Question

Note: This problem is for the 2018 tax year. Devon Bishop, age 45, is single. He lives at 1507 Rose Lane, Albuquerque, NM 87131. His Social Security number is 111-11-1117. Devon does not want $3 to go to the Presidential Election Campaign Fund.

Devon's wife, Ariane, passed away in 2014. Devon's son, Tom, who is age 18, resides with Devon. Tom's Social Security number is 123-45-6788.

Devon owns a sole proprietorship for which he uses the accrual method of accounting and maintains no inventory; the business operates as Devon's Copy Shop, 422 E. Main Street, Albuquerque, NM 87131, IRS business activity code: 453990. His revenues and expenses for 2018 are as follows:

Sales revenue $740,000

Cost of goods sold (based on purchases for the year) 405,000

Salary expense 88,000

Rent expense 30,000

Utilities 8,000

Telephone 6,500

Advertising 4,000

Bad debts 5,000

Depreciation* 21,000

Health insurance** 26,000

Accounting and legal fees 7,000

Supplies 1,000

*New office equipment ($21,000); Devon chose to use the immediate expense election.

** $18,000 for employees and $8,000 for Devon.

Other income received by Devon includes the following:

Dividend income (qualified dividends):

Swan, Inc. $10,000

Wren, Inc. 2,000

Interest income:

First National Bank 11,000

Second City Bank 2,500

County of Santa Fe, NM bonds 17,000

During the year, Devon and his sole proprietorship were involved in the following property transactions. Stock transactions were reported to Devon on Form 1099–B; basis was not reported to the IRS.

Sold Blue, Inc. stock for $45,000 on March 12, 2018. He had purchased the stock on September 5, 2015, for $50,000.

Received an inheritance of $300,000 from his uncle, Henry. Devon used $200,000 to purchase Green, Inc. stock on May 15, 2018, and invested $100,000 in Gold, Inc. stock on May 30, 2018.

Received Orange, Inc. stock worth $9,500 as a gift from his aunt, Jane, on June 17, 2018. Her adjusted basis for the stock was $5,000. No gift taxes were paid on the transfer. Jane had purchased the stock on April 1, 2012. Devon sold the stock on July 1, 2018, for $22,000.

On July 15, 2018, Devon sold one-half of the Green, Inc. stock for $40,000.

Devon was notified on August 1, 2018, that Yellow, Inc. stock he purchased from a colleague on September 1, 2017, for $52,500 had become worthless. Although he understood that investing in Yellow was risky, Devon did not anticipate that the corporation would declare bankruptcy.

On August 15, 2018, Devon received a parcel of land in Phoenix worth $220,000 in exchange for a parcel of land he owned in Tucson. Because the Tucson parcel was worth $245,000, he also received $25,000 cash. Devon's adjusted basis for the Tucson parcel was $210,000. He originally purchased it on September 18, 2015.

On December 1, 2018, Devon sold the condominium in which he had been living for the past 20 years (1844 Lighthouse Lane, Albuquerque, NM 87131) and moved into a rented townhouse. The sales price was $480,000, selling expenses were $28,500, and repair expenses related to the sale were $9,400. Devon purchased the condominium for $180,000.

Devon's potential itemized deductions, exclusive of the aforementioned information, are as follows:

Medical expenses (before the 7.5% floor) $9,500

Property taxes on residence 5,800

State income taxes 4,000

Charitable contributions 10,000

Mortgage interest on residence (First National Bank) 9,900

Sales taxes paid 5,000

During the year, Devon makes estimated Federal income tax payments of $35,000.

Required: Compute Devon's lowest net tax payable or refund due for 2018 assuming that he makes any available elections that will reduce the tax. If you use tax forms for your computations, you will need Form 1040 and Schedules 1, 4, 5, A, B, C, D, and SE and Forms 4562, 8824, 8949, and the Qualified Dividends and Capital Gain Tax Worksheet.

Make realistic assumptions about any missing data. If an amount box does not require an entry or the answer is zero, enter "0". Enter all amounts as positive numbers, unless instructed otherwise. It may be necessary to complete the tax schedules before completing Form 1040. When computing the tax liability, do not round your immediate calculations. If required round your final answers to the nearest dollar. Use the 2018 tax rate schedule provided. Do not use the Tax Tables.

Answer 1