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.
 

5. Your typewritten answers are due in the student services office no later than 8:30 p.m. on Monday, December 21, 1992. 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.
 

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.
 

By placing my examination test number in this space ________, I hereby certify that between receiving and turning in this examination I did not consult or discuss with any person any matter relating to this examination or to any matter discussed in the §2, Fall 1992, Income Tax course, that I did not consult any written material other than my own notes and outlines, course handouts, the Chirelstein book and the textbook and Internal Revenue Code volume assigned in this 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.
 

VIOLATIONS OF THE STUDENT CONDUCT CODE MAY RESULT IN EXPULSION OR

SUSPENSION FROM THE COLLEGE OR DISMISSAL FROM THE CLASS
 

GRADUATING SENIORS: Please consult with Cynthia Boyum in the Student Services office about how the grading of your exams will be handled.
 

ADDITIONAL INSTRUCTIONS:
 

1. Once you have picked up this exam, you may not discuss the exam, the issues raised in the course or any other aspect of the course with any other person, including other members of the class. Direct any questions about the exam to 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.
 

3. This examination must be typewritten and is subject to a 12-page length limitation. Answers must be doubled spaced on 8-1/2 x 11-inch paper with 12 font type and normal top and bottom 1-inch margins and left and right 1-1/4 inch margins. Type only on one side of each sheet of paper. Do not use footnotes. Place your test number on each page of your answer.
 

4. Barring special circumstances, you should be able to complete this exam in two 12-hour days. However, you may take more time if you want or need to do so.
 

5. Each question tells you the relative weight of the question to the exam as a whole. Do not assume that the number of pages you devote to an answer should be proportional to the weight of the question.
 

6. For purposes of this examination, you may assume that the commercial ad applicable federal rates of interest are 10% annual simple interest per year.
 

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

I. (40%)
 

A. Robert flies regularly on Northwest Airlines on business trips for a corporation in which he is the sole shareholder and employee. In March of 1992, Robert traded in his Traveler's Advantage frequent flyer miles to purchase round trip tickets to Nairobi for himself, the members of his family and one additional person. Robert offered to sell the extra ticket to his nephew Andy for $500,, saying, "I'd appreciate it if you'd come along and keep your cousin, Little Rob, company. He doesn't want to go without you." Andy paid Robert $500 for the ticket, which would have cost him $2000 at the nondiscounted coach fair. Discuss the tax consequences to Robert and Andy from these events.
 

B. In 1985, Sarine received as a gift from her aging aunt a profitable, on-going California vineyard and wine production facility worth $500,000. In 1988, she found substantial gold deposits on the property, which suddenly increased its value to $1,500,000. She promptly took out a loan for $800,000, secured by the property, and used the funds to set up mining operations. In 1992, she discovered she had never owned the portion of the

property on which the mine was located, and she was forced to forfeit the land and mining operations to its rightful owner. Discuss Sarine's tax consequences from the forfeiture of the mine property. In the course of your analysis, point out any additional information you need from Sarine and explain why you need it.
 

II. (40%)
 

A minister was sued by the church secretary for sexual harassment under Title VII, as amended by the 1991 Civil Rights Act. The minister responded that the allegations were false and malicious and countersued under a state statute prohibiting "patently malicious and false allegations of sexual misconduct in the workplace" and permitting juries to award judgments covering the costs of litigation and punitive damages. The statute provided that any punitive damages must be paid to a local charity designated by the plaintiff that (1) provides counseling services to the victims of sexual abuse, including sexual harassment, and (2) is described in Section 170 of the Internal Revenue Code.
 

The minister lost and has come to you to determine whether any of the following costs of litigation, including the countersuit, are deductible: backpay award paid to the secretary, attorneys fees, costs of driving to court, lunches with the attorney. What is your response?
 

Would your analysis change if the minister had won and was awarded costs and punitive damages under the state statute? Discuss. How would the minister be taxed on such an award?
 

A member of the minister's church, the attorney forgave a portion of the attorneys fees owed by the minister and claimed the amount forgiven as a deductible charitable contribution. Assuming there is no doubt the attorney had the required donative intent and the church was qualified to receive deductible contributions under Code Section 170, was the attorney entitled to claim such a deduction? Why or why not?
 

III. (20%)
 

President-elect Clinton wants to design investment incentives to help "grow the economy." He is considering the following options: (1) repeal the limitation on deduction of capital losses applicable to individuals; (2) create Super ACRS for property placed in service during his administration by allowing an extra 15% of basis to be deducted in the first year of depreciation; and (3) allow a 50% capital gains exclusion for gain from the sale or exchange of capital assets held at least three years.
 

For each proposal, describe briefly how the proposal would differ from current law and compare these proposals using the tax policy criteria we discussed in class. Which proposal do you think investors will prefer and why?