QUESTION I

(Weight: One third)

You are a judge of the United States Tax Court and recently heard a case in which the taxpayer, Mary Burke, claimed deductions in the amount of $12,200 for child support and alimony she did not receive from her former husband, Raymond Mackey. By a valid decree issued in 1991, the District Court of the State of Minnesota sitting in St. Paul ordered Mackey to pay Burke $600 per month for the support of their two minor children. The court also ordered Mackey to pay Burke temporary alimony in the amount of $500 per month for 2 years beginning on November 1, 1991.

Mackey made the required payments through the end of 1992, but in late December of 1992, he left Minnesota and has not made any payments of either child support or alimony since. Mary Burke has had custody of the children and has furnished all of their support during that time. In 1993 Mackey failed to pay any of the $7,200 in child support he owed nor any of the $5,000 of alimony.

Burke has been employed since the divorce but has still found it necessary to sell some stock she received in the divorce settlement with Mackey just to make ends meet. In 1993 when she received nothing from Mackey, she sold some of this stock for $6,000. Mackey had purchased it for $3,000 in 1989, and had transferred it to her at the time of the divorce in 1991 at which time it was worth $9,000.

On her return for 1993, Mary Burke claimed a deduction for both the child support and alimony she did not receive in 1993. She also claimed a loss deduction on the sale of her stock on the theory that the overall transaction was a loss since she had to use the proceeds of the sale to support herself and the children. The Internal Revenue Service denied all of these deductions and issued a deficiency assessment against Burke. She filed a petition in Tax Court claiming that she is entitled to them.

Write an opinion deciding Mary Burke's case assuming there is no precedent in this Circuit on the issues presented. In writing this opinion, be sure to discuss the arguments on both sides and give your reasons for making your decision.

QUESTION II

(Weight: One third)

Hudson Hayes heads a blues band which travels extensively and plays throughout the country. In March 1994, his agent set up a tour to go to several European countries during the summer of 1994. The tour was to begin with a date in London on June 4 and end with a weeklong run at a club in Paris ending August 16. Hudson owned his home in Austin, Texas, and although he would be gone for the whole summer did not want to rent it out. He had done that before and the tenant had done substantial damage.

He did want to make some arrangements for someone to look in on the house and to care for the yard while he was gone. He had many mementos of his musical career in the house and feared that they might be lost in a burglary or if there were a fire. The yard was perhaps more important to Hudson than the house. He has always been an avid gardener and landscaper. In fact, before his music was successful enough to support him, he had a lawn service and landscaping business, which he had incorporated as Green and Great Lawns, Inc. Even though his musical career was going well, when he sold the company, he had retained one fourth of the stock in the company in case he needed to fall back on the old career. Also, he continued to maintain his own lawn and garden meticulously. He had always believed the way he treated his yard was the best advertisement for the company. He was sure that no one he could hire would do as well as he did with the yard. That included the company because he had not been completely satisfied with the work it had done since he left active involvement.

As luck would have it, Hudson got a new neighbor in March 1994, Jane Clark, whom he discovered was a great gardener and lawn enthusiast. They had several conversations about their mutual interests, and Jane showed him pictures of her previous lawn and garden. Hudson was impressed and relieved. He soon asked Jane if she would be willing to care for his lawn and garden while he was gone. Jane was not only willing but excited to do so. For one thing she was going to China to teach for the summer of 1995, and had already begun to wonder what she would do with her yard and garden. They quickly agreed that Jane would take care of both yards in 1994, and that Hudson would do it in 1995.

Hudson had a very successful tour in 1994. While he was gone, Jane took wonderful care of the property; it looked perhaps better than Hudson could have kept it himself. It looked so good that when he returned he had it professionally photographed and convinced the people at Green and Great Lawns to use his pictures in their advertising materials. They all justified this use on the theory that the love of lawns that went into the company and his lawn both originated with Hudson. Hudson also got the company to agree to try to bring the quality of its lawn care up to the standard established by Hudson's yard.

When 1995 rolled around, Jane went to China, but because his 1994 tour had been so well received, Hudson had another tour of Europe. With Jane's somewhat reluctant agreement, Hudson hired Green and Great Lawns to do the work on both lawns. Each yard cost Hudson $1,500 for the summer, but he thought it well worth the expense. Jane was pleased with the work that the company did, and Hudson was very pleased to see the great improvement in the company's work.

1) On his income tax return for 1994, Hudson deducted the value of the services provided by Jane to him as a business expense. On his return for 1995, he deducted the cost of caring for Jane's lawn as a business expense and the cost of caring for his lawn as an expense deductible under section 212 on the theory that it enhanced the value of his investment in the company. Are these deductions justifiable? Are there other possible tax consequences of these events? Explain.

2) Suppose that Jane had not been available in 1994 and that Hudson convinced his other neighbor, Wiley Foxx, to do the work. Wiley was the pastor at Maple Street Christian Church and to show his gratitude, Hudson donated two properties to the church on his return from Europe. First, he gave the copyright to a song he had written about some of the low points of the lawn business, "The Lawn Mowing Blues" which featured the line, "I don't want to mow the lawn no more." This song had had some success and the value of the copyright was $10,000. Second, he donated $1,500 worth of 3M stock in which his basis was $750. He took charitable deductions of $11,500. Are these deductions proper?

3) In 1995 Hudson had become wildly popular. In July 1995, he gave a collection of his mementos, posters, awards, playbills and the like to Texas Blues Hall of Fame, a charitable organization. At the time the collection had a value of $20,000 and his basis was about $100. In 1997 the Hall of Fame folded when blues music once again went out of favor. It returned his collection to Hudson who sold it in 1998 to the Johnny Winter Group for $50,000. (He had become even more popular.)

How should Hudson report these transactions? Be sure to state clearly your reasons.

QUESTION III

(Weight: One third)

Wilbur Force bought unimproved farmland in rural Olmsted County in 1965 for $50,000. He never lived on this property, but rented it for cash rent to a neighboring farmer. In 1990 he decided to move to Montana to get away from all the people in Minnesota. He found a small ranch that he wanted near the town of Two Dot, Montana and decided to buy it. He closed this transaction by paying $200,000 in cash. A few days after the closing Wilbur was talking to his lawyer friend, Dannielle Waytz, about his plans to sell his Minnesota property for which he expected to get about $250,000. He expressed concern about the large tax he might have to pay, and Danielle told him that if he exchanged the property he could probably avoid much if not all of the tax.

When he told Danielle of his recent purchase of the ranch, she suggested a way to structure the disposition of his Minnesota farm to avoid tax. First, Wilbur would find a buyer for his Minnesota farm. Then, he would transfer the Montana ranch to Danielle in exchange for her promise to pay him $250,000 in cash to be paid within 30 days of closing. Danielle would enter into a purchase agreement with the prospective buyer of the Minnesota farm promising to transfer that property for the payment of $250,000 in cash. At the closing Danielle would first complete an exchange with Wilbur transferring the Montana ranch to him in exchange for his transfer of the Minnesota farm to her. She would then transfer the Minnesota farm to the buyer for Buyer's payment of $250,000 in cash. Danielle would use that $250,000 to pay off her debt to Wilbur.

Wilbur agreed to this deal since Danielle said it would be advantageous from a tax standpoint, and the various steps were carried out before the end of 1990. At all times during 1990 the Montana ranch had a fair market value of $200,000.

About one year later Wilbur became dissatisfied with life in Montana. He had not done his research well before moving and was surprised that half of his neighbors were rich Californians with more arriving every day. He decided to move to Alberta to really get away from it all. Before leaving he executed a deed in which he gave a life estate in the Montana ranch to his daughter, Anne, with remainder to her son, David. He still loved the setting of the ranch (it was the people he could not stand), and hoped to visit his daughter there from time to time.

Anne was anxious to develop the ranch, but knew that it would be several years before she would be ready to leave her job in Minneapolis to settle permanently on the land. She found a tenant named Bill Graze who agreed to lease the ranch property for 10 years. Graze agreed to pay cash rent of $12,000 per year and also agreed to build several ranch buildings on the property with the site of these to be determined by Anne to fit with a new ranchhouse she planned to build at the end of the lease term. The fair rental value of the land was $15,000 per year. This lease was signed in July of 1992, and Graze put up several buildings by the end of 1993. The cost of these buildings was $20,000 not including Graze's labor, and they were expected to last about 25 years.

In 1995 the influx of Californians became too much even for Graze, and he decided to try Alaska. He called Anne to tell her that he was sorry, but that he planned to abandon his lease obligation. He sent her a check for $5,000 explaining that it was all he could afford to pay, but that he felt an obligation to settle some part of what he owed her. He also sent a note in which he stated that he was abandoning all interest in the lease. At the time the buildings were worth $30,000.

In May of 1996 Anne decided to drive to Two Dot to check on the condition of the property and try to find another tenant. On the way out she was killed in a head on collision. David then became the owner of the property by virtue of his remainder interest. At that time the land had a value of $400,000 and the improvements were worth $31,000.

David did not want to have anything to do with the property which he associated with his mother's death and sold it to a woman from Sausilito in 1997 for $420,000.

How should these transactions be reported by Wilbur, Anne, Graze and David?

QUESTION IV

Mazzei operated a sheet metal company in Hopewell, Virginia in partnership with his brother. Vernon Blick was an employee of the company. In March 1965, Blick was told by a man named Cousins of a scheme for reproducing money. Blick accompanied Cousins to a hotel in Washington, D. C., where Cousins introduced Blick to 2 other men named Collins and Joe. At that time, Collins and Joe showed Blick a black box which they asserted was capable of reproducing money. The black box was approximately 15 inches long, 8 or 10 inches wide, and 6 inches deep, about the size of a shoebox. It was made of metal and had a handle on it.

Blick gave Collins a $10 bill which Collins took and placed between 2 pieces of white paper of about the same size. Collins put the money and the paper into the box and connected the box to an electric outlet. The black box began a buzzing sound which continued for about 10 minutes. Then Collins reached into the box and pulled out Blick's $10 bill and what appeared to be a hew $10 bill. Collins then told Blick that they could not reproduce any more money at that time because they did not have enough of the type of paper required. In addition, Collins indicated that they would rather not use small denomination bills, but instead they wanted larger denominations such an $100 bills. Blick then returned to Hopewell.

In April or May of 1965, Blick recounted the events of the demonstration to his boss, Mazzei. Blick arranged to have Mazzei meet with Cousins. Cousins came to Hopewell and discussed a deal to reproduce money involving Blick, Mazzei, Cousins, Collins and Joe in Washington and New York City. Mazzei was to provide money which Cousins, Collins and Joe would reproduce and then return to Mazzei.

In May 1965, Cousins took Mazzei and Blick to New York City. Mazzei took $10,000 in cash with him at Cousins' request. They went to a hotel in Brooklyn where Cousins telephoned Collins and Joe who then came over with the black box. Mazzei gave Collins a $100 bill in order to demonstrate the reproducing box. collins went through the "reproduction" process and returned to Mazzei his bill and a new $100 bill. Mazzei requested that they reproduce more money, but was told that there was not enough of the right kind of paper, which was supposed to be a special type used by the government and obtained through a "friend" in Washington. cousins then took Mazzei and Blick back to Hopewell that afternoon.

Mazzei continued to inquire of Cousins about reproducing more money but again was told that the difficulty in obtaining the paper was holding things up. However, Mazzei did give $700 to Cousins who supposedly went to New York and reproduce it. Cousins returned Mazzei's $700 plus $300 more, supposedly reproduced. Once again, Cousins said that the reason he did not reproduce more was because of the lack of sufficient paper.

About a week later, Joe telephoned Mazzei from New York and stated that they would be ready in a few days to proceed with the deal. Joe requested Mazzei to obtain $20,000 in large denominations, preferably $100 bills.

On June 1, 1965, Mazzei cashed a check for $20,000 on his company's account at a local bank, taking the proceeds in $100 bills. Blick obtained $5,000, borrowed from Mazzei's brother, also through a check on the company account. Several days later, Joe called Mazzei, confirmed that Mazzei had acquired the cash and requested that Mazzei and Blick meet him in New York.

On June 3, 1965 Mazzei and Blick flew to New York with the money. Once in New York, they went to a designated hotel to meet Cousins, Collins and Joe. Joe came by the hotel and met Mazzei, confirming that he and Blick had the money. The 3 went outside where Collins was waiting with a cab. they went to an apartment in Brooklyn, stopping on the way for Collins or Joe to buy liquor.

Once at the apartment, Mazzei and Blick were again shown the black box. Collins then asked Mazzei for the money. Mazzei handed Collins a packet of money containing $5,000. Collins removed the wrapper and placed the money in a pan of water. Collins then removed the money from the water. and placed each $100 bill between 2 pieces of paper which he then set aside. Collins continued the process until he finished with the series of bills in the $5,000 packet. Mazzei then handed Collins another $5,000 packet, and Collins repeated the same process. This continued until Mazzei had given Collins the entire $20,000. Mazzei then informed Collins that Blick had $5,000, which Blick then gave to Mazzei who in turn gave it to Collins.

Collins then informed Mazzei and Blick that the black box was broken and would not work. Collins told them that they would have to use an oven, apparently to complete the reproduction process. Collins then turned on an ordinary electric oven in the apartment and put all of the money in the oven. At this point, 2 armed men broke into the room impersonating law enforcement officers making a counterfeiting raid.