Tax Research Case

timer Asked: Oct 17th, 2018
account_balance_wallet $35

Question Description

Lucy and Ricky Ricardo are married and live in the Upper East Side of New York. Ricky, 53, is a singer/bandleader and Lucy is an aspiring singer/actress (basically she wants to do anything that involves performing). They both live at home full-time. You will be preparing their income tax return for 2018. They will file married filing jointly and claim one dependent (Little Ricky). Their household income in 2018 is expected to be $90,000 and they expect it to be the same next year. Lucy has not worked in 2018 and does not plan to work for the remainder of the year, such that Ricky’s self-employment (Schedule C) earnings represents the entire household income. In October of 2018, you call Lucy and Ricky to find out if they have questions about year-end tax planning.

Ethel Mertz (Fred’s widow, Fred was Ricky's friend, and was past) and Lucy have always been as close as sisters although they are not related in any way by blood. To be honest, Ricky feels that she spends far too much time in their home since Fred died. Against his better judgement, Ricky has agreed to let Ethel (who is in her 60s) move in with them permanently. His hope is that keeping busy with Ethel will keep Lucy out of trouble. He also thinks that Ethel is going to cost him a small fortune since Ethel eats a lot… at least, that’s what Fred always told him. Once Ethel moves in, may the Ricardos claim her as a dependent on their joint return? If so, what are the general requirements? How, if at all, will Ethel’s moving affect the Ricardo’s tax return filing status? Ricky figures that since he is going to support Ethel, he ought to get a tax break.

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Scenario One: Facts Our client, Mr & Mrs Ricardo, have made $3,000 worth of improvements to their house bought in 2010, with original cost of $446,000 that increased their adjusted basis by $3,000 in 2011. In January of the current year, they moved into a new home and sold the old house to an unrelated person for $448,000. The client has asked us to research the tax consequences of the sale and the amount of gain or loss they should recognize in gross income on the sale. Issues 1. The amount of gain or loss that should be realized 2. If there is a realized gain whether Mr. & Mrs. Ricardo meet the ownership and usage requirement for principal residence for the gain to be excludable 3. If there is a realized loss, whether it would be deductible. Applicable Law 1. IRC 1001(a) gain from the sale of property shall be the excess of the amount realized over the adjusted basis and the loss shall be the excess of the adjusted basis over the amount realized. 2. IRC 121(a) states that if the property has been owned and used by the taxpayer for two out of the last five years then it is the principal residence of the taxpayer. 3. IRC 121(2)(A)gain from sale of principal residence is excludable but limited upto $500,000 for joint return, if- (i) either spouse meets the ownership requirements of subsection (a) with respect to such property (ii) both spouses meet the use requirements of subsection (a) with respect to such property; and (iii) ) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3) (application of one sale or exchange every two years) 4. IRC 165-9(a) Losses not allowed. A loss sustained on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible Analysis In regards to IRC 1001(a) the calculation of $(446,000+3,000-448,000= 1,000) results to a $1,000 of realized loss as it is the excess of the adjusted basis over the amount realized. Since Mr. & Mrs. Ricardo has purchased the house in 2010 and is assumed to have lived there till the sale of the house, in absence of information otherwise. According to IRC 121(a) the old house is qualified as the client’s principal residence as they both have satisfied the ownership and usage (living in the house for two of the last five years) requirements. The provision of IRC 165-9(a) does not allow losses on personal residence used by the taxpayer up to the time of the sale non deductible, thus the $1,000 of realized loss is not recognized and so is non deductible in Mr & Mrs Ricardo’s tax return. Conclusion A loss of $1,000 should be realized on the sale of the house below the adjusted basis. However, the loss is not recognized on principal residence resulting it to be non deductible in the return. Scenario Five: Facts Our client, Mr. Ricardo, is considering retiring and moving his family to California as of 2019. Moving expenses are estimated at $12,000-$15,000. The client wishes to know whether these expenses would be deductible. Issues 1. Does the client qualify for the moving expense deduction? 2. As of 2018, the moving expense deduction will be temporarily repealed until 2025. What would be the impact if the client delayed their retirement until the deduction was reinstated? Applicable Law Per IRC 217(i), in the case of any qualified retiree moving expenses, IRC 217 (other than subsection (h) ) shall be applied with respect to such expenses as if they were incurred in connection with the commencement of work by the taxpayer as an employee at a new principal place of work located within the United States. “Qualified retiree moving expenses” are defined as those which are incurred by an individual whose former principal place of work and former residence were outside the United States, and which are incurred for a move to a new residence in the United States in connection with the bona fide retirement of the individual. Analysis and Conclusion Based on the criteria defined in IRC 217(i), the client’s moving expenses do not meet the definition of “qualified retiree moving expenses”, as the client’s principal place of work and current residence is with in the United States. Under these circumstances, consideration of the deduction’s temporary repeal is moot as the client does not qualify in any case. In order to the client’s moving expenses to be deductible, he must not incur them prior to January 1st, 2026 (RIC 217(k)), and, upon moving must fulfill the employment requirements set forth under RIC 217(c)(2). ...
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School: Rice University

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