1. James and Denise Varney are married and file a joint return. James is 48 years of age and
Denise is 49. James is employed full-time as an electrical engineer for Livingston Unitech
Corporation, Ltd. Denise is a self-employed design consultant. They have two children,
Pamela and Vernon, who live at home and receive all of their support from their parents.
Pamela is 20 years old and attended college on a full-time basis, and Vernon is a 17-year-old
high school student. The Varneys currently live at 3102 Willowpoint Drive, Houston, Texas
77069, in a home they have owned since July, 1997. The phone number they wish to show
on their tax return is James’s daytime office number of 713-984-8987.
2. Social security numbers (SSN) and birthdates (DOB) for James, Denise, and their children
are provided below:
James A. Varney (DOB: 11/5/1969)
……………………………………………………………. SSN: 332-25-9610
Denise M. Varney (DOB: 4/12/1968)
…………………………………………………………. SSN: 333-51-9251
Pamela G. Varney (DOB: 11/6/1997)
………………………………………………………….. SSN: 452-19-6552
Vernon N. Varney (DOB: 2/12/2000)
………………………………………………………….. SSN: 452-23-5694
3. James, Denise, Pamela, and Vernon were covered by health insurance all year.
4. Neither Denise nor James want to contribute $3 to the Presidential Election Campaign Fund.
5. James and Denise want to file their return on paper.
6. James received a Form W-2 for 2017 from his employer, Livingston Unitech Corporation,
Ltd., 3445 Synergy Lane, Houston TX 77069 (EIN 68-3123857) which reported the
following relevant information:
Box 1: Gross wages and taxable benefits . . . . . . . . . . . . . . . . . $118,000
Box 2: Federal income tax withheld . . . . . . . . . . . . . . . . . . . . . . 21,500
Box 3: Social Security wages . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000
7. Denise operates her business under the name “Design by Denise.” Her office is located at
2359 Dawnridge Drive, Houston, Texas 77025. The federal EIN for her business is 51-
4867579 and the principal business code is 541400. Denise, who materially participates in
her business, has operated it profitably for 3 of the last 4 years and is fully “at risk” with
respect to her investment. She also has filed all required Forms 1099.
8. In accounting for her business, Denise uses the cash method. For 2017, her records show the
following income and expenses. She participated in James’s health insurance plan and did
not have to pay any premiums.
9. In connection with her business, Denise often travels from her business location to the homes
and offices of her clients, where she provides advice and expertise on interior design. During
2017, her written auto log shows that she drove her vehicle (a 2017 Mitsubishi Mirage that
she purchased and put in service on May 13, 2016) 22,400 miles for business purposes, 3,800
miles for commuting, and 1,800 miles for personal purposes. Denise did not keep track of all
her specific expenditures for the car and she wishes to deduct her auto expenses using the
standard mileage rate for 2017. She has written evidence to support her mileage. The business
car was available for use during off-duty hours, but she and her spouse also have another
vehicle available for personal use.
10. Also in connection with her business, Denise purchased a Mac computer and HP laser color
printer. The computer was purchased for $2,200 on November 10, 2017. The printer was
purchased for $5,800 on September 30, 2017. Denise used the computer and printer for
business purposes at her office 85 percent of the time, and personal purposes 15 percent of
the time, for which she has written evidence. Denise would like to deduct the maximum
allowable amount on each of these assets.
Gross receipts (not reported on Form 1099) . . . . . . . . . . . . . . . . . . . . . . $90,000
Gross receipts (reported on Form 1099; payer was Bernice Ng’s
Furnishings, EIN 68-8752318, nonemployee compensation) . . . . 25,000
Expenses:
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Legal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Office expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
Equipment and machinery rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800
Office rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400
Subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
11. In addition, Denise sold a storage building that she used in her business. She paid $30,000
for the building on January 12, 2012, and sold it on March 14, 2017 for $33,000. Her adjusted
basis in the building was $26,027. (Assume this basis already accounts for whatever you
claim as a 2017 depreciation deduction for the building.) Denise depreciates the building
using straight-line depreciation. The transaction was reported on Form 1099-S, and Denise
has no prior year section 1231 losses.
12. James and Denise received Forms 1099-INT reporting in box 1 (regular or OID interest) or
box 8 (tax-exempt interest) the following interest income during 2017:
13. James and Denise received Forms 1099-DIV reporting the following dividends during 2017.
14. James and Denise have neither a foreign bank account nor a foreign trust.
15. James and Denise received Form 1099-B from Morgan Stanley reporting the following stock
sales during 2017. For all of the sales, the basis amount was reported to the IRS.
16. Statements describing the above sales are not being attached separately in lieu of Form 8949.
Box 1 Box 8
Regular or OID Texas
Johnson & Johnson . . . . . . . . . 700 . . . . . . . . . . . . . . . . . . . . . . 0
Caterpillar . . . . . . . . . . . . . . . . . 900 . . . . . . . . . . . . . . . . . . . . . . 0
Fidelity Tax-Free Bond Fund . . . . 0 . . . . . . . . . . . . . . . . . . . . . . . . 600
Box 1a Box 1b
Ordinary Qualified
American Sun Corp. . . . . . . . $400 . . . . . . . . . . . . . . . . . . . . $ 400
Global Genetic Dynamics . . . 200 . . . . . . . . . . . . . . . . . . 200
J.P. Morgan . . . . . . . . . . . . . . 300 . . . . . . . . . . . . . . . . . . . . 300
Corporation Shares
Date
Acquired Date Sold
Sales
Price Basis Box 3
Bishop Radiocorp, Inc. 600 2-15-17 9-18-17 $23,200 $18,175
McGowan Chemical 800 4-20-17 10-21-17 10,000 13,800
Total short-term $33,200 $31,975
Patel Royal Electric, Inc. 300 7-25-11 11-05-17 6,700 8,500
Agro Memory Group 100 3-10-10 12-12-17 9,400 7,000
Total long-term $16,100 $15,500
17. In a transaction not reported on Form 1099-B, James sold two African jewels on August 13,
2017 for $2,400. He bought the jewels on July 27, 1997 for $300.
18. In August 2017, Pamela enrolled on a full-time basis for a bachelor’s degree at the University
of Houston, 4800 Calhoun Road, Houston, Texas 77004 (EIN 74-6001399). Pamela
graduated from Memorial City High School in May and attended the University of Houston
from August to December, 2017. In August, James and Denise paid $3,500 in qualified
tuition for Pamela’s first semester. In December, they paid another $3,500 in qualified tuition
for her second semester beginning in January, 2018. Pamela received a Form 1098-T from
the University reporting payments received for qualified tuition and related expenses of
$7,000 in box 1. Box 2 is empty but Box 7 is checked. Assume that, if eligible, the Varney’s
want to claim credits rather than deductions for these expenses.
19. Neither Pamela nor Vernon have been convicted of a felony for possessing or distributing a
controlled substance.
20. James and Denise made timely estimated Federal income tax payments of $10,000 for the year
($2,500 each quarter on April 15, June 15, September 15, 2017 and January 15, 2018).
21. James and Denise incurred and paid the following personal expenses during 2017:
Taxes:
Real estate taxes on home (with State Street Bank (reported on Form 1098 together
with mortgage interest- see interest, below) . . . . . . . . . . . . . . . . .
8,691
Sales tax rate (State 6.25%; Local 2.00%) . . . . . . . . . . . . . . . . . . . . . . . . . .
8.25%
Interest:
Home mortgage with State Street Bank
(also reported on Form 1098 together with Real Estate taxes, see above) . . . . . . . . .
. . . . . . . . . . . . . .
7,600
Cash contributions (all substantiated):
United Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Make A Wish Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,275
22. Use these check figures on Form 1040 to help you in preparing your return:
Assignment:
Complete the Varney’s Federal income tax return for 2017. Assume that the Varneys are filing
their return on time (before April 17, 2018). In preparing the return, you will need to use forms
1040, 8949, 8863, 4562, 4797 and schedules A, B, C, D, and SE. The total tax return is
approximately 19 pages. If the Varneys have a refund due, request that it be credited to their 2018
taxes.
