The Tax Return Project is Appendix E, Problem 2 in your text.

The Tax Return Project is Appendix E, Problem 2 in your text. You may use tax software or the attached forms to complete the return and all necessary schedules. Submit the forms here by the due date, as late tax returns are not accepted.

Requirements: Prepare an income tax return for the Browns for 2014 following these guidelines:

1. Make Necessary assumptions for information not given in the problem but needed to complete the return

2. The Browns are employing the same tax return preparer who completed their prior year tax return

3. The taxpayers have substantiation (records, receipts) to support all transactions for the year

4. If any Refund is due, the Browns want it applied to next year’s tax liability

5. The Browns do not want to contribute to the Presidential Election Campaign Fund.

David (Dave) S. and Karen H. Brown

4112 Foxglove Drive, McKinney, TX 75070

Dave –retired petroleum engineer

Karen- portrait artist

Joint tax return

1) 1. pension plan Dave contributed $250,000 (after-tax dollars) ; life-annuity payout of $60,000 per year over his life.

2. as part of retirement package- dave also received nontaxable health insurance coverage for him and Karen.

3. Due to Dave’s expertise in Gulf of Mexico offshore operations, Pelican continues to use his services on a consulting basis (see item 3 below)

2) Karen well known for oil portraits (business activity code 711510) 15 to 16 per year. $3200 per portrait (never varies, set several years ago)- She does all of her work in the studio the Browns maintain their personal residence (see item 6 below). Karen is cash-basis taxpayer w/ respect to her art business

3)Dave made 7 trips on behalf of Pelican as an outside bus consultant (business activity code 541330).

Airfare: $5100

Lodging: $3100

Meals: $2200

Ground Transportation: $750

Total= $11,150

Dave recovers his expenses when he is paid by Pelican for services rendered. They reimburse Dave based on his verbal report of how much he spent

4) In Jan 2014, Karen was paid for 3 portraits she painted and delivered in late 2013. During 2014, Karen completed 14 portraits. Payment was received for 11 portraits when they were delivered to the buyers. One portrait was delivered to CEO who promised payment within 30 days; payment was never received and company went bankrupt. Karen will never be paid for that painting. The final 2 portraits were delivered in late 2014 and payment for both were received in early 2015. In December 2014, Karen accepted $3200 as payment for a portrait to be done in 2015. Although she did not like the arrangement, the customer said the prepayment was motivated by anticipated cash-flow considerations.

Must report: 2013: 3 portraits *$3200= $9600

2014: 11 portraits *$3200= $35,200

2015: 1 Portrait * $3200= $3200

Total for 2014 to report= $48,000

5) Karen total cost for painting supplies in 2014 was $3010 (canvases, brushes, oil paints, smocks, palettes, etc)

6.) For convenience and security reasons, Karen prefers to work at home. ¼ of the 4,000 square-foot living area is devoted to karen’s studio (1,000)

-Browns built home at cost of $350,000 on lot previously acquired for $100,000 and moved in June 15, 2011

-business use: depreciation is based on MACRS (mid-month convention) applicable to a 39-year nonresidential realty. Residence expenses for 2014:

Utilities: $4200

Molly Maid cleaning service: $2800

Service fee for home security system: $1600

Removal of stains from studio flooring: $1,100

Homeowners insurance: $970

Repairs to studio skylight $340

7. Feb 4, 2002 Dave bought sugarcane farm near Magnolia: LaBeaux Place : $30,000

Early 2014, Houston real estate offered him $250,000 for LaBeaux PlaceDave exchanged LaBeaux Place for several vacant lots on Padre Island (TX) worth $240,000 and cash of $10000

Exchange took place on June 20,2014

8. Dave purchased land near Beaumont (TX) for $18,200 auction held on April 17,1989 “ Block 46”

Dave transferred the property to TDC on June 28,0214 for $180,000

On December 17,2014 Dave reinvested $175,000 in vacant land located near Texas State University in San Marcos

Dave spent remaining $5000 on a vacation in 2015

9. June,2014, Browns bought a new Winnebago Deluxe Coach RV for $106,250 ($100,000 discount + $6250 (state local tax)

August 2014, sold the RV to a neighbor for $90,000 (neighbor paid $20,000 down and balance of $70,000 in early Dec 2014)

10. May 9, 1997 Dave’s father gave him 400 shares of Ragusa Corporation common stock as a bday gift. Stock cost his father $16,000 ($40 a share) and was worth $20,000 on date of gift.

In 2009, when stock was worth $!40 per share, Ragusa declared a 2-for-1 stock split

On July 27,2014, Dave sold 400 shares for $20,000 ($50 a share).

Dave kept remaining 400 shares. Form 1099-B did not report the basis of this property

11. December 21, 2014 Browns sold 500 shares of Cormorant Power common stock for $40,000 ($80 a share)

-they purchased the stock on February 1, 2014 for $50,000 ($100 a share), the basis reported on Form 1099-B.

Browns sold the stock to generate a loss to offset some of their capital gains. However, they considered Cormorant Power to be a good investment, so they repurchased 500 shares on February 19 2015, for $45,000 ($90 a share)

12. On March 2, 2013, Karen was contacted by her friend Eva for a loan of $6,000 to help finance a new venture. Eva signed a note due in 2 years at 10% interest. In late 2014, Karen learned that Eva disappeared after being charged by Arizona authorities with Grand Theft. Also learned Eva is wanted in NM for parole violation from a prior felony conviction

13. The Browns have a long-term capital loss carryover of $7,000 from 2013.

14. On May 9,2010 Maximilian Brown (Dave’s favorite uncle) gifted him the family antique gun collection. Based on family records and qualified appraisals, the collection had an adjusted basis to Maximilian of $4,200 and was worth $13,000 on the date of the gift.

After maxi died in early 2014, Dave donated the collection to the Alamo Siege Museum (qualified charity)

-transfer was made on December 5, 2014; at that time, several qualified appraisers valued the collection at $16,000. Museum added the guns to its extensive collection of firearms

15. Karen was hit by car in late 2013 by out of control delivery truck

-she suffered no permante injury

-the driver was given a DUI, the owner of truck, local distributor for local brewery, was concerned about bad publicity so he paid:

-all her medical expenses and offered Karen a settlement if she would sign a release

-karen would receive $134,000 ($126,000 for personal injury and $8,000 for loss of income because her injuries prevented her from painting for a period of weeks. )

-On January 31, 2014 Karen signed and was immediately paid $134,000

16. August 2013, Dave rear-ended while stopped at red light. Dave un injured, but car was damaged. Driver vanished so Dave used his insurance for his car damage.

-Dave was subject to the $1,000 deductible provision in the policy which he paid with respect to his car repairs in 2013

-Browns claimed no deductions w/ respect to the accident on their 2013 income tax return

-In 2014, insurance company (peregrine Casulty) located the driver at fault and recovered the amount paid for reparis by both Dave and Peregrine refunding the $1,000 he paid for repairs according to his policy’s deductible

17. Brown’s only daughter, Pamela Jansen, was divorced and moved back home in December 2013.

-She brought her twins (Malone and Macie)

-Pamela was given custody of children and awarded child support of $2,100 a month

-decree does not indicate who is entitled to the dependency exemptions for the children

-Pamela has no income for 2014 except the $4,200 she received for 2 months of child support

She plans to initiate legal proceedings against her ex-husband for delinquent child support

18. Browns have following additional receipts for 2014

Social Security Benefits (Dave $12,000, Karen $6000) = $18,000

Consulting income paid by Pelican (including expense reimbursement of $11,150 –see item 3) $35,000 ($23,850 what was paid, $11,150 expenses)

Life insurance proceeds = $50,000

Qualified Dividend Income (reported on separate Forms 1099-DIV):

Ragusa Corporation $1,200

Pelican Power $400

Interest Income (reported on separate forms 1099-INT):

IBM bonds $600

CD at First National Bank of McKinney $400

Wells Fargo money market fund $300

City of Beaumont (TX) general purpose bonds $9000

Life insurance proceeds relate to a policy owned by Maximilian Brown (see item 14) which named Dave as sole beneficiary. Receipt of proceeds came as a complete surprise to Dave, as he never knew policy existed

19. Payment made for 2014 expenditures not already mentioned:

Payment of Pamela’s legal fees and court costs incident to her divorce $9000

Medical:

Medicare B insurance premiums for Dave and Karen $2244

Health care premiums for dependents $3600

Dental implants for Karen $8,000

Taxes on personal residence $3600

Interest on home mortgage $2200

Church pledge $1200

Professional journals:

Oil and gas related (Dave) $160

Art related (Karen) $120

Dues to professional organization (Dave) $250

State professional license fee (Dave) $140

2013 tax return prep fee ($200 for Dave business,

250 for Karen’s business; and $450 for personal

Income tax return) $900

Texas does no impose an income tax, so Browns choose state and local sales tax option. IN addition to the state general sales tax, the local sales tax rate is 2% (1.5% city; 0.5% county). They do not keep track of sales tax expenditures for routine purchases (clothes, prepared foods, but can verify the sales tax on exceptional items (i.e. big ticket purchases like the RV)

20. Browns made quarterly Federal income tax payments of $2,400 on each of the following Dates:

April 15, 2014

June 16, 2014

September 15, 2014

December 15, 2014

Last year’s Federal income tax return reflected an overpayment of $800 tax, which the Browns chose to apply to their 2014 income tax liability

The trustee of Dave’s retirement plan also withheld $6,500 of tax with respect to his retirement withdrawals for the year. Neither Dave nor Karen holds any foreign financial accounts