WILLIAM MITCHELL COLLEGE OF LAW
FINAL EXAMINATION--TAKE-HOME
INCOME TAX, SECTION 1
FALL 1999
Professor DENISE ROY
Handout Date: Friday, December 3, 1999, 2:00 p.m.
Due Date: Wednesday, December 15, 1999, 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 8-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. (50%)
Write no more than 4 pages total on the questions in this section.
Rob and Laura are in the process of getting a divorce. Rob owns property including a cabin in the Catskill Mountains, New York. He purchased the cabin property for $70,000 in 1977, before he married Laura. (You may assume that Laura does not have any ownership interest in the cabin under state law or otherwise.) Rob paid $7,000 down in cash and financed the remaining $63,000 with a 30-year recourse mortgage loan from a bank. He has faithfully made the monthly payments of principal (!) and interest and has reduced the outstanding amount of the principal mortgage debt to $20,000. Rob and Laura have used the cabin exclusively as a second home and not for any rental or other business purpose. They have spent no more than 3 months per year living at the cabin. The rest of the time it has been vacant or occupied by friends and relatives. As part of the divorce settlement, Rob is proposing to transfer the cabin to Laura, who would assume the outstanding mortgage debt. Laura may or may not transfer other debt-free property to Rob as part of the settlement; all the terms have not yet been worked out. You may assume that the fair market value of the cabin property at the time of the transfer would be $200,000.
(1) Discuss the tax consequences to Rob and Laura from the proposed transfer of the cabin property including Laura's assumption of the mortgage debt.
(2) How does your analysis in (1), above, change, if at all, if Rob and Laura are not, and have never been, married at the time of the transfer? In answering this question, you may assume that Rob and Laura have been living together as "domestic partners" for a number of years, are in the midst of ending their relationship and contemplate the transfer as part of a "property settlement" allowing them to go their separate ways.
II. (50%)
Write no more than 4 pages total (not including diagrams) on the questions in this section.
Refer to the Charley case in the supplement at p. 3.
1. Diagram the positions of the "parties" (including any relevant persons or organizations) before and after the transaction(s) at issue in the case. Diagram the various ways of characterizing the transaction that appear in the case discussion, which may include some or all of the following: the actual transaction, the IRS position(s), the taxpayer position(s), and any alternatives put forth by the court. For purposes of diagramming, you may treat Truesdail Laboratories as an entity that is separate from its shareholders, including majority owners Philip and Katherine Charley (as if the corporation merely employed Dr. Charley and was not owned by him).
2. On p. 4 of the supplement, the court states, "Because Philip received the frequent flyer miles at no cost [premise], he had a basis of zero [conclusion]." Please explain the legal and theoretical reasoning that underlies this statement. You may complete this task by answering the questions below as best you can or you may approach the task any other way that makes sense to you (other than by skipping it altogether!).
(1) Can you think of a legal (tax law) basis for the court's premise that Dr. Charley obtained the frequent flyer miles "at no cost" (in addition to the fact that Dr. Charley did not have to pay for those miles)? If so, explain.
(b) What is the legal basis for the court's conclusion?
(c) Why is it that assets acquired "at no cost" should have no basis? Explain.
3. For this question, focus on taxpayers like Dr. Charley who are allowed to "keep" miles awarded when they travel using airline tickets purchased by their employers. Discuss whether such a taxpayer (let's call her "Frequent Flyer") would be entitled to a charitable deduction if she donated 50,000 employer-provided frequent flyer miles to a charity through a program similar to Northwest Airline's AirCares Program. (When a WorldPerks member "donates" WorldPerks miles through the AirCares Program, Northwest Airlines credits those miles to the WorldPerks account of the designated charity. The charity can then use the donated miles to obtain free flights under the same terms and conditions applicable to all WorldPerks members.) You may assume that the charity is qualified to take deductible contributions under Section 170 and that Frequent Flyer would be well under any contribution limits set forth in Section 170.
4. Referring to the tax policy considerations we discussed in class, discuss whether you believe it would be good policy to tax frequent flyers when they use frequent flyer miles to acquire free tickets. Include a brief statement of current law on the taxation of such use of frequent flyer miles. In your policy analysis, consider both frequent flyers who earn miles by purchasing their own tickets and frequent flyers who are allowed to "keep" miles awarded when they travel using airline tickets purchased by their employers. You may ignore the question whether frequent flyers should be taxed as they earn frequent flyer miles and focus on the use of miles for a free ticket.
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.