WILLIAM MITCHELL COLLEGE OF LAW
FINAL EXAMINATION--TAKE-HOME
INCOME TAX, SECTION 1
FALL 1998
Professor DENISE ROY
Handout Date: Monday, December 7, 1998, 8:30 a.m.
Due Date: Wednesday, December 16, 1998, 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. 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, INCLUDING DIAGRAMS.
2. You may use the textbook and Internal Revenue Code and Regulations volume assigned for the course, the Chirelstein and Bankman/Griffith/Pratt books 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 10-page length limitation. In addition, each section of the exam is subject to the page limitation specified on the exam. Any required diagrams must be provided on separate sheets of paper that will not be counted for purposes of the applying the page limitation(s). 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 10 PAGES). 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. (20%)
Write no more than 2 pages total on the questions in this section.
A. Discuss the differences and similarities among the following forms of tax benefit: deduction, exclusion, nonrecognition provision, credit.
B. Discuss the differences among the following concepts and explain the role of each in the federal income tax system: gross income, adjusted gross income, taxable income, economic income.
C. One recent proposal to address the "marriage penalty" problem called for increasing the standard deduction for married taxpayers who file jointly to an amount equal to double the standard deduction for single filers. Taking the perspective of one who believes that taxes imposed on a couple should not go up or down merely as a result of marriage, discuss whether, and the extent to which (if any), this approach fixes the "marriage penalty" problem. Include a brief description of the "marriage penalty."
II. (60%)
Write no more than 6 pages total on the questions in this section.
A. Your client, Krista Bear, operates a health food store and therapeutic massage business as a sole proprietorship. She is interested in contributing $2,000 from the business' account to help defray Governor-Elect Ventura's transition expenses. She believes that state government has a very important effect on the business climate and is interested in a number of state regulatory and legislative issues that may come up for decision in the next couple of years. She wants to make sure that the new governor gets off to a good start and has every opportunity to do a good job, and she knows how important it is that he get his staff and operations up and running quickly and efficiently. You understand that such contributions are to be paid into the State of Minnesota Transition Account (an account of the state government) and that Governor Ventura plans to repay contributors if state funds turn out to be adequate to cover the transition expenses.
(1) Advise Krista whether she will be entitled to deduct her $2,000 contribution for federal income tax purposes. Analyze the contribution both as a charitable contribution and as a business expense. Make note of additional information you may need to analyze the question fully.
(2) Discuss the tax consequences to Krista if Governor Ventura returns her contribution to her next year.
B. Suppose that on December 18, 1998, Employer Gigantico Corp. grants Employee Smalley an option to purchase 100 shares of Gigantico publicly traded stock for $80/share, which option may be exercised through December 31, 1999. On the day the option is granted, Gigantico stock is trading at $100 per share. On January 1, 1999, Employee Smalley exercises the option and pays $8,000 in cash to purchase 100 shares of Gigantico stock worth $110 per share (total value of $11,000). On January 1, 2000, Employee Smalley then sells the same 100 shares of Gigantico stock for $17,000. (I'm an optimist.) In the absence of any special rules on the taxation of employee stock options, what would you expect to be the tax consequences to Employee arising from (1) the grant of the stock option on December 18, 1998; (2) the exercise of the stock option on January 1, 1999; and (3) the January 1, 2000, sale of the Employer stock acquired via exercise of the stock option? (You should not need any information about stock options and how they work beyond the information given above. Just in case it's not clear, a stock option gives the holder the right to purchase stock at a stated price within a specified time, regardless of the fair market value---trading price--of the stock.)
C. Among other things, Miranda owns depreciable real property subject to recourse debt of $100,000 that she incurred to purchase the property. Her adjusted basis in the property is $50,000, and the property's value is $70,000. Miranda has two options for settling her debt obligation. First, she has an opportunity to work for six months to earn $30,000 in gross compensation. That money, plus $70,000 in cash she would generate from selling the property, would give her enough to repay the full $100,000 debt. In the alternative, she could let the lender foreclose on the property and give up the property to the lender in full satisfaction of the debt. (For purposes of simplifying the analysis, I am deliberately ignoring the issue of coming up with additional money to pay any tax liability associated with these two alternatives.) Assume that the cost to Miranda in time and effort spent working for six months would exactly equal the cost to Miranda of suffering the embarrasment and damage to credit-worthiness of going through foreclosure. Is there any federal income tax reason to prefer one option over the other? Does your answer depend on whether Miranda is insolvent? Explain your reasoning.
III. (20%)
Write no more than 2 pages total on the question in this section.
Referring to the tax policy considerations we discussed in class and any other consideration you deem relevant, discuss whether you believe law school tuition should, as a general rule, be treated as a deductible expenditure.
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.