Matthew B. (age 42) and Shelli R. (age 48) Thomson are married and live at 7605 Walnut Street, Kansas City, MO 64114. Matthew is a chemist employed by Sargent Pharmaceuticals, Inc., and Shelli is a self-employed doctor of anesthesiology. They are calendar-year, cash-basis taxpayers.
1. 1. Sargent Pharmaceuticals develops and produces injectable medicines used in chemotherapy treatments for cancer patients. Matthew manages the Kansas City facility for an annual salary of $90,000. Sargent makes contributions to a qualified defined contribution pension plan for all of its full-time employees. Although Matthew also has the opportunity to make contributions into the plan, he chose not to do so in 2013. Matthew participates in his employer’s group health insurance plan to which he contributed $4,000 in 2013 for medical coverage. These contributions were made with after-tax dollars. The health plan covers Matthew, Shelli, and their two dependent children. Because of the risk associated with Matthew’s work (i.e., processing of chemotherapy drugs), Sargent provides all of its employees with $200,000 of group term life insurance coverage. An additional $180 of income is included in Matthew’s Form W–2 to report the taxable value of this insurance.
2. 2. In late 2012, three employees at Sargent’s Chicago facility were seriously injured while processing a customer order. While the injuries occurred in what the company described as a “freak accident,” Matthew began to look for a safer job in the chemical industry. He incurred the following expenses during 2013:
Employment agency fee $3,200
3. Vita consultation, preparation, and distribution 1,800
4. Expenses in connection with job interviews 4,100
6. Matthew received several attractive offers but ultimately decided against changing jobs. Influential in his choice was a promotion to regional manager and a $20,000 pay raise (starting in 2014).
8. 3. Sargent generally reimburses Matthew for expenses related to his work for the company. However, as a matter of policy, Sargent does not reimburse for the following:
Monthly dinner sessions of the Midwestern chemists
Association (11 meetings in 2013) $825
Dues to professional organizations 240
Subscriptions to professional journals 180
MIA correspondence study course 230
Each dinner involved the following costs: $40 (fee for speaker), $25 (price of meal), and $10 (parking). Matthew goes to the meeting from work and returns home the same night. The MIA (Management Institute of America) charge was for an online home study course on ways to improve safety measures and avoid accidents in the industrial workplace.
3. 4. Shelli Thomson is a board-certified doctor of anesthesiology. She provides anesthesiology services at a handful of hospitals and surgical centers in the greater Kansas City area on a part-time basis. Shelli is well respected by the surgeons with whom she works. She uses her home as her business address. She keeps her records there and otherwise conducts business (e.g., accepts surgery appointments, renders professional advice, and bills patients) on the premises. Because Shelli does not maintain a specific area for exclusive business use, she does not claim an office in the home for tax purposes. Shelli’s receipts from her practice during 2013 were $245,000, $16,000 of which was for services performed in 2012. Not included in these amounts is $17,500 that she received in January 2014 for services rendered in December 2013. Shelli’s professional activity code is 621111.
5. Shelli had the following business expenses in 2013:
Medical clothing (eg., lab coats, surgical scrubs) $2,200
Medical malpractice insurance 9,500
State medical license fee 450
Dues to professional organizations 350
Subscriptions to professional journals 340
1. In addition, she drove the family Suburban (purchased on March 2, 2012) 2,900 miles in connection with her work. She uses the standard mileage method. Total mileage for the Suburban is 9,000 miles for the year.
3. 6. Matthew’s widowed mother, Lucy, suffered a stroke on December 30, 2012, and died in the hospital on February 3, 2013. Most of Lucy’s medical expenses were covered by Medicare, with Matthew paying the rest. On February 18, 2013, he paid $9,800 to the hospital, half of which was attributable to expenses incurred in 2012. At the same time, Matthew also paid the funeral expenses of $16,000. Although Lucy lived in her own home prior to the stroke, Matthew and Shelli have properly claimed her as a dependent for the past few years.
7. As Lucy’s sole heir, Matthew inherited her home and its furnishings (located at 1420 Chickadee Lane, Topeka, KS 66546). The costs and values involved are as follows:
Cost Basis FVM on 2/3/13
Lot $ 10,000 $ 30,000
Furnishings 55,000 25,000
2. Because the real estate market was depressed and the home was located in an attractive rental area, Matthew decided not to sell. Instead, he rented the property fully furnished on May 1, 2013. The terms of the lease (executed on April 30) provide for the following: one-year lease at $2,500 per month (payable on the first of each month), last month’s rent payable in advance, and damage deposit of $3,000. In total, Matthew received $25,500 from the tenants in 2013 for their use of the property. Besides depreciation, his expenses were as follows:
3. Property taxes $4,800
4. Insurance 3,900
5. Repairs 2,100
6. Real estate renter’s location service 400
8. Matthew plans to use MACRS straight-line depreciation (mid-month convention) for the realty. Regarding the personalty, seeExhibit 8.1 in chapter 8 of the text.
10. 8. While walking the family dogs in late July, Shelli was struck by a delivery van and seriously injured. After being hospitalized for a week, she was released—bruised and sore, but with no permanent injuries. The driver of the van was arrested and ticketed by the police for reckless operation of a vehicle and was later prosecuted for drug use. To prevent adverse publicity related to a lawsuit, the owner of the delivery service paid for Shelli’s medical expenses and sent her a check on August 16, 2013, for $90,000. The check was accompanied by a letter that stated: “This $90,000 is a settlement for physical injuries sustained by Shelli Thomson.” Shelli was represented in the negotiations with the delivery company by her brother, a practicing attorney. He did not charge the Thomsons for his services.
12. 9. The Thomsons had the following property transactions during 2013:
1. a. On October 5, the City Council condemned unimproved land owned by Matthew for the construction of a fire station. He purchased the land (two vacant lots at 3400 and 3402 Sycamore Lane) as an investment on May 25, 2007, for $14,000. In exchange for the lots, the city gave Matthew a large unimproved lot at 440 Genoa Street that was valued at $20,000. All in all, he was satisfied with the exchange because the Genoa Street property is in a better neighborhood and has a greater potential for appreciation.
2. b. On November 22, Matthew sold a gun collection for $32,000 to an avid collector. The collection was a gift from Matthew’s father on December 25, 2009, when it was worth $22,000. His father bought the collection in 1997 for $14,000. The sale was evidenced by a bill of sale.
3. c. On November 9, they sold 3,000 shares of Dove Pharmaceuticals for $2,000. The stock was purchased by the Thomsons on December 4, 2012, for $25,000. The investment was motivated by the rumor that Dove was developing a new drug for infertility. After the FDA failed to approve the drug, the Thomsons decided to cut their losses. Their broker provided them with a Form 1009–B, which reported the gross proceeds from the sale and their basis in the stock.
14. 10. The Thomsons have a long-term capital loss carryover of $1,500 from 2012.
16. 11. In March 2013, the Thomsons were audited by the Missouri Department of Revenue for tax years 2010 and 2011. The audit proposed no changes for the 2010 tax return. However, the Thomsons were assessed $2,250 additional income tax for 2011 (no interest or penalties were included). The Thomsons agreed with the assessment and paid the $2,250 immediately.
18. 12. During 2013, Matthew was called to serve on a jury. As a result of the service, he was paid $700 and incurred nonreimbursed expenses (e.g., parking) of $60. In conformance with company policy, Matthew remitted the $700 of fees to Sargent.
13. Besides the items already noted, the Thomsons had the following receipts in 2013:
Life insurance proceeds $50,000
2012 Missouri state income tax refund 450
Proceeds from garage sale 2,600
Kansas City general purpose bonds$480
Citibank certificate of deposit 600 1,080
3. The insurance proceeds relate to a policy on Lucy’s life, which paid Matthew as the designated beneficiary. At the garage sale, the Thomsons sold personal items (e.g., camper, furniture, hunting and fishing equipment) that belonged to Matthew’s father and mother (i.e., Lucy). Matthew and Shelli estimated that the items they sold had cost $7,100. The garage sale proceeds were donated to the Alzheimer’s Association (a qualified charity) in memory of Matthew’s father.
5. 14. The Thomsons had additional expenditures for 2013 as follows:
6. Dentist bills not covered by insurance $3,100
7. Ad valorem property taxes on personal residence 4,100
8. Interest on home mortgage 2,600
9. Contributions to Goodwill (a qualified charity) 3,600
11. As part of a program sponsored by their church (a qualified charity), the Thomsons used the family Suburban to transport senior citizens to religious services for a total of 900 miles. The Suburban also was used for medical purposes (e.g., visits to an orthodontist) for 480 miles.
13. 15. The Thomsons’ household includes two dependent children: Ethan (age 15) and Bella (age 14), both of whom are full-time students. Relevant Social Security numbers follow:
NameSocial Security Number
Matthew B. Thomson 111-11-1111
Shelli R. Thomson 123-45-6786
Lucy E. Thomson123-45-6787
Ethan M. Thomson123-45-6788
Bella A. Thomson123-45-6789
1. 16. Matthew’s Form W–2 from Sargent Pharmaceuticals reflects income tax withholdings of $6,500 (Federal) and $4,000 (state). The Thomsons made quarterly income tax payments of $20,000 (Federal) and $9,000 (state) for total payments of $80,000 (Federal) and $36,000 (state). They had their Federal income tax refund of $3,000 for 2012 applied toward their 2013 income tax.
Prepare an income tax return (with appropriate schedules) for the Thomsons for 2013, using the following guidelines:
· * The Thomsons choose to file a joint income tax return.
· * The Thomsons do not wish to contribute to the Presidential Election Campaign Fund.
· * The Thomsons do not own any foreign bank accounts or other investments.
· * The Thomsons want to apply any federal tax refund to their 2014 tax liability.
· * The taxpayers are preparing their own return (i.e., no preparer is involved).
· * For the past several years, the Thomsons have itemized their deductions from AGI instead of using the standard deduction. In addition, the Thomsons have deducted state income taxes (not sales taxes) for the past several years.
· * The taxpayers have the necessary substantiation (e.g., records, receipts) to support all transactions reported in their tax return.
· Make necessary assumptions for information not given in the problem but needed to complete the return.