WILLIAM MITCHELL COLLEGE OF LAW

FINAL EXAMINATION--TAKE-HOME

 

INCOME TAX, SECTION 1

FALL 2001

Professor DENISE ROY

 

Handout Date:  Saturday, December 8, 2001, 8:30 p.m.

Due Date:  Wednesday, December 19, 2001, 8:00 p.m.

 

Student Test No.____________________

 

1.         Your examination will be anonymously graded.  To maintain anonymity, use the assigned test number received in the mail.

 

2.         Put your test number on this page and on all of your answer sheets.

 

3.         If you do not know your test number, you may obtain it in Student Services (Room 102).  If you have any concern about the anonymity of your test number, you may have it changed in Student Services. 

 

4.         If you do not use your test number, you will be deemed to have waived your privilege of anonymous grading.  Please do not do this.

 

5.         YOUR TYPEWRITTEN ANSWERS ARE DUE IN THE STUDENT SERVICES OFFICE NO LATER THAN 8:00 P.M. ON WEDNESDAY, DECEMBER 19, 2001.  YOU MUST SIGN THE EXAM CONFIDENTIALITY PLEDGE BELOW USING YOUR TEST NUMBER.  WHEN YOU TURN IN YOUR EXAM, HAVE THE STUDENT SERVICES PERSONNEL SIGN AND ACKNOWLEDGE TIME AND DATE OF RECEIPT.

 

            LATE EXAMINATIONS WILL BE ACCEPTED ONLY UPON A GRADE PENALTY DETERMINED BY THE DEAN OF STUDENTS.

 

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STUDENT CONDUCT CODE                                 

 

                IT IS A VIOLATION OF THE CODE:

     

1.             To use any sources which are forbidden by the instructor to complete an exam.

 

2.             To submit as one's own work the work of another.

 

3.             To engage in any conduct which tends to give an unfair advantage to any student in any

                academic matter.

 

4.                Knowledge of any violation should be promptly reported.

 

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By placing my examination test number in this space _____________, I hereby certify that between the receipt and due date of this examination I did not consult or discuss with any person other than other students in this class any matter relating to this examination or to any matter discussed in the Fall 2001 Income Tax, Section 1, course, and that I did not work or consult with anyone in writing the answers to these exam questions.  In addition, I hereby certify that I have no knowledge of any other classmate's violation of this rule.

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VIOLATIONS OF THE STUDENT CONDUCT CODE MAY RESULT IN EXPULSION OR SUSPENSION FROM THE COLLEGE OR

DISMISSAL FROM THE CLASS.

 

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GRADUATING SENIORS:  If you are a graduating senior, note this fact CONSPICUOUSLY on all answer sheets

and this exam paper.

 

ADDITIONAL INSTRUCTIONS:

 

1.         ONCE YOU HAVE PICKED UP THIS EXAM, YOU MAY DISCUSS THE EXAM WITH OTHER MEMBERS OF THE CLASS.  DO NOT DISCUSS THE EXAM, THE ISSUES RAISED IN THE COURSE OR ANY OTHER ASPECT OF THE COURSE WITH ANY PERSON OTHER THAN MEMBERS OF THE CLASS AND ME.  YOU MUST WRITE YOUR OWN EXAM ANSWERS.

 

2.         You may use the textbook and Internal Revenue Code and Regulations volume assigned for the course,  the Chirelstein book recommended in connection with the course, your own notes and outlines and any course handouts.  You may not consult any outside materials. 

 

3.         This examination must be typewritten or printed (not handwritten) and is subject to a 9-page length limitation. In addition, each section of the exam is subject to the page limitation specified on the exam.  IF YOU EXCEED THE PAGE LIMITATION(S), YOU WILL BE GRADED ONLY ON THE PAGES THAT FALL WITHIN THE LIMITATION (E.G., ON THE FIRST 9 PAGES OF THE EXAM).  Answers must be doubled spaced on 8-1/2 x 11 inch paper with non-proportional-type font[1] having no more than 12 characters per inch (CPI)[2] and normal top and bottom 1 inch margins and left and right 1 inch margins.  Do not justify the right-hand margin of your text.  Type only on one side of each sheet of paper.  Do not use footnotes.   PLACE YOUR TEST NUMBER ON EACH PAGE OF YOUR ANSWER AND NUMBER YOUR PAGES.  FAILURE TO COMPLY WITH THESE INSTRUCTIONS MAY BE TAKEN INTO ACCOUNT IN YOUR GRADE.  

 

4.         Each section tells you the relative weight of the section to the exam as a whole.   Do not assume that the number of pages you devote to a section should be proportional to the weight of the section. 

 

5.         You will be graded on the quality of your analysis rather than on the conclusions you reach.  Do not discuss extraneous issues.  Limit your analysis to federal income tax issues.  Do not discuss other tax (e.g., payroll, estate and gift, state) issues that may be presented.

 

6.         You need not provide numerical answers but may do so if you choose. In some cases you may not have sufficient information to provide numerical answers.  If you do provide numerical answers, be sure to explain how you reached your conclusions.

 

            Good luck on your exam.  It has been a pleasure working with you this semester.  Denise Roy

I (50%)

 

Write no more than 4 pages total on the questions in this section.

 

Eighteen-year-old Leona went to Midnight’s tattoo parlor in May of 2000.  She wanted to surprise her mother on Mother’s Day with a tattoo on her shoulder.  (You know the one—“Mom” under a red heart shot through with a purple cupid’s arrow.)  She agreed to pay for her tattoo on credit:  $100 down and $20 per month for 11 months (for a total payment of $320).  Eddie, an employee of the tattoo parlor, did a beautiful job on the tattoo.  Unfortunately, he used an unsterilized needle and Leona developed a severe case of hepatitis.  She was hospitalized for a week and out of work for a month.  As a result of the illness, she incurred substantial medical bills, missed a month of wages and tips from her work as a server at Perkins Restaurant and suffered quite a bit of pain and suffering.  Leona was not covered by health insurance and paid all the medical bills herself.  The owner of the tattoo parlor, Midnight, knows a law suit when he sees one staring him in the face, and offered to pay Leona $20,000 in release of any legal claims she might have against him and the parlor as a result of the illness.  As part of the settlement, he also offered to return her $100 down payment and cancel the monthly payments for the tattoo.  She agreed and signed the release.  Midnight made all payments under the settlement in January 2001.

 

(a)            Would Leona be allowed to deduct her hepatitis-related medical expenses on her federal income tax return? 

 

(b)            What are the federal income tax consequences to Leona from the settlement of her legal claims against Midnight? 

 

(c)            Would Midnight be allowed to deduct the $20,000 payment to Leona on his federal income tax return?

 

II (25%)

 

Write no more than 2 pages total on the questions in this section.

 

Wendra and Zach are cousins.  They inherited two houses from their grandfather in 1990.  One house is located on Washburn Avenue, and the other is located on Zenith Avenue.  Zach lives in the Zenith house, and Wendra lives in the Washburn house.  However, pursuant to the terms of the bequest, they own each house as joint tenants.  In other words, each owns an undivided 50 percent interest in the Washburn house, and each owns an undivided 50 percent interest in the Zenith house.  Grandfather paid $30,000 for the Washburn house in 1970, and it was worth $120,000 at the time he died.  It is worth $200,000 now.  Grandfather purchased the Zenith house for $70,000 in 1980, and it was worth $140,000 when he died.  It is worth $250,000 now.  There is no mortgage or other debt associated with either house.  Wendra is getting married and wants to own the Washburn house by herself.  (She is thinking about maybe letting her husband live there though.)  Zach is amenable to working out some kind of arrangement.  He proposes to give Wendra his interest in the Washburn house.  In return, Wendra would give Zach her interest in the Zenith house.  Each would then be sole owner of his or her residence.  Since the Zenith house is worth more, Zach would also give Wendra $25,000 in cash.  What would be the federal income tax consequences to Wendra from this transaction? 

 

III (25%)

 

Write no more than 3 pages total on the questions in this section.

 

Code Section 170 allows taxpayers to deduct the fair market value of long-term capital gain property, such as stock, that is contributed to a qualifying charity.  As staff to a member of the U.S. Senate Finance Committee, it is your job to evaluate proposals for raising revenue.   One such proposal is to limit the deduction for charitable contributions of long-term capital gain property to the taxpayer’s adjusted basis in the property at the time of the contribution.  Using the tax policy criteria we discussed in class and any other considerations you think are relevant, evaluate this proposal.

 

 

The End! 


[1] Nonproportional fonts, such as Courier, have letters that are all the same size.  Therefore, the number of characters per inch does not vary depending on the letters used.

[2] CPI is not the same as “point” size (e.g., 10-point font). The exam questions appear in Courier font size 10, which meets the 12 CPI requirement.  Use a ruler or compare with the exam questions to make sure you get the font size correct.