Alicia, Bob and Carol are equal partners in, Dunning Law Associates. In 2011, Alicia, in an attempt to maximize the firms return on its investment portfolio, encourages her partners to acquire $90,000 of stock in a local Internet provider. The stock was acquired by the partnership from the issuing corporation and the corporation that issued the stock meets all the tests for the stock to be treated as small business stock. In 2017, when the stock is worth $20,000, Bob and Carol, who are upset with Alicia’s investment choice, distribute all the shares of the small business stock to Alicia as part of her partnership distribution. The following year, Alicia sells the stock for $15,000. Required: Determine the tax treatment of Alicia’s loss on the sale of the stock. Search a tax research database and find the relevant authority(ies) that forms the basis for your answer. Your answer should include the exact text of the authority(ies) and an explanation of the application of the authority to Alicia’s facts. If there is any uncertainty about the validity of your answer, indicate the cause for the uncertainty.
> Marvin and Tracy Peery’s 2016 taxable income is $87,830 before considering the effect of their investment activities. Details of their 2016 sales of investment assets follows: / The Form 1099 Marvin and Tracy received from their broker indic
> Assume the same facts as in problem 47. What is FFF's allowable casualty loss deduction under each of the following situations? a. A comparable van sells for $4,000. After the accident, the insurance adjuster estimates the van was worth $1,500. The in
> Gordon is the sole proprietor of Fashion Flowers & Florals (FFF). During the current year, one of FFF's delivery vans is involved in an automobile accident. The van has a basis of $6,000. What is FFF's allowable casualty loss deduction under each of t
> Based on the facts of problem 57, calculate the taxable income and the tax liability for a married couple. Facts of problem 57, Total income…………………………………………………….$118,000 Excludable income………………………………………………..2,000 Deductions for adjusted gross income……………
> The Goodson Company is a chain of retail electronics stores. How much of a loss can Goodson deduct in each of the following cases. Explain. a. An employee drops a 65 inch 3D television, cracking the plastic case on the back. The television normally sel
> ABC Company owns a chain of furniture stores. How much loss can ABC Company deduct in each of the following cases? Explain. a. ABC closes a store in a depressed part of the county. Rather than move furniture to other stores, ABC sells furniture that ha
> Claudio owns a passive activity that has a basis of $28,000 and a fair market value of $38,000. The activity has suspended losses of $16,000. To reduce their estate, every year Claudio and his wife give their son Anthony and his wife a gift of approxima
> Masaya owns a passive activity that has a basis of $32,000 and a suspended loss of $13,000. Masaya's taxable income from active and portfolio income is $73,000. a. What is the effect on Masaya's taxable income if he sells the passive activity for $46,000
> Return to the facts of problem 39. Assume that Jeremy gives the property to his son Felipe when the property has a fair market value of $37,000. What is the effect of the gift on Jeremy's taxable income? Felipe's taxable income? Data from Problem 39:
> Return to the facts of problem 39. Assume that Jeremy dies when the passive activity has a fair market value of $25,000. What is the effect on Jeremy's taxable income for the year he dies? Data from problem 39: Jeremy owns a passive activity that has a
> Return to the facts of problem 39. Assume that Jeremy dies when the passive activity has a fair market value of $37,000. What is the effect on Jeremy's taxable income for the year he dies? Data from problem 39: Jeremy owns a passive activity that has
> What are the three basic tests that an expense must satisfy to be deductible?
> Jeremy owns a passive activity that has a basis of $30,000 and a suspended loss of $16,000. His taxable income from active and portfolio income is $81,000. a. What is the effect on Jeremy's taxable income if he sells the passive activity for $37,000?
> Return to the facts of problem 37. At the end of 2018, Mason sells the passive activity that generated the losses for $16,000. What is the effect on his taxable income if his basis in the activity sold is a. $4,000? b. $21,000? Data from Problem 37: M
> Mason owns a passive activity that generates a loss of $14,000 in 2016, $12,000 in 2017, and income of $4,000 in 2018. In 2017, Mason purchases a second passive activity that has passive income of $6,000 in 2017 and $10,000 in 2018. Discuss the effect
> Based on the following information, what are the taxable income and the tax liability for a single individual? Total income…………………………………………………….$118,000 Excludable income………………………………………………..2,000 Deductions for adjusted gross income…………………….2,500 Deduct
> Return to the facts of problem 35. In the next year, Janet has a taxable income from her salary and investment activities of $62,000. The results for her 3 passive activities are Passive Activity 1………………………………………$ 15,000 Passive Activity 2……………………………
> Janet has a taxable income of $54,000 from her salary and investment assets. She also owns 3 passive activities that have the following income (loss) for the year: Passive Activity 1…………………………….$ 12,000 Passive Activity 2…………………………..$ (18,000) Passi
> Jacqueline is a 60% owner of a rental property and has a significant role in the management of the property. During the current year, the property has a rental loss of $21,500. What is the effect of the rental property on her taxable income, if her adj
> Ivan and Olga own a duplex. They collect the rents and make repairs to the property when necessary. That is, they are active participants in the rental activity. During the current year, the duplex has gross rents of $16,000 and total allowable deduct
> Katrina is the sole owner of rental real estate that produces a net loss of $18,000 in 2016 and $22,000 in 2017 and income of $9,000 in 2018. Her adjusted gross income, before considering the rental property for the years 2016 through 2018, is $115,000,
> Mort is the sole owner of rental real estate that produces a net loss of $18,000 in 2016 and $20,000 in 2017 and income of $6,000 in 2018. His adjusted gross income, before considering the rental property for the years 2016 through 2018, is $120,000, $1
> Julio and Rosetta are retired and receive $12,000 in Social Security benefits during the current year. They also receive $10,000 in interest and taxable pension payments of $30,000. Prepare a spreadsheet calculating the amount of Social Security income
> Prizes and awards are generally taxable. Under what conditions is the receipt of a prize or award not taxable?
> Carlos is a 25% owner of CEBJ Builders, a company that specializes in residential construction. The other 75% of CEBJ is owned by his three brothers. During the year, Carlos spends 1,800 hours managing the operations of CEBJ. He also is the 100% owner
> Aretha and Betina own a 10-unit apartment complex. Aretha owns a 60% interest in the apartment complex, and Betina has a 40% interest. Aretha is an investment banker and spends 120 hours helping to manage the apartment complex. Betina is the co-owner
> Sidney and Gertrude Pearson own 40% of Bearcave Bookstore, an S corporation. The remaining 60% is owned by their son Boris. Sidney and Gertrude do not participate in operating or managing the store and they invested $19,000 in the business when it open
> Which of the following are passive activities? a. Marvin is a limited partner in the Jayhawk Beach Club and owns a 20% interest in the partnership. The partnership's sole asset is a resort hotel. b. Marcie owns a royalty interest in an oil and gas opera
> Classify each of the following transactions as a deductible expense, a nondeductible expense, or a loss: a. Nira sells for $4,300 stock that cost $6,000. b. Chiro Medical, Inc., pays $2,200 for subscriptions to popular magazines that it places in its wai
> Which of the following would be a passive activity? Explain. a. Kevin is a limited partner in Marlin Bay Resort and owns a 15% interest in the partnership. b. Tom owns a 15% interest in a real estate development firm. He materially participates in the ma
> A taxpayer has the following income (losses) for the current year: Active Income Portfolio Income Passive Income $43,000 $29,000 $(27,000) What is the taxpayers taxable income (loss) if a. The taxpayer is a single
> A taxpayer has the following income (losses) for the current year: / What is the taxpayers taxable income (loss) if a. The taxpayer is a publicly held corporation? b. The taxpayer is a closely held corporation? c. The taxpayer is a single individual
> Return to the facts of problem 21. In the next year, Carlos has a loss from the dry cleaning store of $18,000. How much of the loss can Carlos deduct? Explain. Problem 21: Carlos opens a dry cleaning store during the year. He invests $30,000 of his o
> A stock appreciation right (SAR) entitles the holder of the right to a cash payment equal to the difference between the fair market value of the stock on the date the SAR is exercised and the fair market value of a share on the date the SAR is granted.
> Carlos opens a dry cleaning store during the year. He invests $30,000 of his own money and borrows $60,000 from a local bank. He uses $40,000 of the loan to buy a building and the remaining $20,000 for equipment. During the first year, the store has a
> Anton is single and a self-employed plumber. His net income from his business is $56,000. He has dividend income of $6,000 and an $8,000 loss from a rental property in which he actively participates. Determine the possible tax consequences of each issu
> Emma owns and operates Conway Camera. One night someone breaks into the store and steals cameras that cost $2,200. The retail price of the cameras is $3,500. Determine the possible tax consequences of each issue you identify.
> Margery owns a passive activity with a basis of $15,000. The activity has a $9,000 suspended loss. Margery sells the passive activity for $22,000. Determine the possible tax consequences of each issue you identify.
> Rita is the sole owner of Video Plus, a local store that rents video games, software, and movies. She works 40 hours a week managing the store. Determine the possible tax consequences of each issue you identify.
> Explain why each of the following expenditures is or is not deductible: a. Lumbar, Inc., pays $12,000 as its share of its employees’ Social Security tax. The $12,000 is deductible. b. Leroy pays a cleaning service $250 per month to clean his real estate
> Briefly state Adam Smith's four requirements for a good tax system.
> Celine opens a jewelry store during the current year. She invests $20,000 of her own money and receives a nonrecourse bank loan of $80,000. During the current year, the store has a loss of $24,000. Determine the possible tax consequences of each issue
> The Readyhough Corporation was incorporated in 2009. During 2016, the corporation had operating income of $80,000. Because of a strike at its major supplier, the corporation had an operating loss of $60,000 in 2017. The corporation expects to rebound
> Rick and Debbie Siravo own a beachfront home in Wrightsville Beach, NC. During the year, they rent it for 20 weeks (140 days) at $1,100 per week and use it 10 days for personal purposes. Rick actively participates in the management of the property, but
> Nathan and Maranda agree to divorce in the current year. In structuring the divorce agreement, Maranda proposes that Nathan assign a $200,000 life insurance policy on himself to her as part of the divorce agreement. Under Maranda's proposal, Nathan wou
> Adela owns rental real estate that generated a $27,000 loss during the current year. Using the information below as a guide, prepare a spreadsheet calculating her adjusted gross income. It should be flexible enough to calculate Adela's adjusted gross i
> Suzanne is married and the sole owner of Laidlaw Corporation. When the corporation was established in 2006, she received 10,000 shares of qualified small business stock in exchange for her $100,000 investment. On four occasions, Suzanne made loans tota
> Carla is an engineer for Snyder Corporation and travels frequently. On a recent business trip to Indianapolis, she checks into her hotel room early on Sunday afternoon and then spends the rest of the day touring the city. When she goes to put on her e
> The Internal Revenue Service provides information on a variety of tax issues in its publication series. These publications can be found on the IRS world wide web site (http://www.irs.gov/). Go to the IRS World Wide Web site and find publications with i
> George is single and has adjusted gross income of $37,000. He discovers termites in the basement of his house and pays $6,200 to fix the damage. His insurance company will not reimburse him for the damage. Determine the possible tax consequences of eac
> On January 1, 2017, Brenda acquires 200 shares of Disney stock for $8,000. She sells 200 shares of the stock on September 2, 2017, for $30 per share. On September 23, 2017, Brenda acquires 400 shares of Disney stock for $10,400. Determine the possible
> Classify the following items as ordinary income, a gain, or an exclusion: a. The salary received by an employee b. Dividends of $400 received on 100 shares of corporate stock c. Sale for $10,000 of an antique chair that cost $3,500 d. Rental income from
> Alphonse sells stock with a basis of $5,500 to his brother, Conner, for $4,000. His brother sells it later in the year for $5,100. Determine the possible tax consequences of each issue you identify.
> Zoriana sells stock that she acquired in 2013 for $7,500. Her basis in the stock is $14,000. She has a $2,000 long-term capital loss carryover from 2016. Determine the possible tax consequences of each issue you identify.
> In the United States, dividends received from corporations are taxable at long-term capital gains rates. Because the corporation paying the dividend does not get a deduction for dividends paid, the dividends are subject to double taxation. Other countrie
> Mike's Pizza decides to replace one of its delivery vehicles. The vehicle has a basis of $2,700 and Mike's is able to sell it for $2,100.
> Orlando owns a passive activity with a basis of $13,000 and a $6,000 suspended loss. He dies when the passive activity has a fair market value of $17,000. Determine the possible tax consequences of each issue you identify.
> Anthony owned a 2015 Luxuro automobile that had a fair market value of $18,000. His son James, who is 19, borrows the car without his father's knowledge and totals it in 2016. James has been involved in two car accidents, and his father is afraid that
> What is the purpose of the passive loss rules?
> Discuss the basic differences between annual losses and transaction losses.
> How are deductions and losses different? How are they similar? Explain.
> How are the rules for deducting personal casualty and theft losses different from the rules for business casualty and theft losses? Explain the difference in treatments and the rationale for the difference.
> What is a wash sale? How is the treatment of a wash sale different from the treatment of other sales of securities?
> Classify the following items as ordinary income, a gain, or an exclusion: a. The gross revenues of $160,000 and deductible expenses of $65,000 of an individual's consulting business b. Interest received on a checking account c. Sale for $8,000 of Kummel
> Losses incurred on the sale of business assets are generally deductible in full in the year the loss is realized. Describe a situation in which a realized loss on the sale of a business asset is not deductible in the current year, and explain why it wou
> Capital gains of individuals are taxed at a 15% rate (0% for 10% and 15% marginal tax rate taxpayers, 20% for 39.6% marginal tax rate taxpayers). Capital gains of corporations are taxed at the corporation’s marginal tax rate. In reducing the individual
> What is the purpose of the related party rules as they apply to sales of property?
> Most sales of securities at a loss result in capital losses. Under what circumstances would a loss on the sale of a security be treated as an ordinary loss? Explain the rationale for allowing this treatment.
> What are the limitations on the deductibility of capital losses by individuals? How do the limitations compare with those for corporations?
> When a business sustains a loss from a casualty, one of two measurement rules is used to determine the amount of the loss. Why is the use of two measurement rules necessary for determining a business casualty loss?
> For purposes of the passive loss rules, what is a closely held corporation? How is the tax treatment of passive losses incurred by a closely held corporation different from the tax treatment of passive losses incurred by: a. Individuals? b. Corporation
> Are the passive loss rules disallowance-of-loss provisions or are they loss deferral provisions? Explain.
> What is a nonrecourse debt? How is financing using nonrecourse debt different from financing using recourse debt?
> How is a taxpayer's amount at risk in an activity different from the taxpayer's basis in the same activity? What purpose does the amount at risk serve in regard to losses?
> What are the characteristics of a tax shelter as the term is commonly used by tax practitioners?
> Darrell is an employee of Whitney's. During the current year, Darrell's salary is $136,000. Whitney's net self-employment income is also $136,000. Calculate the Social Security and self-employment taxes paid by Darrell and Whitney. Write a letter to
> Gloria sells land that she held as an investment for $2,000 to the Lacy for Senate Campaign Committee. Gloria purchased the land twenty years ago for $2,000. The chairman of the Lacy for Senate Campaign Committee intends to sell the land at an auction of
> What are the net operating loss carryback and carryforward periods? Does a taxpayer have a choice of the years to which a net operating loss can be carried? Explain.
> The enactment of the passive loss rules has generally diminished the attractiveness of tax shelters as investments. However, rental real estate continues to provide a viable tax shelter for certain taxpayers. Explain why this is true.
> Jordan and her brother Jason agree to purchase a hardware store from a local bank, which acquired it through foreclosure. Because the bank wants to sell the business, Jordan and Jason can to buy it for only $160,000. Jordan will invest $42,000 and own
> Exeter Savings and Loan is located in a two-story building in downtown Exeter. The building has a basement in which the heating system for the bank is located. The bank also uses the basement to store records and photocopying equipment. Last fall, the
> Calculate Calzone Trucking's 2017 taxable income. Indicate the amount and the effect of any carryforwards or carrybacks on Calzone Trucking's current, past, or future income.
> Harold and Maude are both 55 years of age and have two married children. Harold is an engineer and is an active participant in his company’s qualified pension plan. Maude is a retired school teacher and works for an educational non-profit organization.
> In 2015, Samantha loaned her friend Lo Ping $15,000. The loan required Lo Ping to pay interest at 8% per year and to pay back the $15,000 loan principal on July 31, 2017. Lo Ping used the loan to start a clothing store. Lo Ping paid Samantha interest
> During the current year, Carson pays $1,500 in child support and $2,000 in alimony to his ex-wife. What is Carson's allowable deduction, and how should it be deducted on his tax return?
> Can Joe Corporation deduct the following expenses related to its business? a. Legal fee paid ($40,000) to acquire a competing chain of stores b. Legal fee paid ($12,000) to determine whether it should become an S corporation c. Legal fee paid ($5,000) to
> Kuerten Manufacturers sue the Rafter Corporation for patent infringement. The court upholds Kuerten’s claim and requires Rafter to pay Kuerten $2,000,000 in damages. However, the court does not allow Kuerten to recover its $100,000 in legal expenses fr
> Tonya purchased land for investment purposes in 2014 for $21,000. In 2017, she sells the land for $36,000. The terms of the sale require the purchaser to pay Tonya $12,000 per year for three years with interest of 6% on the unpaid balance. Tonya also
> Eric is a self-employed financial consultant. During the current year, Eric's net self-employment income is $160,000. What is Eric's self-employment tax?
> The Kimpton Corporation pays the following taxes during 2017: Federal taxes withheld from employees……………………………….$26,000 State taxes withheld from employees …………………………………………9,000 Social Security withheld from employees………………………………… 4,850 Kimpton's share
> Martin receives the following tax bills, related to a rental dwelling, from the county treasurer. Special assessment for installing sidewalks and streets……………………… 12,000 Real property tax on dwelling for the 1/1/17 -- 12/31/17
> State whether the following taxes are allowed as a current deduction for taxes paid by a business: a. Sales tax on the purchase of a desk b. State and local income, real estate, and personal property taxes c. Federal income, estate, and gift taxes d. An
> For each of the following situations, state whether the expense related to the transaction can be deducted as an insurance expense: a. Baker Company pays the insurance premium to provide each of its employees with a $50,000 whole life insurance policy.
> KOM pays the following insurance premiums during 2017: Auto accident and liability insurance: Paid 1/1/17 Coverage period 1/1/17 - 12/31/17…………………..$3,500 Fire, storm, and other casualty insurance: Paid 4/1/17 Coverage pe
> The Rollins Group produces training corporate training videos. It operates as a sole proprietorship and is 100% owned by Scott Rollins. For 2017, Rollins has gross receipts from qualified production activities of $1,500,000. The cost of goods sold rel
> The Cavanaugh Corporation owns the licensing rights to the Mississippi Marauders hockey apparel. For 2017, Cavanaugh has gross receipts from qualified production activities of $6,000,000. The cost of goods sold related to these receipts is $2,000,000,
> In addition to being an employee of Rock Hard Roofing Material, Lou owns 10% of the company's common stock. Rock Hard falls on hard times in 2016. To forestall bankruptcy, Rock Hard's employees and shareholders loan the company $1,000,000. Lou's share
> The following information is from the financial records of the Adham Corporation at the end of the year: Accounts receivable…………………………..$ 450,000 Allowance for bad debts account………….(34,000) Net accounts receivable…………………..$ 416,000 The allowance for b
> RealTime Rentals leases space on its Internet server. Its standard one-year lease agreement requires new customers to pay the first and last months' rent upon signing the lease and a $500 deposit that is returned after the customer has been with RealTim
> During the year, Grace Inc. has total sales of $800,000. Based on total sales, the corporation estimates that its bad debts for the year are 2% of sales. As a result, the corporation deducts $16,000 in bad debts for financial accounting purposes. At t
