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TAX STRATEGY PROBLEMPedro Bourbone is the founder and owner of a highly successful small business and over the past several years has accumulated a significant amount of personal wealth. His portfolio of stocks and bonds is worth nearly $5000000 and generates income from dividends and interest of nearly $250000 per year. With his salary from the business and his dividends and interest Pedro has taxable income of approximately $600000 per year and is clearly in the top individual marginal tax bracket. Pedro is married and has three children ages 16 14 and 12. Neither his wife nor his children are employed and have no income. Pedro has come to you as his CPA to discuss ways to reduce his individual tax liability as well as to discuss the potential estate tax upon his death. You mention the possibility of making gifts each year to his children. 1:1-48Explain how annual gifts to his children will reduce both his income during lifetime and his estate tax at death.CASE STUDY PROBLEMJohn 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:1-49 I: A $10000 loss deduction on the rental of his beach cottage. A $20000 charitable contribution deduction for the donation of a painting to a local art museum. The agent has questioned whether the painting is overvalued. A $15000 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 client?

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