Problem:
Can you help me start the following case study?
John Gemstone, a wealthy client, has recently been audited by the IRS. The agent has questioned the following deduction items on Mr. Gemstone's tax return for the year under review:
- A $10,000 loss deduction on the rental of his beach cottage.
- A $20,000 charitable contribution deduction for the donation of a painting to a local art museum. The agent has questioned whether the painting is overvalued.
- A $15,000 loss deduction from the operation of a cattle breeding ranch. The agent is concerned that the ranch is not a legitimate business (i.e., is a hobby).
Your supervisor has requested that you represent Mr. Gemstone in his discussions with the IRS.
a. What additional questions should you ask Mr. Gemstone in an attempt to substantiate the deductibility of the above items?
b. What tax research procedures might be applied to build the best possible case for your client?
c. Conduct tax research and formulate tax-planning advice for response.