Gregory R. and Lulu B. Clifden live with their family at the Rock Glen House Bed & Breakfast, which Gregory operates. The Bed & Breakfast (B&B) is located at 33333 Fume Blanc Way, Temecula, CA 92591. Gregory's Social Security number is 543-88-9756 and Lulu's is 256-43-8819. Both are in their mid-40s and enjoy good health and eyesight.
The Clifdens have three sons, Gerald A. (SS# 466-74-1131), Gary T. (SS# 465-76-8375), and Glenn E. (SS# 475-23-1426). Gerald is 17 years old, Gary is 12 years old, and Glenn is 10 years old.
The Rock Glen House Bed & Breakfast is operated as a sole proprietorship and had the following income and expenses for the year:
Gregory and Lulu Clifden's Tax Return
All of the above amounts relate to the business portion of the Bed & Breakfast; the personal portion is accounted for separately. The Rock Glen House Bed & Breakfast uses the cash method of accounting and has no inventory. The employer tax ID number is 95-1234567.
The Clifdens made estimated federal income tax payments of $16,000 and estimated state income tax payments of $6,000 (all made during 2013).
Lulu is a substitute schoolteacher with the local school district. For the current year, Lulu's Form W-2 from the school district showed the following:
Gregory and Lulu Clifden's Tax Return
Gregory is retired from the U.S. Navy. His annual statement from the Navy, Form 1099-R.
Gregory and Lulu paid (and can substantiate) the following amounts during the year:
Gregory and Lulu Clifden's Tax Return
None of the investment interest is related to amounts borrowed to purchase the City of Atlanta tax-exempt bonds.
During the year, Gregory and Lulu received the following qualifying dividends and interest:
Gregory and Lulu Clifden's Tax Return
Also, Lulu owns Series EE U.S. savings bonds. During the year, the bond redemption value increased by $1,300. Lulu has not elected the accrual method for these bonds. There were no Irish taxes paid on the interest from the Bank of Ireland. All the above stocks, bonds, and bank accounts are community property.
Lulu has a stock portfolio. During the year she sold the following stock, shown on her Forms 1099-B as follows:
Gregory and Lulu Clifden's Tax Return
Lulu paid her ex-husband $6,000 alimony in the current year, as required under the divorce decree. Her ex-husband's name is Hector Leach and his Social Security number is 566-23-5431.
Gregory does all the significant work in the Bed & Breakfast and therefore he pays self-employment tax on 100 percent of the earnings from the B&B.
During the year, Gregory's uncle Martin died. Martin had a $50,000 life insurance policy that named Gregory as the beneficiary. Gregory received the check for the benefits payable under the policy on November 30 of the current year. Martin also left Gregory a small nonoperating farm with an appraised value of $120,000.
Two years ago, Gary won a contest and received a cash prize. The money is in a savings account in Gary's name. His interest on the savings account in the current year is $3,400. Instead of having Gary fill out a tax return and pay the "kiddie tax," Gregory and Lulu elect to report the interest income on their joint tax return.
Required: Gregory and Lulu have come to you to prepare their 2013 federal income tax return. Do not complete a California state income tax return. Gregory and Lulu have completed a tax organizer and have also given you several IRS forms (see Comprehensive Problem Two) that they were not sure what to do with. Make realistic assumptions about any missing data (addresses, etc.) that you need. Do not file a federal Form 4562, Form 4952, or Form 8829 for the Clifdens. The following is a list of the forms and schedules that you will need to complete the tax return:
Gregory and Lulu Clifden's Tax Return
Note: The forms included in Appendix D are provided for the student to work on only one of the two comprehensive problems. If desired, additional forms may be obtained from the IRS website at www.irs.gov.