INSTRUCTIONS: 

This is an open book take-home essay examination.  You may not consult or collaborate with any other person on this exam.  You may utilize any written materials, such as your class notes, casebook, codebook or study-aids. 

The length of your answers must be limited to 400 words for each question.  You are encouraged to take a position and argue it.  Support your argument with specific code sections, treasury regulations and cases.  Be concise.  Each question is worth 50 points. 

You must e-mail all of your typed essay answers in word compatible format to Renate Behrendt renate.behrendt@wmitchell.edu no later than Monday, May 07, 2007 at 6:00 PM.  You are encouraged to send all of the answers in one word document.  

The top line of your document must clearly and correctly state your exam number. 

Number your answers to correspond with the questions. 

Read the following fact pattern carefully.  Discuss the following four questions. 

QUESTION 1:           What is the significance to A of B’s secret activities and their joint tax return for 2006?   

QUESTION 2:           What ethical issues are present, and what are the potential consequences for an attorney representing both A and B? 

QUESTION 3:           As to B only, discuss how imputed income applies. 

QUESTION 4:           What arguments could be made to reduce the amount of tax owed by A and B, as to 2006 and 2007?  Specifically, what are the issues that have more than one possible characterization and provide the arguments for the tax-minimizing characterization of each transaction?

      Famed law professor A from Columbia University and his wife B lived an interesting life in a rent controlled apartment on the Upper East Side of Manhattan in New York City.  B was not in a trade or business, and she attended Columbia University at a 94% discount.  B had received scholarships for her participation in theatrical and musical activities that promote Columbia University.  A and B paid only $500.00 per month in rent as they had resided in the unit since 1971.   

     In 2005, A suffered a significant brain injury during a University sanctioned game of “lawn darts” with other faculty members.  In January of 2006, A received a gift of $100,000.00 from the University and was appointed Dean of Student Affairs.  A also received written permission to take a paid sabbatical until he was ready (if ever) to resume his duties at the University.  The University also gave A a gold watch at a faculty safety awareness meeting.   

     In 2006, A acting “pro se” secured a judgment award against the manufacturer of the lawn darts game in the amount of $250,000.00.  Payment was made in stock from the company, which was far less than similar plaintiffs had received.  B felt that her husband had lost them millions through his legal incompetence.  A incurred more than 10 percent of their adjusted gross income for medical and cosmetic surgery expenses, wigs, aroma therapy, hypnotic trance sessions all related to his brain injury.  B also incurred more than 10 percent of their adjusted gross income for extensive cosmetic surgery to enhance her appearance.  

      In a joint tax return for 2006, A and B reported a loss of $1,750,000.00 due to A’s under achievement in his legal action against the lawn darts game.  Unknown to A, B had extorted (in 2006) $1,400.00 worth of herbal dietary supplements from the Chairperson of the University Chemistry Department.  Furthermore, unbeknownst to A, B had traded services (in 2006) with her cousin, a harpsichord dealer, wherein B received a $63,000.00 antique “nearly played-out” harpsichord which B intended to use in the future for her proposed business as a performer.  A and B did not own a car; therefore, they had to walk to get to their jobs and other activities.  

     In January of 2007 the manufacturer of the lawn darts game went bankrupt, and all of its stock was declared worthless.  In early 2007, A’s publisher (“P”) declined to publish his latest non fiction work.  P publisher dropped A’s publishing contract despite having previously paid A an advance of $10,000.00 as a contractual pre-payment on two new legal texts.  In a written letter, the publisher declared A’s work as unworthy of print.  P further told him to “keep the $10,000.00 advance as a gift in light of your mental impairment, you are released and discharged”.  

     On June 20, 2007, A lost his gold watch while scuba diving in the Atlantic Ocean.  He had been attempting to salvage sunken treasure from a 210-foot Civil War Era steamship wrecked in 1865.  A had hoped and intended to sell his salvage findings on the internet.  

     Also, in 2007 A’s neighbor who had paid market rent of $5,000.00 per month for the same sized apartment unit, died.  In her will, she stated that all of her real estate holdings including a working diamond mine (all together valued at $6,000,000.00) be transferred to my beloved A… “In love and in consideration for his services of admiration, care and mutual affection.”  A had provided free legal services and been a good friend to the neighbor.  Shortly thereafter, at a cost of $10,000.00, A’s new diamond miners stuck a huge underground deposit potentially worth $1,000,000.00.  A received income from the mine for 2007 in the amount of $50,000.00. 

     In late 2007, a competing publisher (“CP”) discovered and carried off the original draft of A’s unpublished book while rifling through the trash set out on the sidewalk in front of A’s apartment building.  Thinking it a lambasting commentary of hyper-litigious American society, CP offered A a $50,000.00 signing bonus plus 10% of the gross sales of books or other sales resulting from the publication.  The book was published and reviewed by the New York Times, and within weeks it became a national phenomenon.  A and B both traveled to appear on television to promote the book but were not paid or compensated for travel expenses.  The book was quickly adapted into a screen play for HBO called “Lauz,” and gross sales of the movie topped $6,500,000.00 in late 2007.  In late December 2007, A and B met with and paid a tax attorney a retainer deposit of $70,000.00 to clean up their taxes. 

     On December 30, 2007, A and B were killed after refusing a panhandler’s request for more money, having already written her a check for $250.00.  They died without a will, and their only heir was the harpsichord dealer.

 End.

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