Applying Tax Law

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Part 1

Tax practitioners are being more closely scrutinized by the IRS and the Securities and Exchange Commission (SEC) as a result of the Sarbanes-Oxley Act and other increases in regulation. As a tax professional, you need to possess an understanding of the Internal Revenue Code and the knowledge to conduct quality tax research to deliver solutions to your clients.

For the past two years, Masako, a Japanese American, has worked as a high school physical education teacher. He is also a body-builder and a part-time graduate student in educational technology at State University. In preparing for a master’s thesis, Masako has decided to participate in Arnold’s Body-Building Training Program, which uses advanced analysis technology to help students absorb physical education. Arnold’s training program has a regular faculty, curriculum, an enrolled body of students, and advanced technology in its gym equipment.

During the fall of 20X5, Masako earned $4,000 as a body-builder by coming in second in the state contest. In spring of 20X5, Masako paid $3,000 for his masters’ degree tuition at State University for one class on advanced computer technology and another $5,000 to participate at Arnold’s. Masako knows about relevant educational tax credits and wants you to focus just on the deductions. Based on the information provided:

  • How much can Masako deduct?
  • Discuss whether Masako may deduct the cost of his graduate degree or the body-building training program as a business expense based on tax law.

In the University of Arizona Global Campus Library, access the WESTLAW (Cases, Statutes & Court Rules, and Regulations) database to conduct tax research on Business Deductions. (Hint: You need to research Reg. § 1.162-5(b)(3), Reg. § 1.162-5(a), Reg. §1.183-2, Sec. 183(b)(1), sec. 262(a), and sec. 67(b)).

Part 2

Federal, state and local income taxes have been deductible since the inception of the federal income tax in 1913. Proponents of the elimination of the state and local income tax deduction argue that the portion of an individual’s income claimed by a state or local government is not really part of the individual’s disposable income and that taxing it is double taxation. Read the article, “Why Congress Should Axe the State and Local Income Tax Deduction (Links to an external site.)” and discuss why the State and Local Income tax deduction is one of the most politically challenging tax reforms. Do you agree or disagree with the elimination of the state and local income tax deduction? Why or why not?

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