David R. and Sheri N. Johnson Tax problem



For the Part I (Week 3) assignment, you are
asked to use the introductory sentence about the tax payer and complete
paragraph items 14 and 16. You will also use item 18 for needed Social Security
numbers. Do not do additional work from any other paragraph.

Determine the forms to be completed. Once
completed, save your form(s) as Your Last Name – formname (e.g.,
Smith-f2106.pdf). Submit your assignment to the Week 3 Assignments Dropbox.

David R. and Sheri N. Johnson (ages 45 and
46) are married and live at 641 Cody Way, Casper, WY 82609. David is a
consulting engineer, while Sheri is a paralegal. They file a joint return and
use the cash basis for tax purposes.

1. Trained
as a mining engineer, David has developed considerable expertise in the
treatment and disposition of waste material. He also is well versed in the
federal and state requirements for land reclamation projects. David maintains a
consulting practice through which he advises clients on these matters. David’s
business activity code is 541990. Most of his clients are small and medium-size
mine owner/operators located in Wyoming and contiguous states (e.g., Montana,
Idaho, Utah). Usually, David is retained by a client on a contract-fee basis
and is reimbursed for all out-of-pocket expenses. In performing his services,
David usually visits the job site and later submits his recommendations in a
written report along with a statement for his services and expenses. David
received the following amounts from his consulting business in 2012:

Fees for services rendered

$ 92,800

Expense reimbursements:







Transportation (taxis, airport limos, car rentals)


Subtotal for expense reimbursement


Total received


2. The
following fees for services rendered to mining companies are not included in
the receipts listed in item 1 above:

Echo Mining: Payment received January 2013;
work done December 2012


Sesa Mining: Payment received January 2012;
work done December 2011


Cormorant Mining: No payment received; work
done March 2012


David did not incur travel expenses in any
of these engagements (i.e., the work was done in his office). As Cormorant
Mining is in bankruptcy, David does not expect to collect any of this fee.

3. Other
expenses paid by David in 2012 relating to his practice are listed below.

Contribution to H.R. 10 (Keogh) retirement


Premiums on medical insurance (covering
self, spouse, and dependents)


Landscape models purchased from topographer
for reclamation projects


Advertising in trade journals


Office supplies (including drafting


Business phone and Internet service


State occupation license


Subscriptions to trade journals


Membership dues to trade associations


4. David
operates his consulting business out of an office in his home. Twenty percent
of the 3,000-square-foot living area is devoted to the office. David inherited
the home on Cody Way from his father, who died on June 6, 2003, when it had a
fair market value of $400,000 ($40,000 of which was allocated to the land). The
Johnsons moved into the home in 2003, and David began using his home office in
the same year. The home’s current fair market value is $500,000 ($50,000
allocated to the land). County land records reflect that David’s father bought
the land in 1969 for $6,000 and built the house in 1973 at a cost of $60,000.
David depreciates the business use of his home using MACRS, treating the home
as 39-year nonresidential reality.

Additional information regarding the properly for 2012 follows:



Repairs and maintenance


Property/casualty insurance


The properly taxes and mortgage interest
paid in 2012 on the home are listed in item 15 below. In addition to the
repairs and maintenance noted above, David had the office repainted at a cost
of $1,200. The furniture in the office, including business equipment (e.g.,
computer, fax machine, copier), was properly expensed in the year bought and
has a zero basis. However, on March 5, 2012, David purchased a heavy-duty,
fire-resistant file cabinet with security-vault features for $4,800. He made
the acquisition to safeguard and maintain the privacy of client data. If
possible, David prefers to avoid capitalizing and depreciating the cabinet.

5. On
February 4, 2011, David paid $41,000 (including sales tax) for an Infiniti
crossover SUV (gross weight under 6,000 pounds), which he uses 90% of the time
for business. No trade-in was involved, and he did not claim any § 179
expensing of the cost. Under the actual operating cost method, he depreciates
the SUV using MACRS (half-year convention). [Hint. See Table 3 in the
Instructions to Form 4562.] His operating expenses for the Infiniti for 2012
are as follows:



Auto insurance




Auto club dues


Oil changes and lubrication


License and registration


During business use, David received three
moving traffic violations (total fines of $680) and incurred tolls and parking
charges of $440. The Infiniti was driven a total of 14,500 miles during 2012
(mileage was incurred evenly during the year).

6. Sheri
is a licensed paralegal and is employed on a part-time basis by several local
attorneys. She commuted to work using the family Suburban for a total of 813
miles and paid parking fees of $310. Her earnings and job-related expenses are
summarized below.

Salary (from four employers)


Laptop computer


Subscriptions and dues to professional


Continuing education correspondence course


Occupational license fee


Sheri purchased the laptop computer on
March 12 and uses it 80% of the time for business. The correspondence course is
required continuing education so she can retain her license. Sheri is
considering going to law school, so she attended a series of LSAT preparation
sessions at a cost of $350. Because Sheri is a part-time employee, she is not
covered by any of her employers’ medical or retirement plans. During 2012,
however, she contributed $5,000 to a traditional IRA that she established
several years ago. The Johnsons use the automatic mileage method to calculate
any tax deductions to which they are entitled for use of the Suburban.

7. With
funds received from the settlement of his father’s estate, David purchased
rental properly at 4620 Cottonwood Lane. Of the $250,000 purchase price,
$30,000 was allocated to the land. After an $80,000 renovation to the house
(e.g., new flooring, roof, heating unit), the properly was rented beginning
February 1, 2006. In 2010, the Johnsons decided that their investment would be
more marketable if the house was rented as furnished. Consequently, in May of
that year, they spent $38,000 on new furniture (including drapes, carpeting,
and appliances). Under the current lease agreement, the properly rents for
$2,200 a month (payable at the beginning of each month) with utilities not
included. Information regarding the properly for 2012 appears below.

Rent received


Property/casualty insurance premiums paid


Property taxes paid


Yard maintenance paid




The rent received includes $2,200 for
January 2013. The tenants prepaid the rent in mid-December because they went on
vacation during the Christmas/New Year holidays. In addition to the properly
taxes listed above, David paid a special tax assessment of $2,400 to the city
of Casper for repaving the street in front of the properly. The Johnsons use
MACRS to depreciate the rental home and the furnishings within it (assume
half-year convention for the personally).

8. The
Johnsons acquired 1,000 shares of common stock in Cormorant Mining on March 7,
2011, to hold for investment purposes. David performed services for the company
in late 2010, submitting a bill for $3,900. Because Cormorant was experiencing
cash-flow problems at the time, David accepted the stock as payment for his
services. Unfortunately, Cormorant is currently in bankruptcy (see item 2
above), and expectations are that the shareholders will not recover anything on
their stock investments. The stock is not publicly traded.

9. On
March 10, 1994, David’s father gave the Johnsons a plot of land located in
Teton County (WY) as an anniversary present. It had a value of $150,000 at the
time of the gift (no gift tax was due on the transfer). The land had been
purchased by David’s father on June 1, 1984, for $50,000. In December 2011, a
real estate developer contacted the Johnsons and offered $800,000 for the
properly. After considerable negotiation, the following transaction took place
on March 4, 2012: the Johnsons transferred the Teton plot in return for $8,000
in cash and four city lots in Laramie (WY) worth $792,000. The Johnsons
considered the city lots to be a good investment because they are located near
the state university. All closing costs and legal fees were absorbed by the
real estate developer.

10. David
inherited an antique gun collection from his father when he died—mainly large
caliber rifles used for buffalo hunting. Although David has no idea what his
father’s cost basis was in these guns, the collection had a date-of-death value
of $22,000. Concerned about the maintenance and security of the collection, David
sold it to a dealer for $29,000 on July 10, 2012.

11. On
July 12, 1998, using $50,000 of funds she had received from an aunt’s life
insurance policy, Sheri purchased grazing land in Converse County (WY). On
August 2, 2011, she sold the land to a local rancher for $75,000. Under the
terms of the sale, Sheri received a down payment of $15,000 and 10 annual notes
of $6,000 each. Sheri is also to receive simple interest of 8% on the
outstanding principle balance each year. On August 4, 2012, Sheri collected
$10,800 ($6,000 on the note and $4,800 of interest) on the maturity of the
first note.

12. Although
the Johnsons had several Schedule D transactions during 2011, they ended up
with a net short-term capital loss of $7,000. Of this loss, $3,000 was deducted
in 2011, and $4,000 carried over to 2012.

13. For
several years, Sheri’s widowed mother, Vivian Olson, has lived with the
Johnsons and has been claimed by them as a dependent. On December 30, 2011,
Vivian suffered a heart attack. After six days in the ICU of a local hospital,
Vivian died. In early February 2012, the Johnsons paid the following expenses
related to Vivian:

Burial expenses


Medical expenses incurred in 2011


Medical expenses incurred in 2012


Remainder of church pledge for 2012


Fortunately, the balance of Vivian’s
medical expenses ($11,900) was covered by insurance. Besides personal and
household effects, Vivian’s major asset was life insurance. As the designated
beneficiary of the policy, Sheri received $20,000 of death benefits on March
13, 2012.

14. Besides
the items already mentioned, the Johnsons had the following receipts during

Interest income—

City of Cheyenne general purpose bonds


at Wells Fargo Bank


Money market account at Bank of America


Yard (garage) sale


Qualified dividends on Meadowlark
Corporation common stock


Jury duty fees


The yard sale involved used furniture,
appliances, books, toys, and other household goods, having an estimated
original cost value of $1,800. In connection with her jury duty assignment in
June, Sheri drove the Suburban 40 miles and incurred expenses of $30 for
parking and $45 for meals.

15. In
addition to the items already noted, the Johnsons had the following
expenditures for 2012:

Interest on home equity loan used to
finance the purchase of personal items (e.g., camper)


Charitable contributions (not including
Vivian’s pledge)


Ad valorem property taxes on personal


Medical and dental bills (including
prescription drugs of $400) other than those relating to Vivian (see item 13)


The Johnsons drove the Suburban 420 miles
to various medical and dental appointments. Wyoming has no state or local
income tax but does impose a general sales tax. The county in which they live
imposes an additional local sales tax of 1%. Although they do not keep track of
their sales taxes, they purchased a camper for $40,000 in May 2012. The sales
tax on this purchase was $1,600.

16. Besides
Vivian (see item 13), the Johnsons’ household includes two daughters, Meredith
(age 19) and Kirby (age 18), and one son, Toby (age 17). Kirby and Toby are
full-time students in high school. Meredith graduated a year ago and earned
$9,000 working part time during 2012. She deposited these earnings in a savings
account, hoping someday to attend college.

17. For
tax year 2011, the Johnsons had an overpayment of $150, which they applied
toward their 2012 income tax. Sheri’s income tax withholdings for the year are
$5,100, and the Johnsons made federal quarterly tax payments totaling $16,000
($4,000 each installment).

18. Relevant
Social Security numbers are noted below.


Social Security Number

David Johnson


Sheri Johnson


Vivian Olson


Meredith Johnson


Kirby Johnson


Toby Johnson



Prepare an income tax return (with
appropriate supporting forms and schedules) for the Johnsons for 2012. In doing
this, utilize the following guidelines:

• Make
necessary assumptions for information not given but needed to complete the

• The
taxpayers are preparing their own return (i.e., no preparer is involved).

• The
taxpayers have the necessary written substantiation (e.g., records, receipts)
to support the transactions involved.

• If
any refund is due, apply it toward next year’s taxes.

• The
Johnsons do not wish to contribute to the Presidential Election Campaign Fund.
(Hoffman E-1-E-5)


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