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Exam No._____ UNIVERSITY OF FLORIDA COLLEGE OF LAW FINAL EXAMINATION INCOME TAX FALL SEMESTER 2001 PROFESSOR WILLIS DATE: DECEMBER 6, 2001 TIME: 9:00 a.m. TIME LIMIT: 4-1/2 HOURS INSTRUCTIONS 1. Any written materials you believe are helpful are allowed. 2. Write your exam number on the top of this page. 3. You should attempt to answer the questions in the space provided. You may use additional space; however, you should not need to. 4. Your answers may be written in ink or pencil or typed. 5. Unless otherwise indicated, all parties are on the cash method of accounting and use the calendar year. All parties are unrelated unless otherwise indicated. 6. If you feel you need further facts, indicate what sort of facts you would want to know and what difference they would make in your answer.
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QUESTION ONE (20 points) Father has an auto repair shop, which he operates as a sole proprietorship. Not including the following facts, his adjusted gross income from the business during 2001 is $150,000 and will be the same amount in 2002. Father consulted you about marital problems. He anticipates leaving his wife and kids sometime next year. He would like to minimize his obligation to pay alimony and child support (both of which you know to be a function of his income). You have learned, from experience, that “income” as determined for U.S. tax purposes is typically a reference point for the determination of alimony and child support. Father is interested in purchasing a new machine that will cost $215,000. It has a class life of seven years. If he purchases the machine today, what will be his adjusted gross income for 2001 and 2002. To minimize his 2001 income, he would elect section 179. This would be advisable because the alimony and child support issues will likely be a function of the income from both 2002 and 2001 (and perhaps even some earlier years). Per section 179(b) the limit would be 24,000 reduced by at least 15,000 (the amount by which the property cost exceeds 200,000). I would need to know whether he placed other section 179 property into service during 2001, as well. If he did, the cost would be added to the 215,000, resulting in a larger reduction: if he placed $9000 or more into service during 2001, he would have no section 179 eligibility. To the extent his section 179 amount would be lower, his depreciable basis for 2001 and 2001 would be greater in the following discussion. For example, if he could not use section 179, his section 168 amounts (using the mid-year convention) for 2001 and 2002 would be 43,000 and 68,800, causing his AGI to be correspondingly higher. If he is able to use the mid-year convention under section 168 (purchase of the machine did not result in his having made over 40% of his purchases of section 168 property in the final quarter), he would also have 41,200 depreciation in 2001 and 65,920 in 2002. [I calculated this with the depreciation calculator, using 209,000 as the depreciable basis (215,000 minus 9,000 per section 179) and five years as the recovery
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  • Fall '11
  • Staff
  • Taxation in the United States, Long-Term Capital Management, child support, Section 179 depreciation deduction

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