Individual Income Taxation

Alice J. and Bruce M. Jones are married taxpayers who file a joint return. Alice’s
birthday is September 21, 1961, and Bruce’s is June 27, 1960. Bruce is the office
manager for Ames Dental Clinic. Alice is the CPA at Lehman, York & Hunter CPA, LP.
The Jones provide over half of the support of their two children, Cynthia (born
January 25, 1994, Social Security number (017-44-9126) and John (born February 7,
1995, Social Security number (017-27-4148), who live with them. Both children are fulltime students and live with the Jones except when they are away at college. Cynthia is in
her third year of college, and earned $7,500 from a summer internship in 2017, and John
is in his first year of college and he earned $4,200 from a part-time job in 2017. In 2017,
the Jones’ paid $3,000 for Cynthia’s college tuition and $2,500 for John’s college tuition.
The Jones also provided all the support for their 26-year-old son Ryan who recently
graduated from law school but cannot find employment. Ryan lives in DC.
According to Mr. Jones on July 01, 2017, he and his wife exchanged their twofamily house in Westchester County (378 Pinebrook Blvd, New Rochelle, NY), which
they rented entirely from January 01, 2009 to July 01, 2017, for a four family rental
property located at 581 Atlantic Avenue, Brooklyn, NY. At the time of the exchange, the
FMV of the two-family house was $900,000, and the adjusted basis was $???????
(Calculate based on information provided below). The six-family house had an adjusted
basis of $300,000 and a FMV of $850,000. The two-family home was subject to a
$50,000 mortgage, which the buyer assumed.
The Jones also owned and rented a two-unit commercial retail building located at
1560 Avenue A, New York NY, which they purchased on December 01, 2016 and placed
in service on January 01, 2017. Information for all three of the rental properties is listed
In March 2017, Bruce decided to start his own business; a retail bicycle shop to be
located in NYC near Central Park called “Bruce’s Bikes.” On April 20, 2017, Bruce
signed a 10-year lease at a monthly rental rate of $10,000, effective May 01, 2017, for
retail space on 110th Street and CPW. The lease provided that Bruce was responsible for
the costs of improving the retail space for its intended use. The terms of the lease also
provided that the first three months were rent-free so that Bruce could complete the
construction needed to operate a retail bike shop. When Bruce executed the lease he paid
the landlord $30,000 as a security deposit. On May 01, 2017, Bruce paid a contractor
$175,000 to provide all construction work relating to the build-out, which included
electrical, plumbing, and carpentry. On June 01, 2017, Bruce purchased the following
assets for the business:
Equipment $ 45,000
Furniture & Fixtures $ 10,500
Computer Equipment $ 11,750
Although Bruce planned on a grand opening on July 01, 2017, the construction
was not completed until July 21, 2017, causing Bruce to delay the grand opening until
August 01, 2017.
On August 01, 2017, Bruce purchased a new truck for $24,000, which weighs
9,850 pounds, to be used 100% in the business for pickups and deliveries.
Bruce planned to finance the new business with the $100,000 inheritance he
received on 03/01/2017, from his late father’s estate. Bruce also planned to use $50,000
of savings he had invested with Madoff Investment Securities (MIS) but learned on
3/29/2017, that his entire savings was lost as a result of a massive ponzi scheme. In order
to come up with the additional funds needed to finance the construction, equipment, and
inventory, Bruce’s grandfather loaned him $50,000 on 05/15/2017. On December 25,
2017, Bruce received a letter from his grandfather stating that he forgives the entire
$50,000 loan effectively immediately.
For 2017, the bike shop generated the following revenues and incurred the following
Sales, Rental, & Service Revenue $ 245,000.00
Inventory purchased 105,000.00
Inventory on hand at December 31, 2017 65,000.00
Rent from (August 01 – December 31, 2017) 50,000.00
Salaries 25,000.00
Supplies 10,000.00
Utilities 9,000.00
Promotional expense 5,500.00
Travel to Trade Shows 1,500.00
Meals & Entertainment 1,200.00
Postage and Delivery 1,050.00
Telephone 1,850.00
Attorney fees 5,000.00
Pre-startup investigative expense 55,200.00
Other relevant information:
• Bruce has decided that he wants to minimize his tax as much as legally
possible and has requested your assistance in preparing his 2017 Federal
income tax return.
• Bruce has asked you to depreciate as much of the capital expenditures as
legally possible, but only wants to use IRC Sec 179 expense on the
equipment, furniture and fixtures, and computer equipment. Bruce does not
want to use first year bonus depreciation.
• The company has adopted the accrue method of accounting for inventory and
cash method for all other purposes.
• On March 15, 2017, York Technology Inc. filed for bankruptcy resulting in a
total loss for its’ only two shareholders. Bruce and a friend founded the
company on May 15, 2013, with each owning 50% of the outstanding shares.
Both Bruce and his friend each initially contributed $35,000 in exchange for
their 50% interest in the company.
• Bruce and Alice earned $2,500.00 interest income from savings in 2017.
• Bruce earned $1,500 in interest income from US Treasury Bonds in 2017.
• On October 18, 2017, Bruce received $1,250 of dividend income from JP
Morgan Chase Stock, which he purchased on September 01, 2017.
• On November 15, 2017, Bruce sold some of his JP Morgan Stock for $75,000,
which he purchased on July 01, 2015 for $30,000.
• Bruce was named as the sole beneficiary on his late mother’s life insurance
policy, and on December 31, 2017, Bruce received a check for $100,000 from
the insurance company, which he held and deposited on January 02, 2018.
• On June 13, 2017, Bruce sold 1,000 shares Citibank Stock for $20,000. He
purchased the stock on May 17, 2015 for $49,000.
• On November 04, 2017, Alice received a settlement award for injuries
sustained in 2016. The settlement award included the following amounts:
o Reimbursements of medical expenses which were not deducted on
previous tax returns $10,000
o Loss income $30,000
o Punitive damages $20,000
o Compensatory relating to a broken leg $18,000
• On November 03, 2016, Bruce determined that a personal loan to a friend was
uncollectible because his friend had recently and unexpectedly died. The
amount of the loan was $7,500.
• Bruce collected $7,500.00 per month for three months (October – December)
in rental income on 581 Atlantic Avenue. For 2017 Bruce paid mortgage
interest of $6,200 and real estate taxes of $4,500.00. Bruce paid no other
expenses in 2017 for 581 Atlantic Avenue. The property was placed in service
on October 01, 2017.
• Other Rental Income and Expenses for 2017 included:
Pinebrook Property Avenue A Property
Rental Income $69,000.00 $105,000.00
Mortgage Interest Expense $10,000.00 $12,000.00
Real Estate Taxes $4,000.00 $8,000.00
Utilities $2,000.00 $6,000.00
Insurance $2,500.00 $5,000.00
Water & Sewer $1,200.00 $3,000.00
Place in Service 01/01/2007 01/01/2016
Purchase Price $550,000.00 820,000.00
• Bruce and Alice 2017 W-2 statement shows the following wages and
Alice Bruce
1) Wages $50,000 $45,000
2) FWT 8,500 7,000
3) SWT 6,000 5,500
4) CWT 4,200 3,800
• The Jones also paid the following personal expenses in 2017:
a. Contributions to Museum of Modern Art (a 50% Organization):
i. Cash $25,000
ii. JP Morgan Chase Stock -FMV $42,100
(Long Term) -A/B $40,800
b. Real Estate Taxes on primary residence $12,300
c. Mortgage Interest on primary residence $10,600
d. Student loan Interest $3,600
Instructions: Make realistic assumptions about any missing or inconsistent data and state
your assumptions on a separate typed schedule.
i. Prepare form 1040, including all schedules and forms for 2017. (Do not prepare
NYS or NYC tax returns).
ii. Taxpayers wishes to use the Reduce Deduction Election for charitable donations.
iii. All work must be typed onto approved IRS forms (no hand written forms will be
iv. Read chapter 8 to determine how to handle depreciation/amortization and IRC
section 179.
v. Only hand in the appropriate forms and schedules.