“Problem 52Frank B. and Lucy B. Rose have no dependents and are both under age 65. Frank is a statutory employee of green valley, a wholesaler of recyclable materials (business code is 421930); his social security number is 123-45-6789. The Roses live at 482 Devon Drive, Clearwater, FL 33758. They do not contribute to the presidential election campaign fund.In 2009, Frank earned $66,000 in commissions. His employer does not withhold income taxes. Frank paid 5,000 in estimated taxes. Lucy earned $70,000 from which her employer withheld federal income taxes of $6,000. Assume both employers withheld the correct amounts of social security and Medicare taxes. Neither Frank nor Lucy received any expense reimbursements.Frank uses his automobile in his employment, and during 2009, his business mileage is 29,000 miles (divided evenly throughout the year). Parking and tolls in connection with business use are $520 and $190, respectively. Fines paid for traffic violations (during business use) total $600. In deducting business use of his automobile, Frank always uses the automatic mileage method. His other employment- related expenses for the year are as follows:Airfare – $4,100Meals – 3, 800Lodging – 3,200Entertainment – 2,000Business gifts – 870The business gifts consist of 30 fruit baskets Frank sent to key customers during the Christmas season. Each basket cost $25 (not including $4 for wrapping and shipping).During the year, Lucy enrolled in a weekend MBA program at a local university. In this regard, she spent the following amounts: $3,800 (tuition), $820 (books and computer supplies), $250 (meals while on campus), and $220 (bus fare to and from campus). Lucy took her secretary to lunch on two occasions ($91 and $86) and her boss on one occasion ($110). She spent $140 on professional dues and $120 on trade journals.Neither Frank nor Lucy is covered under an employer- sponsored retirement plan.However, each contributes $5,000 ( for total of $10,000) to a traditional IRA.In addition to their salaries, the Roses received the amounts listed below during the year:Interest on certificate of deposit issued by Tampa State Bank – $2,200Inheritance from Albert – 50,000Distribution from Cardinal Life – 100,600The distribution from cardinal life represented the maturity value ($100,000) plus interest ($600) of an insurance policy on Albert’s life. Albert was Frank’s uncle and had designated Frank as the beneficiary of the policy.Because Albert died overseas, the insurance company had delayed in making the distribution to frank.The Roses had other Expenditures as follows:Charitable contributions (cash) – $2,600Medical and dental expenses – 9,000Real property taxes on residence – 4,900Sales taxes- actual amount (receipt available) 2,400Home mortgage interest – 5,900Tax return preparation fee – 500Part 1- tax computationCompute the rose’s federal income tax payable or refund due, assuming they file a joint income tax return, for 2009. If they have overpaid, they want the amount refunded. You will need forms 1040 and 2106 and schedules A, B, and C.Part 2- tax planningThe roses request your help in deciding where to invest the extra $150,000 (life insurance and inheritance) they received in 2009. They are considering two alternatives:• Municipal bonds that yield 4.5 %• Common stock that regularly pays cash dividends (and appreciates) at the rate of 7%.a. Calculate the better alternative for next year. Assume that Lucy and frank will have the same income and deductions in 2010, except for the income from the investment they choose.b. Write a memo to the roses, explaining their alternatives.Problem 3Over the years, Julie Hoyle (117 Western Avenue, Peoria, IL 61604) has taken great pride in her ability to spot exceptional rental real estate investments, particularly in terms of their appreciation potential. As a result, she has accumulated several properties. In the past, she was able to devote only a limited amount of time to these ventures, in the current year, however, she retires from her full – time job and devotes most of her time to the management and operation of the rental activities. The relevant tax attributes of each of Julie’s properties are as follows:Property Suspended passive losses Expected current years income (loss)A None $25,000B ($20,000) 15,000C (40,000) (15,000)Julie has enough understanding of the tax law to know that she is a qualifying real estate professional for the current year and materially participates in all three properties. However, she is uncertain whether she should treat the properties as three separate activities or aggregate them as one activity. Write a letter to Julie to assist her in making the decision. Because of Julie’s expertise in the lax law, feel free to use technical language in your letter.”
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