Devani 1 Nadia Devani ACCT 3350 Professor Steven Scholer Tax Issue Project 10/07/2013 Silver Linings Playbook

The parents of the hero (Pat Solatano Jr.), Pat Solatano Sr. and Dolores Solatano were retired couple living in their small house in Philadelphia. The taxable income would be their pensions if they are receiving and income from the other sources. The retired couple might be receiving social security benefits. According to the social security benefits a portion of social security benefits may be taxable if modified AGI exceeds certain limits. For instance, Mrs. and Mr. Pat Solatano Sr., AGI is $43,000 and their social security benefits are $10,000 then there modified AGI will be $48,000 which exceeds $44,000 base amount that is subject to second tier rule. Here, 50% of social security is lesser than $6000. Therefore, under the second tier rule, the couple should include 85% of ($48,000-$44,000) plus $5000 that equals to $8,400. The social security benefits were excluded from taxation before 1984, based on administrative convenience because there was no specific law for this kind of exclusion. According to the capital recovery concept, half of each payment received from social security represents a return of the taxpayers investment and that is why it was excluded. After 1993, a second tier applies up to 85% of benefits will be subject to tax when modified AGI more than $34,000 and $44,000 for married filing jointly. For singles, if modified AGI is between $25,000

Devani 2 and $34,000 and for married couples filing jointly $32,000 and $44,000, the 50% inclusion rule applied for them. Pat Juniors mother Dolores Solatano, brings him back home to help him get cured from bipolar disorders. Pat Solatano Sr. and his wife can get allowable itemized deduction for their sons medical expenses, as he is dependent on them and meets the support, relative, and residency tests to consider a dependent for purpose of the medical expense deduction. The cost of medical drugs that doctor prescribed, payment made to psychiatrist Dr. Patel. The medical expense area is the only context in which a person is allowed a deduction for the payment of expenses of another taxpayer. Pat Junior wants to get back to his job as a teacher and wants his wife Nikki to come back to him. One day he meets his friend Ronnie and his wife Veronica; they invited him for dinner where he meets Veronicas widowed sister Tiffany. Tiffany and Pat junior forms a love-hate relationship based on what they can do for each other to fulfill each individuals goal. Pat wants Tiffany to help him by sending his message to his wife Nikki and for this Tiffany wants Pat to take part with her in a dance competition. Tiffany being widow pays taxes as a single and since she is unemployed, she might be receiving unemployment benefit until she finds a job for herself. Nikki and Pat are married and living separately but not divorced, so they file taxes separately and not joint. Pat Senior bets all his wealth with his gambler friend for Philadelphia Eagles game against Dallas Cowboys. He thinks that his son is good luck charm for him and asks him to attend the game for him. Pat junior attends the game, gets into the fight,

Devani 3 at the same time Philadelphia Eagles looses the game and Pat Senior looses all his wealth in the bet. Here, Pat Sr. did not transfer any property to his gambler friend but he was trying to find a way to save all his property. Under the realization concept, no income is recognized as taxable income to the taxpayer until it has been realized and until the amount is received without any restriction, the realization does not occur. The transaction does not happen, it was not recognized. Pat Senior agrees that Tiffany and Pat Jr. are together good luck charm and makes parley with his gambling friend that if Tiffany and Pat Jr. make at least 5 out of 10 in the dance competition because they are not professional dancers, he wins double the amount he lost. The gambler friend was sure that among all those professional dancers in the dance competition, its impossible for Pat Jr. and Tiffany to get 5 out of 10, that was the reason he agreed to this parley. Tiffany and Pat Jr. takes part in the dance competition, does not win the competition but make 5 out of 10 and Pat Sr., wins back all his property and some cash with which he opens a restaurant business. The winner couple in that dance competition wins the award and if the award includes certain amount of cash then the winners have to include it in their gross income. Under the prizes and awards concept, all the prizes and awards received are taxable income to the recipients. Unless the prizes and awards are given in charity to qualified charitable organization such as church, school, then they are excluded from taxes. Therefore, the winners can avoid taxation by immediately transferring the winning amount to local charity.

Devani 4 Even though the betting is illegal, under all-inclusive concept Pat Sr., has to pay taxes on his income. Under the capital recovery concept, no income is recognized until all capital invested in an asset has been recovered. Therefore, Pat Sr. recovered all his property and made some cash, he should recognize the gains with which he bought the restaurant business. Further, if he had bought the business with the property and formed a ccorporation, then his corporation is liable to pay property (ad valorem) tax and other taxes like employment tax, Federal income tax, State income tax (franchise/corporate) and he is only liable to pay State income tax (married Joint). After Pat Jr. gets cured and starts working as a teacher or being his dads good luck charm and works with his dad then he starts paying taxes. If Tiffany and Pat Jr. get married, they file income taxes jointly. If Pat Sr. gives partnership to his son and Tiffany forming a S-corporation, then in this scenario, under the entity concept, conduit entities are a tax-reporting entity that reports its results to the government but does not pay tax on its income. The owners of conduit would pay all the income taxes. Therefore Pat Sr., Pat Jr., and Tiffany are liable to pay the taxes on the income from the business.