Chapter 13, Problem 5QAP

Charles wants to renovate the bathroom and kitchen in his home, and he hires Veronica to do this work. They enter into a contract after agreeing to a cost of $40,000. However, once Veronica starts work, she realizes that it will cost $15,000 extra to complete the work that she promised. To show good faith to Charles, Veronica tells him that she will split the added cost with Charles and asks Charles for an additional $7,500. Charles refuses to pay the additional $7,500, and Veronica threatens to stop work on the renovation.   After fearing that another contractor will probably charge much more, Charles calls Veronica and tells her he’ll pay the additional $7,500. After the renovations are completed, Charles refuses to pay the additional $7,500, despite agreeing to it. Veronica sues Charles. Who wins? Please explain.

On July 24 of the current year, Sam Smith was involved in an accident with his business use automobile. Sam had purchased the car for 30,000. The automobile had a fair market value of 20,000 before the accident and 8,000 immediately after the accident. Sam has taken 20,000 of depreciation on the car. The car is insured for the fair market value of any loss. Because of Sams history, he is afraid that if he submits a claim, his policy will be canceled. Therefore, he is considering not filing a claim. Sam believes that the tax loss deduction will help mitigate the loss of the insurance reimbursement. Sams current marginal tax rate is 35%. Write a letter to Sam that contains your advice with respect to the tax and cash flow consequences of filing versus not filing a claim for the insurance reimbursement for the damage to his car. Also prepare a memo for the tax files. Sams address is 450 Colonels Way, Warrensburg, MO 64093.