John represents several national casualty insurance companies on a contract basis. He is paid a retainer and receives additional compensation if the claims for the year exceed a specified number. As an independent contractor, he is responsible for whatever expenses he incurs. Karl works out of an office near his home. The office is located at 1202 Brentwood Avenue. He shares Suite 326 with a financial consultant, and operating expenses are divided equally between them. The suite has a common waiting room with a receptionist furnished and paid by the landlord. Karl’s one-half share of the 2011 expenses he paid is listed below.

Office rent

$11,600

Utilities (includes telephone and fax)

4,300

Replacement of waiting room furniture on April 22

3,600

Renters’ insurance (covers personal liability, casualty, and theft)

1,400

Office expense (supplies and postage meter)

740

New Toshiba copier (less trade-in on old machine) on February 7

300

Waiting room coffee service (catered)

280

Waiting room magazine subscriptions

90

For his own business use, Karl purchased a laptop computer for $2,100 on June 17 and a Nikon camera for $1,200 on February 5. Except for his vehicle (see item 2), John uses the § 179 write-offoption whenever possible.

 

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John’s grandfather passed away a year ago. John inherited a portrait of his grandmother. His grandfather painted the portrait of his grandmother during their honeymoon.

1.1 Identify the legal object in this scenario and motivate your answer. (3)

1.2 Two years later, John falls into financial difficulties and decides to sell the the portrait. Anna, who owns a second-hand shop, offers to buy the painting from John for R500. Identify and explain the two types of rights that are applicable here. (4)

 

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John Smith, Esq.I worked on this case for over two years. The jury awarded my client $2,000,000 in damages, of which my fee was $300,000 plus recovery of expenses paid up front in the amount of $25,000. How is the $300,000 taxed? What about the $25,000? What can I do to minimize the tax consequences of each?Also, I am thinking about buying the building that I currently lease my office space in. My current lease is $3,500 per month. How is this lease reported on my income tax returns (either personally or for my business which is a separate law practice established as an LLC)? Do I get better tax benefits for paying the lease or for buying the building? What are the differences?Jane SmithI think that the fees would be better used for paying off our house and buying a new, bigger house that I’ve had my eye on. Does it make better tax sense for us to pay off the mortgage, sell the house, and buy a new house, or should we just use the money to buy the new house after selling the old house?Also, I sell handcrafted jewelry which earned me $20,000 last year. Do my business activities constitute a trade or business for federal income tax purposes? Or, is this just a hobby? Should I establish a separate trade or business to get tax benefits on these earnings? Does it make any difference that I use my car primarily for transporting my jewelry to different shops around town? Finally, I think I can earn more money if John were willing to invest $15,000 for new jewelry making equipment since my original equipment, which cost $10,000 five years ago, is almost obsolete. Does this make sense from a tax perspective?Scenario SummaryYou are a CPA with an office in NearLakes City and clients consisting primarily of professionals, entrepreneurs, and small business owners. John Smith, Esq., a practicing attorney with offices near yours, walks in your office and wants advice from you relating to a recent influx of cash he received as a result of winning a large jury verdict on behalf of his client in a personal injury case. His wife Jane Smith accompanies him during your meeting because she has some additional tax planning advice to ask of you.RoleAfter reviewing John and Jane Smith’s points of view, it will be your turn as a tax professional to decide on the best course of action from a tax perspective on their issues. Prepare a three page memo (at least 300 words per page) to John and Jane Smith addressing the issues presented.1. John Smith tax issues:a. How is the $300,000 treated for purposes of Federal tax income?b. How is the $25,000 treated for purposes of Federal tax income?c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?2. Jane Smith tax issues:a. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax purposes?b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John’s case?c. Does Jane have a business or hobby? Why is this distinction important?d. Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry making activities?e. What tax benefits would John realize if he invested $15,000 in Jane’s jewelry making?f. Can Jane depreciate her vehicle or jewelry making equipment? How?3. John and Jane Smith tax issue:a. Should John and Jane file separate tax returns or jointly?You Decide: It’s your turn as a tax professional to decide on the best course of action from a tax perspective on their issues as presented above.For each issue, begin by restating the issue and numbering as shown above, i.e., 1(a), 1(b), and so on. Then, explain and discuss the tax rules that apply to the issue, which you gleaned from your tax research. Then, conclude with a definitive answer to the issue, supported by citations to the sources used. So, for each issue, you should:1. State the issue,2. Explain and discuss the applicable law (IRC sections, regulations, court decision, etc.), and3. Present your answer in the form of a concluding paragraph that refers to specific language from the IRC sections, regulations, court decisions, and other sources (if applicable) to support the conclusion.CITATIONSCitations are required. You must provide cites whenever you refer to the sources of tax law used in this memorandum. You may cite your sources in numbered footnotes, numbered endnotes, or in parentheses immediately after the sentence mentioning the cited source.

 

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John writes a check to Kay as payment for a CD player but soon discovers the player is broken. He goes to the drawee bank and orally authorizes Larry, a bank officer, to stop payment on the check. This order is a)fourteen days. b)fourteen months. c)six days d)six months.

 

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