You decide project week-4
AC553 W4 You Decide
You Decide Activity 125 points
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.
After reviewing John and Jane Smith’s points of view, it will be your turn as a tax
professional to decide on the best course of action from a tax perspective on their issues.
Prepare a three page memo (at least 300 words per page) to John and Jane Smith
addressing the issues presented.
1. John Smith tax issues: a. How is the $300,000 treated for purposes of Federal tax
b. How is the $25,000 treated for purposes of Federal tax income?
c. What is your determination regarding reducing the taxable amount of income for both
(a) and (b) above?
2. Jane Smith tax issues: a. What are the different tax consequences between paying
down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax
b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house
using additional money from John’s case?
c. Does Jane have a business or hobby? Why is this distinction important?
d. Would Jane (and John) realize better tax benefits if she had a separate business for her
jewelry making activities?
e. What tax benefits would John realize if he invested $15,000 in Jane’s jewelry making?
f. Can Jane depreciate her vehicle or jewelry making equipment? How?
3. John and Jane Smith tax issue: a. Should John and Jane file separate tax returns or
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), and so on. Then, 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:
1. State the issue,
2. Explain and discuss the applicable law (IRC sections, regulations, court decision, etc.),
3. 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