William owns a building that is leased to Lester’s Machine Shop. Lester requests that William rewire the building for new equipment Lester plans to purchase. The wiring would cost about $4,000, but would not increase the value of the building because its only use is in connection with the specialized equipment. Rather than lose Lester as a lessee, William agrees to forgo one month’s rent of $1,000 if Lester will pay for the wiring. Because Lester does not want to move, he agrees. What amount, if any, must William include in gross income? A partial list of research sources is • Sec. 109 •Reg. Sec. 1.109-1 •CIR v. Grace H. Cunningham, 2 AFTR 2d 5511, 58-2 USTC ¶9771 (9th Cir., 1958)
> 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,
> Donna files as a head of household in 2017 and has taxable income of $90,000, including the sale of a stock held as an investment for two years at a gain of $20,000. Only one asset was sold during the year and Donna does not have any capital loss carryov
> Many tax professionals have moved into the field of financial planning for their clients. a. How do taxes impact financial planning for a client? b. Why do tax professionals have a perfect opportunity to perform financial planning for their clients?
> Dan owns 500 shares of Rocket Corporation common stock. The stock was acquired two years ago for $30 per share. On October 2, 2017, Dan writes five calls on the stock, which represent options to buy the 500 shares of Rocket at $75 per share. For each cal
> Dale purchased Blue Corporation stock four years ago for $1,000 as an investment. He intended to hold the stock until funds were needed to help pay for his daughter’s college education. Today the stock has a $6,500 FMV and Dale decides to sell the stock
> Under Sec. 267, current deductions may not be taken for certain transactions between related parties. a. Who is considered a member of a taxpayer’s family under the related party transaction rules of Sec. 267? b. Identify some of the other relationship
> The timing of when the economic performance test is satisfied depends on the type of transaction and whether the transaction is recurring. a. When does economic performance occur for a taxpayer who must provide property or services to another person? b
> Because expenses incurred both in a business and for the production of investment income are deductible, why is it important to determine in which category a particular activity falls?
> The Michigan Corporation owns 20% of the Wolverine Corporation. The Wolverine stock was acquired eight years ago to ensure a steady supply of raw materials. Michigan also owns 30% of Spartan Corporation and 85% of Huron Corporation. Stock in both corpora
> What problem may exist in determining the amount realized for an investor who exchanges common stock of a publicly traded corporation for a used building? How is the problem likely to be resolved?
> Phil, a cash-basis taxpayer, sells the following marketable securities, which are capital assets during 2017. Determine whether the gains or losses are long-term or short-term. Also determine the net capital gain and adjusted net capital gain for 2017.
> Richard Penn lives in Harrisburg, Pennsylvania. Richard is the president of an architectural firm. Richard has become known throughout the community for excellent work and honesty in his business dealings. Richard believes his reputation is an integral p
> What is the primary service function provided by the National Office of the IRS?
> During 2017, Gary receives a $50,000 salary and has no deductions for AGI. In 2016, Gary had a $5,000 STCL and no other capital losses or capital gains. Consider the following sales and determine Gary’s AGI for 2017. • An automobile purchased in2012 for
> Trisha, whose tax rate is 35%, sells the following capital assets in 2017 with gains and losses as shown: a. Determine Trisha’s increase in tax liability as a result of the three sales. All assets are stock held for investment. Ignore t
> Today, Juanita purchases a 15-year, 7% bond of the Sunflower Corporation issued four years ago at par. She purchases the bond as an investment at a discount from the par value. If she sells the bonds two years from now, explain why some or all of the gai
> What is the normal due date for the tax return of calendar-year taxpayers? What happens to the due date if it falls on a Saturday, Sunday, or holiday?
> When is the gain on the sale or exchange of securities by a dealer in securities classified as capital gain?
> Mario owns 2,000 shares of Nevada Corporation common stock at the beginning of the year. His basis for the stock is $38,880. During the year, Nevada declares and pays a stock dividend. After the dividend, Mario’s basis for each share of stock owned is $1
> Jim inherits stock (a capital asset) from his brother, who died in March of 2017, when the property had a $6.9 million FMV. This property is the only property included in his brother’s gross estate and there is a taxable estate. The FMV of the property a
> Anna, age 65, who lives with her unmarried son, Mario, received $7,000, which was used for her support during the year. The sources of support were as follows: Social Security benefits ………………………. $1,500 Mario ……………………….………………………..2,600 Caroline, an un
> Bart and Kesha, who are in the 39.6% tax bracket, are interested in reducing their taxes. They are currently considering several alternatives. For each, indicate how much tax, if any, they would save. a. Make a gift of bonds valued at $5,000 that yield
> Tom Williams is an equal partner in a partnership with the Kansas Corporation. Williams, an inventor, produced a new process while working for the partnership, which has been patented by the partnership. Before making any use of the patent, the partnersh
> Jack, a tenured university professor, has been a malcontent for many years at Rockport University. The university has recently offered to pay $200,000 to Jack if he will relinquish his tenure position and resign. Jack is of the opinion that tenure is an
> Why is a thorough knowledge of sources of tax law so important for a professional person who works in the tax area?
> Why are the gift and estate taxes called wealth transfer taxes? What is the tax base for computing each of these taxes?
> On October 21 of the current year, David receives stock of Western Corporation as a gift from his grandfather, who acquired the stock on January 20, 1995. Under what conditions would David’s holding period start on? a. October 22 of the current year? b
> Under what circumstances would a taxpayer use both the cash method and the accrual method of accounting at the same time?
> How might the current treatment of capital losses discourage an individual investor from purchasing stock of a high-risk, start-up company?
> Betty incurs the following transactions during the current year. Without considering the transactions, her 2017 AGI is $40,000. Analyze the transactions and answer the following questions: • On March 10, 2017, she sellsa painting for $2,000.Bettyis the
> Juan helps support his mother Maria, his son Jose, and a niece Norma. How many dependency exemptions can Juan claim given these additional facts? Maria lives with Juan. She receives $12,000 of Social Security benefits which she uses to pay for food, clo
> Katie and Alan are avid boaters and water skiers. They also enjoy parasailing. This year, they started a new parasailing venture to give rides to patrons. Katie and Alan are bothemployed full-time in other pursuits, but they take patrons out during the s
> Your client, Apex Corporation, entered into an agreement with an executive to purchase his personal residence at its current FMV in the event that his employment is terminated by the company during a five-year period. The executive’s job was terminated b
> Why was pay-as-you-go withholding needed in 1943?
> Mr. and Mrs. Pickens purchased a used piano in Y1 for their young son who had started taking piano lessons. In Y8 while cleaning the piano, Mrs. Pickens discovered $4,800 of old currency. They exchanged the old currency for new currency.
> Explain the distinction between income and gross income.
> As a political consultant for an aspiring politician, you have been hired to evaluate the following statements that pertain to capital gains and losses. Evaluate the statement and provide at least a one-paragraph explanation of each statement. As you pre
> Larry and Sue separated at the end of the year. Larry has asked Sue to sign a joint income tax return for the year because he feels that the tax will be lower on a joint return. Larry and Sue both work. Sue received a salary of $25,000 and Larry’s salary
> Under what circumstances can prepaid expenses be deducted in the year of payment by a taxpayer using the cash method of accounting?
> Lynette, a famous basketball player, is considering the possibility of transferring the sole right to use her name to promote basketball shoes produced and sold by the NIK Corporation. NIK will pay $2 million to obtain the right to use Lynette’s name for
> Partnerships and S corporations are flow-through entities. In connection with filing annual taxreturns, these entities must include Form K-1 in the returns. What is Form K-1, what is its purpose, and who receives the form?
> Robert provides much of the support for his daughter, Jane, and her two children. Jane earned $20,000. Robert, whose AGI is $350,000, paid the rent of $11,000 on Jane’s apartment and provided an additional $15,000 support. Jane is age 30, and her childre
> David, a CPA for a large accounting firm, often works 10- to 12-hour days. As a requirement for his position, he must attend social events to recruit new clients. In addition to his job with the accounting firm, he also has private clients in his unincor
> On January 1, 2016, Sean purchased an 8%, $100,000 corporate bond for $92,277. The bond was issued on January 1, 2016, and matures on January 1, 2021. Interest is paid semiannually, and the effective yield to maturity is 10% compounded semiannually. On J
> Beth retires when she turns 65. She begins receiving a monthly pension of $300 from her employer’s qualified retirement plan. While employed, Beth contributed $13,000 to the plan. a. Beth uses the simplified method to compute her exclusion. Why? b. Com
> Web Baker was hired three years ago by the Berry Corporation to serve as CEO for the company. As part of his employment contract, the corporation had agreed to purchase his residence at FMV in the event the company decided to fire him. Last year, Berry,
> On January 1 of the current year, the Orange Corporation issues $500,000 of 11%, 20-year bonds for $480,000. Determine the amount of original issue discount, if any.
> Martha has $40,000 AGI without considering the following information. During the year, she incurs an LTCL of $10,000 and has a gain of $14,000 due to the sale of a capital asset held for more than a year. a. If the $14,000 gain is not properly classified
> On December 31, 2016, Phil purchased $20,000 of newly issued bonds of Texas Corporation for $16,568. The bonds are dated December 31, 2016. The bonds are 9%, 10-year bonds paying interest semiannually on June 30 and December 31. The bonds are priced to y
> In 2001, Ellen purchased a house for $60,000 to use as her personal residence. She paid $12,000 and borrowed $48,000 from the local savings and Loan Company. In 2005 she paid $10,000 to add a room to the house. In 2007 she paid $625 to have the house pai
> a. What does the term “hazards of litigation” mean in the context of taxation? b. Why would the IRS or a taxpayer settle or compromise a case based on the “hazards of litigation”?
> Income earned by C corporations is taxed twice, once when the income is earned and again when it is distributed. If so, how is it possible that operating a business as a C corporation can reduce taxes.
> For the following taxpayers, indicate which tax form should be used, the applicable filing status, the number of personal and dependency exemptions available, and the number of children who qualify for the child credit. a. Arnie is a single college stud
> Wes and Tina are a married couple and provide financial assistance to several persons during the current year. For the situations below, determine whether the individuals qualify as Wes and Tina’s dependents. In all of the situations below, assume that a
> Explain what is meant by the phrase maintain a household.
> The following information relates to Tom, a single taxpayer, age 18: Salary $1,800 Taxable interest income 1,600 Itemized deductions 600 a. Compute Tom’s taxable income assuming he is self-supporting. b. Compute Tom’s taxable income assuming he is a de
> Otter Corporation sends people to the state capital to lobby the legislature to build a proposed highway that is planned to run through the area where its business is located. a. If Otter Corp. incurs $3,200 of expenses, what part, if any, of its expens
> Peter Baumann, your client, wants to sell a printing press to Chamberlain Corporation for $50,000. Pete has used the press in his business for two years and its adjusted basis is $90,000. The Coxmann Partnership; Chloe International, Inc.; Watts, Inc., a
> Deductible business or investment expenses must be related to a profit-motivated activity. a. What are the factors used in determining whether an activity is profit-motivated? b. Why are these factors so important in making this determination?
> Bala and Ann purchased as investments three identical parcels of land over a several-year period. Two years ago they gave one parcel to their daughter, Kim, who is now age 16. They have an offer from an investor who is interested in acquiring all three p
> Assume that it is December 31, and that Jake is considering making a $1,000 charitable contribution. Jake currently is in the 39.6% tax bracket, but expects that his tax bracket will be 28% next year. How much more will the deduction for the contribution
> a. Explain the principal difference in the tax treatment of an S corporation and a C corporation. b. Why would a C corporation be used if an S corporation is generally exempt from tax?
> Explain the purpose of the multiple support agreement.
> Tax rules are often very precise. For example, a taxpayer must ordinarily provide “over 50%” of another person’s support in order to claim a dependency exemption. Why is the threshold “over 50%” as opposed to “50% or more?”
> a. What determines who must file a tax return? b. Is an individual required to file a tax return if he or she owes no tax?
> Consider the four independent situations below for an unmarried individual, and analyze the effects of the capital gains and losses on the individual’s AGI. For each case, determine AGI after considering the capital gains and losses.
> Mr. and Mrs. Dunbar have taxable income of $260,000 without considering the following sales. Consider the following independent cases where capital gains are recognized and determine the marginal tax rate for the capital gain in each case. Ignore the eff
> An investor in a 28% tax bracket owns land that is a capital asset with a $50,000 basis and a holding period of three years. The investor wishes to sell the asset at a price high enough so that he will have $120,000 in cash after paying the income taxes.
> Beth acquired only one tract of land seven years ago as an investment. In order to sell the land at a higher price, she decides to subdivide it into 20 lots. She pays for improvements such as clearing and leveling, but the improvements are not considered
> Martha Lou owns 100 shares of Blain Corporation common stock. She purchased the stock on July 25, 1986, for $4,000. On May 2 of the current year, she receives a nontaxable distribution of 100 stock rights. Each stock right has a $10 FMV, and the FMV of t
> An individual taxpayer has realized a $40,000 loss on the sale of an asset that had a holding period of eight months. Explain why the taxpayer may be indifferent as to whether the asset is a capital asset.
> Tally owns a house that she has been living in for eight years. She purchased the house for $245,000 and the FMV today is $200,000. She is moving into her friend’s house and has decided to convert her residence to rental property. Assume 20% of the prope
