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.
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
Fees for services rendered
Transportation (taxis, airport limos, car rentals)
Subtotal for expense reimbursement
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.
Other expenses paid by David in 2012 relating to his practice are listed below.
Contribution to H.R. 10 (Keogh) retirement plan
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 materials)
Business phone and Internet service
State occupation license
Subscriptions to trade journals
Membership dues to trade associations
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
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.
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 tradein was involved, and he did not claim any Â§ 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
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).
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)
Subscriptions and dues to professional organizations
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 employersâ€™
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.
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.
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 midDecember 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).
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.
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.
David inherited an antique gun collection from his father when he diedâ€”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,
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.
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.
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:
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,
Besides the items already mentioned, the Johnsons had the following receipts during
City of Cheyenne general purpose bonds
CD 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
In addition to the items already noted, the Johnsons had the following expenditures for
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 residence
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.
Besides Vivian (see item 13), the Johnsonsâ€™ 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.
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).
Relevant Social Security numbers are noted below.
Social Security Number
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 return.
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.