John Gemstone, a wealthy client, has recently been audited by the IRS. The agent has questioned the following deduction items on Mr. Gemstone's tax return for the year under review:
A $10,000 loss deduction on the rental of his beach cottage.
A $20,000 charitable contribution deduction for the donation of a painting to a local art museum. The agent has questioned whether the painting is overvalued.
A $15,000 loss deduction from the operation of a cattle breeding ranch. The agent is concerned that the ranch is not a legitimate business (i.e., is a hobby).
Your supervisor has requested that you represent Mr. Gemstone in his discussions with the IRS.
What additional questions should you ask Mr. Gemstone in an attempt to substantiate the deductibility of the above items?
What tax research procedures might be applied to build the best possible case for your client?
The tax research procedures that might be applied to build the best possible case for the client is to first collect and analyse applicable tax rulings, and then second, collect and analyse tax jurisprudence. The first would help establish the basis of the deductions claimed by Mr. John Gemstone for the tax return for the year under review while the tax jurisprudence would establish how the tax courts interpreted these basis in the past.
1. A $10,000 loss deduction on the rental of his beach cottage.
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The solution discusses questions regarding tax research.