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John and Kathy Brown have just been audited and the IRS
agent disallowed the business loss they claimed in 2016. The agent asserted
that the activity was a hobby, nor a business. John and Kathy live in
Rochester, New York, near Lake Ontario. Kathy is a CPA, and John was formerly
employed by an insurance firm. John ‘s firm moved in 2011 and John resolved not
to move ro the firm’s new location. Instead of seeking ocher employment, John
felt he could supplement his income by using his fishing expertise. He had been
an avid fisherman for 15 years, and he owned a large Chris-Craft fly-bridge
that he chartered to paying parties. In 2012, Kathy and John developed a
business plan, established a bank account for the charter activities, developed
a bookkeeping system, and acquired insurance to cover the boat and the
passengers. John fulfilled all the requirements to receive a U.S. Coast Guard
operating license, a New York sport trolling license, and a seller’s permit.
These licenses and permits were necessary to legally operate a charter boat.
The first year of their activity was 2012. John advertised in local papers and
regional sport fishing magazines. He usually had three or four half-day paying
parties each week. John spent at least one day per week maintaining and
repairing his boat. Kathy usually accompanied John on charters three or four
times each year. John’s charter activity was unprofitable the first two years.
In 2014, John and Kathy restructured the activity to improve profitability. The
restructuring included increasing advertising, participating in outdoor shows,
and negotiating small contracts with local businesses. After the restructuring,
the activity provided a small profit in 2014 and 2015. In 2016, John started
working with another insurance company in the area on a fulltime basis. Even
though he returned ro the insurance business, John normally took two paying
parties and one nonpaying, promotional party each week throughout the fishing
season. John ‘s costs unexpectedly increased and he lost $8,000 in the activity
during 2016. John and Kathy deducted the entire loss on Schedule C of their
2016 tax return. Required: Prepare a memo to the Browns recommending what
position they should take and why. Show the logic used in arriving at your
recommendation.

Richard Penn lives in Harrisburg, Pennsylvania. Richard is
the president of an architectural firm. Richard has become known throughout the
community for excellent work and honesty in his business dealings. Richard
believes his reputation is an integral part of the success of the firm. Oil was
found recently in the area around Harrisburg and some geologists believed the
reserves were large. A few well-respected businesspeople organized Oil Company
to develop a few wells. Although some oil was being extracted, the oil
corporation lacked capital to develop the oil fields to their expected
potential. After reading the geologists’ report, Richard felt that Oil Company
was a good investment; therefore, he acquired 25% of the company. A short rime
after Richard ‘s acquisition, the price of foreign oil decreased sharply. The
drop in foreign oil prices caused Oil Company to be unprofitable due to its high
production costs. Three months later Oil Company filed bankruptc y. The
bankruptcy proceedings were reported in the local newspaper. Many of Oil
Company’s creditors were real estate developers chat engaged Richard ‘s
architectural firm

to provide designs. After Oil Company declared bankruptcy
the architectural firm’s business noticeably decreased. Richard felt the
decline in business was related to the bankruptcy of Oil Company. Richard
convinced his partner to use the accumulated earnings of the firm to repay all
the creditors of Oil Company. Richard has asked you whether his firm can deduct
the expenses of repaying Oil Company’s creditors. After completing your
research explain to Richard why the expenses are or are not deductib le. A
partial list of research sources is as follows:
• Sec. 162
• Thomas H. Welch v. Helvering, 12 AITR 1456, 3 USTC ‘l(1164
(USSC, 1933)
• William A. Thompson, Jr., 1983 PH T.C. Memo ‘l(83,487, 46
TCM 1109

Three years ago, Paul Wilde exercised all his stock options
in the start up company he helped establish and wa lked away with over $100
million. Since that time, he has spent all his energy, time, and effort in
managing his portfolio. His investment philosophy is one of steady, careful
investment in a well-balanced portfo lio. Thus, although each year he engages
in several sales and purchases, he genera lly buys and holds the securities for
both the dividends and the growth potential. Consequently, most of the stock
sales he makes are of securities he has held for over one year. Because his
investment activities have grown so large, this year he rented a suite of
offices and hired two investment advisors and five secretaries to help him. He
also purchased several new computers and some new office furniture for the
office. Paul has now come to you for some tax help. Specifically, he would like
to know if his activities are considered a business or an investment activity.
In your explanation, please include whether the expenses incurred in the
activity are deductions for or from AGL A partial list of research sources is
as follows:
• Higgins v. CIR, 25 AITR 1160, 41-1 USTC §9233 (USSC, 1941)
• Estate of Louis Yaeger, Deceased, Judith Winters, Ralph
Meisels, Abraham). Weber and the Bank of New York, 889 F2d 29, 89-2 USTC
‘l(9633 (CA-2)
• Frederick Mayer and Jan Perry Mayer, 67 TCM 2949 (1994)
• Rudolph W. and Abbie A. Steffler, 69 TCM 2940 (1995)
• Sec. 179

1.Why is it important to distinguish whether an individual
is an employee or an independent contractor (self-employed)?
2.Deductions for individual taxpayers are classified as
either for AGl or from AGL Discuss the two categories of for AGI deductions.
3. Kelly is self-employed and incurs $2,200 of business meal
expenses in connection with business travel. $500 of the business meal costs
are consid – ered to be lavish or extravagant. How much can Kelly deduct in
2019?

In each of the following cases involving travel expenses,
indicate how each item is reported on the taxpayer’s tax return for 2019.
Include any limitations that might affect its deductibility.
a. Marilyn lives in Houston and owns several rental
properties in Denver. To supervise the management of these properties, Marilyn
incurs travel expenses including airfare, lodging, and meals while traveling to
and from the location of the rental properties.
b. Marc is an employee who incurs travel expenses as a
salesperson. The expenses are fully reimbursed by his employer after an
adequate accounting has been made.
c. Assume the same facts as in Parr b, except that the
expenses are not reimbursed.
d. Kay is a self-employed attorney who incurs travel
expenses (including meals) ro prepare a court case in a nearby city where she
spends the night.

Latoya is an independent contractor and operates her own
successful consulting business in Milwaukee. She has just signed a large
contract with a new client chat will require her to spend nine months in
Cincinnati. Latoya leaves her husband and children in Milwaukee and incurs the
following expenses in connection with the tempo – rary assignment:
a. Which (if any) of these items can Latoya deduct in 2019?
b. Would your answer to Part a change if Latoya, after
completing the nine month assignment, needed to spend an additional six months
in Cincinnati?

Louie is a self-employed taxpayer and also an investor in
the stock market in his spare time. In the current year, Louie incurs $2,500 of
travel expenses and $1,000 in registration fees related ro attending investment
seminars. Can Louie deduct the expenses for attending an investment seminar?

If a self-employed individual uses the actual method of
deducting automobile expenses and claims depreciation for the first two years
of business use, can the individual switch to the stan – dard mileage rate
method for the third year and beyond?

1. If an individual belongs to a country club and uses the
facility primari ly for business entertain – ment of customers, what portion of
the club dues is deductible?
2. What is the difference between a defined benefit pension
plan and a defined contribution pension plan?