a. Keith Thomas and Thomas Brooks began a new consulting business on January 1, 2017. They organized the business as a C corporation, KT, Inc. During 2017, the corporation was successful and generated revenues of $1,300,000. KT had operating expenses of $800,000 before any payments to Keith or Thomas. During 2017, KT paid dividends to Keith and Thomas in the amount of $165,000 each. Assume that Keithhad other ordinary taxable income of $130,000, itemized deductions of $40,000, is married (wife has no income), and has no children. Compute the total tax liability of KT and Keith for 2017. Ignore any phaseout of itemized deductions or reduction of personal exemptions. b. Instead of organizing the consulting business as a C corporation, assume Keith and Thomas organized the business as a limited liability company, KT, LLC. KT made a distribution of $200,000 each to Keith and Thomas during 2017. Compute the total tax liability of KT and Keith for 2017. Ignore any phaseout of itemized deductions, any phase out of personal exemptions, and additional tax on net investment income.
> Which of the following constitutes constructive receipt in the current year ended December 31? a. A salary check received at 6:00 p.m. on December 31, after all the banks have closed. b. A rent check received on December 30 by the manager of an apartmen
> Lisa and John are in the business of breeding beavers to produce fur for sale. They recently purchased a pair of breeding beavers for $30,000 from XUN, Inc., and agreed to pay interest at 10% each year for five years. After the five-year period, they cou
> Four years ago, Susan loaned $7,000 to her friend Joe. During the current year, the $7,000 loan is considered worthless. Explain how Susan should treat the worthless debt for tax purposes.
> a. Explain the distinction between a deduction and a credit. b. Which is worth more, a $10 deduction or a $10 credit? c. Explain the difference between refundable and nonrefundable credits.
> Nancy and the Minor Corporation own bonds of the East Corporation. Minor Corporation owns 80% of the stock of East Corporation. East Corporation has declared bankruptcy this year, and bondholders will receive only 26% of the face value of the debt. Expla
> During 2017, Julio attended school for much of the year but was supported by his parents. Julio married Jillian in December 2017. Julio graduated and began working full-time in 2018. Jillian worked during 2017 and earned $20,000. Julio’s only income was
> Carl and Carol have salaries of $14,000 and $22,000, respectively. Their itemized deductions total $8,500. They are married and both are under age 65. a. Compute their taxable income assuming they file jointly. b. Compute their taxable incomes assuming
> Under what circumstances, if any, can a married person file as a head of household?
> Under the related party rules of Sec. 267, why has Congress imposed the concept of constructive ownership?
> How does a lessor treat payments received for canceling a lease?
> Sylvia, a dentist with excellent skills as a carpenter, started the construction of a house that she planned to give to her son as a surprise when he returned from Afghanistan, where he is serving in the military. She began construction on March 23, 2016
> The following information relates to two married couples: Compute the 2017 tax due or refund due for each couple. Assume that the itemized deductions have been reduced by the applicable floors. Ignore credits. Lanes $32,000 $115,000 1,000 5,500 15,00
> Gail is a wealthy widow whose husband died last year. Her dependent daughter lives with her for the entire year. Gail has interest income totaling $382,400 and she pays property taxes and home mortgage interest totaling $20,000. a. What filing status ap
> This year, Yung Tseng, a U.S. citizen, supported his nephew who is attending school in the United States. Yung is a U.S. citizen, but his nephew is a citizen of Hong Kong. The nephew has a student visa, but he hopes to become a permanent U. S. resident.
> Jane and Bill have lived in a home Bill inherited from his parents. Their son Jim lives with them. Bill and Jane obtain a divorce during the current year. Under the terms of the divorce, Jane receives possession of the home for a period of five years and
> Carmen and Carlos, who have filed joint tax returns for several years, separated this year. Carlos works in construction and is often paid in cash. Carlos says he only worked a few weeks this year and made $11,000. In prior years he made approximately $3
> Which of the following taxpayers must file a 2017 return? a. Amy, age 19 and single, has $8,050 of wages, $800 of interest, and $350 of self- employment income. b. Betty, age 67 and single, has a taxable pension of $9,100 and Social Security benefits o
> Cathy, who is single, makes gifts of $50,000 to each of her two adult children. a. Who is primarily liable for the gift tax on the two gifts, Cathy or the two children? b. If Cathy has never made a taxable gift in prior years, is a gift tax due on the
> What conditions must be met by a married couple before they can file a joint return?
> Carlos inherits 100 shares of Allied Corporation stock from his father. The stock cost his father $8,000 and had a $25,000 FMV on the date of his father’s death in 2017. The alternate valuationdate was not elected. What is Carlos’s tax basis for the Alli
> Can couples change from joint returns to separate returns? Separate to joint?
> In 2012, the Ryan Corporation sold a capital asset and incurred a $40,000 LTCL that was carried forward to subsequent years. That sale was the only sale of a capital asset that Ryan made until 2017, when Ryan sells a capital asset and recognizes an STCG
> Tracy owns a nondepreciable capital asset held for investment. The asset was purchased for $250,000 six years earlier and is now subject to a $75,000 liability. During the current year, Tracy transfers the asset to Tim in exchange for $94,000 cash and a
> Summarize the rules that explain which parent receives the dependency exemption for children in cases of divorce.
> The wash sale rules disallow a loss in the year of sale when substantially identical stock or securities are acquired by the taxpayer within a 61-day period. What types of stock or securities are considered substantially identical?
> John and Carole file a joint return and have three children: Jack, age 23; David, age 20; and Kristen, age 15. All three children live at home the entire year. Below is information about each of the children: • Jack: graduated from college last year and
> Can a scholarship qualify as support?
> Limited liability companies (LLCs) are very popular today as a form of organization. Assume a client asks you to explain what this type of organization is all about. Prepare a brief description of the federal income tax aspects of LLCs.
> When is the transferor of a franchise unable to treat the transfer as a sale or an exchange of a capital asset?
> Can tax-exempt income qualify as support? Explain.
> Michelle pays a CPA $400 for the preparation of her federal income tax return. Michelle’s only sources of income are her salary from employment and interest and dividends from her investments. a. Is this a deductible expense? If so, is it a deduction fo
> Read the following two cases and explain why the Supreme Court reached different conclusions for cases involving similar facts and issues: • CIR v. Court Holding Co., 33 AFTR 593, 45-1 USTC ¶9215 (USSC, 1945) • U.S. v. Cumberland Public Service Co., 38
> Rick Cabela, a high income client, has contacted you for advice regarding two new proposed business ventures and other tax planning ideas. Rick already operates a highly successful consulting business that earns approximately $2,000,000 net after expense
> For each of the following items, indicate whether the individual taxpayer must include any amount in gross income. a. Employees of Eastside Bookstore are given their birthdays off with pay. b. Westside Hardware, Inc., gave each employee 10 shares of We
> Carmen has computed that her average tax rate is 16% and her marginal tax rate is 25% for the current year. She is considering whether to make a charitable contribution to her church before the end of the tax year. Which tax rate is of greater significan
> Congressional committee reports are an important source of information concerning the legislative enactment of tax law. a. Name the three Congressional committee reports that are issued in connection with a new tax bill. b. Of what importance are Congre
> Anya is concerned that she will be audited by the IRS. a. Under what circumstances is it possible that the IRS will review each line item on her tax return? b. Is it likely that all items on Anya’s return will be audited?
> Pedro 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 port-folio of stocks and bonds is worth nearly $5,000,000, owns real estate worth
> The Bruin Corporation, a C corporation, is owned 100% by John Bean and had taxable income in 2017 of $500,000. John is also an employee of the corporation. In December 2017, the corporation has decided to distribute $400,000 to John and has asked you whe
> a. What assets are excluded from capital asset status? b. Are capital gains given favorable tax treatment? c. What is the significance of an asset being classified as a capital asset? d. Are capital losses deductible?
> What are the criteria for distinguishing between a deductible expense and a capital expenditure?
> In April 2017, Dan is audited by the IRS for the year 2015. During the course of the audit, the agent discovers that Dan’s deductions for business travel and entertainment are unsubstantiated and a $600 deficiency assessment is proposed for the tax year
> Explain how a computer can assist a tax practitioner in tax planning activities and making complex tax calculations.
> Which of the following individuals is most likely to be audited? a.Connie has a $20,000 net loss from her unincorporated business (a cattle ranch). She also received a $200,000 salary as an executive of a corporation. b. Craig has AGI of $20,000 from w
> Sometimes taxpayers may not be able to file their tax returns by the normal due date. Are extensions available? How long are the extensions? Do extensions enable taxpayers to delay paying the tax they owe?
> In 2016, Paul, who is single, has a comfortable salary from his job as well as income from his investment portfolio. However, he is habitually late in filing his federal income tax return. He did not file his 2016 income tax return until December 4, 2017
> Howard Gartman is a 40% partner in the Horton &Gartman Partnership. During 2017, the partnership reported the total items below (100%) on its Form 1065: Ordinary income ………………………………. $180,000 Qualified dividends……………………………10,000 Long-term capital loss…
> a. Who is liable for additional taxes on a joint return? b. Why is this so important?
> Bill and Mary plan to marry in December 2017. Bill’s salary is $32,000 and he owns his residence. His itemized deductions total $12,000. Mary’s salary is $39,000. Her itemized deductions total only $1,600 as she does not own her residence. For purposes o
> Congressman Patrick indicates that he is opposed to tax proposals that call for a flat tax rate because the structure would not tax those individuals who have the ability to pay the tax. Discuss the position of the congressman, giving consideration to ta
> Why did Congress enact the wash sale provisions?
> Sally and Tom are married, have three dependent children, and file a joint return in 2017. If they have adjusted gross income (AGI) of $90,000 and itemized deductions of $10,000, what is their taxable income for 2017?
> Why are expenses related to tax-exempt income disallowed?
> Clay, who was single, died in 2017 and has a gross estate valued at $8,500,000. Six months after his death, the gross assets are valued at $9,000,000. The estate incurs funeral and administration expenses of $125,000. Clay had debts amounting to $150,000
> Betty, a married taxpayer, makes the following gifts during the current year (2017): $20,000 to her church, $50,000 to her daughter, and $40,000 to her husband.What is the amount of Betty’s taxable gifts for the current year (assuming that she does not e
> Jill and George are married and file a joint return. They expect to have $425,000 of taxable income in the next year and are considering whether to purchase a personal residence that would provide additional tax deductions of $80,000 for mortgage interes
> Based on the amounts of taxable income below, compute the federal income tax payable in 2017 on each amount assuming the taxpayers are married filing a joint return. Also, for each amount of taxable income, compute the average tax rate and the marginal t
> During November and December of last year, Tommy’s, Inc., incurred the following expenses ininvestigating the feasibility of opening a new restaurant in town: Expenses to do a market survey……………………………………..$3,800 Expenses to identify potentialsuppliers
> Danielle Anderson, your client and a cash method taxpayer, works full-time at a music store located in a mall. She assists the manager in buying decisions, serves customers on the sales floor, and plays music to draw in customers. On the weekends, she pl
> The governor of your state stated in a recent political speech that he has never supported any income tax increases as the tax rates have remained at the same level during his entire term of office. Yet, you believe that you are paying more tax this year
> On February 10, 2017, Gail purchases 20 calls on Red Corporation for $250 per call. Each call represents an option to buy 100 shares of Red stock at $42 per share any time before November 25, 2017. Compute the gain or loss recognized, and determine wheth
> a. The tax law refers to gross income, yet the term gross income is not found on Form 1040. Explain. b. Why is it important to understand the concept of gross income even though the term is not found on Form 1040?
> a. Explain the difference between income splitting and income shifting. b. Why are taxpayers interested in shifting income from one tax return to another within the same family or economic unit? c. Is there a relationship between the tax on unearned inco
> During the year, Sara sold a capital asset at a loss of $2,000. She had held the asset as an investment. This is the only capital asset she sold during the year. Is her deduction for this capital loss a deduction for or a deduction from AGI?
> In order for a business expense to be deductible it must be ordinary, necessary, and reasonable. Explain what these terms mean.
> The effective tax rate on gain of $1 million resulting from the sale of qualified small business stock obtained in 2005 in an initial public offering and held more than five years is 14%. Do you agree or disagree? Explain.
> Wayne is single and has no dependents. Without considering his $11,000 adjusted net capital gain (ANCG), his taxable income, which includes no investment income, in 2017 is as follows: a. What is Wayne’s tax liability without the ANCG?
> Sam owns a small house that he rents out to students attending the local university. Are the expenses associated with the rental unit deductions for or from AGI?
> A corporate taxpayer plans to build a $6 million office building during the next 18 months. How must the corporation treat the interest on debt paid or incurred during the production period?
> If Pam transfers an asset to Fred and the asset is subject to a liability that is assumed by Fred, how does Fred’s assumption of the liability affect the amount realized by Pam? How does Fred’s assumption of the liability affect his basis for the propert
> Under Sec. 280A, how are expenses allocated to the rental use of a vacation home? In what order must the expenses be deducted against the gross income of the property?
> Under Sec. 280A, what constitutes personal use of a vacation home by the taxpayer?
> If an activity does not generate a profit in three out of five consecutive years, is it automatically deemed to be a hobby? Why or why not?
> For 2017, Mario, a single individual with no dependents, receives income of $55,000 and incurs deductible expenses of $9,000. a. What is Mario’s taxable income assuming that the expenses are deductions for AGI? b. What is Mario’s taxable income assumin
> Is there any tax advantage for an individual who has held an appreciated capital asset for eleven months to delay the sale of the asset? Explain.
> Amy has LTCGs that are taxed at different tax rates, 15%, 25% and 28%. She also has NSTCLs that amount to less than her NLTCG. The procedure for offsetting the NSTCL against the LTCGs is favorable to her. Explain.
> Joe is a single, self-employed individual who owns his own business. During the current year, Joe reported $200,000 gross income and $60,000 of business expenses. He also paid $30,000 in alimony to his former spouse, $4,000 mortgage interest on his perso
> What types of taxpayers are more likely to be audited by the IRS?
> Many homeowners itemize deductions while many renters claim the standard deduction. Explain.
> Assume that Jill is engaged in painting as a hobby. During the year, she earns $1,000 from sales of her paintings and incurs $1,300 expenses for supplies and lessons. Jill’s salary from her job is $70,000. What is the tax treatment of the hobby income an
> How many dependency exemptions are the following taxpayers entitled to, assuming the people involved are U.S. citizens? Which dependents qualify for the child credit? a. Andrew supports his cousin Mary, who does not live with him. Mary has no income and
> Why is the distinction between deductions for AGI and deductions from AGI important for individuals?
> Is the principal goal of tax planning to absolutely minimize the amount of taxes that a taxpayer must pay?
> If a taxpayer files his or her tax return and receives a tax refund from the IRS, does this mean that the IRS feels that the return is correct and will not be subject to a future audit.
> Under Sec. 280A, how will a taxpayer report the income and expenses of a vacation home if it is rented out for only 12 days during the year?
> Holly inherited $10,000 of City of Atlanta bonds in February. In March, she received interest of $500, and in April she sold the bonds at a $200 gain. Holly redeemed Series EE U.S. savings bonds that she had purchased several years ago. The accumulated i
> Bryce, a bank official, is married and files a joint return. During 2017 he engages in the following activities and transactions: a. Being an avid fisherman, Bryce develops an expertise in tying flies. At times during the year, he is asked to conduct fl
> Discuss what is meant by the term “double taxation” of corporations. Develop an example of double taxation using a corporation and shareholder.
> Under what circumstances must a taxpayer use a rate schedule instead of a tax table?
> To better understand the rules for offsetting capital losses and how to treat capital losses carried forward, analyze the following data for an unmarried individual for the period 2014 through 2017. No capital loss carryforwards are included in the figur
> Judy just obtained a patent on a new product she has developed. Bell Corporation wishes to market the product and will pay 12% of all future sales of the product to Judy. How can she be sure that the payments received will be treated as a longterm capita
> Using the following facts, answer the questions below concerning Jaron’s 2017 tax liability. 1. Two years ago, in November 2015, when his wife died, Jaron left the CPA firm he was working for and started his own practice so he could have more time to sp
> Latesha, a single taxpayer, had the following income and deductions for the tax year 2017: INCOME: Salary$ 80,000 Business Income25,000 Interest income from bonds10,000 Tax-exempt bond interest5,000 TOTAL INCOME120,000 DEDUCTIONS:Business expenses$9,5
> John and Kathy Brown have just been audited and the IRS agent disallowed the business loss theyimed in 2015. The agent asserted that the activity was a hobby, not a business. John and Kathy live in Rochester, New York, near Lake Ontario. Kathy is a CPA,
> Dallas, whose tax rate is 35%, has recognized an STCL of $11,000 and an LTCG of $10,200 due to the sale of stock. In late December, he is considering the sale of an antique chair held for investment that would result in an LTCG of $5,000. If he sells the
> On December 20 of the current year, Winneld has decided to sell all of the stock that she owns and reinvest the proceeds in state of Minnesota bonds. Without considering the sales, her taxable income is expected to exceed $500,000 this year and in future
> In 2002, Florence purchased 30 acres of land. She has not used the land for business purposes or made any substantial improvements to the property. During the current year, she subdivides the land into 15 lots and advertises the lots for sale. She sells
> Calvin, whose tax rate is 35% is considering two alternative investments on January 1, 20Y1. He can purchase $100,000 of 10% bonds due in five years or purchase $100,000 of Hobbes, Inc. common stock. The bonds are issued at par, pay interest annually on
> Gus, a football player who was renegotiating his contract with the Denver Broncos, paid his ex-girlfriend $50,000 to drop a sexual assault complaint against him and keep the matter confidential. The Broncos stated that if criminal charges were filed and
> On January 1, 2015, Swen paid $184,000 for $200,000 of the 8%, 20-year bonds of Penn Corporation, issued on January 1, 2011, at par. The bonds are held as an investment. Determine the gain and the character of the gain if the bonds are sold on January 1,
