1. John Croy, age 40, social security number 697-73-1286, is unmarried. His wife, Beth, was killed in a plane crash 18 months ago. Since this tragedy, John's mother, Lisa' has moved in to help raise his children.
2. John maintains a home at 549 Coastal Lane, Saco, Maine 68215. John is the manager and sole proprietor of The Elite, a combination beauty salon and gift shop. He engages you to prepare his 1997 federal income tax return. He does not wish to contribute to the presidential election campaign fund.
3. The following people lived with John during 1997:

   						Social
   Name		Relationship		Age		Security Number
   Lisa Croy		Mother		61 years		748-25-9327
   Jason Croy		Son		9 years		258-90-0081
   Lauren Croy		Daughter		11 years		515-58-2014
   Liz Croy		Daughter		21 years		357-23-5916
   Jeff Banks		Foster Child		12 years		218-56-7463

   Although Lisa is helping to raise the kids, she manages to work part-time at The Elite as a receptionist. She earned $1,400 during 1997. That income was not enough to support herself. In fact, John provided 70% of her total support for the year.

   Jeff is a foster child who has been living in John's residence and under John's care and support since February 2, 1997.

   Liz attended Hardman State University during 1997. To help cover some of her expenses, she earned $4,500 by stocking shelves during the year in the school's bookstore. She was a full-time student and will graduate at the end of Spring semester 1998.

4. The Elite is located at 544 Ocean Drive, Portland, Maine 68327. Its employer identification number is 56-4321765. The business code for me Elite is 8110. Elite's 1997 cash receipts and disbursements are as follows:

   Receipts:

   • Receipts for income from salon services, $397,000
   • Receipts for income from gift shop, $173,000
   • Interest income, $4,275

   Disbursements:

   • Employee wages, $157,000
   • Payments into employee's Keogh plan, $15,700
   • Property and liability insurance, $20,500
   • Payment for purchases of cards and gift items, $77,000
   • Janitorial service, $12,000
   • Contribution to American Heart Association, $600
   • Rental of sound equipment, $2,200
   • Utilities, $15,000
   • Repairs, $8,700
   • Purchase of furniture for reception area on 04/01/96, $22,000
   • Accounting fees, $7,000
   • Advertising, $10,000
   • Payroll taxes, $14,076
   • Mortgage interest payment on building, $19,000
   • Federal income tax withholdings made in behalf of John, $59,900
   • State income tax withholdings made in behalf of John, $18,899
   • John's travel expenses to/from work, $950

   Other items related to The Elite are as follows:

   • The balances in Accounts Receivable for the gift shop were $14,500 at January 1, 1997 and $2,500 at December 31, 1997. No credit is extended for salon services.
   • Of the $2,500 in receivables on December 31, 1997, John estimates that $1,580 will be uncollectible. Of the $14,500 in receivables on January 1, 1997, $1,450 proved uncollectible because the customers associated with those receivables left town without a forwarding address. Furthermore, an additional $675 worth of those receivables are related to NSF checks from customers who are now bankrupt.
   • The beginning and ending inventory balances are $31,750 and $19,000, respectively.
   • The beginning and ending balances of the accounts payable associated with inventory are $17,000 and $31,705, respectively.
   • On October 1, 1996, John paid $5,000 to the Daily Coast for ads in the paper beginning November 1, 1996 and running through March 31, 1997.
   • In August, several severe storms occurred in Portland and surrounding areas. During one storm lightening struck a utility pole which supplied electricity to John's Salon. This caused a power surge which damaged a computerized state-of-the-art hooded hair dryer. The dryer had an adjusted basis of $1,550. Fair market values before and after the power surge were $11,000 and $8,000, respectively. After a lengthy dispute with his insurance company, John received $2,000 in November of 1997. On December 1, 1997, John traded the old hair dryer in on a new hair dryer that had a fair market value of $14,000 and paid an additional $5,000 in cash. As part of the installation of the new hair dryer, special circuit protectors costing $1,000 were built in to prevent future damage.
   • These assets are also of interest:
   • $15,000 computer system acquired on May 1, 1994 (old system traded in on the new system had a book value of $1,152; cash paid, $14,500).
   • $500,000 salon equipment (including the damaged hair dryer noted above) acquired on August 1, 1994 (old salon equipment traded in on the new equipment had a book value of $34,560; cash paid, $425,000).
   • $200,000 building completed on May 1, 1990.
   • $40,000 gift shop equipment acquired on August 1, 1994 (includes a $3,000 display case acquired on August 1, 1994 and sold on December 31, 1997 for $4,300).
   • John always makes the maximum possible payment into his Keogh plan.
5. John received the following interest and dividends during the year (unless otherwise noted):
   • Dividends on Credit Union Savings account, $1,400
   • 10% stock dividend (35 common shares) received on common stock of Ready Cable, Inc.:
   • Fair market value of shares received, $8,000
   • Purchase cost of the original 350 shares was, $6,000
   • ELO Corp (on preferred stock):

   Date		Date		Ex-Dividend		Date		Date
   Declared		of Record		Date		Mailed		Received		Amount
   12/02/96		12/14/96		12/20/96		12/31/96		01/06/97		800
   12/15/97		12/18/97		12/20/97		12/30/97		01/04/98		900

   • Form 1099-DIV from BioGen:
   • Line 1a gross dividends, $1,580
   • Line 1b ordinary dividends, $580
   • Line 1d nontaxable distribution (i.e., return of capital), $1,000
   • Form 1099-INT from Prime Bank of the North, line 1 interest, $2,670
   • Interest received on City of Portland Municipal Water Works Bonds, $500
   • Interest on Series EE U.S. Savings Bond purchased on 09/01/96 for $1,600 will be redeemed for $3,200 on 09/01/2003. Increment in value during 1997 was (no special election has been made with respect to the bond), $130
   • Form 1099-INT interest credited to savings account by Safehaven National Bank during 1997. Although there is no restriction on withdrawals, John did not withdraw the monies until 1997, $850
6. John received a CD player valued at $125 for opening a savings account with Safehaven National Bank.
7. The State of Maine Department of Revenue audited John's 1996 separate income tax return and found that he had overstated his tax liability. The state refunded him $765 in taxes plus $90 of interest. Assume that John's 1996 itemized deduction exceeded the standard deduction by well over $765 dollars.
8. John's best friend, Craig Lesser, a used car salesman, borrowed $4,000 from John in May of 1996 to hire an attorney. Craig was recently accused and convicted of false advertising and skipped town to avoid a substantial fine. Unfortunately, John has no idea where Craig went, and it appears that he will never get his money back.
9. While on a business trip in June, John's car was burglarized and his baseball card collection was stolen from the trunk John bought the cards for $400 on May 1, 1978 and their fair market value before the theft was $2,100. The cards were not insured.
10. John is a CPR instructor for the American Red Cross. During 1997, John incurred these expenses in rendering his services to that charitable organization:
    • Drove his automobile 2,750 miles to teach classes and related activities. John did not keep a record of actual operating expenses.
    • Paid parking fees and tolls, $160
    • Cost and upkeep of CPR mannequins, $110
    • Estimated value of rent-free use of his home, $1,750
    • Estimated value of his services (200 hours @ $20/hour), $4,000
11. John's 1099-B (proceeds from broker and barter exchange transactions) reports the total sales proceeds, $53,500, from these transactions:

    		Date		Purchase		Date		Sales
    Property		Acquired		Price		Sold		Price
    Pock Corp. p.s.		06/02/96		$ 3,200		04/08/97		$ 4,500
    BioGen Corp. c.s.		04/16/93		8,000		09/25/97		32,000
    Bell Corp. c.s.		08/10/95		13,000		12/03/97		17,000

    Other Details:

    • John purchased the Bell Corp. Stock from his brother, Mike, while it was experiencing a temporary market slump. Mike paid $18,000 for the stock when he bought it on December 1, 1990.
    • On January 22, 1990, relying upon a tip from a seemingly informed party, John purchased his original holding in BioGen Corporation for $22,000. On March 17, 1993, frightened by the fact that the value of his BioGen stock stock's had plummeted to $9,000, John sold his BioGen stock. On April 16, 1993, John reacquired BioGen stock when he discovered that BioGen was under the management of a new CEO and that it had recently secured patents on a number of phenomenal breakthroughs.
12. In 1995, John became one of 100 limited partners when he invested $50,000 in HairLine (59-7158369), a mail order venture specializing in hair care products. John's K-1 for:
    • 1995 reported line 1 ordinary loss of $20,000; line 4a interest of $979; line 4b dividends of $520; line 9 §179 expense deduction of $175; line 15a net earnings from self employment of ($20,000), and a line 16a deprecation adjustment of $1,229.
    • 1996 reported line 1 ordinary loss of $10,000; line 4a interest of $1,097; line 4b dividends of $439; line 15a net earnings from self employment of ($10,000), and a line 16a deprecation adjustment of $1,807.
    • 1997 reported line 1 ordinary income $35,000; line 4a interest of $1,001; line 4b dividends of $597; line 15a net earnings from self employment of $35,000, and a line 16a deprecation adjustment of $761.
13. On January 1, 1995, John sold a rental home located on scenic beach front property for $400,000. This home was acquired on August 23, 1984 at a cost of $100,000 (land 20 percent and building 80 percent) and was subsequently used only for rental purposes (i.e., wealthy tourists). The buyer paid $50,000 down and, beginning December 31, 1995 and given an interest rate of 9 percent, agreed to make 5 equal annual installments for the balance.
14. John owns and manages a very nice cabin in a very scenic location in the Adirondacks. The cabin's 1997 usage was as follows: 16 personal days, 160 rental days, and 189 vacant days. Revenue from rentals total $30,000. The cabin was purchased in 1995 for $250,000. Related expenditures are as follows:
    • Real estate taxes, $ 3,750.
    • Mortgage interest, $14,100.
    • Utilities and maintenance, $12,000.
    • Depreciation, $??????.
    • Roof replaced due to storm damage (FMV before, $295,000; FMV after, $275,000; adjusted basis of roof, $16,000), $25,000 (assume insurance recovery is equal to 60 percent of the loss).
15. John's new puppy, Dudley, chewed the leg off an antique coffee table one day while no one was at home. This resulted in $1,000 worth of damage to the table. The table was purchased by John's great-aunt for $100. John inherited the table when it had a fair market value of $5,000.
16. The following previously unmentioned items were paid out of John's checkbook during 1997:
    • Subscription to The Stylist Magazine, $125
    • Personal interest on American Express card, $1,175
    • House mortgage interest payments to the Safehaven National Bank, $10,500
    • County and city property taxes on his home, $3,600
    • Preparation of 1995 income tax return (including $520 of fees related to preparing income and expense schedules for The Elite), $850
    • Sales tax on family auto bought in August 1996, $900
    • Safety deposit box rental for stocks and bonds, $55
    • Contribution to Grace Methodist Church Payments, $11,300
    • Payments to Prudential for John's family health insurance , $5,000
    • Payments for vitamins and herbs to increase strength and stamina on the advice of John's health guru, $725
    • Hearing aid for Jeff Banks, $2,100
    • Cosmetic surgery to improve John's self-esteem and social life, $4,700
    • Medical bills for Lisa ($2,360 reimbursement was received during 1996 from Prudential), $4,000
    • Payments to Lisa Croy for care of Jason and Lauren while John worked, $5,000
    • On January 10, 1998 John made 4th Quarter 1997 estimated income tax payments of $3,500 to the State of Maine and $7,500 to the Internal Revenue Service.
17. John trains and shows German Shepherds as a hobby. During the year his dogs placed 1st and 2nd in several shows and won prizes totaling $8,700. His expenses included dog food $2,500, registration fees for shows $1,500, and kennel costs $3,300. Assume depreciation on the capitalized cost of the dogs for 1997 is $3,000.
18. During 1997, John made these noncash contributions:
    • On September 16, 1997 John donated an oil painting to the local library. He paid $6,000 for the painting six years ago. The library had no wall space on which to hang the painting and sold it immediately for $18,000. John received no service or other benefit from the charity in exchange for the painting.
    • Clothes (estimated fair market value at time of the contribution, $950; cost when purchased during 1997, $900) were contributed to the Salvation Army.
19. On July 18, 1997 John bought a Jet Ski from Mocean for $5,600. Due to a special promotion, John received a $1,650 cash rebate from the manufacturer a short time following his purchase.

Requirements:

Given that his 1996 tax liability was $69,457 and that he always seek to legitimately minimize his income tax, please save John's 1997 Federal income tax return with password protection in the Prosystems environment on May 12, 1998 by 2:00 PM.

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