You Decide Activity (125 points)
You 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. Role
After 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.), and 3. 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.
Citations 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. AC553 W4 You Decide
John Smith, Esq.
<graphic: Lawyer with briefcase, suit>
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?
<graphic: Professional looking woman>
I 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...