• The taxpayers are preparing their own return (i.e., no preparer is involved). • For the past several years, the Marshalls have itemized their deductions from AGI. • The taxpayers have the necessary substantiation (e.g., records, receipts) to sup- port all transactions reported in their tax return. • Make necessary assumptions for information not given in the problem but needed to complete the return. PROBLEM 2—INDIVIDUALS (FORM 1040) Neil B. (age 42) and Mae R. (age 48) King are married and live at 7605 Walnut Street, Kansas City, MO 64114. Neil is a chemist employed by Sargent Pharmaceuticals, Inc., and Mae is a self-employed doctor of anesthesiology. They are calendar year, cash basis taxpayers. 1. Sargent Pharmaceuticals develops and produces injectable medicines used in chemotherapy treatments for cancer patients. Neil manages the Kansas City facility for an annual salary of $90,000. Sargent makes contributions to a qualified defined contribution pension plan for all of its full-time employees. Although Neil also has the opportunity to make contributions to the plan, he chose not to do so in 2016. Neil participates in his employer’s group health insurance plan, to which he contrib- uted $4,000 in 2016 for medical coverage. These contributions are made with pre- tax dollars. The health plan covers Neil, Mae, and their two dependent children. Because of the risk associated with Neil’s work (i.e., processing chemotherapy drugs), Sargent provides all of its employees with $200,000 of group term life insur- ance. An additional $180 of income is included in Neil’s Form W–2 to report the tax- able value of this insurance. 2. In late 2015, three employees at Sargent’s Chicago facility were seriously injured while processing a customer order. While the injuries occurred in what the com- pany called a “freak accident,” Neil began to look for a safer job in the chemical industry. He incurred the following expenses during 2016: Employment agency fee $3,200 R!esum!e consultation, preparation, and distribution 1,800 Expenses in connection with job interviews 4,100 Neil 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 starting in 2017. 3. Sargent generally reimburses Neil for expenses related to his work for the company. However, as a matter of policy, Sargent does not reimburse for the following: Monthly dinner meetings of the Midwestern Chemists Association [MCA] $825 Dues to professional organizations 240 Subscriptions to professional journals 180 MIA correspondence study course 230 Neil attended 11 MCA dinner meetings in 2016. Each dinner involved the following costs: $40 (fee for speaker), $25 (price of meal), and $10 (parking). Neil goes to the meetings from work and returns home the same night. The MIA (Management Insti- tute of America) charge was for an online home study course on ways to improve safety measures and.

1. • The taxpayers are preparing their own return (i.e., no preparer
is involved).
• For the past several years, the Marshalls have itemized their
deductions from AGI.
• The taxpayers have the necessary substantiation (e.g., records,
receipts) to sup-
port all transactions reported in their tax return.
• Make necessary assumptions for information not given in the
problem but needed
to complete the return.
PROBLEM 2—INDIVIDUALS (FORM 1040)
Neil B. (age 42) and Mae R. (age 48) King are married and live
at 7605 Walnut Street,
Kansas City, MO 64114. Neil is a chemist employed by Sargent
Pharmaceuticals, Inc., and Mae
is a self-employed doctor of anesthesiology. They are calendar
year, cash basis taxpayers.
1. Sargent Pharmaceuticals develops and produces injectable
medicines used in
chemotherapy treatments for cancer patients. Neil manages the
Kansas City facility
for an annual salary of $90,000. Sargent makes contributions to
a qualified defined
contribution pension plan for all of its full-time employees.
Although Neil also has
the opportunity to make contributions to the plan, he chose not
to do so in 2016.

2. Neil participates in his employer’s group health insurance plan,
to which he contrib-
uted $4,000 in 2016 for medical coverage. These contributions
are made with pre-
tax dollars. The health plan covers Neil, Mae, and their two
dependent children.
Because of the risk associated with Neil’s work (i.e., processing
chemotherapy
drugs), Sargent provides all of its employees with $200,000 of
group term life insur-
ance. An additional $180 of income is included in Neil’s Form
W–2 to report the tax-
able value of this insurance.
2. In late 2015, three employees at Sargent’s Chicago facility
were seriously injured
while processing a customer order. While the injuries occurred
in what the com-
pany called a “freak accident,” Neil began to look for a safer
job in the chemical
industry. He incurred the following expenses during 2016:
Employment agency fee $3,200
R!esum!e consultation, preparation, and distribution 1,800
Expenses in connection with job interviews 4,100
Neil 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 starting in 2017.
3. Sargent generally reimburses Neil for expenses related to his
work for the company.
However, as a matter of policy, Sargent does not reimburse for
the following:

3. Monthly dinner meetings of the Midwestern Chemists
Association [MCA] $825
Dues to professional organizations 240
Subscriptions to professional journals 180
MIA correspondence study course 230
Neil attended 11 MCA dinner meetings in 2016. Each dinner
involved the following
costs: $40 (fee for speaker), $25 (price of meal), and $10
(parking). Neil goes to the
meetings from work and returns home the same night. The MIA
(Management Insti-
tute of America) charge was for an online home study course on
ways to improve
safety measures and avoid accidents in the industrial workplace.
4. Mae King is a board-certified doctor of anesthesiology. She
provides anesthesiology
services at a number of hospitals and surgical centers in the
greater Kansas City area
on a part-time basis. Mae is well respected by the surgeons with
whom she works.
She uses her home as her business address. She keeps her
records there and other-
wise conducts business (e.g., conducts pre-surgery
appointments, renders professional
APPENDIX E Practice Set Assignments—Comprehensive Tax
Return Problems E-5
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not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203

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advice, bills patients) on the premises. Because Mae does not
maintain a specific
area for exclusive business use, she does not claim an office in
the home for tax
purposes. Mae’s receipts from her practice during 2016 were
$245,000, $16,000 of
which was for services performed in 2015. Not included in these
amounts is
$17,500 she received in January 2017 for services rendered in
December 2016.
Mae’s professional activity code is 621111.
5. Mae had the following business expenses in 2016:
Medical clothing (e.g., lab coats, surgical scrubs) $2,200
Medical malpractice insurance 9,500
State medical license fee 450
Dues to professional organizations 350
Subscriptions to professional journals 340
In addition, she drove the family Suburban (purchased on March
2, 2015) 2,900
miles in connection with her work. She uses the standard
mileage method for com-
puting deductible vehicle costs. Total mileage for the Suburban
is 9,000 miles for
the year.
6. Neil’s widowed mother, Lucy, suffered a stroke on December
30, 2015, and died in
the hospital on February 3, 2016. Most of Lucy’s medical
expenses were covered by

5. Medicare, with Neil paying the remainder. On February 18,
2016, he paid $9,800 to
the hospital, half of which was attributable to expenses incurred
in 2015. At the
same time, Neil also paid the funeral expenses of $16,000.
Although Lucy lived in
her own home prior to the stroke, Neil and Mae have properly
claimed her as a
dependent for the past few years.
7. As Lucy’s sole heir, Neil inherited her home and its
furnishings (located at 1420
Chickadee Lane, Topeka, KS 66546). The costs and values
involved are as follows:
Cost Basis FMV on 2/3/16
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, Neil decided not to sell. Instead, he rented
the property fully
furnished on May 1, 2016. The terms of the lease (executed on
April 30) provide 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. In
total, Neil received $25,500 from the tenants in 2016 for their
use of the property.
Besides depreciation, his expenses were:
Property taxes $4,800

6. Insurance 3,900
Repairs 2,100
Real estate renter’s location service 400
For MACRS depreciation purposes, Neil plans to use the
straight-line method with
the mid-month convention to compute the deduction for the
realty and the 200%
declining-balance method with a half-year convention for the
personalty.
8. While walking the family dogs in late July, Mae was struck
by a delivery van and seri-
ously injured. After being hospitalized for a week, she was
released—bruised and
sore but with no permanent injuries. The driver of the van was
arrested and ticketed
by the police for reckless operation of a vehicle and was later
prosecuted for drug
use. To prevent adverse publicity related to a lawsuit, the owner
of the delivery ser-
vice paid for Mae’s medical expenses and sent her a check on
August 16, 2016, for
$90,000. The check was accompanied by a letter that stated
“This $90,000 is a
E-6 APPENDIX E Practice Set Assignments—Comprehensive
Tax Return Problems
Copyright 2018 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
settlement for physical injuries sustained by Mae King.” Mae

7. was represented in the
negotiations with the delivery company by her brother, a
practicing attorney. He did
not charge the Kings for his services.
9. The Kings had the following property transactions during
2016:
a. On May 5, the City Council condemned unimproved land
owned by Neil for
the construction of a fire station. He purchased the land (two
vacant lots at
3400 and 3402 Sycamore Lane) as an investment on May 25,
2009, for $14,000.
In exchange for the lots, the city gave Neil a large unimproved
lot at 440 Genoa
Street that was valued at $20,000. All in all, he was satisfied
with the exchange
because the Genoa Street property is in a better neighborhood
and has a
greater potential for appreciation.
b. On August 22, Neil sold a gun collection for $32,000 to an
avid collector. The
collection was a gift from Neil’s father on December 25, 2011,
when it was
worth $22,000. His father bought the collection in 1997 for
$14,000. Neil’s sale
of the collection was documented by a bill of sale, signed by
both Neil and the
buyer.
c. On September 9, the Kings sold 3,000 shares of Dove
Pharmaceuticals for
$2,000. The couple purchased the stock on December 4, 2015,
for $25,000. The

8. investment was motivated by the rumor that Dove was
developing a new drug
for infertility. On September 7, the FDA announced that it
would not approve
the drug due to adverse side effects, and the Dove stock price
plummeted. The
Kings’ broker provided them with a Form 1099–B, which
reported the gross
proceeds from the sale and their basis in the stock.
10. The Kings have a long-term capital loss carryover of $1,500
from 2015.
11. In March 2016, the Kings were audited by the Missouri
Department of Revenue for
tax years 2013 and 2014. The audit proposed no changes for the
2013 tax return.
However, the Kings were assessed $2,250 additional income tax
for 2014 (no inter-
est or penalties were included). The Kings agreed with the
assessment and paid the
$2,250 immediately.
12. During 2016, Neil served on a jury for a civil case that was
litigated at the county
courthouse. As a result of the service, he was paid $700 and
incurred unreimbursed
parking expenses of $60. In conformance with company policy,
Neil remitted the
$700 of jury duty fees to Sargent.
13. In addition to the items already noted, the Kings had the
following receipts in 2016:
Life insurance proceeds $50,000
2015 Missouri state income tax refund 450

9. Proceeds from garage sale 2,600
Interest income—
Kansas City general purpose bonds $480
CitiBank certificate of deposit 600 1,080
The insurance proceeds were paid to Neil as the designated
beneficiary of Lucy’s
life insurance policy. At the garage sale, the Kings sold
personal items (e.g., camper,
furniture, hunting and fishing equipment) that belonged to
Neil’s father and Neil’s
mother, Lucy. Neil and Mae estimated that the items they sold
originally cost
$7,100. The garage sale proceeds were donated to the
Alzheimer’s Association
(a qualified charity) in memory of Neil’s father.
14. The Kings had additional expenditures for 2016 of:
Dentist bills not covered by insurance $3,100
Ad valorem property taxes on personal residence 4,100
Interest on home mortgage 2,600
Contributions to Goodwill (a qualified charity) 3,600
APPENDIX E Practice Set Assignments—Comprehensive Tax
Return Problems E-7
Copyright 2018 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
As part of a program sponsored by their church (a qualified
charity), the Kings used

10. the family Suburban to transport senior citizens to religious
services, for a total of
900 miles. The Suburban also was used for numerous visits to
an orthodontist for
both of the Kings’ children, for a total of 480 miles.
15. The Kings’ household includes two dependent children:
Ethan (age 15) and Bella
(age 14), both of whom are full-time students. Relevant Social
Security numbers
appear below:
Name
Social Security
Number
Neil B. King 123-45-6785
Mae R. King 123-45-6786
Lucy E. King 123-45-6787
Ethan M. King 123-45-6788
Bella A. King 123-45-6789
16. Neil’s Form W–2 from Sargent Pharmaceuticals reflects
income tax withholding of
$6,500 (Federal) and $4,000 (state). The Kings made quarterly
income tax payments
of $20,000 (Federal) and $9,000 (state), for total payments of
$80,000 (Federal) and
$36,000 (state). They had their Federal income tax refund of
$3,000 (for 2015)
applied toward their 2016 income tax.
Requirements
Prepare an income tax return (with appropriate schedules) for
the Kings for 2016, using
the following guidelines:

11. • The Kings choose to file a joint income tax return.
• The Kings do not want to contribute to the Presidential
Election Campaign Fund.
• The Kings do not own any foreign bank accounts or other
investments.
• The Kings want to apply any Federal tax refund to their 2017
tax liability.
• The taxpayers are preparing their own return (i.e., no preparer
is involved).
• For the past several years, the Kings have itemized their
deductions from AGI
instead of using the standard deduction. In addition, the Kings
have deducted
state income taxes (not sales taxes) for the past several years.
• The taxpayers have the necessary substantiation (e.g., records,
receipts) to sup-
port all transactions reported in their tax return.
• Make necessary assumptions for information not given in the
problem but needed
to complete the return.
PROBLEM 3—C CORPORATION (FORM 1120)
On November 1, 2007, Janet Morton and Kim Wong formed Pet
Kingdom, Inc., to
sell pets and pet supplies. Pertinent information regarding Pet
Kingdom is summar-
ized as follows.

12. • Pet Kingdom’s business address is 1010 Northwest Parkway,
Dallas, TX 75225;
its telephone number is (214) 555-2211; and its e-mail address
is [email protected]
pki.com.
• The employer identification number is 11-1111111, and the
principal business
activity code is 453910.
• Janet and Kim each own 50% of the common stock; Janet is
president and Kim is
vice president of the company. No other class of stock is
authorized.
E-8 APPENDIX E Practice Set Assignments—Comprehensive
Tax Return Problems
Copyright 2018 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
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