetvsources.vSomevofvthevproblemsvrequirevaccessvtovCheckpoint®vorvavsimilarvservice.
73. [LOv3.2]vYearvGiftvCardvRevenuevisvIncludedvinvIncomev(canvbevsolvedvusingvfreevInternetvsourcesvifvcita
tionsvarevprovidedvtovstudents)
GammavCorporation,vavcalendar-yearvaccrual-
basisvtaxpayer,voperatesvdepartmentvstores.vAlphavCorporationvandvBetavCorporationvarevwholly-
ownedvdomesticvsubsidiariesvofvGammavCorporationv andv filev av consolidatedv federalv taxv returnv underv
Gammav Corporation‘sv consolidatedv group.v Gamma,
