Tax Problems 2015

Accounting 530 Business Taxation Tax Research Problems

Research Problem 1: Bart and Arlene Keating are husband and wife and lived in Mineola, New York. They had been married for 18 years and have four children, all of whom are teenagers. After the birth of her last child, Arlene took a job as a city clerk and, over the years, has become city treasurer. Since graduating from high school, Bart has worked as a dispatcher for the city fire and ambulance departments. As Arlene has some college training in finance and accounting, she handled the family’s financial affairs, including reconciling the bank account, paying bills, and preparing all tax returns. She also took care of major purchases (e.g., autos, furniture) and servicing of debt (e.g., home mortgage, auto loans, charge accounts). The Keatings maintained a modest lifestyle, but Arlene was quite generous with the children. All were well-dressed, attended summer camp, and had their own cars. Bart believed that Arlene obtained any additional funds for the children’s support through credit card financing and bank loans. The Keatings filed joint returns for 2012 and 2013 that reflected their salary income. Arlene prepared the returns, and Bart signed them without reviewing them first. The returns did not show the $90,000 Arlene had embezzled from her employer over this two-year period. The City of Mineola discovered the theft, and Arlene was tried and convicted of grand larceny April of 2014. Due to the adverse publicity generated by these events, the Keatings were divorced, and Arlene moved to another state. In January of 2015, the IRS assessed a deficiency against Bart for the income taxes that would have resulted if the embezzled amounts had been reported as income. What can Bart do? Write a letter to Bart that contains your advice and prepare a memo for the tax file. Bart’s address is 123 Elm Street, Mineola, NY 11501. Research aids: IRC §6013(d)(3) and §6015. Kathryn Cheshire, 115 T.C. 183 (2000). Evelyn M....