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Taxing Non-Cash Winnings; Bad Debt Deduction; Tax Base

1.Tom Y, a longtime client and golfing buddy, has asked you to prepare his tax return. In looking at the material he has prepared for you, you notice that he has not mentioned the BMW that he won in the annual club tournament.

When you ask Tom about this, he says that he knows that the club never reports these items to the IRS and they told him to "proceed accordingly."

What would you advise Tom to do? What would you do?

2.Dr. Z is a cash basis taxpayer who maintains a dental practice as a sole proprietor. After performing various procedures, he billed the clients repeatedly, but never received payment. He is confident that these clients will never pay their bills.

So, for tax year 2008, he claims $20,000 as a bad debt deduction.

What do you think about Dr. Z's approach?

3.Why is real property a better tax base than personal property?

Solution Preview

1. The prize Tom won is taxable income (i.e., it is an accretion to his wealth which is not otherwise exempt from income tax). Though the club told Tom to "proceed accordingly," the club must issue a W-2G or 1099-Misc (depending upon whether he put up a fee to play in the tournament) and possibly withhold income tax on the car. However, even if the club does not report it, Tom must. He should call ...

Solution Summary

This solution discusses the income tax treatment of non-cash winnings, the ability of a cash-basis taxpayer to deduct bad debts, and whether real property or personal property is a better tax base.

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