On January 1, year 1, Jessica received 10,000 shares of restricted stock from her employer, Rocket Corporation. On that date, the stock price was $10 per share. On receiving the restricted stock, Jessica made the §83(b) election. Jessica’s restricted shares will all vest at the end of year 4. After the shares vest, she intends to sell them immediately to fund an around-the-world cruise. Unfortunately, Jessica decided that she couldn’t wait four years and quit her job to start her cruise on January 1, year 3. a. What are the year 1 tax consequences of these transactions to Jessica, assuming her marginal tax rate is 33 percent and her long-term capital gains rate is 15 percent? b. What are the year 3 tax consequences of these transactions to Jessica, assuming her marginal tax rate is 33 percent and her long-term capital gains rate is 15 percent?
> Describe the annual limitation on employer and employee contributions to traditional 401(k) and Roth 401(k) plans.
> Describe how an employee’s benefit under a defined benefit plan is computed.
> Harry decides to finance his new home with a 30-year fixed mortgage. Because he figures he will be in this home for a long time, he decides to pay a fully deductible discount point on his mortgage to reduce the interest rate. Assuming Harry itemizes dedu
> Under what circumstances is it likely economically beneficial to pay points to reduce the interest rate on a home loan?
> Barbi really wants to acquire an expensive automobile (perhaps more expensive than she can really afford). She has two options. Option 1: finance the purchase with an automobile loan from her local bank at a 7 percent interest rate or Option 2: finance t
> How are defined benefit plans different from defined contribution plans? How are they similar?
> In year 0, Javens, Inc. sold machinery with a fair market value of $400,000 to Chris. The machinery’s original basis was $317,000 and Javens’s accumulated depreciation on the machinery was $50,000, so its adjusted basis to Javens was $267,000. Chris paid
> Russell Corporation sold a parcel of land valued at $400,000. Its basis in the land was $275,000. For the land, Russell received $50,000 in cash in year 0 and a note providing that Russell will receive $175,000 in year 1 and $175,000 in year 2 from the b
> Baker Corporation owned a building located in Kansas. Baker used the building for its business operations. Last year a tornado hit the property and completely destroyed it. This year, Baker received an insurance settlement. Baker had originally purchased
> Nicole’s employer, Poe Corporation, provides her with an automobile allowance of $20,000 every other year. Her marginal tax rate is 30 percent. Poe Corporation has a marginal tax rate of 35 percent. Answer the following questions relating to this fringe
> Prater Inc. enters into an exchange in which it gives up its warehouse on 10 acres of land and receives a tract of land. A summary of the exchange is as follows: What is Prater’s realized and recognized gain on the exchange and its basi
> Metro Corp. traded machine A for machine B. Metro originally purchased machine A for $50,000 and machine A’s adjusted basis was $25,000 at the time of the exchange. What is Metro’s realized gain or loss, recognized gain or loss, and adjusted basis in mac
> Woodley Park Corporation currently owns two parcels of land (parcel 1 and parcel 2). It owns a warehouse facility on parcel 1. Woodley needs to acquire a new and larger manufacturing facility. Woodley was approached by Blazing Fast Construction (who spec
> Kase, an individual, purchased some property in Potomac, Maryland, for $150,000 approximately 10 years ago. Kase is approached by a real estate agent representing a client who would like to exchange a parcel of land in North Carolina for Kase’s Maryland
> Independence Corporation needs to replace some of the assets used in its trade or business and is contemplating the following exchanges: Determine whether each exchange qualifies as a like-kind exchange. Also explain the rationale for why each qualifies
> Hans runs a sole proprietorship. Hans reported the following net §1231 gains and losses since he began business: a. What amount, if any, of the year 7 (current year) $50,000 net §1231 gain is treated as ordinary income? b. Assume
> Morgan’s Water World (MWW), an LLC, opened several years ago and reports the following net §1231 gains and losses since it began business. What amount, if any, of the year 7 $113,000 net §1231 gain is treated as
> Tonya Jefferson, a sole proprietor, runs a successful lobbying business in Washington, D.C. She doesn’t sell many business assets, but she is planning on retiring and selling her historic townhouse, from which she runs her business, in order to buy a pla
> Twinbrook Corporation needed to upgrade to a larger manufacturing facility. Twinbrook first acquired a new manufacturing facility for $2,100,000 cash, and then transferred the facility it was using (building and land) to White Flint Corporation for $2,00
> On January 1, year 1, Tyra works for Hatch Corporation. New employees must choose immediately between receiving seven NQOs (each NQO provides the right to purchase for $5 per share 10 shares of Hatch stock) or 50 restricted shares. Hatch’s stock price is
> Bourne Guitars, a corporation, reported a $157,000 net §1231 gain for year 6. a. Assuming Bourne reported $50,000 of non-recaptured net §1231 losses during years 1–5, what amount of Bourne’s net §1231 gain for year 6, if any, is treated as ordinary incom
> Moab, Inc. manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during th
> Fontenot Corporation sold some machinery to its majority owner Gray (an individual who owns 60 percent of Fontenot). Fontenot purchased the machinery for $100,000 and has claimed a total of $40,000 of depreciation expense deductions against the property.
> Hauswirth Corporation sold (or exchanged) some manufacturing equipment in year 0. Hauswirth bought the machinery several years ago for $65,000 and it has claimed $23,000 of depreciation expense against the equipment. a. Assuming that Hauswirth receives
> Two years ago, Bethesda Corporation bought a delivery truck for $30,000 (not subject to the luxury auto depreciation limits). Bethesda used MACRS 200 percent declining balance and the half-year convention to recover the cost of the truck, but it did not
> Deirdre sold 100 shares of stock to her brother, James, for $2,400. Deirdre purchased the stock several years ago for $3,000. a. What gain or loss does Deirdre recognize on the sale? b. What amount of gain or loss does James recognize if he sells the st
> Hillary is in the leasing business and faces a marginal tax rate of 35 percent. She has leased equipment to Whitewater Corporation for several years. Hillary bought the equipment for $50,000 and claimed $20,000 of depreciation deductions against the asse
> Aruna, a sole proprietor, wants to sell two assets that she no longer needs for her business. Both assets qualify as §1231 assets. The first is machinery and will generate a $10,000 §1231 loss on the sale. The second is land that will generate a $7,000 §
> Ken sold a rental property for $500,000. He received $100,000 in the current year and $100,000 each year for the next four years. $400,000 of the sales price was allocated to the building and the remaining $100,000 was allocated to the land. Ken purchase
> Pratt is ready to graduate and leave College Park. His future employer offers the following four compensation packages from which Pratt may choose. Pratt will start working for Ferndale on January 1, year 1. Assume that the restricted stock is 1,000 shar
> Shimmer Inc. is a calendar-year end, accrual-method corporation. This year, it sells the following long-term assets: Shimmer does not sell any other assets during the year and its taxable income before these transactions is $800,000. What is Shimmer&acir
> Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. This year, she sells the following long-term assets used in her business: / Lily’s taxable income before these transactions is $160,500. What is Lilyâ&#
> Buckley, an individual, began a business two years ago and has never sold a §1231 asset. Buckley owned each of the assets since he began the business. In the current year, Buckley sold the following business assets: Assuming Buckleyâ
> Luke sold a building and the land on which the building sits to his wholly owned corporation, Studemont Corp. at fair market value. The fair market value of the building was determined to be $325,000; Luke built the building several years ago at a cost o
> Hart, an individual, bought an asset for $500,000 and has claimed $100,000 of depreciation deductions against the asset. Hart has a marginal tax rate of 30 percent. Answer the questions presented in the following alternative scenarios (assume Hart had no
> Moran owns a building he bought during year 0 for $150,000. He sold the building in year 6. During the time he held the building he depreciated it by $32,000. What is the amount and character of the gain or loss Moran will recognize on the sale in each o
> Rayburn Corporation has a building that it bought during year 0 for $850,000. It sold the building in year 5. During the time it held the building, Rayburn depreciated it by $100,000. What is the amount and character of the gain or loss Rayburn will reco
> On August 1 of year 0, Dirksen purchased a machine for $20,000 to use in its business. On December 4 of year 0, Dirksen sold the machine for $18,000. a. What is the amount and character of the gain or loss Dirksen will recognize on the sale? b. What is
> On May 1, year 1, Anna received 5,000 shares of restricted stock from her employer, Jarbal Corporation. On that date, the stock price was $5 per share. On receiving the restricted stock, Anna made the §83(b) election. Anna’s restricted shares will all ve
> In year 0, Longworth Partnership purchased a machine for $40,000 to use in its business. In year 3, Longworth sold the machine for $35,000. Between the date of the purchase and the date of the sale, Longworth depreciated the machine by $22,000. a. What
> In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated the machine by $32,000. a. What is the amount and charac
> Identify each of White Corporation’s following assets as an ordinary, capital, or §1231 asset. a. Two years ago, White used its excess cash to purchase a piece of land as an investment. b. Two years ago, White purchased land and a warehouse. It uses the
> Franco converted a building from personal to business use in May 2014 when the fair market value was $55,000. He purchased the building in July 2011 for $80,000. On December 15 of this year, Franco sells the building for $40,000. On the date of the sale,
> On September 30 of last year, Rex received some investment land from Holly as a gift. Holly’s adjusted basis was $50,000 and the land was valued at $40,000 at the time of the gift. Holly acquired the land five years ago. What is the amount and character
> Hannah Tywin owns 100 shares of MM Inc. stock. She sells the stock on December 11 for $25 per share. She received the stock as a gift from her Aunt Pam on March 20 of this year when the fair market value of the stock was $18 per share. Aunt Pam originall
> Compare and contrast how employers record book and tax expense for stock options.
> What is a “disqualifying disposition” of incentive stock options, and how does it affect employees who have exercised incentive stock options?
> Alan Meer inherits a hotel from his grandmother, Mary, on February 11 of the current year. Mary bought the hotel for $730,000 three years ago. Mary deducted $27,000 of cost recovery on the hotel before her death. The fair market of the hotel in February
> Rafael sold an asset to Jamal. What is Rafael’s amount realized on the sale in each of the following alternative scenarios? a. Rafael received $80,000 of cash and a vehicle worth $10,000. Rafael also pays $5,000 in selling expenses. b. Rafael received $
> Mr. Kyle owns stock in a local publicly traded company. Although the stock price has declined since he purchased it two years ago, he likes the long-term prospects for the company. If Kyle sells the stock to his sister because he needs some cash for a do
> What is an installment sale? How do the tax laws ensure that taxpayers recognize all the gain they realize on an installment sale? How is depreciation recapture treated in an installment sale? Explain the gross profit ratio and how it relates to gains re
> Compare and contrast the similarities and differences between like-kind exchanges and involuntary conversions for tax purposes.
> Olympia Corporation, of Kittery, Maine, wants to exchange its manufacturing machinery for Bangor Company’s machinery. Both parties agree that that Olympia’s machinery is worth $100,000 and that Bangor’s machinery is worth $95,000. Olympia would like the
> Minuteman wants to enter into a like-kind exchange by exchanging its old New England manufacturing facility for a ranch in Wyoming. Minuteman is using a third-party intermediary to facilitate the exchange. The purchaser of the manufacturing facility want
> Salazar Inc., a Colorado company, is relocating to a nearby town. It would like to trade its real property for some real property in the new location. While Salazar has found several prospective buyers for its real property and has also located several p
> Compare and contrast the like-kind property requirements for real property and for personal property for purposes of qualifying for a like-kind exchange. Explain whether a car held by a corporation for delivering documents will qualify as like-kind prope
> Why does the tax code allow taxpayers to defer gains on like-kind exchanges? How do the tax laws ensure that the gains (or losses) are deferred and not permanently excluded from a taxpayer’s income?
> Rocky and Bullwinkle Partnership sold a parcel of land during the current year and realized a gain of $250,000. Rocky and Bullwinkle did not recognize gain related to the sale of the land on its tax return. Is this possible? Explain how a taxpayer could
> Describe the circumstances in which an individual taxpayer with a net §1231 gain will have different portions of the gain taxed at different rates.
> On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. On receiving the restricted stock, Dave made the §83(b) election. Dave’s restricted shares will vest
> Does a taxpayer apply the §1231 look-back rule in a year when the taxpayer recognizes a net §1231 loss? Explain.
> Explain the purpose behind the §1231 look-back rule.
> Jeraldine believes that when the §1231 look-back rule applies, the taxpayer deducts a §1231 loss in a previous year against §1231 gains in the current year. Explain whether Jeraldine’s description is correct.
> Bingaman Resources sold two depreciable §1231 assets during the year. One asset resulted in a large gain (the asset was sold for more than it was purchased for) and the other resulted in a small loss. Describe the §1231 netting process for Bingaman.
> Explain why gains from depreciable property sold to a related taxpayer are treated as ordinary income under §1239.
> How is unrecaptured §1250 gain for individuals similar to depreciation recapture? How is it different?
> Are both corporations and individuals subject to depreciation recapture when they sell depreciable real property at a gain? Explain.
> What are the similarities and differences between the tax benefit rule and depreciation recapture?
> Why is depreciation recapture not required when assets are sold at a loss?
> Compare and contrast §1245 depreciation recapture and §1250 depreciation recapture.
> On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end
> Explain Congress’s rationale for depreciation recapture.
> Lincoln has used a piece of land in her business for the past five years. The land qualifies as §1231 property. It is unclear whether Lincoln will have to recognize a gain or loss when she eventually sells the asset. She asks her accountant how the gain
> Dakota Conrad owns a parcel of land he would like to sell. Describe the circumstances in which the sale of the land would generate §1231 gain or loss, ordinary gain or loss, or capital gain or loss. Also describe the circumstances where Dakota would not
> Discuss the reasons why individuals generally prefer capital gains over ordinary gains. Explain why corporate taxpayers might prefer capital gains over ordinary gains.
> Explain the difference between ordinary, capital, and §1231 assets.
> What does it mean to characterize a gain or loss? Why is characterizing a gain or loss important?
> When a taxpayer sells an asset, what is the difference between realized and recognized gain or loss on the sale?
> Hawkeye sold farming equipment for $55,000. It bought the equipment four years ago for $75,000, and it has since claimed a total of $42,000 in depreciation deductions against the asset. Explain how to calculate Hawkeye’s adjusted basis in the farming equ
> Montana Max sells a 2,500-acre ranch for $1,000,000 in cash, a note receivable of $1,000,000 and debt relief of $2,400,000. He also pays selling commissions of $60,000. In addition, Max agrees to build a new barn on the property (cost $250,000) and spend
> Potomac Corporation wants to sell a warehouse that it has used in its business for 10 years. Potomac is asking $450,000 for the property. The warehouse is subject to a mortgage of $125,000. If Potomac accepts Wyden Inc.’s offer to give Potomac $325,000 i
> Harmer Inc. is now a successful company. In the early days (before it became profitable), it issued incentive stock options (ISOs) to its employees. Now Harmer is trying to decide whether to issue nonqualified options (NQOs) or ISOs to its employees. Ini
> Compare and contrast different ways in which a taxpayer triggers a realization event by disposing of an asset.
> Circuit Corporation (CC) is a calendar-year, accrual-method taxpayer. CC manufactures and sells electronic circuitry. On November 15, year 0, CC enters into a contract with Equip Corp (EC) that provides CC with exclusive use of EC’s specialized manufactu
> Matt hired Apex Services to repair Matt’s business equipment. On November 1, of year 0, Matt paid $2,000 for the repairs that he expects to begin in early March of year 1. a. What amount of the cost of the repairs can Matt deduct in year 0 if he uses th
> Haven received 200 NQOs (each option gives him the right to purchase 20 shares of Barlow Corporation stock for $7 per share) at the time he started working for Barlow Corporation three years ago when its stock price was $7 per share. Now that Barlow’s sh
> Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share) at the time he started working for Cutter Corporation three years ago. Cutter’s stock price was $15 per share. Yost exercises al
> Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share) at the time she started working for MNL Corporation (5/1/Y1) four years ago when MNL’s stock price was $8 per share. Now (8/15/Y5) that MNL’s sto
> Ramon has finally arrived. He has interviewed for the CEO position with MMM Corporation. They have presented him with two alternative compensation offers. Alternative 1 is for a straight salary of $2,500,000. Option 2 is for a salary of $1,000,000 and pe
> Marcus is the CEO of publicly traded ABC Corporation and earns a salary of $1,500,000. Assume ABC has a 35 percent marginal tax rate. a. What is ABC’s after-tax cost of paying Marcus’s salary? b. Now assume that Marcus, in addition to the $1.5 million s
> Jorgensen High Tech Inc. is a calendar-year, accrual-method taxpayer. At the end of year 1, Jorgensen accrued and deducted the following bonuses for certain employees for financial accounting purposes. • $40,000 for Ken. • $30,000 for Jayne. • $20,000 fo
> North Inc. is a calendar-year C corporation, accrual-basis taxpayer. At the end of the year 1, North accrued and deducted the following bonuses for certain employees for financial accounting purposes. • $7,500 for Lisa Tanaka, a 30 percent shareholder.
> Antonio received 40 ISOs at the time he started working for Zorro Corporation six years ago (each option gives him the right to purchase 20 shares of Zorro stock for $3 per share). Zorro’s share price was $3 per share at the time. Now that Zorro’s share
> Matt works for Fresh Corporation. Fresh offers a cafeteria plan that allows each employee to receive $15,000 worth of benefits each year. The menu of benefits is as follows: For each of the following independent circumstances, determine the amount of in
> Jarvie loves to bike. In fact, he has always turned down better paying jobs to work in bicycle shops where he gets an employee discount. At Jarvie’s current shop, Bad Dog Cycles, each employee is allowed to purchase four bicycles a year
> Jasmine works in Washington, D.C. She accepts a new position with her current firm in Los Angeles. Her employer provides the following moving benefits: • Temporary housing for one month……………………………… — $3,000 • Transportation for her household goods………………
> LaMont works for a company in downtown Chicago. The firm encourages employees to use public transportation (to save the environment) by providing them with transit passes at a cost of $260 per month. a. If LaMont receives one pass (worth $260) each mont
> Sharmilla works for Shasta Lumber, a local lumber supplier. The company annually provides each employee with a Shasta Lumber shirt so that employees look branded and advertise for the business while wearing the shirts. Are Shasta’s employees required to
> Gray’s employer is now offering group-term life insurance. The company will provide each employee with $100,000 of group-term life insurance. It costs Gray’s employer $300 to provide this amount of insurance to Gray each year. Assuming that Gray is 52 ye
> JDD Corporation provides the following benefits to its employee, Ahmed (age 47): • Salary………………………………………...$300,000 • Health insurance:……………………….…$10,000 • Dental insurance:……………………………$2,000 • Life insurance:………………………………..$3,000 • Dependent care:…………………
