Individual Income Taxation
Prof. E. Gary
Due May 04, 2021
Alice J. and Bruce M. Jones are married taxpayers who file a joint return. Alice’s
birthday is September 21, 1961, and Bruce’s is June 27, 1960. Bruce is the office
manager for Ames Dental Clinic. Alice is the CPA at Lehman, York & Hunter CPA, LP.
The Jones provide over half of the support of their two children, Cynthia (born
January 25, 2002, Social Security number (017-44-9126) and John (born February 7,
2000, Social Security number (017-27-4148), who live with them. Both children are full-
time students and live with the Jones. The Jones also provided all the support for their 25-
year-old son Ryan who recently graduated law school but cannot find employment. Ryan
lives in DC.
According to Mr. Jones on May 31, 2019, he and his wife exchanged their two-
family house in Westchester County (500 William Street, White Plains, NY), which they
rented entirely from January 01, 2015 to May 31, 2019, for a four family rental property
located at 300 5th Avenue, Brooklyn, NY. At the time of the exchange, the FMV of the
two-family house was $1,225,000, and the adjusted basis was $??????? (Calculate based
on information provided below). The Four-family house had an adjusted basis of
$525,000 and a FMV of $850,000. The two-family home was subject to a $250,000
mortgage, which the buyer assumed. The buyer also included equipment worth $125,000
with and adjusted basis of $200,000.
The Jones also owned and rented a two-unit commercial retail building located at
1560 Avenue A, New York NY, which they purchased on October 10, 2018 and placed in
service on January 01, 2019. Information for all three of the rental properties is listed
In April 2019, Bruce decided to start his own business; a retail bicycle shop to be
located in NYC near Central Park called “Bruce’s Bikes.” On April 20, 2019, Bruce
signed a 10-year lease at a monthly rental rate of $10,000, effective May 01, 2019, for
retail space on 110th Street and CPW. The lease provided that Bruce was responsible for
the costs of improving the retail space for its intended use. The terms of the lease also
provided that the first two months were rent-free so that Bruce could complete the
construction needed to operate a retail bike shop. When Bruce executed the lease he paid
the landlord $30,000 for 2 months security deposit and the first month rent. On May 01,
2019, Bruce paid a contractor $435,000 to provide all construction work relating to the
build-out, which included electrical, plumbing, and carpentry. On May 01, 2019, Bruce
purchased the following assets for the business:
Equipment $ 45,000
Furniture & Fixtures $ 20,000
Computer Equipment $ 18,000
Although Bruce planned on a grand opening on June 01, 2019, the construction
was not completed until June 24, 2019, causing Bruce to delay the grand opening until
July 01, 2019.
On July 01, 2019, Bruce purchased a new truck for $27,500, which weighs 8,500
pounds, to be used 100% in the business for pickups and deliveries.
Bruce planned to finance the new business with the $100,000 inheritance he
received on 05/01/2019, from his late father’s estate. Bruce also planned to use $100,000
of savings he had invested with Madoff Investment Securities (MIS) but learned on
4/29/2019, that his entire savings was lost as a result of a massive ponzi scheme, which
was not covered by any insurance. In order to come up with the additional funds needed
to finance the construction, equipment, and inventory, Bruce’s grandfather loaned him
$85,000 on 06/10/2019. On December 30, 2019, Bruce received a letter from his
grandfather stating that he forgives the entire $85,000 loan effectively immediately.
For 2019, the bike shop generated the following revenues and incurred the following
Sales, Rental, & Service Revenue $ 325,000.00
Inventory purchased 170,000.00
Inventory on hand at December 31, 2019 130,000.00
Rent from (August 01 – December 31, 2019) 50,000.00
Promotional expense 5,000.00
Travel to Trade Shows 1,800.00
Meals & Entertainment 1,250.00
Postage and Delivery 1,920.00
Attorney fees 15,000.00
Pre-startup investigative expense 50,500.00
Other relevant information:
• Bruce has decided that he wants to minimize his tax as much as legally
possible and has requested your assistance in preparing his 2019 Federal
income tax return.
• Bruce has asked you to depreciate as much of the capital expenditures as
legally possible, but only wants to use IRC Sec 179 depreciation on the
equipment (not the furniture & fixtures or computer equipment).
• On March 15, 2019, York Technology Inc. filed for bankruptcy resulting in a
total loss for its’ only two shareholders. Bruce and a friend founded the
company on July 15, 2017, with each owning 50% of the outstanding shares.
Both Bruce and his friend each initially contributed $75,000 in exchange for
their 50% interest in the company.
• Bruce and Alice earned $2,800.00 interest income from savings in 2019.
• Bruce earned $1,500 in interest income from US Treasury Bonds in 2019.
• On October 18, 2019, Bruce received $5,200 of dividend income from JP
Morgan Chase Stock, which he purchased on September 01, 2019.
• On November 15, 2019, Bruce sold some of his JP Morgan Stock for $65,000,
which he purchased on July 01, 2018 for $42,000.
• Bruce was named as the sole beneficiary on his late mother’s life insurance
policy, and on December 31, 2018, Bruce received a check for $200,000 from
the insurance company, which he held and deposited on January 02, 2019.
• On June 13, 2019, Bruce sold 1,000 shares Citibank Stock for $60,000. He
purchased the stock on July 17, 2018 for $52,500.
• On November 04, 2019, Alice received a settlement award for injuries
sustained in 2018. The settlement award included the following amounts:
o Loss income $15,000
o Punitive damages $28,000
o Compensatory relating to a broken leg $20,000
• On November 03, 2019, Bruce determined that a personal loan to a friend was
uncollectible because his friend had recently and unexpectedly died. The
amount of the loan was $7,600.
• Bruce collected $7,000.00 per month for six months (July 2019 – December
2019) in rental income on 300 5th Avenue. For 2019 Bruce paid mortgage
interest of $12,500 and real estate taxes of $8,200.00. Bruce paid no other
expenses in 2019 for 300 5th Avenue. The property was placed in service on
July 01, 2019.
• Other Rental Income and Expenses for 2019 included:
500 William Street Avenue A Property
Rental Income $55,000.00 $105,000.00
Mortgage Interest Expense $15,000.00 $18,000.00
Real Estate Taxes $8,000.00 $12,000.00
Utilities $3,000.00 $2,700.00
Insurance $1,470.00 $3,900.00
Water & Sewer $1,320.00 $3,1250.00
Place in Service 01/01/2016 01/01/2019
Purchase Price $525,000.00 975,000.00
• Bruce and Alice 2019 W-2 statement shows the following wages and
1) Wages $75,000 $57,000
2) FWT 11,000 10,200
3) SWT 6,500 5,100
4) CWT 2,500 2,800
• The Jones also paid the following personal expenses in 2019:
a. Contributions to Museum of Modern Art (a 50% Organization):
i. Cash $38,000
ii. JP Morgan Chase Stock -FMV $90,000
(Long Term) -A/B $45,000
b. Real Estate Taxes on primary residence $17,000
c. Mortgage Interest on primary residence $11,850
d. Student loan Interest $3,000
Instructions: Make realistic assumptions about any missing or inconsistent data and state
your assumptions on a separate typed schedule.
i. Prepare form 1040, including all schedules and forms for 2019. (Do not prepare
NYS or NYC tax returns).
ii. Taxpayers does not want to use the Reduce Deduction Election for charitable
iii. All work must be typed onto approved IRS forms (no hand written forms will be
iv. Read chapter 8 to determine how to handle depreciation/amortization.
v. Only hand in the appropriate forms and schedules.