WILLIAM MITCHELL COLLEGE OF LAW
FINAL EXAMINATION--TAKE-HOME
INCOME TAX
FALL 1996
Professor DENISE ROY
Handout Date: Monday, December 9, 1996, 12 p.m.
Due Date: No later than Monday, December 16, 1996, 9:00 p.m.
ADDITIONAL INSTRUCTIONS:
1. ONCE YOU HAVE PICKED UP THIS EXAM, YOU MAY DISCUSS THE EXAM WITH OTHER MEMBERS OF THE CLASS. HOWEVER, YOU MUST WRITE YOUR OWN ANSWER. YOU MAY 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.
2. You may use the Chirelstein book, the textbook and Internal Revenue Code volume assigned for the course, your own notes and outlines and any course handouts. You may not consult any outside materials. Feel free, but not obligated, to refer to regulations relating to the assigned Code sections.
3. This examination must be typewritten or printed (not handwritten) and is subject to a 15-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 15 PAGES). Answers must be double 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 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's been a pleasure working with you this semester.
Denise Roy
I (40%)
Write no more than 6 pages total on the questions in this section.
A. Explain the tax consequences to S and B from the following transactions in which S disposes of property with a fair market value of $150,000 and adjusted basis of $110,000:
(1) S transfers the property to B in satisfaction of a judgment ordering S to pay compensatory damages to B for a physical personal injury;
(2) S transfers the property to B in exchange for $25,000 cash and $125,000 worth of "like kind" property in an exchange generally qualifying for nonrecognition under Section 1031 (for purposes of this question 2 only, please limit your analysis to S' tax consequences);
(3) S makes a gift of the property to B, who agrees to assume the $80,000 outstanding mortgage debt on the property.
B. A Twin Cities law professor plans to travel to Washington, D.C. to attend an ABA conference. She will arrive in D.C. on Wednesday evening, and the conference begins bright and early Thursday morning. The conference consists of educational seminars on a variety of topics related to the professor's courses and scholarship, as well as business meetings of ABA committees and subcommittees. These sessions run from 7:30 a.m. until 5:00 p.m. Thursday through Saturday, and there are cocktail receptions hosted by various ABA committees, law book publishers and D.C. law firms in the evenings. (Although the conference ends early Saturday evening, the law professor plans to stay over in D.C. Saturday night to lower her airfare. The savings will more than make up for the added hotel and meal costs.) The law professor spends most of each day attending conference meetings, seminars and cocktail receptions, but, since she used to work in D.C. and has numerous friends who also attend this ABA conference, there is a significant social component to all her conference-related activities. In addition, the law professor always takes time off to visit friends (who also work in the same field and are important professional contacts), get a massage or facial and go to the zoo. Moreover, the law professor will spend Saturday evening and Sunday morning entirely on social pursuits.
The law school encourages attendance at professional conferences such as this one, but does not require attendance at any particular conference. The law school gives each professor a professional development budget from which to pay the expenses of a conference such as this one. The academic dean must approve attendance at such a conference if law school funds will cover the related expenses. It is up to the individual professor to make judgments about how much to spend on any given professional development activity. Since there is a cap on how much may be spent on such activities each year, spending more on one activity will reduce the amount available for other activities. The law professor obtains the academic dean's approval to attend the ABA conference, and makes arrangements to have the law school pay most of her conference-related expenses (transportation, meals, hotel, registration and incidentals) directly from her professional development budget.
For various reasons, the law professor must bring her two-month old baby along on the trip. While the law professor is busy with conference activities, she will hire a sitter through a babysitting service at a cost of $10/hour plus carfare. She will probably end up paying the sitter for a minimum of eight hours on each of the three days of the conference, for a total cost of more than $240.00. This expense will be over and above her regular childcare expenses since she must make her regular weekly childcare payment regardless of whether the baby actually attends the childcare center the full week of the conference. She will pay the babysitting service herself and will not seek reimbursement from the law school. Her regular childcare expenses are reimbursed by her employer through a dependent care assistance program that qualifies for the Code Section 129 exclusion, and she always excludes the maximum amount ($5,000) allowed by that section.
(1) What are the tax consequences to the law professor from the law school's payment of her Saturday night hotel bill?
(2) What are the tax consequences to the law professor from the babysitting expenses paid in connection with the conference trip?
[End of Section I. Go to next page.]
II (40%)
Write no more than 6 pages total on the questions in this section.
As an agent for the IRS, your job is to search media sources for promising audit subjects. You see the newspaper article copied below and shout "Eureka!" In an advisory memo to your supervisor, discuss the likely tax consequences for Leslie Robins and Colleen De Vries from winning the lottery and dividing the proceeds as described in the article. In your analysis, assume alternatively that they (a) succeed in getting a court order dividing the annual payments and (b) do not succeed in court but Leslie agrees to pay Colleen one-half of each annual payment. Be sure to note additional information you may need to complete your analysis and explain why you may need it. Since you are a would-be lottery winner yourself (and a reasonable person, to boot) and this is an advisory memo, provide your honest judgment about the application of the tax rules, and do not slant your analysis in favor of the government. A word of caution: Do not believe everything you read about tax consequences in newspaper articles, including this one. Use your own judgment in applying the tax rules.
[End of Section II. Go to next page.]
III (20%)
Write no more than 3 pages total on the questions in this section.
U.S. Representative Bill Archer, Chair of the House Ways and Means Committee (which has jurisdiction in the U.S. House of Representatives over federal tax matters), has proposed allowing a homeowner to deduct any tax loss incurred on the sale of a principal residence. (Recall that such losses are currently treated as nondeductible personal expenses.) Congress watchers predict this proposal will appear in the next major tax bill reported out of the Ways and Means Committee.
(1) Which Code section(s) would you recommend amending to accomplish this proposed change in law? Describe briefly how you would change each such section. (Do not draft the actual amendments; instead describe the kind of change that you believe would need to be made.)
(2) Evaluate this proposal using the tax policy factors we discussed in class.
THE END
0 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. 0 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.