Carrie A. Morgan, age 45, is single and lives with her dependent



The forms can be located through 1)
Form 1040 2) Form 1040 Schedule

A 3) Form 1040 Schedule

B 4) Form 1040

C 5) Form 1040 Schedule

D 6) Form 1040 Schedule S

E 7) Form 8949 8) Form 4562

Carrie A. Morgan, age 45, is single and lives with her dependent
mother atXXXXX Allentown, PA 18105. Her social security number isNNN-NN-NNNN 1.
Carrie is a licensed hairstylist and operates her own business. Located atXXXXX
Allentown, PA 18105, the business is conducted under the name of “Carrie’s
Coiffures.” Carrie’s business activity code is 812112. In addition to 10
workstations (i.e., stylist chairs) and a small reception area, the shop has
display and storage areas for the products Carrie sells (see item 2 below).
During the year, Carrie leased nine of the stations to other hairstylists. As
is common practice in similar businesses in the area, the other stylists are
considered to be self-employed. In fact, the IRS sanctioned the self-employment
classification for the stylists in an audit of one of Carrie’s prior tax
returns. Each stylist pays Carrie a fixed rent for the use of a workstation,
resulting in $68,000 of rents received during 2012. From her own station,
Carrie earned $44,000 (including tips of $12,000) for the styling services she
provided to her own clients. 2. Carrie’s Coiffures is the local distributor for
several beauty products (e.g., conditioners, shampoos) that cannot be purchased
anywhere else. Carrie buys these items from the manufacturers and sells them to
regular patrons, walk-in customers, and other beauticians (including those who
lease chairs from her). Carrie’s Coiffures is also known for the selection and
quality of its hairpieces (i.e., wigs, toupees). Through the shop, Carrie made
the following sales during the year: Hairpieces and wigs $69,000 Beauty
products 48,000 3. Although Carrie operates her business on a cash basis, she
maintains inventory accounts for the items she sells as required by law.
Relevant information about the inventories (based on lower of cost or market)
is summarized below. 4. 12/31/11 12/31/12 Hairpieces and wigs $10,700 $12,600
Beauty products 11,400 9,900 5. Carrie’s purchases for 2012 were $30,500 of
hairpieces and wigs and $26,100 of beauty products. 6. Carrie’s Coiffures had
the following operating expenses for 2012: Utilities (i.e., gas, electric,
telephone) $12,900 Ad valorem property taxes: On realty (e.g., shop building
and land) $4,200 On personalty (e.g., equipment, inventory) 1,800 6,000 Styling
supplies (e.g., rinses, dyes, gels, hair spray) 5,700 Fire and casualty
insurance 4,100 Liability insurance 4,000 Accounting services 3,800 Janitorial
services 2,400 Sewer service, garbage pickup $ 2,300 Water 2,200 Occupation
licenses (city and state) 1,500 Waiting room supplies (e.g., magazines, coffee)
1,300 7. As Carrie prefers to avoid employer-employee arrangements and the
payroll tax complexities, she retains outside agencies to handle her accounting
and janitorial needs. 8. In early 2012, Carrie decided to renovate the waiting
room. On May 10, she spent $10,400 for new chairs, a sofa, various lamps,
coffee bar, and other furnishings. Carrie follows a policy of claiming as much
depreciation as soon as possible. The old furnishings were thrown away or given
to customers. For tax purposes, the old furnishings had a zero basis. 9.
Carrie’s Coiffures is located in a building Carrie had constructed atXXXXXin
March 1998. The shop was built for a cost of $300,000 on a lot she purchased
earlier for $35,000. Except for a down payment from savings, the cost was financed
by a 20- year mortgage. For tax purposes, MACRS depreciation is claimed on the
building. During 2012, the following expenses were attributable to the
property: Repainting (both exterior and interior) $8,000 Repairs (plumbing and
electrical) 1,900 10. In May (after her accident settlement discussed in item
11 below), Carrie paid the balance due on the business mortgage. To do so, she
incurred a prepayment penalty of $4,400. Prior to paying it off, she paid
regular interest on the mortgage in 2012 of $6,000. 11. In February 2012,
Carrie’s Coiffures was cited by the city for improper disposal of certain waste
chemicals. Carrie questioned the propriety of the proposed fine of $2,000 and
retained an attorney to represent her at the hearing. By pleading nolo contendere,
the attorney was able to get the fine reduced to $500. Carrie paid both the
fine of $500 and the attorney’s fee of $600 in 2012.

12. In August 2012, Carrie saw an ad in a trade publication
that attracted her attention. The owner of a well-respected styling salon in
Reading (PA) had died, and his estate was offering the business for sale.
Carrie traveled to Reading, spent several days looking over the business
((including books and financial results), and met with the

executor. Carried treated the executor to dinner and a music
concert. Immediately after

the concert, Carrie made an offer for the business, but the
executor rejected it. Her

expenses in connection with this trip were as follows:

Car rental $140

Entertainment of executor 280

Motel (August 6-7) 220

Meals 110

13. In March 2011, Joan Myers, one of Carrie’s best
stylists, left town to get away from a

troublesome ex-husband. In order to help Joan establish a
business elsewhere, Carrie

loaned her $7,000. Joan signed a note dated March 3, 2011,
that was payable in one

year with 6% interest. On December 30, 2012, Carrie learned
that Joan had declared

bankruptcy and was awaiting trial on felony theft charges.
Carrie never received

payment from Joan, nor did she receive any interest on the

14. At Christmas, Carrie gave each of her 35 best customers
a large bottle of body lotion.

Each bottle had a wholesale cost to Carrie of $12 but a
retail price of $24. Carrie also

spent $3 to have each bottle gift wrapped. (Note: The lotion
was special order

merchandise and was not part of the business’s inventory or
purchases for the year—see item 2 above.) She also gave each of the nine
stylists who leased chairs from her a

basket of fruit that cost $30 (not including $5 delivery

15. In March 2012, the Pennsylvania Department of Revenue
audited Carrie’s state income

tax returns for 2009 and 2010. She was assessed additional
state income tax of $340

for these years. Surprisingly, no interest was included in
the assessment. Carrie paid

the back taxes promptly.

16. On a morning walk in November 2011, Carrie was injured
when she was sideswiped by

a delivery truck. Carrie was hospitalized for several days,
and the driver of the truck

was ticketed and charged with DUI. The owner of the truck, a
national parcel delivery

service, was concerned that further adverse publicity might
result if the matter went to

court. Consequently, the owner offered Carrie a settlement
if she would sign a release.

Under the settlement, her medical expenses were paid and she
would receive a cash

award of $200,000. The award specified that the entire
amount was for physical pain

and suffering. Because she suffered no permanent injury as a
result of the mishap, she

signed the release in April 2012 and received the $200,000

17. In January 2012, Carrie was contacted by the state of
Pennsylvania regarding a tract of

land she owned in York County. The state intended to convert
the property into a

district headquarters, barracks, and training center for its
highway patrol. Carrie had

inherited the property from her father when he died on
August 11, 2011. The property

had a value of $140,000 on that date and had been purchased
by her father on March

3, 1980, for $30,000. On July 25, 2012, after considerable
negotiation and after the

state threatened to initiate condemnation proceedings, she
sold the tract to the state

for $158,000. Since Carrie is not comfortable with real
estate investments, she does not

plan to reinvest any of the proceeds received in another
piece of realty.

18. When her father died in 2011, Carrie did not know that
he had an insurance policy on

his life (maturity value of $50,000) in which she was named
as the beneficiary. When

her mother told her about the policy in July 2012, Carrie
filed a claim with the carrier,

Falcon Life Insurance Company. In August 2012, she received
a check from Falcon for

$51,500 (including $1,500 interest).

19. Upon the advice of a client who is a respected broker,
Carrie purchased 1,000 shares of

common stock in Grosbeak Exploration for $40,000 on March 4,
2012. In the months

following her purchase, the share value of Grosbeak
plummeted. Disgusted with the

unexpected erosion in the value of her investment, Carrie
sold the stock for $28,000 on

December 23, 2012.

20. While on her way to work in 2011, Carrie was rear-ended
by a hit-and-run driver. The

damage to her Lexus was covered by her insurance company,
General Casualty, except

for the $1,000 deductible she was required to pay. In 2012,
the insurance company

located the driver who caused the accident and was
reimbursed by his insurer.

Consequently, Carrie received a $1,000 refund check from
General Casualty in May

2012 to reimburse her for her $1,000 deductible.

21. After her father’s death, Carrie’s mother (Mildred
Morgan, Social Security number NNN-NN-NNNN moved in with her. Mildred’s
persistent back trouble made it difficult for

her to climb the stairs to the second-floor bedrooms in
Carrie’s house. So Carrie had an

elevator installed in her personal residence at a cost of
$12,000 in January 2012. A

qualified appraiser determined that the elevator increased
the value of the personal

residence by $7,000. The appraisal cost $400. The operation
of the elevator during

2012 increased Carrie’s electric bill by $300.

22. As a favor to a long-time client who is a drama
professor at a local state university,

Carrie spent a weekend as a stylist preparing hairdos for
the key actresses in the annual Theater Department fund-raising event. The
drama professor supplied all of the

resources that Carrie needed to provide her services. Carrie
estimates that she would

have charged $800 for the services she donated to this
charitable event.

23. In addition to the items already mentioned, Carrie had
the following receipts during


Interest income—

CD at Scranton First National Bank $900

City of Lancaster general purpose bonds 490

Money market account at Allentown State Bank 340 $1,730

Qualified dividends on stock investments—

General Motors $470

AT&T common 380 850

Federal income tax refund (for tax year 2011) 791

Pennsylvania state income tax refund (for tax year 2011) 205

24. Expenditures for 2012, not previously noted, are
summarized below.

Contribution to pension plan $10,000


Premiums on medical insurance $4,800

Dental bills 1,400 6,200

Property taxes on personal residence 3,800

Interest on home mortgage 3,200

Professional expenses—

Subscriptions to trade journals $ 180

Dues to beautician groups 140 320

25. The $10,000 contribution to the pension plan is to a §
401(k) type of plan she

established in 2011. Previously, she had contributed to an
H.R. 10 (Keogh) plan but

found that the § 401(k) retirement arrangement provides more
flexibility and is less

complex. The medical insurance policy covers Carrie and her
dependents and was

issued in the name of the business (i.e., “Carrie’s
Coiffures”). It does not cover dental

work or capital modifications to a residence (see item 16

26. During 2012, Carrie made the following total estimated
tax payments with respect to

her 2012 tax returns:

Federal estimated income tax payments $20,800

Pennsylvania estimated income tax payments 2,400

Allentown City estimated income tax payments 800


Prepare an income tax return (with appropriate schedules)
for Carrie for 2012. In doing this, use the

following guidelines:

1) Make necessary assumptions for information not given in
the problem.

2) Carrie has itemized deductions ever since she became a
homeowner many years ago.

3) The sales tax option was not chosen in 2011, and Carrie
had no major purchases that

qualify for the sales tax deduction in 2012.

4) Carrie has substantiation (e.g., records, receipts) to
support the transactions involved.

5) If a refund results, Carrie wants it sent to her.

6) Carrie is preparing her own return (i.e., no preparer is

7) Carrie does not wish to contribute to the Presidential
Election Campaign Fund.


There are no reviews yet.

Be the first to review “Carrie A. Morgan, age 45, is single and lives with her dependent”

Your email address will not be published. Required fields are marked *