Kimball is a full-time tax accountant. He is a keen runner. He competes weekly a
ID: 2341556 • Letter: K
Question
Kimball is a full-time tax accountant. He is a keen runner. He competes weekly and then enter competitions. Most recently competing at the SEA Games, in April 2018. He earned $80,300 from running events. in the form of prize money; however, a component is from sponsorships and appearances leading up to the games. Kimball niece which is Ryan is also a runner. However, Ryan is not as expert as Kimball but Ryan managed to earn $3,000 in prize money in February after competing.
Ryan is employed as a constructor but he is also a keen gardener. During weekends she has been nurturing watermelon, peanut and durian he planted on a 6 - acre piece of land he owns. Although the trees have yet to produce, he saw a potential market for local produce after he did some research on organic farming. After that, he went to buy saplings to fill most of the land. He has set up a Facebook page.
Two years ago, on the remaining 2-acres of land, Ryan began constructing his house. The construction was completed in August 2017 and he moved in in September 2017. His previous house was sold for $360,000 in 2017, with the contract being signed in June 2017 and settlement occurring in October 2017. His prior home was a Victorian era, purchased 10 years ago for $145,000, on 1 July 2007. Ryan had lived in the house since 1 July 2010. In total, Ryan spent $45,000 on renovations.
Kimball helped Ryan clean up his old house before selling it. Ryan found an antique mirror that he had five years ago for $600. He offered to Kimball as a thank you gift for the assistance. It is now worth $1,500. After Ryan had moved to his new house, Kimball gift Ryan a piece of artwork valued at $550. Kimball purchased the piece for $300. Once Ryan moved in, he set up a separate room to organize her organic goods and equipment.
Can you please explain to me in 800 words on Advising Kimball and Ryan regarding the issues arising from the above fact situation. Please use the right legislation, case law and rulings. (key point : Talk about whether is it ordinary income or assessable income? The CGT on antiques and the CGT on the artwork)
Explanation / Answer
1. TAX ISSUES
a. Income earned by both Kimball and Ryan as athletes will be considered as ordinary income and liable to tax. A point to consider in this case is that, if the winnings are not in a domicile state, then a Jock Tax is leviable according to the laws of state in which sporting event happened.
b. Farm Income from selling of watermelon, peanut and durian by Ryan will be taxable when such sale will actually happen. Related farm expenses will be allowed as deductions. Reporting has to be done in IRS Schedule F for such Farm Income and Farm Expenses. This income will be treated as an ordinary income.
c. Section 121 of the IRC provides for an exclusion of $2,50,000 in profit from the sale of their main home, for individual who are filing their return singly. To get the benefit of this inclusion, one must live in the property for minimum of 2 years out of the last 5 years immediately preceding date of sale. Remaining profit after above exclusion will be taxed as Capital Gain.
Ryan's Profit from Sale of Land= Sale Price - (Cost +Renovations Cost) = $360,000- =(145,000+45,000)= $160,000
Hence, full profit is tax exempt.
d. As per Section 2501 of IRC There will be no CGT on artwork in either person's hands gifted by Kimball to Ryan, since gifts up to the annual exclusion of $14,000 are exempt from tax and reporting.
e. As in the case of Cesarini v. United States, any treasure you find is liable to tax, over and above its cost. However, since the value addition in antique at the time Ryan find it is only $900, therefore same will be covered under exclusion limit of $14,000 and will be exempt from tax and reporting.
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