Two years ago, Micro Corporation granted Alisa, their General Manager, 20,000 incentive stock options with an exercise price of $15 per share. The stock currently trades at $40 per share, but Alisa expects its price to continue to increase. She wants to exercise her options this year, either now or later in the year when she believes the stock will be trading at $55 per share. Regardless of when she exercises the options, she expects to hold onto the stock for at least a year before selling it at an expected price of $100 per share. Alisa wants to know if it makes any difference when she exercises the options. She also wants to know what the tax implications are for each stock sale alternative.
> When Keith created a new corporation as the sole shareholder, he was advised by his accountant to treat 50 percent of the amount invested as a loan and 50 percent as a purchase of stock. Explain the advantages and disadvantages of this structure rather t
> What do you think the effect would be if Congress changes the law so that retirement plan contributions are included in taxable income at the time they are made rather than taxing the payment when received in retirement?
> From the perspective of both the taxpayer and the IRS, what are the advantages and disadvantages of the statute of limitations?
> The scandal on backdating stock options introduced new terminology to describe these controversial practices. Describe what you think each of these terms means. a. Backdating b. Repricing c. Reloading d. Spring-loading e. Bullet-dodging
> Construct a scenario in which the tax treatment of stock options is very unfavorable for the employee.
> What tax planning should be done before exercising incentive stock options?
> Cindy is president and sole shareholder of Chipsmart Corporation. Through her hard work (frequently putting in 70 hours per week), she has managed to triple the number of clients and revenue in the past year. Chipsmart has never paid a dividend to Cindy,
> Go to the IRS Web site (www.irs.gov) and locate Publication 502: Medical and Dental Expenses. What expenses qualify for impairment-related work expenses? How do employees deduct these expenses, and does an AGI floor (percentage) limit apply to them?
> Go to the IRS Web site (www.irs.gov) and locate Publication 501: Exemptions, Standard Deduction, and Filing Information. What documentation is necessary for a taxpayer with impaired vision to qualify for the additional standard deduction for blindness?
> Go to www.taxfoundation.org (the Web site for the Tax Foundation). a. What is Tax Freedom Day? b. When were Tax Freedom Days in 2015 and 2016?
> What is a tax service?
> Where would you find information about the IRS
> Briefly describe the statistical information available when you search the IRS website for statistics.
> Go to www.legalbitstream.com and locate Announcement 2002–18. What is the IRS’s policy on taxing frequent flyer miles?
> Go to the IRS Web site (www.irs.gov) and locate Publication 915: Social Security and Equivalent Railroad Retirement Benefits. Determine how much of the Social Security benefits must be included in income for a single individual who had $20,000 in dividen
> Go to www.irs.gov/irb/ (the IRS site containing Internal Revenue Bulletins). Locate the Definition of Terms section in a recent IRB. Differentiate between the following terms as used by the IRS in its rulings: amplified, modified, clarified, and distingu
> Go to www.aicpa.org (the AICPA’s Web site) and search for Statements on Standards for Tax Services. Read the history section of the most recent version of the Statements on Standards for Tax Services. What reasons were provided for revising the SSTS?
> Go to the IRS site (www.irs.gov) and search for “Circular No. 230.” Download a copy of Treasury Circular 230: Regulations Governing Practice before the Internal Revenue Service. a. Read §10.33 and then list four best practices for tax advisors. b. Read
> Go to www.irs.gov/irb/ (the IRS site containing Internal Revenue Bulletins). Locate and read IRS Notice 2008-14, 2008-4 IRB 310 and answer the following questions. a. What is the penalty for filing a frivolous tax return? b. What are the first three br
> Go to Gap Inc.’s Web site (www.gapinc.com) and locate its annual report. Find the note on income taxes. a. What was Gap’s effective tax rate for its two most recent fiscal years? b. How much was Gap’s valuation allowance for its two most recent fiscal
> Find an article on the Internet that describes how a traditional IRA can be converted into a Roth IRA. Summarize the process explaining any tax costs associated with the conversion. Include the URL for the article.
> What is the rationale for taxing unemployment compensation?
> Go to www.legalbitstream.com. Locate and read Revenue Ruling 2003–102. What type of medicines and drugs can be reimbursed through a flexible spending arrangement (FSA) according to this ruling? What change took effect in 2011?
> Go to www.legalbitstream.com. Locate and read Regulation Section 1.62–2(j), example 6. If an employer has an otherwise accountable plan but reimburses employees at 60 cents per mile, how is the reimbursement treated?
> Sarah pays $800 per month for her five-year-old daughter to attend a private kindergarten from 8:30 A.M. until 2:30 P.M. and after-school care until 5:30 P.M. The price of the kindergarten without the after-school care is $300 per month. Assuming Sarah p
> Howard is a single parent with an 11-year-old dependent son. The son currently attends sixth grade at public school. Howard accepts a temporary foreign assignment from his employer, which is expected to last from August through December. Because of the u
> Charlene provides 100 percent of the support for her elderly handicapped mother, Amanda. Amanda insists on living alone in her own apartment even though she has a severe hearing impairment. Amanda has always liked cats, so Charlene purchased a cat that i
> Don has a very painful terminal disease and has learned that marijuana may mitigate his pain. Don lives in a state in which it is legal to use the drug if under the direction of a medical doctor. Can Don deduct the cost of the marijuana as a medical expe
> Suzanne owns a vacation home at the beach in which she lived for 30 days and rented out for 61 days during the current year. Her gross rental income is $2,600. Her total expenses for the vacation home are as follows: Mortgage interest……………………….$1,500 Pro
> Marino Corporation pays $6,500 to rent a 10-seat skybox for three football games to use for business entertainment at each game. The price for a regular nonluxury box seat at each game is $45. How much can Marino Corporation deduct for this entertainment
> A minister receives an annual salary of $16,000 in addition to the use of a church parsonage that has an annual rental value of $6,000. The minister accepted this minimal salary because he felt that was all the church could afford to pay. He plans to rep
> Alice and Manny agree to divorce. Alice proposes that Manny purchase and assign to her a life insurance policy on his life as part of the divorce agreement. She wants Manny to continue paying the premiums on this policy for the next 10 years. Manny wants
> For each of the following independent situations, identify whether the item would be primarily a tax or a nontax factor in tax planning. a. The taxpayer lost a quarter of her net worth when the dot-com bubble burst and does not want to own any investmen
> Locate and read the following two cases: J.B.S. Enterprises, Inc., TC Memo 1991-254, 61 TCM 2829, 1991 PH TC Memo 91,254 Summit Publishing Company, Inc., TC Memo 1990-288, 59 TCM 833, 1990 PH TC Memo 90,288 List those facts that you feel most influenced
> Locate and read Greg McIntosh, TC Memo 2001-144, 81 TCM 1772, RIA TC Memo 2001144 (6/19/2001). Answer the following questions. a. What requirements must be met for a taxpayer to recover litigation costs from the IRS? b. Was the taxpayer in this case ab
> Fred Fisher is a licensed scuba diver who lives in Key Largo. He is employed full-time as an engineer. Five years ago he had been employed as a professional diver for a salvage company. While working for the salvage company, he became interested in marin
> Your clients, Sonny and his wife, Honey, believe in worshiping Ta-Ra, the Sun God. To practice their religious beliefs, they take a weeklong trip to Hawaii to worship Ta-Ra. The cost of this pilgrimage (including airfare, hotel, and meals) is $2,800. Son
> Last year your client, Barney Bumluck, worked part-time for Timely Tax Return Preparation Service. Barney was promised an hourly wage plus a commission. He worked under this arrangement from early February until April 15. His accrued pay amounted to $900
> Your client, Ms. I. M. Gorgeous, is an aspiring actress. She has managed to earn a living doing television commercials but was unable to get the acting parts she really wanted. She decided to have botox injections in her forehead and collagen enhancement
> Samantha has been unemployed for some time and is very short of money. She learned that the local blood bank has a severe shortage of her type of blood and is therefore willing to pay $120 for each blood donation. Samantha gives blood twice a week for 12
> Thomas ran for Congress, raising $2 million for his campaign. Six months after losing the election, auditors discovered that Thomas kept $160,000 of the campaign funds and used the money to purchase a vacation home. What are the tax consequences for this
> Gamma Corporation, a calendar-year accrual-basis taxpayer, operates department stores. Alpha Corporation and Beta Corporation are wholly-owned domestic subsidiaries of Gamma Corporation and file a consolidated federal tax return under Gamma Corporation’s
> Ben is the chief executive officer of a restaurant chain based in Maine. Ben began the business 15 years ago and it has grown into a multimillion-dollar company, franchising restaurants all over the country. Ben has a new interest, however, in horse bree
> Briefly explain Adam Smith’s four canons of taxation.
> Gary Sanders owns his own real estate business. He has a reputation within the community for honesty and integrity and believes that this is one of the reasons his firm has been so successful. Gary was a 30 percent shareholder in an unsuccessful fast-foo
> Jennifer, age 40, has accumulated $40,000 in her traditional IRA. She would like to withdraw $22,000 from her IRA to pay for her daughter’s college expenses. She plans to use $15,000 for tuition and $7,000 for room and board. Write a letter to Jennifer s
> Robert, age 35, has accumulated $36,000 in his traditional IRA. He recently married and would like to withdraw $25,000 from his IRA for a down payment on his first house. Write a letter to Robert stating the tax implications of his proposed withdrawal.
> McGuire Corporation is planning to acquire a corporate jet to increase the efficiency and security of its executives who will use the jet for both business trips and personal vacations. McGuire Corporation wants to know how it should determine the amount
> Martin Martindale, the 40-year-old founder and president of Martindale Corporation (an accrual-basis, calendar-year C corporation), owns 60 percent of the stock and receives a salary of $600,000. Four unrelated shareholders own the rest of the stock equa
> Eileen files as head of household and earns a salary of $75,000. She has a 4-year-old dependent daughter for whom she pays $5,000 in annual day care expenses so that she can work. Eileen’s employer offers a dependent care flexible spending arrangement in
> Sharon has not worked outside the home since her first child was born five years ago and the younger of her two children is now three. She thinks they are old enough to go to a day care center so she can return to work. Sharon received two job offers. Ma
> Laura and Bryan’s daughter, Lillian, starts college in a few months. What tax issues should they consider when they pay for Lillian’s college tuition and related expenses.
> Martin, a single man, contributes a painting to an art museum in the current year. The museum is thrilled to get the painting because it fits its Impressionist collection. Martin purchased the painting 10 years ago for $50,000. The painting is currently
> What guidelines are provided by the Statement on Standards for Tax Services No. 3 regarding a CPA’s reliance on information supplied by the client for use in preparing the client’s tax return?
> What Constitutional Amendment allowed implementation of an income tax? In what year was it ratified?
> Manuel plans to make a significant contribution to his favorite charity with one of the following assets. Which asset would you recommend Manuel contribute and why? a. Stock acquired five years ago at a cost of $13,000. The current fair market value is
> Larry wants to purchase a new car for personal use. He anticipates financing $40,000 of the purchase price. The car dealer is offering a special 3.5 percent interest rate on new cars. Alternatively, Larry could use a home equity loan with a 5 percent int
> Lauren is single, age 60, and has an annual salary of $68,000. She paid off her mortgage in December 2016 but expects that her annual real estate taxes will continue to be approximately $5,800. Lauren contributes $2,500 each year to her favorite qualifie
> John has a vacation condo in the Florida Keys that he rented out for two weeks in December for $250 a day. John has used this vacation home himself for a total of three weeks during the year. His total (unallocated) expenses for the condo are Taxes……………
> Ken, owner of Kendrick Corporation, needs to send an employee on a temporary assignment at a plant in another state. He can either send one employee for 18-months or two employees for 9-months each. Kendrick Corporation will pay for all the meal and lodg
> Bob lives in Atlanta and needs to set up three days of business meetings with customers in San Francisco. While he is in California, he would like to spend two days sightseeing in the wine country. Bob’s customers are willing to meet any weekday with him
> Jorge, a single individual, agrees to accept an assignment in Saudi Arabia, a country that imposes no income tax on compensation, beginning on January 1. Jorge will be paid his normal monthly salary of $5,000, plus an additional $1,400 per month for each
> Robert, age 55, plans to retire when he reaches age 65. He is not currently an active participant in any qualified retirement plan. His budget will allow him to contribute no more than $3,000 of his income before taxes to either a traditional IRA or a Ro
> Carol has recently incorporated her sole proprietorship and is considering making an S election. The corporation has $200,000 of gross revenue and expenses of $75,000 before Carol’s salary. She plans to take a gross salary of $60,000 from the business an
> Jeremy is setting up a service business. He can either operate the business as a sole proprietorship or he can incorporate as a regular C corporation. He expects that the business will have gross income of $80,000 in the first year with expenses of $12,0
> What basic tax rates apply to the ordinary income, dividend income, and interest income of an individual? What are they for a corporation?
> John and Martha are planning to be married. Both are professionals each with taxable incomes of $89,700 annually. They are deciding on a wedding date. They have two dates to choose from: December 14, 2017, or January 11, 2018. If they marry on December 1
> Palace Company (an accrual-basis taxpayer) is writing the lease agreements for its new apartment complex, Palace Apartments, which will rent for a minimum of $2,000 per month. Palace wants tenants to pay $6,000 when they sign the lease and is considering
> Robert plans to start a new business that he believes will have steady growth in profits for the next 15 years. He needs to select a method of accounting to use: cash or accrual. He would like to select the method that will provide the higher net present
> Kevin and Elizabeth are negotiating a divorce settlement. Kevin is in the 33 percent marginal tax bracket and Elizabeth is in the 15 percent marginal tax bracket. Kevin has offered to pay Elizabeth $15,000 each year for 10 years; payments would cease if
> Sandra, a single taxpayer in the 39.6 percent marginal tax bracket, has $60,000 she can invest in either corporate bonds with a stated interest rate of 9 percent or general revenue bonds issued by her municipality with a stated interest rate of 6 percent
> Marlin Corporation must decide between two mutually exclusive projects because it lacks sufficient personnel to complete both projects. Each project takes two years to complete and the project selected will be Marlin’s only source of taxable income for t
> The manager at Striker Corporation can hire either Ken, a marketing student, who will do research on a marketing plan, or Lisa, a tax student, who will research tax strategies to reduce corporate taxes. If she hires Ken, his wages and benefits will total
> Debbie owns investment land that she purchased 10 years ago for $12,000. The land consists of two adjoining lots recently appraised at $80,000. She needs $40,000 cash for another investment opportunity and considers two alternatives: (1) sell half of the
> Norman considers the purchase of some investment land from his neighbor, Robin, a high school math teacher. Robin purchased the land 10 years ago for $6,000. They have agreed on payments of $800 every month for the next three years for a total of $28,800
> Richard plans to invest $100,000 for a 50 percent interest in a small business. His friend, Jack, will also invest $100,000 for the remaining 50 percent interest. They expect to generate a 10 percent before-tax return on their investment the first year.
> Differentiate a progressive tax system from a proportional and a regressive system and give examples of each.
> Jessica plans to invest $150,000 in a second business. She expects to generate a 12 percent before-tax return on her investment the first year. Her marginal tax rate is 25 percent due to the income from her other business. She needs to decide whether to
> William, an employee for Williamson Corporation, receives an annual salary of $120,000 and is in the 28 percent marginal tax bracket. He is eligible to contribute to Williamson’s 401(k) plan and could contribute the pretax amount of $12,000. Alternativel
> Maria, age 42, just resigned from Bygone Corporation to accept a new job with Future, Inc. Bygone informed Maria that she has a $38,000 balance in its qualified retirement plan and wants to know if she plans to roll over this balance into another plan or
> Global Corporation is looking for a new CEO. The board of directors selected Miguel as the top candidate. During negotiations, Miguel indicated he wanted a $2 million salary in addition to the stock-based compensation the board was offering. Although thi
> Melinda has been offered two competing employment contracts for the next two years. Argus Corporation will pay her a $75,000 salary in both years 1 and 2. Dynamic Corporation will pay Melinda a $100,000 salary in year 1 and a $49,000 salary in year 2. Me
> Martin Galloway, the sole proprietor of a consulting business, has gross receipts of $45,000 in 2017. His address is: 1223 Fairfield Street, Westfield, New Jersey and his SSN is 158-68-7799. Expenses paid by his business are Advertising………………………………………………
> Barley Corporation used the FIFO method for inventory valuation when it began operations because this reflected the true physical flow of inventory. Its inventory under FIFO is valued at $375,000 at the end of its first year of operations. If Barley inst
> Refer to the information in problem 42 for Arnold Corporation. a. Identify which of Arnold Corporation’s book/tax differences result in a deferred tax asset or a deferred tax liability. b. Prepare the journal entry to record the federal tax expense and
> Arnold Corporation (a calendar-year, accrual-basis taxpayer) reported $500,000 pre-tax income on its financial statements for the year. In examining its records, you find the following: • $3,000 of interest income from municipal bonds • $200 of expense
> Maxwell Corporation has income per books before tax of $400,000. Included in the income per books is $8,000 interest income from tax-exempt municipal bonds. In computing income per books, Maxwell deducted $22,000 for meals and entertainment expenses, $3,
> Over what ranges of taxable income in 2017 will the total income tax liability for two persons with equal incomes who file as single individuals equal their income tax liability if they file jointly as a married couple?
> Neil owns a ski lodge in Aspen. His use of this lodge varies from year to year. The annual expenses for the lodge are as follows: Mortgage interest………………………………………$24,000 Property taxes………………………………………………12,000 Snow removal……………………………………………….1,000 Yard mai
> Teresa is an accomplished actress. During the summer, she rented a vacant store to stage productions of four plays, using the local townspeople as actors and stagehands. She sold $24,000 of tickets to the various plays. Her expenses included $10,000 for
> Maureen operates a cosmetics sales business from her home. She uses 400 of 1,600 square feet of the home as an office for the entire year. Her income before her home office deduction is $3,400 and unapportioned expenses for the home are as follows: Mortg
> Jim, the owner of a tabloid magazine, is sued by an actor for libel and pays $15,000 in legal fees. Jim is found guilty. Jim also received many parking tickets while attending various business meetings in areas where legal parking spaces are extremely di
> Maria earns $50,000 from consulting contracts during the year. She collects only $48,000 from her clients and expects the $2,000 will remain uncollectible. a. If Maria’s business uses accrual basis, what is her gross income for the year and how much can
> Tim accepts a temporary assignment that is 500 miles away from his office. The assignment is expected to last 7 months. Tim spends $7,000 for lodging and transportation and $3,000 for meals during these 7 months. At the end of the 7 months, Tim is notifi
> Mark flew from Baltimore to Phoenix on business. He spent four days on business and visited friends for two days before returning home. He stayed at a hotel for the four business days but he stayed at his friend’s home the last two days. He paid the foll
> In January, Marco incurs $2,800 in expenses traveling to San Diego to investigate the feasibility of acquiring a new business. He acquires the business and on March 1 forms a new corporation, Marco Enterprises, Inc. and pays $6,000 for organization costs
> Foster Corporation, a cash-basis taxpayer, borrowed $100,000 on January 1, year 1, but received only $98,000. The loan matures in 10 years with the $100,000 principal due on that date. Interest of $10,000 is payable on January 1 of each year beginning Ja
> When Kelley couldn’t make several monthly payments on a business loan, her brother Mike made three of the monthly payments of $700 each, a total of $2,100 ($1,950 for interest expense and $150 for principal) for Kelley’s loan. Kelley made the other nine
> Distinguish tax planning from tax compliance.
> Marco and Lisa are married and file a joint tax return. Lisa has salary income of $260,000 and Marco has salary income of $400,000. They also have the following items of investment income: $60,000 net long-term capital gain on sale of stock, $8,000 divid
