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.
1. John Smith's Tax Issues
Issue (a): How is the $300,000 treated for purposes of federal tax income?
Applicable Law and Analysis
Conclusion
Issue (b): How is the $25,000 treated for purposes of federal tax income?
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Conclusion
Issue (c): What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
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Issue (d): Do I get better tax benefits for paying the lease on office space or for buying the building? What are the differences?
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Conclusion
2. Jane Smith's Tax Issues
Issue (a): What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes?
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Issue b) Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case?
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Issue (c): Does Jane have a business or hobby? Why is this distinction important?
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Issue (d): Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry-making activities?
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Issue (e): What tax benefits would John realize if he invested $15,000 in Jane's jewelry making?
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Issue (f): Can Jane depreciate her vehicle or jewelry-making equipment? How?
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3. John and Jane Smith's Tax Issue
Issue (a): Should John and Jane file separate or joint tax returns?
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Conclusion
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), etc.]. Next, 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
- state the issue;
- explain and discuss the applicable law (IRC sections, regulations, court decision, and so forth); and
- 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
Citations are required. You must provide citations 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.