Alan B. and Paula R. Turner (ages 43 and 39) are married and live at 4603 Dogwood Lane, Raleigh, NC 27611. Alan is a chemist, employed by Old North Chemical Corporation, and Paula is a self-employed doctor of veterinary medicine. They use the cash basis for tax purposes.
1. Old North Chemical Corporation renders chemicals out of forest products and has several plants in the Carolinas and Georgia. Alan is the manager of the Raleigh facility at an annual salary of $90,000. Old North maintains a qualified defined contribution pension plan for its full-time employees, but Alan did not contribute to it in 2010. The company also has a health insurance plan-Alan's contribution for 2010 is $4,000. (The plan covers the employee, spouse, and their dependent children.) Because of the increased risk associated with the type of business involved (i.e., processing of chemicals), Old North provides all of its employees with $200,000 of group term life insurance coverage. (See Table 4.3 in Chapter 4 of the text.) None of these items are included in Alan's Form W-2.
2. After an explosion occurred at Old North's Union (SC) plant killing two employees and injuring several others, Alan began to look for a safer job in the chemical industry. In this connection, he incurred the following expenses during 2010:
Employment agency fee $3,200
Vita consultation, preparation, and distribution 1,800
Expenses in connection with job interviews 4,100
Alan received several attractive offers but ultimately decided against changing jobs. Influential in his choice was a promotion to regional manager and a $20,000 pay raise (effective in 2011). Apparently, Old North became aware of Alan's job search and reacted accordingly.
3. Old North generally reimburses Alan for all of his employment-related expenses (item 2 above excepted), but not those noted below:
Monthly dinner sessions of the Southern Chemists Association (11 meetings in 2010) $825
Dues to professional organizations 240
Subscriptions to professional journals 180
MIA correspondence study course 230
Each dinner involved the following costs: $40 (fee for speaker), $25(price of meal), $10 (parking at the Raleigh City Club). Alan goes to the meeting from work and returns home the same night.
The MIA (Management Institute of America) charge was for an online home study course on ways to improve safety measures and avoid accidents in the industrial workplace.
4. Paula Turner is a licensed doctor of veterinary medicine with a specialty in exotic animals (e.g., reptiles, birds). Although she is considering starting her own practice (or buying an existing one), she is not sure the time is right in view of the depressed economy. For the time being, she enjoys working for other veterinarians on a contract basis. By doing this, she is making valuable contacts and benefiting from the experiences of fellow practitioners. For one of her major clients, the Raleigh SPCA, she bills her services at a discount rate. Paula uses her home as her business address. She keeps her records there and otherwise conducts business (e.g., accepts engagements and referrals and renders professional advice) on the premises. Since she does not maintain a specific area for exclusive business use, however, she does not claim an office in the home for tax purposes.
Paula's receipts from her practice during 2010 were $41,000, $6,000 of which was for services performed in 2009. Not included in these amounts is $7,500 she received in January 2011 for services rendered in December 2010.
5. Paula had the following business expenses in 2010:
Medical supplies (e.g., bandages, drugs, instruments) $1,500
Medical clothing (e.g., lab coats, surgical scrubs)-laundry service of $800 not included 1,400
Medical malpractice insurance 8,000
State license fee 450
Dues to professional organizations 350
Subscriptions to professional journals 340
In addition she drove the family Suburban (purchased on March 2, 2009) 2,900 miles in connection with her work. She uses the automatic (standard) mileage method. Total mileage for the Suburban is 9,000 miles for the year.
6. In October, Paula saw an ad for the sale of a veterinary practice in Durham (NC). Apparently, the veterinarian had just died, and the executor of his estate was anxious to sell the practice while it still had value. After contacting the executor, Paula went to Durham and spent two days investigating the business. Her expenses for the trip were:
Transportation (rental automobile) $300
Motel 240
Meals 610
The cost of the meals included a dinner attended by both the executor and the attorney for the estate. Paula turned down the offer as she thought the price was too high. Also, the practice involved mainly large animals (horses, cattle), which are not her specialty.
7. Alan's widowed mother, Loretta, died on January 3, 2010. As her sole heir, Alan inherited her property, which included her home and its furnishings (located at 1320 Cardinal Lane, Raleigh, NC 27611). The costs and values involved are as follows:

Cost (Includes Some Estimates) Value on 1/3/10
Lot $ 10,000 $ 30,000
House 110,000 250,000
Furnishings 55,000 25,000
Because the real estate market was depressed and the home was located in an attractive rental area, Alan decided not to sell. Instead, he rented the property furnished on May 1, 2010. The terms of the lease (executed on April 30) provided for the following: one-year lease at $2,500 per month (payable on the first of each month), last month's rent payable in advance, and damage deposit of $3,000. During 2010, Alan received $25,500 regarding the property. Besides depreciation, his expenses were:
Property taxes $4,800
Insurance 3,900
Repairs 2,100
Real estate renter's location service 400
Alan plans to use MACRS straight-line depreciation (mid-month convention) for the realty. Regarding the personalty, see Exhibit 8.1 in Chapter 8 of the text.
8. While walking the family dogs in late July, Paula was struck by a delivery van and seriously injured. After being hospitalized for a week, she was released-very bruised but with no permanent impairment. The driver of the van was arrested and ticketed by the police for reckless operation of a vehicle and later was prosecuted for drug use. To forestall the adverse publicity of a lawsuit, the owner of the delivery service paid for Paula's medical expenses and sent her a check on August 16, 2010. The award stated that "$90,000 is a settlement for physical injury sustained." In the negotiations, Paula was represented by her brother who is a practicing attorney. In the interest of family harmony, the brother did not charge for the services he rendered.
9. The Turners had the following property transactions during 2010:
On October 5, the City of Raleigh condemned unimproved land owned by Alan for the construction of a fire station. The land consisted of two vacant lots at 3400 and 3402 Cardinal Lane and had been acquired by Alan as an investment on May 25, 2004, for $14,000. In exchange for the lots, the city gave Alan a large lot at 440 Pine Street (worth $20,000). Alan was satisfied with the exchange because the Pine Street property is in a better neighborhood and has a greater potential for appreciation.
On November 22, they sold a gun collection for $32,500. The collection was given to Alan by his father on December 25, 2007, when it was worth $22,000. His father's basis in the collection (dating back to 1997) was $14,000.
On November 9, they sold 3,000 shares of Dove Pharmaceuticals for $5,000. The stock was purchased by the Turners on December 4, 2009, for $25,000. The investment was motivated by the rumor that Dove was developing a new drug for infertility. After the FDA failed to approve the drug, the Turners decided to cut their losses.
The Turners have a long-term capital loss carryover of $1,500 from 2009.
10. In March 2010, the Turners were audited by the North Carolina Department of Revenue for tax years 2007 and 2008. As a result of the audit, no change was made for 2007, but they were assessed $250 additional income tax for 2008 (no interest or penalties were included). The Turners paid the $250 immediately.
11. Alan's mother, Loretta, suffered a stroke on December 30, 2009, and died in the hospital on January 3, 2010. Part of Loretta's medical expenses was covered by Medicare, but Alan absorbed the balance. On January 18, 2010, he paid the balance of $9,800, of which half was attributable to expenses incurred in 2009 and the rest in 2010. At the same time, Alan also paid the funeral expenses of $6,000. Although Loretta lived in her own house (see item 7 above), she has been properly claimed as a dependent of the Turners for the past few years.
12. During 2010, Alan was called to serve on a jury. As a result of the service, he was paid $700 and incurred nonreimbursed expenses (e.g., parking) of $60. In conformance with company policy, Alan remitted the $700 of fees to Old North.
13. Besides the items already noted, the Turners had the following receipts in 2010:
Life insurance proceeds $50,000
State of North Carolina income tax refund (for tax year 2009) 450
Proceeds from garage sale 2,600
Interest income-
City of Durham general purpose bonds $480
CD at Wells Fargo Bank 600
1,080
The insurance proceeds relate to a policy on Loretta's life in which Alan was the designated beneficiary. The garage sale mainly involved personal items (e.g., camper, furniture, hunting and fishing equipment) belonging to Alan's father and mother (i.e., Loretta). The items sold, based on receipts and some estimates, cost $7,100.
14. In addition to the items already mentioned, the Turners' expenditures for 2010 are summarized below:
Dentist bills not covered by insurance $3,100
Ad valorem property taxes on personal residence 4,100
Interest on home mortgage 2,600
Charitable contributions of cash 3,600
As part of a program sponsored by their church, the Turners used the family Suburban to transport senior citizens to religious services for a total of 900 miles. The Suburban also was used for medical purposes (e.g., visits to an orthodontist) for 480 miles.
15. The Turners' household includes two dependent children: Ethan (age 14) and Ava (age 15), both of whom are full-time students. Relevant Social Security numbers appear below:
Name Social Security Number Birth Date
Alan B. Turner 123-45-6785 07/14/1967
Paula R. Turner 123-45-6786 02/20/1971
Loretta Turner 123-45-6784 04/09/1938
Ethan Turner 123-45-6787 12/06/1996
Ava Turner 123-45-6788 07/29/1995
Paula's professional activity code is 541940.
16. 16. Alan's Form W-2 from Old North Chemical Corporation reflects income tax withholding of $6,500(Federal) and $4,000(state). The Turners made quarterly income tax payments of $750 (Federal) and $450 (state) for total payments of $3,000 (Federal) and $1,800 (state). They had their Federal income tax refund of $305(for 2009) applied toward their 2010 income tax.
REQUIREMENTS
Prepare an income tax return (with appropriate schedules) for the Turners for 2010. Make any necessary assumptions for facts not stated in the problem. If a refund results, the taxpayers want it applied toward their 2011 tax liability. The Turners do not wish to contribute to the Presidential Election Campaign Fund. In the past several years, the Turners have itemized their deductions from AGI (have not claimed the standard deduction option). Use Form 1040, Schedule A, Schedule C, Schedule D, Schedule E, Form 2106, Form 4562, and Schedule SE