Jimmy J. and Kimberly S. Johnson are married and live at 105

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Description

Jimmy J. and Kimberly S. Johnson are married and live
a Jackson, WY 83001. They file a joint return and are calendar year, cash
basis taxpayers.

1. Jimmy is
a self-employed insurance agent (professional activity code is 524210) for
several major casualty insurance companies. He maintains an office atXXXXX
Suite 130, Fort Wayne, IN 46802. He shares the suite with several other
professionals and has no employees. A receptionist handles all calls and is
provided by the landlord as part of the services offered to tenants. Jimmy’s
work-related expenses for 2013 are as follows:

Office rent
$8,100

Utilities 3,000

Accounting services
1,200

Office expenses (supplies, use of copier, etc.) 1,100

Legal services (see item 9. below) 300

State and local license fees
900

Renter’s insurance (covers personal liability, casualty,
theft) 1,500

Replacement of reception room furnishings (6/5/2013) 2,200

Professional dues and subscriptions to trade publications 400

Business lunches
1,400

Contribution to H.R. 10 (Keogh) plan 8,000

Medical insurance premiums
5,000

The business meals Jimmy paid for were to entertain various
visiting executives from the insurance companies he does business with. As is
the case with all of Jimmy’s business transactions, the lunches are properly
documented and supported by receipts. Because the reception room furnishings
were looking shabby, Jimmy and his suite-mates had them replaced. The $2,200
Jimmy spent was his share (i.e., a sofa and coffee table) of the cost. Jimmy
follows a policy of avoiding depreciation by utilizing the Section 179 election
to expense assets. All of Jimmy’s office equipment (e.g., desk, chairs, file
cabinets, computer, etc.) has previously been expensed. Of 10,000 total miles
in 2013, Jimmy drives his car (a Ford Explorer purchased on 6/1/2011) 3,200
miles for business (not including commuting) and has business parking and toll
charges of $310. The Johnsons use the automatic mileage method of claiming
automobile expenses.

2. Kimberly
is a registered nurse employed on a part-time basis by Home Care Services. She
generally is assigned to provide medical services at the residences of patients
recently discharged from the hospital. Her employer does not provide her with
an office, and she has no separate office in her home. She does, however,
maintain her business records at home and lists it as her business address.
After receiving her assignments by phone, she drives the family Buick
(purchased on 7/1/2009) directly to the residence of the patient. Home Care
Services requires all of its nurses to wear uniforms while on duty. As Kimberly
is not a full-time employee, she is not covered by Home Care’s health or retirement
plans. Kimberly’s work-related expenses for 2013 appear below:

Mileage (total Buick miles in 2013 = 10,000) 3,000 miles

Professional dues and subscriptions $180

Continuing education programs (required to

maintain license)
320

Annual license fee
150

Nursing supplies (e.g., masks, gloves) 260

Uniforms purchased (including $240 for shoes) 410

Laundering of uniforms
210

3. At a
foreclosure sale on May 8, 2013, the Johnsons purchased a house to be held as a
rental investment. The property cost $300,000 (of which $40,000 is allocated to
the land) and is located atXXXXX Morgantown, IN 46515. After making minor
repairs and placing the property in service on June 1, the Johnsons were
fortunate in that they were able to rent it immediately for $1,500 a month
(payable on the first of each month). Information regarding the rental property
for 2013 is summarized below:

Rent received ($1,500 x 8 months) $12,000

Refundable damage deposit
2,000

Property taxes 1,800

Interest on mortgage
1,500

Repairs 400

Insurance
2,500

Street paving assessment
1,200

Although the property was rented for only seven months, in
late December 2013 the tenants prepaid the January 2014 rent because they were
going to be out of town on New Year’s Day. The special assessment was levied by
the city of Elkhart to resurface the street in front of the house. The Johnsons
plan to use MACRS straight-line depreciation, assuming the mid-month
convention.

4. On her
birthday on May 9, 2006, Kimberly received as a gift from her father unimproved
land located in Marshall County (IN). The land cost her father $20,000 in 1974
and had a value of $90,000 on the date of the gift. No gift tax was due as a
result of the transfer. On May 1, 2013, Kimberly sold the land to an adjoining
property owner for $100,000. Under the terms of the sale, Kimberly received a
down payment of $10,000 and six notes maturing annually for $15,000 each with
interest payable at the rate of 8%. Kimberly did not elect out of the
installment method.

5. When
Kimberly’s father died in 2012, he had a life insurance policy issued by Condor
Assurance with a maturity value of $100,000. As the designated beneficiary of
the policy, Kimberly picked a settlement option of $23,000 annually, payable
over five years. In 2013, she receives a check from Condor for $23,000.

6. Based on
a tip from a friend who is an investment adviser, on November 6, 2012, Jimmy purchased
14,000 shares of common stock in Eagle Corporation for $14,000. Eagle, a
manufacturer of auto parts, was experiencing financial difficulties and was
contemplating bankruptcy. Nevertheless, the adviser was sure that its
liquidation value would far exceed the cost of the stock. Eagle went into
receivership in early March 2013, and by October 15 of this year, it was
determined that its common stock was worthless.

7. In 2012,
a hit-and-run driver severely damaged Jimmy’s Ford while it was parked in front
of his office. Jimmy’s insurance carrier, Peregrine Company, paid the cost of
repairing the vehicle, but he was charged $1,000 under the deductible
provision. In 2013, the authorities located the driver who caused the accident,
and Peregrine recovered on the loss. As a result, in February 2013 Peregrine
reimbursed Jimmy for the $1,000 deductible. Although they itemized when they
filed the 2012 income tax return, the Johnsons were unable to claim any
deduction for casualty losses.

8. In July
2013, the Johnson’s state income tax returns for 2010 and 2011 were audited by
the Department of Revenue. A no-change determination was made for 2010, but the
audit resulted in an additional assessment of $300 for 2011. Jimmy immediately
paid this amount to the State of Indiana.

9. Besides
those previously noted, the Johnsons had the following receipts for 2013:

Payment for services rendered as an insurance agent

(as supported on Forms 1099 issued by several

payor insurance companies)
$72,000

Nursing wages (Form W-2 issued by Home Care

Services)
39,000

Cash payments received by Jimmy from numerous

repair facilities and building contractors that he

deals with frequently
10,500

Income tax refunds for tax year 2012

Federal tax
$1,200

State tax
350 1,550

Interest income–

City of South Bend bonds
$900

Interest on Wells Fargo Bank CD 800
1,700

Garage sale
4,200

Loan repayment
20,000

The cash payments were delivered to Jimmy during the
Christmas season by special courier. They were enclosed in an envelope marked
“GIFT” with a note expressing thanks for the business referrals. No arrangement
exists, contractual or otherwise, that requires Jimmy to be compensated for any
referrals he makes. Although Jimmy realizes that kickbacks are not uncommon in
the repair business, he was concerned about the legality of the procedure.
During 2013 he retained an attorney, who shares his suite, to research the
matter. Without passing judgment on the status of the payors, the attorney
found that Jimmy’s acceptance of the payments does not violate any state or
local law. Since he is a friend, the attorney charged Jimmy a modest $300 for
his advice (see item 1. above).

The garage sale involved mostly items Kimberly inherited
from her father (e.g., boat and trailer, camper, hunting and fishing
equipment). Kimberly has no proof as to the cost of these assets, nor does she
know their value at the time of his death (no estate tax return had to be
filed).

Three years ago, Jimmy had loaned his younger sister, Marcie,
$20,000 to help start a business. No note was signed, no interest was provided
for, and no due date was specified. Much to Jimmy’s surprise, Marcie repaid the
loan in late 2013.

Not mentioned above were two tickets that the Johnsons won
in a church raffle. The tickets to an Indianapolis opera benefit performance
were worth $240 but cost the church only $100. The Johnsons accepted the
tickets, but no one in the family wanted to attend.

10. In
addition to any items previously noted, the Johnsons had the following expenses
for 2013:

Medical and dental expenses not covered by

Insurance
$8,000

Ad valorem property tax on personal residence 5,200

Interest—

Home mortgage
$3,800

Interest on home equity loan
1,200 5,000

Charitable contributions
3,000

Tax return preparation fee (60% relates to

Jimmy’s business)
400

Of the $8,000 in medical expenses, $5,000 was used to pay
for Zoe Johnson’s gall bladder operation. Zoe is Jimmy’s mother who lives with
them and would otherwise qualify as their dependent except for the gross income
test.

During 2013, Kimberly borrowed $20,000 under a home equity
loan arrangement. The money was used to help pay family credit card debt and to
help pay for her younger sister Clara’s wedding.

11. Besides
Zoe, the Johnsons’ household includes their three children: Dale (age 17), Dana
(age 16), and Kirk (age 14). All are full-time students. Dale is very
proficient with the bagpipes and during the year earned $4,400 playing at
special occasions (i.e., mainly funerals). Dale is saving his earnings for
college.

12. Kimberly’s
Form W-2 from Home Care Services shows $2,000 withheld for Federal income tax
and $941 for state income tax. Jimmy made equal quarterly payments of $2,600
(Federal) and $500 (state). Relevant Social Security numbers are noted below.

Social Security

Name Number Birth Date

Jimmy L. Johnson
XXX-XX-XXXX 07/01/1967 07/01/1967

Kimberly S. Johnson
XXX-XX-XXXX 02/20/2968 02/20/1968

Dale Johnson
XXX-XX-XXXX 04/09/1996 04/09/1996

XXXXX XXXXX
XXX-XX-XXXX 12/06/1997 12/06/1997

Kirk Johnson
XXX-XX-XXXX 07/29/1999 07/29/1999

Zoe Johnson
XXX-XX-XXXX 01/03/1939

REQUIREMENTS

Prepare an income tax return (with appropriate schedules)
for the Johnsons for 2013. In doing this, use the following guidelines:

• Make
necessary assumptions for information not given in the problem but needed to
complete the return. Be aware of the possible application of certain tax
credits.

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

• If a
refund results, the taxpayers want it sent to them.

• The
Johnsons do not wish to contribute to the Presidential Election Campaign fund.

• In the
past several years, the Johnsons have itemized their deductions from AGI (have
not claimed the standard deduction option).

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