Documentos de Académico
Documentos de Profesional
Documentos de Cultura
L6256y
Professor Chirelstein
IF YOU ARE A CANDIDATE FOR GRADUATION IN MAY, 1992, WRITE ON THE COVER OF YOUR
ANSWER BOOK (OR, IF TYPEWRITTEN, AT THE TOP OF YOUR FIRST PAGE) "CANDIDATE FOR
GRADUATION IN MAY 1992."
Instructions:
This is a limited open-book examination. You may bring your Code and
Regulations volume to the exam, but nothing else. Answer each of the
following questions -- there are five -- in sufficient detail to convey your
reasoning as well as your conclusions. But please be brief. Not more than
two (or at most three) bluebook pages should be needed for any question; for
some, a single page, maybe only a paragraph, should be enough. No credit
whatever is given for irrelevant discussion.
I.
What are the tax consequences of these events to Aunt in Year 4 and to
Neph in Year 6?
II.
FEDERAL TAXATION Page 2 of 4
Bob and Christina were divorced a few years ago, Christina getting
custody of the couple's two minor children. The divorce settlement contained
no alimony provision -- as mentioned below, both parties had substantial
professional earnings -- but it did obligate Bob to make child-support
payments of $20,000 a year. The settlement also provided that Bob was to
promptly pay off a mortgage of $35,000 on a vacation home in Maine used by the
family but owned by Christina. Finally, it was agreed that Bob, who was then
a practicing architect, was to pay Christina, a practicing engineer, $12,000
for consulting services which Christina had performed in connection with a
building project being carried out by Bob's firm.
Bob paid the child support regularly for the first twelve months or so
but then stopped completely (having for various reasons lost his architect's
license), leaving Christina to support the children on her own. Bob never
paid off the mortgage on the home in Maine and, similarly, never paid
Christina for her consulting services.
Christina sued Bob last year in state court and received a judgment of
$87,000, which included (a) $40,000 of unpaid child support, (b) the $35,000
due on the mortgage, and (c) the $12,000 consulting fee. Bob, however, is
totally broke and it is now clear that no portion of the judgment will ever be
satisfied.
III.
At the end of the 6-month period Max has stopped smoking (can't even
stand to be in the same room with a smoker) and is lean, trim and muscular.
His employer very gladly agrees to continue Max' health insurance coverage.
Max now wants to know whether he can deduct the cost of the two programs
on his federal income tax return. Advise him.
(b) As respects the fee paid to "Break...", would your advice be the
same or different if Max' employer had accompanied the above announcement with
an offer to pay directly (up to $2,500) for any stop-smoking program in which
its employees who were smokers chose to enroll, and in fact had paid Break's
fee directly? Explain.
IV.
Musical Melody Co. owns and operates a large recording studio in lower
Manhattan. Musical provides performance rooms, recording facilities and other
technical services to local artists wanting to make tapes for audition
purposes. The company has been in existence for forty years. A few months
ago Clanging Brass Co. took space next door. Clanging runs a machine shop and
its operations are sometimes very noisy. Unable to fully use its studio
because of the noise, Musical threatened to bring an action against Clanging
on grounds of nuisance and business interference. Negotiations ensued.
Anxious to avoid litigation, the parties agreed to settle their dispute in the
following simple manner: Musical would soundproof its performance studios at a
cost of $60,000, of which Clanging would pay two-thirds, or $40,000, and
Musical itself would pay the balance of $20,000.
The soundproofing work has now been completed and paid for. Both
parties being reasonably well satisfied, the only questions remaining are: How
should Musical, and how should Clanging, report these events for federal
income tax purposes? What are your answers?
V.
Susan's decision turns out to have been a lucky one: the dime on further
analysis is found to be genuine. Susan at once gets an offer of $30,000 for
the dime from another dealer. Harold advises her to accept the offer at once,
but Susan, ever the gambler, decides to keep the dime for a while in the hope
of a rise in the rare coin market. Her decision turns out well. In Year 3
the same dealer offers Susan $50,000 for the coin and this time she sells.
What are the tax consequences of these events to Harold and to Susan?
END EXAMINATION