Question: Art likes to invest his spare cash

> Find and provide a citation for the IRC section that defines taxable income. Be precise in your reference [e.g., Section 61(a)(1), not Section 61]

> Jurisdiction B’s tax system consists of a 6.5 percent general sales tax on retail goods and selected services. Over the past decade, the average annual volume of sales subject to this tax was $500 million. The jurisdiction needs to increase its tax reven

> KTR Company earns a $10 profit on each unit of manufactured goods, and it sells 20 million units each year. KTR’s income tax rate is 20 percent. However, the jurisdiction in which KTR operates just increased the tax rate to 22 percent for next year. KTR’

> Company N, an accrual basis taxpayer, owes $90,000 to Creditor K. At the end of 2017, Company N accrued $7,740 interest payable on this debt. It didn’t pay this liability until March 3, 2018. Both Company N and Creditor K are calendar year taxpayers. For

> Mr. and Mrs. J own a dry cleaning business that generates $125,000 taxable income each year. For the past few years, the couple’s federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent. a

> The management of WP Company must decide between locating a new branch office in foreign Jurisdiction F or foreign Jurisdiction G. Regardless of location, the branch operation will use tangible property (plant and equipment) worth $10 million and should

> Ms. Barstow purchased a limited interest in Quinnel Partnership in 2018. Her share of the partnership’s 2018 business loss was $5,000. Unfortunately, Ms. Barstow couldn’t deduct this loss because she had no passive activity income, so she is carrying it

> Mr. and Mrs. Prinze are evaluating an investment in undeveloped land. The year 0 cost is $100,000, and they can borrow $60,000 of the purchase price at 8 percent. They will pay interest only in years 1 through 5. The annual property tax on the land will

> As of November 30, Ms. Brett had $12,000 capital losses and no capital gains. She owns 4,900 shares of GG stock with a $15 basis and a $45 FMV per share. Ms. Brett plans to hold her stock for three more years before selling it and using the proceeds to b

> Ms. Kaspari, who has a 24 percent marginal tax rate on ordinary income, acquired the following blocks of stock in KDS, a closely held corporation. July 12, 2003 …………………….1,400 shares at $41 per share December 3, 2007 ………………800 shares at $46 per share Se

> Ms. Echols is the owner and beneficiary of a $150,000 insurance policy on her mother’s life. Ms. Echols has paid $46,000 premiums, and the policy is fully paid up (no more premiums are due). She needs money and is considering cashing in the policy for it

> Mr. and Mrs. Boltono, ages 64 and 65, are both retired and live on Social Security plus the interest and dividends from several investments. Their taxable income averages $35,000 a year. Mrs. Boltono owns a traditional IRA that she funded entirely with d

> Ms. Price, age 51, plans to save $5,000 this year toward her retirement. She is considering three different investments. First, she could make a nondeductible contribution to a traditional IRA earning 5 percent a year. Second, she could purchase a certif

> Mr. Remling is entitled to a $5,200 bonus this year (year 0). His employer gives him two options. He can either receive his $5,200 bonus in cash, or the employer will credit him with $4,500 deferred compensation. Under the deferral option, the employer w

> This year, Mr. Joss accepted a job with BL Inc. He intends to work for only eight years and then start his own business. He has two options for accumulating the money he will need for this business. Option 1: He is eligible to participate in BL’s Section

> Extronic, a calendar year, accrual basis corporation, reported a $41,900 liability for accrued 2017 state income tax on its December 31, 2017, balance sheet. Extronic made the following state income tax payments during 2018. On December 27, Extronic&ac

> Assume that the tax law allows individuals to claim an itemized deduction for the cost of music lessons for the taxpayer or any member of his family. Instead of this deduction, individuals may claim the first $1,000 of the cost as a nonrefundable tax cre

> Mr. and Mrs. Wilson are married with one dependent child. They report the following information for 2018. Schedule C net profit ……………………………………………………$66,650 Interest income from certificate of deposit (CD) …………….…..2,100 Self-employment tax on Schedule C

> Echo Inc., which has a 21 percent U.S. tax rate, plans to expand its business into Country J. It could open a branch office, or it could create a foreign subsidiary in Country J. The branch office would generate $5,000,000 income in year 0. The foreign s

> Minden Corporation wants to open a branch operation in eastern Europe and must decide between locating the branch in either Country R or Country S. Labor costs are substantially lower in Country R than in Country S. For this reason, the Country R branch

> Lydell Corporation currently operates in two states, P and Q. State P has a 5 percent tax rate and uses an equally weighted three-factor apportionment formula. State Q has a 9 percent tax rate and uses an apportionment formula that double-weights the sal

> Mr. Young operates a photography studio as a sole proprietorship. His average annual income from the business is $100,000. Because Mr. Young does not need the entire cash flow for personal consumption, he is considering incorporating the business. He wil

> Agatha is planning to start a new business venture and must decide whether to operate as a sole proprietorship or incorporate. She projects that the business will generate annual cash flow and taxable income of $100,000. Agatha’s personal marginal tax ra

> Mr. and Mrs. Tinker own a sizeable investment portfolio of stock in publicly held corporations. The couple has four children—ages 20, 22, 25, and 27—with whom they want to share their wealth. Unfortunately, none of the children has demonstrated an abilit

> A&Z Inc. averages $4 million taxable income a year. Because it needs an infusion of cash, the board of directors is considering two options: selling a new issue of preferred stock to the public for a total offering price of $500,000 or borrowing $500,000

> Congress recently enacted a nonrefundable credit based on the cost of qualifying alcohol and drug abuse counseling programs provided by any corporate employer to its employees. The credit is limited to 50 percent of the total cost of the program. If a co

> In 2017, AS, an accrual basis corporation, contracted with a nationally prominent artist to paint a mural in the lobby of the new corporate headquarters under construction. The artist’s commission was $180,000, payable on completion of the mural. The art

> Marla recently inherited $50,000 and is considering two alternatives for investing these funds. Investment A is stock of a C corporation, expected to pay annual dividends of 8 percent. Investment B is stock of an S corporation. Based on income projection

> In the current year (year 0), Amisha became a shareholder in Sultan Inc., a calendar year S corporation, by contributing $15,000 cash in exchange for stock. Shortly before the end of the year, Sultan’s CFO notified Amisha that her pro rata share of ordin

> On March 1, 2018, Eve and Frank each contributed $30,000 cash to the newly formed EF Partnership in exchange for a 50 percent general interest. The partnership immediately borrowed $50,000 from an unrelated creditor, a debt that it does not have to repay

> Mr. and Mrs. Janus operate a restaurant business as a sole proprietorship. The couple has decided to purchase $85,000 of new kitchen equipment for the restaurant. They also want to buy two new automobiles—one for their personal use and one for their 19-y

> DM Inc. incurred a $25,000 net capital loss last year that has carried forward into the current year. During the current year, a hurricane destroyed business assets with a $120,000 basis. DM received a $150,000 insurance reimbursement, which it immediate

> Firm K, a non corporate taxpayer, has owned investment land with a $600,000 basis for four years. Two unrelated parties want to acquire the land from K. Party A has offered $770,000 cash, and Party B has offered another tract of land with a $725,000 FMV.

> Firm NS owns 90 percent of Corporation T’s outstanding stock. NS also owns business realty that T needs for use in its business. The FMV of the realty is $4 million, and NS’s adjusted basis is $5.6 million. Both NS and T are in the 35 percent marginal ta

> Rocky Corporation is experiencing cash flow problems. It needs to generate an additional $60,000 of working capital and is considering selling off assets to meet this need. Rocky’s marginal tax rate is 21 percent, and it has no prior year capital gains.

> Olno Inc. has a $52,100 capital loss carryforward into its current taxable year that will expire at the end of the year. During the year, Olno realized a $141,900 capital gain on sale of land. The purchaser paid 10 percent down and gave Olno an interest-

> For its first four years of operation, Corporation Y reported the following taxable income. In 2018, Corporation Y generated $900,000 ordinary income and recognized a $20,000 loss on the sale of a capital asset. It is considering selling a second capit

> Assuming a 21 percent marginal tax rate, compute the after-tax cost of the following business expenses: a. $5,600 premium on business property and casualty insurance. b. $1,200 fine paid for business entertainment. c. $3,700 premium on key-person life in

> Mr. RH purchased 30 acres of undeveloped ranch land 10 years ago for $935,000. He is considering subdividing the land into one-third acre lots and improving the land by adding streets, sidewalks, and utilities. He plans to advertise the 90 lots for sale

> Firm Z, a corporation with a 21 percent tax rate, has $100,000 to invest in year 0 and two investment choices. Investment 1 will generate $12,000 taxable cash flow annually for years 1 through 5. In year 5, the firm can sell the investment for $100,000.

> KP Inc. is negotiating a 10-year lease for three floors of space in a commercial office building. KP can’t use the space unless a security system is installed. The cost of the system is $50,000, and it will qualify as seven-year recovery property under M

> MG, a corporation in the 21 percent marginal tax bracket, owns equipment that is fully depreciated. This old equipment is still operating and should continue to do so for four years (years 0, 1, 2, and 3). MG’s chief financial officer estimates that repa

> Company C has a 21 percent marginal tax rate and uses an 8 percent discount rate to compute NPV. The company must decide whether to lease or purchase equipment to use for years 0 through 7. It could lease the equipment for $21,000 annual rent, or it coul

> MRT, a calendar year corporation, placed the following assets in service this year. a. Compute MRT’s MACRS depreciation with respect to the assets placed in service this year. Assume MRT does not elect to use first year bonus deprecia

> Corporation VB was formed in 2018. Immediately prior to year-end, VB is considering a $500,000 deductible expenditure. It can either make the expenditure before the end of 2018, or wait until 2019. However, if it waits, the cost of the expenditure will i

> Company Y began business in February 2018. By the end of the calendar year, it had billed its clients for $3.5 million of services and had incurred $800,000 of operating expenses. As of December 31, it had collected $2.9 million of its billings and had p

> Lucille is an avid boater living near Gotham City. Gotham has recently created a harbor improvement special assessment district to oversee renovations to the public boat docks and boardwalk area surrounding the city harbor. The special assessment distric

> Lance Strong arm, a recently retired professional athlete, is writing his memoirs. He intends to direct any royalties received on the book to his favorite charitable organization. He has not yet signed a contract with a publisher. Will the future royalti

> Parmco, a calendar year corporation, made the following accruals for 2018 financial statement purposes. In each case, determine how much of the accrued expense is deductible on Parmco’s 2018 federal tax return. a. $30,000 expense and $30,000 liability fo

> Ms. Z has decided to invest $75,000 in state bonds. She could invest in State A bonds paying 5 percent annual interest or in State R bonds paying 5.4 percent annual interest. The bonds have the same risk, and the interest from both is exempt from federal

> Mr. A, who has a 35 percent marginal tax rate, must decide between two investment opportunities, both of which require a $50,000 initial cash outlay in year 0. Investment 1 will yield $8,000 before-tax cash flow in years 1, 2, and 3. This cash represents

> Firm DFG plans to open a foreign subsidiary through which to sell its manufactured goods in the European market. It must decide between locating the subsidiary in Country X or Country Z. If the subsidiary operates in Country X, its gross receipts from sa

> Mrs. O is negotiating to purchase a tract of land from DC Company, a calendar year taxpayer. DC bought this land six years ago for $480,000. According to a recent appraisal, the land is worth $800,000 in the current real estate market. According to DC’s

> Firm D is considering investing $400,000 cash in a three-year project with the following cash flows: Under each of the following assumptions, determine if Firm D should make the investment. In each case, use a 10 percent discount rate to compute NPV. a

> Firm B wants to hire Mrs. X to manage its advertising department. The firm offered Mrs. X a three-year employment contract under which it will pay her an $80,000 annual salary in years 0, 1, and 2. Mrs. X projects that her salary will be taxed at a 25 pe

> As discussed in Chapter 3, the IRS carefully scrutinizes transactions between related parties. Several different Code sections define which taxpayers are considered related parties. Suppose that Marsha and Jan are sisters. Are they considered family memb

> One of your clients is planning to start a business. She has incurred costs to investigate potential locations for the business and hired a consultant to conduct a feasibility study. She wishes to know whether such costs will be currently deductible. Lis

> Visit the website for the Tax Foundation (www.taxfoundation.org). Select the link “About Us” to read the organization’s mission statement. Select the link “Tax Topics” to research the following: a. What and when was Tax Freedom Day in 2017? b. How many a

> BZD, a calendar year corporation, made the following year-end accruals for 2018 financial statement purposes. In each case, determine how much of the accrued expense is deductible on BZD’s 2018 federal tax return. a. $55,000 expense and $55,000 liability

> Visit the website for the Congressional Budget Office (www.cbo.gov), follow the link to Budget and Economic Information, and look up the most current Monthly Budget Review. What is the CBO’s estimate of the U.S. government’s total budget surplus or defic

> Rachel Sanchez is a limited partner in HN Partnership, which operates a souvenir shop, and a member in Jams-n-Jellies LLC, which makes specialty food items and sells them at retail. Rachel has no involvement in the partnership business, but she handles a

> Todd Zimler, who files a joint income tax return with his wife, Stella, owns 85 percent of the outstanding stock of Zimler Manufacturing. In January of last year, Todd transferred a tract of investment land to the corporation in exchange for 600 shares o

> Mrs. Evelyn Baker sued her stockbroker for mismanagement of her account. The broker ultimately settled the case by paying her $250,000. The payment represented the loss in value of Mrs. Baker’s stock portfolio attributable to the mismanagement. Because t

> Early this year, Scott Lowe, age 54, became dissatisfied with the service he was receiving from the broker who managed his traditional IRA. He requested a distribution of the $48,200 balance in the account and received a check for this amount from the br

> Helene Toolson, age 67, is an avid collector of historical documents and signatures. Her collection is worth more than $300,000 and, by any measure, is an excellent investment. Helene also owns an IRA with First State Bank. She recently learned that a le

> Marion Kline was recently elected mayor of a large mid western city that furnishes its mayor with an official residence for occupancy during the term of office. The residence (house and gardens) is owned and maintained by the city, and the mayor doesn’t

> Curtis Bedford, age 73, is a professor of English at a private university. He holds a tenured position, which represents a lifetime employment contract. The university has offered Curtis a $75,000 lump-sum payment if he will retire from the faculty. If C

> Tim Loker is the five-year-old godson of Mr. and Mrs. Bryant. Tim’s parents died in an accident on December 18 of last year. Tim was seriously injured in the accident and remained hospitalized until August 12 of this year. After his discharge from the ho

> Bert Baker and Ernestine Moffet were never formally married but have lived together as husband and wife for the last 14 years. Bert and Ernestine reside in Washington, D.C., a jurisdiction that recognizes common law marriages as valid. Consequently, they

> Home Safe, an accrual basis, calendar year corporation, sells and installs home alarm systems. The contract price of a system includes four free service calls. Home Safe’s cost of each call is $75. At the end of 2018, Home Safe accrued a $48,900 expense

> In 1995, Jenson Investments, a Delaware corporation with a 35 percent federal tax rate, formed Bestmark, a wholly owned German subsidiary. Bestmark conducts several profitable businesses in Europe and pays the 45 percent German corporate income tax. Best

> Endless Summer is a Florida corporation that operates a fleet of cruise ships. It offers two categories of cruises. The first category includes round-trip cruises on ships that depart from Miami, visit various Caribbean and South American ports, and then

> Visit the website for Federation of Tax Administrators (www.taxadmin.org) under the Taxpayers & Tax Preparers menu, and use the State Tax Agencies link to go to the Illinois Department of Revenue website. Locate a copy of the Corporate Income and Replace

> Four years ago, Amy Huang contributed four acres of undeveloped land to Richter Company in exchange for a 12 percent equity interest in Richter. Amy’s tax basis in the land was $275,000, and the land’s appraised FMV on date of contribution was $430,000.

> Fair View Inc. owns and operates a golf club, which includes two 18hole courses, a driving range, a restaurant, and a pro shop. The club’s facilities can be used only by its membership, which includes all the individual shareholders as well as non shareh

> On March 1, Mr. and Mrs. Trent formed Trent Properties Inc. through which to operate a real estate management business. Both Mr. and Mrs. Trent worked full-time for modest, but reasonable, salaries. In early December, the Trents estimated that the corpor

> Fifteen years ago, Mr. and Mrs. Boyer created Brovo, a regular corporation, through which to operate a service business. The Boyers own all of Brovo’s 1,000 shares of stock with a $1.6 million aggregate tax basis. The corporate business has been extremel

> This year, Prewer Inc. received a $160,000 dividend on its investment consisting of 16 percent of the outstanding stock of TKS Inc., a taxable domestic corporation. Before considering this dividend, Prewer had a $43,500 operating loss for the year. It al

> Barry and Lynette Majors own 36 percent of the outstanding stock of Echo Valley, which has approximately $5 million earnings and profits. Echo Valley owns 38 tracts of undeveloped land in central Colorado. Barry and Lynette want to acquire one of the tra

> On December 10, 2017, the representative of a national charitable organization contacted the CEO of Wilkie Inc., a calendar year accrual basis corporation, to solicit a $100,000 donation. The CEO presented the solicitation to Wilkie’s board of directors

> Ernlo is an accrual basis corporation with a June 30 fiscal year-end. On June 2, 2018, Ernlo entered into a binding contract to purchase a six-month supply of heating oil from a local distributor at the current market price of $12,450. This price is guar

> In early 2018, Connor Inc. announced its intention to construct a manufacturing facility in the Shenandoah Valley. To persuade Connor to locate the facility in Augusta County, the county government contributed a six-acre tract of undeveloped county land

> At the beginning of the current year, Sandy Brewer had a zero basis in her 38 shares of stock in Lindlee, an S corporation, a zero basis in a $5,000 note from Lindlee, and a $7,400 carryforward of a prior year ordinary loss from Lindlee that she was unab

> Herold had been a calendar year S corporation since 1990. On October 10, 2018, Mrs. Hughes sold 18 shares of Herold stock to a foreign partnership, thereby terminating Herold’s S election. Herold’s taxable income for the entire 2018 calendar year was $59

> Max Coen is employed as a full-time police officer by the Memphis Police Department. He is required to abide by the department’s rules of conduct, which apply whether he is on-duty or off-duty. With the department’s permission, Max “moonlights” as a secu

> Don Ferris and Lou Lindberg are the two partners in F&L Partnership. The partnership agreement provides that all income is allocated equally between Don and Lou but in no case shall the allocation to Don be less than $75,000 per year. (In other words, Do

> On April 1, 2018, Bullen Company transferred machinery used in its business to Eaton Inc. in exchange for Eaton common stock. Both Bullen and Eaton use the calendar year for tax purposes. Bullen’s exchange of property for stock qualified as a nontaxable

> On February 2, Mr. Eugene Pomeroy transferred all the assets of his sole proprietorship (Pomeroy’s Ski Shop) to a newly created corporation, Pomeroy Ski Inc. In exchange for the business assets, Mr. Pomeroy received all 1,000 shares of the corporation’s

> Mr. Bryan Olgivie owned an indoor roller-skating rink as a sole proprietorship. On April 9, a flood completely destroyed the rink. Mr. Olgivie’s adjusted basis in the rink was $833,400. On May 15, he received a check for $1.1 million from his insurance c

> The BPL Corporation is considering selling investment land to Kaier Partnership for the land’s independently appraised FMV of $1.2 million. BPL purchased the land 20 years ago for $1.32 million cash. Mr. Larry Bass is the largest shareholder in BPL; he o

> In 1998, Big Skye Partnership paid $695,500 for a Christmas tree farm in northern Arizona. In 1991, over 300 farms and ranches in the area were granted allocations of water from a newly completed irrigation project funded by the U.S. Department of the In

> KLP, a calendar year corporation, sponsored a contest for its customers with a grand prize of $100,000 cash. Contestants could enter the contest from June 1 through November 30. KLP selected the winner and announced her name on December 20. However, it d

> Six years ago, Graham Inc., an accrual basis corporation, sold investment land (basis $562,250) to Jervil LLC and accepted Jervil’s note for the entire $865,000 sale price. The land was the collateral for the note, and Graham used the installment sale me

> For the past 12 years, George Link has operated his appliance repair business out of a 1,000-square-foot, ground floor office in a four story commercial building called 129 Main. Last year, George signed a five-year lease with Kramer Management, the owne

> Peter Nelson is employed full time as an accountant by an insurance company. In his spare time, he operates a secondary business as a self-employed wedding photographer. On January 3 of the current year, Peter purchased new video recording equipment for

> Last year, Manabee Inc. leased a computer system from ICS Company for five years. After using the system for only 10 months, Manabee realized that it was no longer adequate for its expanding business needs. As a result, Manabee negotiated with ICS to ter

> On January 1 of every year since 1993, Lanier Corporation has paid a $35,000 retainer fee to the law firm of Myer and Weeble (MW). MW specializes in structuring corporate mergers and acquisitions. In return for the annual payment, MW guarantees that it w

> Find the Internal Revenue Code on any freely accessible website and provide the URL. Do you consider the site reliable? Why or why not? What assurance, if any, does the site provide that its information is accurate and up to date?

> Elsworthy Company operates a number of public golf courses in Florida. This year, Elsworthy constructed six new greens of a type described as “modern” greens. Modern greens contain sophisticated drainage systems that include subsurface drainage tiles and

> Using an electronic research database such as Checkpoint, CCH Intelli Connect, or LexisNexis, find the case Thomas A. Curtis, M.D., Inc., 1994 T.C. Memo ¶94,015, and answer the following questions. The purpose of these questions is to enhance your skills