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    John Gemstone

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    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

    ? 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.

    a. What additional questions should you ask Mr. Gemstone in an attempt to substantiate
    the deductibility of the above items?
    b. What tax research procedures might be applied to build the best possible case for your

    At least 400 words please.

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    Solution Summary

    In case of income tax assessment not all expenses which are claimed are allowed as deduction by the tax authorities. In the given case there are questions raised on some of the expenses claimed by Mr. John Gemstone. There is a clear distinction in the laws that no personal expenses will be allowed as deduction in computing the taxable income for any business organization. Based on the facts of the case and the provisions of the law summarized below is the answer to the questions.