Chapter 9:

Problem 49: Decision Making LO.3, 6, 9 During the year, Brenda has the following expenses
related to her employment:
A. Airfare B. $8,5
00

C. Meals D. 4,00
0
E. Lodging F. 4,90
0
G. Transportation while in travel status H. 940
(taxis and limos)
I. Entertainment of clients J. 8,00
0
Although Brenda renders an adequate accounting to her employer, she is reimbursed for
only $12,000 of the above expenses. What are Brenda's tax consequences based on the
following assumptions?

- “The classification of employee expenses depends on whether they are reimbursed by the
employer under an accountable plan. If so, they are not reported by the employee at all. In
effect, therefore, this result is equivalent to treating the expenses as deductions for AGI.”
((Hoffman, W.H. et al. 2017). The fact that Brenda was to render adequate accounting for her
employee expenses leads me to believe that she is under an accountable plan with her
employer. There may have been expenses that were incurred that did not meet the criteria
under the accountable plan and are treated under the nonaccountable plan.
a. The $12,000 reimbursement does not designate which expenses are covered.
-Since the reimbursement does not specify which expenses were to be covered, an allocation
must be made to determine the appropriate portion of the reimbursement that applies to the
meals and entertainment expenses incurred during her travels, which are subject to the 50%
limit. Brenda could itemize the other employee expenses subject to 2%-of-AGI floor.
b. The reimbursement specifically covers only the meals and entertainment expenses.
- If the reimbursement only covers the meals and entertainment expenses, no problems arise.
The reimbursement and expenses are recorded as such. The unreimbursed expenses for
airfare, lodging and transportation can then be considered itemized deductions subject to the
2%-of-AGI floor.
c. The reimbursement covers any of the expenses other than meals and entertainment.
- If the reimbursement covers airfare, lodging and transportation and not meals and
entertainment, then she is able to deduct 50% of the meal and entertainment expenses and any
unreimbursed expenses from other travel expenses subject to the 2%-of-AGI floor.
d. If Brenda has a choice of reimbursement procedures [parts (a), (b), or (c) above],
which should she select? Why?
- If Brenda has a choice of how the reimbursement will be treated, she should go with part b
because she has the most to gain from the itemized deductions being travel expenses, which
are not subject to the cutback adjustment.

Work Cited
 Hoffman W.H., Young J.C., Raabe W.A.,Maloney D.M. and A. Nellen. (2017) South-Western
Federal Taxation 2017: Individual Income Taxes(40th Ed.)

Research Problem 1
Aaron, a resident of Minnesota, has been a driver for Green Delivery Service for the past
six years. For this purpose, he leases a truck from Green, and his compensation is based
on a percentage of the income resulting from his pickup and delivery services. Green
allows its drivers to choose their 10-hour shifts and does not exercise any control on
how these services are carried out (e.g., the route to be taken or the order in which
parcels are delivered or picked up). Under Green's operating agreement with its drivers,
Green can terminate the arrangement after 30 days' notice. In practice, however, Green
allows its truckers to quit immediately without giving advance notice. The agreement
also labels the drivers as independent contractors. Green maintains no health or
retirement plans for its drivers, and each year it reports their income by issuing Forms
1099–MISC (and not Forms W–2). Green requires its drivers to maintain a commercial
driver's license and be in good standing with the state highway law enforcement division.
Citing the employment tax Regulations in §§ 31.3121(d)–1(c)(2) and 31.3306(i)–1(b), an
IRS agent contends that Aaron is an independent contractor and, therefore, is subject to
the self-employment tax. Based on Peno Trucking, Inc. (93 TCM 1027, T.C.Memo. 2007–
66), Aaron disagrees and contends that he is an employee (i.e., not self-employed). Who
is correct? Why?
The IRS is correct to state that Aaron is an independent contractor. In order to determine if an
individual such as Aaron falls into the independent contractor category, is to answer a few
questions about the behavior of the relationship, the financials of the relationship and the type of
the relationship it is. Many of the determining facts center around who has the control in the
types of situations within the relationship (“Independent Contractor (Self-employed) or
Employee?”., 2016). For instance, “Does the company control or have the right to control what
the worker does and how the worker does his or her job?” (“Independent Contractor (Self-
employed) or Employee?”, 2016). One characteristic that distinguish Aaron as an independant
contractor is that fact that he can choose his 10-hour shift and how he goes about doing that
job. Aaron could have interpreted that the company is charging him with the delivery of their
packages. However, there are more characteristics that play into the IRS’s decision. Aaron is
paid a percentage of the income generated by deliveries that he makes. He leases the truck that
he uses to make his deliveries. These facts point to the argument that Aaron maintains more
financial control than does Green. Just to confirm we could ask, “Are the business aspects of
the worker’s job controlled by the payer? (these include things like how worker is paid, whether
expenses are reimbursed, who provides tools/supplies, etc.)” “Independent Contractor (Self-
employed) or Employee?”, 2016). When it comes to the type of relationship these two parties
have we can see that there is an agreement that is made between Aaron and Green. “Are there
written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)?
Will the relationship continue and is the work performed a key aspect of the
business?”(“Independent Contractor (Self-employed) or Employee?”, 2016) Green can
terminate the arrangement after 30 days' notice, but Aaron is able to quit immediately without
giving advance notice. Also, Green maintains no health or retirement plans for any of their
drivers. Aaron is also issued a 1099-MISC by Green Delivery, this is typically given to an
independent contractor, not an employee. All of these factors have lead the IRS and myself to
believe that Aaron is an independent contractor for the Green Delivery Service.
Work Cited
“Independent Contractor (Self-employed) or Employee?”. IRS. Nov 28, 2016. Web. March 9,
2017. <https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-
self-employed-or-employee>.
 Chapter 10: Problem 45 Cumulative Problem
45 Tax Return Problem – Decision Making Alice J. and Bruce M. Byrd are married taxpayers
who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1112,
respectively. Alice's birthday is September 21, 1968, and Bruce's is June 27, 1967. They live
at 473 Revere Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic,
433 Broad Street, Lowell, MA 01850 (employer identification number 98-7654321). Bruce is
the manager of a Super Burgers fast-food outlet owned and operated by Plymouth
Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (employer identification number
11-1111111).
● The following information is shown on their Wage and Tax Statements (Form W–2)
for 2015.
● ● ● Description ● Alice ● Bruce
L
i
n
e
● 1 ● ● Wages, tips, other ● $58,000 ● $62,100
compensation
● 2 ● ● Federal income tax ● 4,500 ● 6,300
withheld
● 3 ● ● Social Security ● 58,000 ● 62,100
wages
● 4 ● ● Social Security tax ● 3,596 ● 3,850
withheld
● 5 ● ● Medicare wages ● 58,000 ● 62,100
and tips
● 6 ● ● Medicare tax ● 841 ● 900
withheld
● 1 ● ● State ● Massac ● Massachusett
5 husetts s
● 1 ● ● State wages, tips, ● 58,000 ● 62,100
6 etc.
● 1 ● ● State income tax ● 2,950 ● 3,100
7 withheld
● The Byrds provide over half of the support of their two children, Cynthia (born
January 25, 1991, Social Security number 123-45-6788) and John (born February 7,
1995, Social Security number 123-45-6786). Both children are full-time students
and live with the Byrds except when they are away at college. Cynthia earned
$4,200 from a summer internship in 2015, and John earned $3,800 from a part-time
job.
● During 2015, the Byrds provided 60% of the total support of Bruce's widower
father, Sam Byrd (born March 6, 1939, Social Security number 123-45-6787). Sam
lived alone and covered the rest of his support with his Social Security benefits.
 Sam died in November, and Bruce, the beneficiary of a policy on Sam's life,
received life insurance proceeds of $1,600,000 on December 28.
● The Byrds had the following expenses relating to their personal residence during
2015:
● Property taxes ● $5,000
● Qualified interest on home mortgage ● 8,700
● Repairs to roof ● 5,750
● Utilities ● 4,100
● Fire and theft insurance ● 1,900
● The Byrds had the following medical expenses for 2015:
● Medical insurance premiums ● $4,500
● Doctor bill for Sam incurred in 2014 and not ● 7,600
paid until 2015
● Operation for Sam ● 8,500
● Prescription medicines for Sam ● 900
● Hospital expenses for Sam ● 3,500
● Reimbursement from insurance company, ● 3,600
received in 2015
● The medical expenses for Sam represent most of the 60% that Bruce contributed
toward his father's support.
● Other relevant information follows:
○ When they filed their 2014 state return in 2015, the Byrds paid additional
state income tax of $900.
○ During 2015, Alice and Bruce attended a dinner dance sponsored by the
Lowell Police Disability Association (a qualified charitable organization).
The Byrds paid $300 for the tickets. The cost of comparable entertainment
would normally be $50.
○ The Byrds contributed $5,000 to Lowell Presbyterian Church and gave used
clothing (cost of $1,200 and fair market value of $350) to the Salvation
Army. All donations are supported by receipts, and the clothing is in very
good condition.
○ In 2015, the Byrds received interest income of $2,750, which was reported
on a Form 1099–INT from Second National Bank.
○ Alice's employer requires that all employees wear uniforms to work. During
2015, Alice spent $850 on new uniforms and $566 on laundry charges.
○ Bruce paid $400 for an annual subscription to the Journal of Franchise
Management and $741 for annual membership dues to his professional
association.
○ Neither Alice's nor Bruce's employer reimburses for employee expenses.
○ The Byrds do not keep the receipts for the sales taxes they paid and had no
major purchases subject to sales tax.
 ○ All members of the Byrd family had health insurance coverage for all of
2015.
○ Alice and Bruce paid no estimated Federal income tax. Neither Alice nor
Bruce wants to designate $3 to the Presidential Election Campaign Fund.
● Part 1—Tax Computation
● Compute net tax payable or refund due for Alice and Bruce Byrd for 2015. If they
have overpaid, they want the amount to be refunded to them. If you use tax forms
for your computations, you will need Forms 1040 and 2106 and Schedules A and
B. Suggested software: H&R BLOCK At Home.
Part 2—Tax Planning
Alice and Bruce are planning some significant changes for 2016. They have provided you
with the following information and asked you to project their taxable income and tax
liability for 2016.
● The Byrds will invest the $1,600,000 of life insurance proceeds in short-term
certificates of deposit (CDs) and use the interest for living expenses during 2016.
They expect to earn total interest of $32,000 on the CDs.
● Bruce has been promoted to regional manager, and his salary for 2016 will be
$88,000. He estimates that state income tax withheld will increase by $4,000 and
the Social Security tax withheld will be $5,456.
● Alice, who has been diagnosed with a serious illness, will take a leave of absence
from work during 2016. The estimated cost for her medical treatment is $15,400, of
which $6,400 will be reimbursed by their insurance company in 2016. Their
medical insurance premiums will increase to $9,769. Property taxes on their
residence are expected to increase to $5,100. The Byrds' home mortgage interest
expense and charitable contributions are expected to be unchanged from 2015.
● John will graduate from college in December 2015 and will take a job in New York
City in January 2016. His starting salary will be $46,000.
Assume that all of the information reported in 2015 will be the same in 2016 unless other
information has been presented above.
- SEE ATTACHED PDF FOR PART 1 AND PART 2