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Steven B. (Age 42) and Debra S. (Age 41)
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Steven B. (Age 42) and Debra S. (Age 41) Marshall are married and live at 426 East Twin Oaks Road, Sioux Falls, SD 57105. Steven is the regional manager for a restaurant chain (Moveable Feast), and Debra is a self-employed architect. They are calendar year, cash basis taxpayers.

1. Steven's annual salary from Moveable Feast is $82,000. He also earns an annual bonus. The amount is determined in late December, and Steven receives it in January of the next year. Steven's 2015 bonus was $6,000 (received in 2016), and his 2016 bonus was $7,000 (received in 2017). Steven is also paid a flat travel allowance of $16,000 per year. The allowance is to cover his expenses in visiting restaurants in his region to conduct inspections, consult with the local managers, and recruit potential hires. Although Steven maintains substantiation of his travel, he is not required to account for these expenses to Moveable Feast. Steven participates in his employer's group health insurance plan to which he contributed $3,600 in 2016 for medical coverage. These contributions are made with after-tax dollars. The health plan covers Steven, Debra, and their two dependent children. Moveable Feast does not provide any retirement benefits, but it has established a S 401(k) plan to enable its employees to save for retirement. Steven contributed $10,000 to the plan in 2016. The company provides an office for Steven's use that is located at 110 North Reid Street, Suite 217, Sioux Falls.

2. On March 5, 2015, Steven purchased a new Ford Focus for use in his job. The car cost $24,000 (including sales tax), with no trade-in involved. The car was driven 14,000 miles in 2015 and 18,000 in 2016 with usage as follows: 20% for his commute to the office and 80% for business trips. The mileage for 2016 was evenly distributed throughout the year. Steven deducts actual operating costs for his vehicle, using the 200% declining-balance method with a half-year convention to compute MACRS depreciation. In addition, Steven did not claim and S 179 expensing or additional first-year depreciation last year when he bought the car. Steven's expenses related to operating the Focus for 2016 are as folllows:

Gasoline - $2,900

Oil change and lubrication - $150

Auto insurance - $1,800

Repairs - $400

Auto club dues - $160

License and registration - $120

Interest on car loan - $900

3. Steven also incurred the following out-of-pocket employment-related expenses during 2016:

Airfare - $2,600

Lodging - $3,200

Meals - $3400


Entertainment - $800

Car rentals, limos, taxis - $600

Parking and tolls - $300

Subscriptions to trade journals - $120

Dues to trade association - $80

Business gifts - $550

Speeding tickets - $620

Steven made the business gifts in late December to managers of the top 11 restaurants in his region, with each manager receiving a $50 gift card to a national retailer. While on business trips in his car, Steven was cited for speeding several times and paid related fines totaling $620.


4. Debra Marshall is a licensed architect who works part-time on a consulting basis. Her professional activity code is 541310. Her major clients are real estate developers (both residential and commercial) for whom she prepares structural designs and constructional plans. She also advises on building code requirements regarding the renovation and remodeling of existing structures. Debra does her work at the client’s location or in her office at home (see item 5 below).
Debra collected $52,000 in consulting fees during 2016. This total includes a $3,000 payment for work she performed in 2015 and does not include $5,000 she billed in December for work performed in late 2016. In addition, Debra has an unpaid invoice for $6,000 from a client for work done in 2014. This client was convicted of arson in August 2013 and is now serving a five-year sentence in state prison. Debra is certain she will never collect the $6,000 she is owed. Her business expenses for 2016 are:
Drafting supplies - $4,800
Reproduction materials (e.g., molds, models, photos, blueprints, copies) - $3,200
On-site work clothing (e.g., hip boots, safety glasses, safety helmet) - $800
Professional license fee - $400
Subscriptions to professional journals - $250
Dues to professional organizations - $240

In addition, Debra drove the family Acura (purchased on June 7, 2015) 940 miles on her job assignments. She uses the standard mileage method to deduct business costs related to the Acura. During 2016, Debra drove the car a total of 10,000 miles.

5. When the Marshalls purchased their home on February 2, 2015, they set aside 300 square feet (out of a total of 2,400 square feet) of living space for Debra’s office. As of January 1, 2016, the home had an adjusted basis of $240,000 for purposes of line 36 of Form 8829 (of which $40,000 is attributable to the land) - the fair market value of the property is in excess of this amount. Relevant information concerning the residence for all of 2016 appears below.
Homeowner’s insurance - $3,200
Repairs and maintenance - $1,800
Utilities - $6,200
Painting (office area only) - $2,500

The cost of Debra’s office furniture and equipment was previously deducted under S179 in the years these assets were acquired. On June 29, 2016, she purchased a fireproof file cabinet for $800 to safeguard the blueprints of her structural designs and construction plans. If possible, Debra prefers to avoid depreciating capital expenditures.

6. One of Debra’s clients was interested in building a shopping center on a tract of land Debra owned in Lincoln County. She inherited the property from her uncle when he died on June 6, 1996. At that time, the land was worth $40,000. It has since been rezoned for commercial use and has a current value of $200,000. On February 10, 2016, Debra exchanged the Lincoln parcel for a similar tract in Minnehaha County worth $190,000 and cash of $10,000.

7. On September 2, 2016, Debra sold a tract of land in McCook County to a farmer who owned the adjoining property. The land was inherited from the same uncle who died in 1996, and it was worth $30,000 on June 6, 1996. Under the terms of the sale, Debra received cash of $20,000 and four notes to be received at one-year intervals. Each note calls for the payment of $25,000 plus simple interest of 8%. To the extent allowed by law, Debra wants to defer recognition of gain as long as possible.

8. In early 2015, Steven learned that one of his restaurant managers, Mindy Smith, was suffering domestic abuse at the hands of her husband, Billy. When Billy started to abuse their 5-year-old daughter too, Mindy decided it was time to get away. Before they left on April 14, 2015, Steven loaned Mindy $5,500 to help her and her daughter relocate. Steven had her sign an interest-free note due in one year. Steven never heard from Mindy again. In late 2016, Steven learned that Billy had tracked down Mindy and their daughter and killed both of them before he committed suicide. Given these tragic circumstances, Steven has no expectation that the loan will ever be repaid.

9. On August 5, 2014, Steven purchased 1,000 shares of Farmer’s Markets America (FMA) common stock for $16 a share as part of its initial public offering. The corporation was formed to establish and operate farmers’ markets in midsize cities throughout the United States. Although some market locations were profitable, the venture as a whole proved to be a failure. In November 2016, FMA’s remaining assets were seized by its creditors, and FMA stock became worthless.

10. In addition to the items previously noted, the Marshalls had the following receipts for 2016:
Interest Income:
General Motors corporate bonds - $1,900
City of Sioux Falls, SD bonds - 1,400
Castle Bank certificate of deposit - 210 3510
Qualified dividends from MG&E Inc. 3100
Refund from HomeStuff 430
Loan repayment by Sarah Marshall-Caine 4500
Cash gifts from Debra’s parents 32,000
2015 Federal income tax refund 290

In December 2015, the Marshalls made a major purchase of household items (e.g., appliances, furniture, etc.) at HomeStuff (a discount big box store). They called the manager when they realized they did not receive the advertised sale price. Consequently, the store corrected the mistake and sent a $430 refund that the Marshalls received in January 2016. Four years ago when his sister Sarah married, Steven lent her $4,000 to help pay for her honeymoon. Steven was pleasantly surprised when Sarah paid him back (plus interest of $500) on December 20, 2016. On March 20 of each year, Debra’s parents send a generous gift of cash as a birthday present. Just as she has done for the past seven years, Debra immediately invested the cash in her children’s S 529 college savings plans.

11. The Marshalls had the following expenditures for 2016:
Debra’s contribution to her traditional IRA - $5,500
Net gambling loss - $1,000
Life Insurance Premiums $2,700
Medical and dental expenses not covered by insurance $6,200
Taxes:
Ad valorem taxes on personal residence $4,800
State and local sales taxes from receipts $3,200 $8,000
Interest on home mortgage $4,000
Cash contributions:
Goodwill (Sioux Falls branch) $1,200
South Dakota governor’s election campaign fund $300 $1,500

The $1,000 net gambling loss for 2016 is the difference between the Marshall’s gambling winnings of $1,200 and losses of $2,200. The life insurance premiums relate to the universal life insurance policies that Steven and Debra own. The first beneficiary on both policies is the other spouse, with the second beneficiaries being the children. Included in the medical expenses are $1,200 incurred in 2015, which were paid in early February 2016. The Marshalls can substantiate the $3,200 in sales taxes paid based on their purchase receipts for the year. The local sales tax rate in Sioux Falls is 2%. (HINT: Check to see if the Optional Sales Tax Tables provide the Marshalls with a greater deduction.). Debra contributed to the governor’s campaign fund because she thinks his influence was key in getting the Lincoln County land rezoned for commercial use (see item 6 above).

12. The Marshalls maintain a household that includes their two children, Nickolas (age 16) and Kaleigh (age 19). Nickolas, a junior in high school, is a talented wrestler. In hopes of competing at the state tournament, he spends all of his free time on weight training when he’s not at wrestling practice. Kaleigh graduated from high school on June 7, 2016, and is undecided about college. She is an accomplished vocalist and during 2016 earned $7,200 performing at various events (e.g., weddings, funerals.). Kaleigh placed most of her earnings in a savings account for future use and kept only a small amount to spend on herself.

13. Steven’s Form W-2 from Moveable Feast shows $13,800 withheld for Federal income tax. The Marshalls have made total quarterly income tax payments of $4,000.

14. Relevant Social Security numbers are noted below:
Steven B. Marshall 123-45-6786
Debra S. Marshall 123-45-6787
Kaleigh J. Marshall 123-45-6788
Nickolas W. Marshall 123-45-6789

REQUIREMENTS
Prepare an income tax return (with appropriate schedules) for the Marshalls for 2016, using the following guidelines:
The Marshalls choose to file a joint income tax return
The Marshalls do not want to contribute to the Presidential Election Campaign Fund.
The Marshalls do not own any foreign bank accounts or other investments.
The Marshalls prefer to receive any refund of overpaid taxes.
The taxpayers are preparing their own return (i.e., no preparer is involved.)
For the past several years, the Marshalls have itemized their deductions from AGI.
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.

Please take as much time as you need, as this is a very large assignment.

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