You have been assigned as the staff preparer on the Morris and Gail Vanden individual income tax return for 2015.

You have been assigned as the staff preparer on the Morris and Gail Vanden individual income tax return for 2015.  They have been a client of your firm for over 20 years but this is the first time you have worked on their engagement.  The supervisor on the engagement has had several interactions with the client over the course of the year and has attempted to ensure that all of the documentation you need is in place, however he has made no attempt to organize it for you other than to review the package sent by the client and make sure it appears that all of the documents and other information, including his discussions with the client during the year, are in the package of information provided to you.  Should you feel you need additional facts, feel free to email your supervisor (that would be me), though he has already instructed you that you are on your own for purposes of research and calculations.  Due to your excellent past performance, your supervisor has told you that you can make whatever decisions you think necessary to complete the return provided you document your analysis, conclusions and calculations.   Because your supervisor is extremely busy he has requested that any research and analysis be kept brief and to the point – long winded analysis will not get you any additional benefits — but you must provide enough details so that your analysis and conclusions can be followed and reviewed quickly.  Include code section cites only as necessary to support your work.  Any calculations you do that support numbers on the return must also be clear, concise and provided along with the return for review. Your supporting workpapers should be in the order that the items they support appear on the form 1040. (Note that the “package” of information will consist of a narrative explaining the client’s situation plus some additional supporting forms – normally you would receive simply a box of information including various tax forms, broker statements, K-1 forms, etc. but since this is an exam, I am providing most of the information in narrative form, though some important details are included in the paper forms also being provided).  As always, you can contact me a

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Prepare the 2015 form 1040 and all necessary supporting forms and calculations.  To qualify for credit, the forms MUST be handwritten (i.e. I will not accept returns that have been prepared using a software program, however if you use the type in forms at the IRS website, those will be acceptable).  This is to essentially force you to follow the connections and mechanisms of how the forms work together.  While I cannot prevent you from preparing the forms using software and then copying to a handwritten set of forms, that will accomplish the same goal of getting you accustomed to how the forms work together.  I expect that you will complete the form 1040, Schedules A, B, C, D, E and other supporting forms as necessary.  All of the forms are available on the IRS website at irs.gov.  Supporting calculations using excel will be acceptable.  Please make sure they fit to a single page as best as possible for purposes of printing.

In addition to the completed set of forms and supporting workpapers, conclusions and calculations, provide a list of all tax carryover items, if they exist, such as passive loss carryovers, etc.

You ONLY need to calculate through taxable income on page 2 of the 1040.  You do NOT need to calculate tax due.

DETAILS

Morris is a double retiree living in Incline Village, Nevada.  He previously worked for a technology firm in San Jose, California from which he retired early many years ago with a nice pension (see attached form).  Subsequent to his first retirement he joined a venture capital firm in San Diego, California as a partner/advisor.  He has invested in many of the venture firm’s funds and has annually received several form K-1’s.  Over the years, these venture fund investments have been quite successful and now Morris has again retired and spends his time traveling the country with his wife visiting his properties, vacationing, buying cars, writing, and spending time with family.  Morris and Gail have three adult sons who have not lived with them at all in 2015.  Because Morris has been so successful with his money, he has been quite generous with his kids the last several years, annually making large gifts to each of them.  Morris has also made other investments over the years, some of which he still owns.  Note that the only partnership that Morris still owns is “The Fly Company” for which he has provided the form K-1.

Gail worked part time at a gift shop owned by a friend in Incline Village, but only when not traveling with Morris.  Her friend is very absent minded and rarely remembers to pay Gail but allows Gail to choose anything in the store around Christmas time to make up for it.  Gail prefers this method because she then does not have to worry about receiving a form W-2 for the wages she has not been paid.  During 2015, Gail was away most of the year, but still worked enough hours in the shop to be allowed to pick out several items which she gave away as Christmas presents to her grandkids.  Based on conversations with Morris and Gail, your supervisor found that the store owner passed away in January 2016 and no tax forms will be forthcoming.  He found out that the approximate fair market value of the items Gail chose in 2015 was $12,000 and the store usually marks up the prices about 40% from original cost.

Morris and Gail are both in their 60’s and have been drawing on Social Security for the last couple of years.  They each received a form from the Social Security Administration noting their benefits paid in 2015 – see attached forms SSA-1099.

Morris also picked up the gambling bug during 2015 and spent a considerable amount of time playing slot machines at one of the local casinos.  He actually won some money and the form 1099 W-2G is attached.  He estimates, but provided you no receipts, that he probably spent the entire amount of winnings plus another $2,500 on the slot machines during 2015.

Morris was quite busy this year managing his various properties and investments.  He has invested a significant amount of money with a broker who has full control over the trades within guidelines set by Morris upon the initial funding of the brokerage account.  There were over 1,000 total trades in the account and the form 1099-B that was originally supplied to Morris showed only the sales price of each one.  Your supervisor requested Morris to ask for the basis for each trade and being a little greedy decided to ask the broker to supply the gain or loss and type (short-term vs. long-term) for each trade.  Luckily, Morris is a big client of this broker so the broker was willing to comply with the request and provided the details.  The attached sheet (see last page of this narrative) summarizes the data provided for the brokerage account.  Morris being Morris, he also had several transactions that were outside of the broker account.  He sold some stock that he had acquired by inheritance from his grandfather 28 years ago.  The sales price of the stock was $257,000 for all of the 5,000 shares of IBM stock he had sold.  Your supervisor’s research noted that the IBM stock had split several times during the years, such that the 5,000 shares he sold were originally 1,250 shares.  The discussion between your supervisor and Morris resulted in a conclusion that Morris had no idea of his grandfather’s original cost basis nor of the fair value of the stock at the time of the gift.  The only piece of information you have is that grandpa bought the stock just before he died on June 15, 1984.  Morris also sold some stock he received from his brother as a birthday present in 2014.  Morris’s brother has not had a good track record at picking stocks.  Morris sold the stock in two separate transactions – one in June 2015 and the other in December 2015.  Each time, he sold half of the shares.  At the date of the sale in December 2015, the gross sales price of half of the shares Morris received was $4,375. The June transaction resulted in gross sales price of $3,000.  Having been through this before, Morris remembered on his birthday in 2014 to ask his brother for the original cost basis of the 5,000 shares and the date of purchase.  His brother was so offended by this that he has not spoken to Morris since then.  Morris told your supervisor that the best he could get out of his brother was that he (the brother) purchased the shares in the company’s Initial Public Offering (IPO) and that he paid $1.50 per share (not much of an IPO).  Further research indicates that the IPO was completed in August 2014.  Knowing that Morris’s birthday is in November, your supervisor also tracked down the fair market value of the stock on his birthday as $1.30 per share.

Morris noted in his letter to your supervisor that he had about $900 of gross proceeds from the sales of a self published book he had finished writing in 2015.  His original note indicated that his costs were well in excess of this amount and he was not real worried about reporting the income.  Your supervisor however noted that since this was his first year as a published author, perhaps Morris could deduct the costs in excess of the revenues as a business loss, but provided you no insight as to whether this was a true business or a hobby for Morris.  Further investigation determined that in 2016, the book was being turned into a screen play and Morris was working on a sequel.  Via email, your supervisor determined that Morris had incurred the following costs during 2015: