Courtney is an employee of Freemont Company. An average of three times a week, she works out during her lunch hour at a health club provided by Freemont. Discuss the taxability of Freemont’s provision of the health club in the following situation. a. The health club is owned by Freemont and is located on its business premises. All employees and their dependents are allowed to use the facility. The cost of joining a comparable facility is $60 per month. b. The health club is located in Freemont’s office building, but is owned by Manzer Fitness World. Freemont pays the $60 per month health club dues. c. Freemont is in the health club business. The health club is used primarily by customers, although several employees, including Courtney, use it, too.
> Russell is employed as a prosecutor for the town of Swansee. He also works 15-20 hours a week raising purebred Labradors. Over the last 7 years, he has reported an average net income from this activity of $7,000 per year. However, in two of those year
> Gary and Wes operate a wholesale meat company. The company sells to restaurants, golf clubs and other dining establishments. Recently they spent $20,000 for market and demographic surveys, financial projections and real estate appraisals to help them d
> In auditing the Philbin Corporation's repair expense account, Sara finds a $28,000 entry. Since the amount is so large, she obtains supporting documentation. The invoice lists the Fradin Roofing Company as providing the service, but no description of t
> Evaluate the following statement: "The goal of good tax planning is to pay the minimum amount of tax."
> Based solely on the definitions in the chapter, is the sales tax a proportional, regressive, or progressive tax? Explain and state how the tax might be viewed differently.
> Leonard owns an apartment complex. During the current year, he pays $14,000 to have all the apartments painted and re-carpeted. Gena purchases an apartment complex during the current year. Before she can rent out the apartments, she pays $14,000 to ha
> Buford purchased a new automobile in March for $23,000. In April, he receives a $500 rebate check from the manufacturer. The rebate was paid to all customers who purchased one of the manufacturer's automobiles in March. Should Buford include the $500
> Harry and Sydney each inherited 50% of the stock in their father's corporation when he died. Harry had been working for their father and wanted to retain control of the business. Sydney was not really interested in the family business and wanted to sel
> Dan owns a successful sports bar in downtown Providence. The state is considering legislation that would restrict the sale of alcohol in restaurants and bars on Saturdays and Sundays until after 7:00 P.M. The association of Providence restaurant owners
> What is the fundamental requirement that must be satisfied to deduct a business expense?
> What is the general purpose of the economic performance test?
> What is/are the criterion (criteria) for the deduction of an expense by a cash basis taxpayer?
> Discuss how well the rules for deducting expenses implement the ability-to-pay concept.
> The rules for deducting business expenses assure that virtually all expenses related to a trade or business or a production of income activity are deductible at some time during the life of the activity. However, few personal expenditures are deductible.
> What is the effect on a partner's individual tax return if a partnership does not report separately the partner's pro rata share of investment expenses and instead includes these expenses in determining the partnership's ordinary taxable income?
> Why must a conduit entity report certain deductions separately?
> Randy is studying finance at State University. To complete the finance major, he has to take a basic income tax course. Because Randy does not intend to be a tax expert, he considers the course a waste of his time. Explain to Randy how he can benefit fro
> What is the difference between realized income and recognized income?
> What are the two primary categories of business expense? Why is it necessary to classify business expenses in these two categories?
> Why does the computation of adjusted gross income apply only to individual taxpayers and not to other tax entities such as corporations?
> All allowable deductions of individual taxpayers are classified as either for adjusted gross income or from adjusted gross income. Why are deductions for adjusted gross income usually more advantageous than deductions from adjusted gross income?
> What tests must be met for an accrual basis taxpayer to deduct an expense?
> What are the criteria for the current deduction of a prepaid expense by a cash basis taxpayer?
> What constitutes the payment of an expense by a cash basis taxpayer?
> Under what circumstances can a taxpayer deduct the costs of a home office?
> What is/are the requirement(s) for determining whether a residence used for personal purposes is a vacation home or a true rental property?
> Explain the rationale for the treatment of deductions related to hobbies, vacation homes, and home offices.
> Why are expenses related to the production of tax-exempt income not deductible?
> One of Adam Smith's four criteria for evaluating a tax is certainty. Does the income tax definition of gross income promote certainty in the U.S. tax system? Explain.
> What is the purpose of the standard deduction for individuals?
> Explain why the income tax concepts support a deduction for some of the expenses of an illegal business.
> Explain the rationale for not allowing a deduction for political and lobbying expenditures.
> Why are start-up costs related to the investigation of a business opportunity treated differently depending on the current trade or business of the taxpayer?
> How do you distinguish a currently deductible expenditure from a capital expenditure? Give examples of each type of expenditure.
> When are capital expenditures deductible?
> What requirements must be met to deduct a trade or business expense? an expense related to the production of income?
> What is the difference between a trade or business and a production of income activity and why is it important to distinguish a trade or business activity from a production of income activity?
> How are mixed-use expenditures and expenses related to mixed-use assets treated for tax reporting?
> Malloy Industries manufactures air conditioners. The machines used to manufacture the air conditioners are usually insulated with asbestos. Because of health risks associated with asbestos, the Occupational Safety and Health Administration (OSHA) lower
> How is the definition of income for income tax purposes different from the definition used by economists to measure income?
> During the current year, Benjamin and Valerie were notified that their 2015 tax return was being audited. The IRS commissioner has disallowed all the losses attributable to Valerie's cattle breeding and showing venture. Valerie was raised on a small r
> How do deductions for adjusted gross income and deductions from adjusted gross income of an individual differ?
> Conrad purchases a condominium in Aspen, Colorado. Because of his hectic work schedule, Conrad is unsure how much he will be able to use the condo over the next few years. A friend of his who has a condo in Aspen tells him that the condominium is both a
> Carol is a single mother who owns a wholesale auto parts distributorship. The business is organized as a sole proprietorship. Her business has advanced, and she can no longer devote the time necessary to do her own tax return. Because she always has pr
> Reggie wants to invest $10,000. His options are a. Gibraltar Corporation bonds with an annual interest rate of 8%, b. State of Hawaii bonds with an annual interest rate of 5%, c. Series EE savings bonds; a $10,000 investment will pay $14,300 in 5 years
> Leyh's Outdoor Adventures, Inc., would like to begin providing life insurance coverage for its employees. Three employees are officers; each earns $100,000 per year. The other three employees each earns $40,000 per year. Ricardo, president of Leyh's, com
> May was injured when a forklift tipped over on her while she was moving stock in the company warehouse. Because of her injuries, she could not work for three weeks. Her employer paid her $400, which was half her normal wages for the three-week period.
> Theresa is an employee of Hubbard Corporation with an annual salary of $60,000. Hubbard has a cafeteria plan that lets all employees select a total of 10% of their annual salary from a menu of nontaxable fringe benefits. Theresa selects medical insuran
> Assume the same facts as in problem 27, except that Earl is not a residence hall assistant and his general scholarship is for $10,000.
> What is an installment sale?
> Determine whether the taxpayer has received taxable income in each of the following situations. Explain why any amount(s) may be excluded: a. Jim is an employee of Fast Tax Prep, Inc. All employees of Fast Tax Prep are eligible for a 50% discount on th
> Don is the production manager for Corporate Manufacturing Facilities (CMF). CMF works three production shifts per day. Because Don is so integral to operations, the company requires him to live in housing that CMF owns so he can be available for any em
> How is the calculation of taxable income for an individual different from the calculation of a corporation's taxable income?
> Adam works during the summer as a fire watcher for the Oregon forest service. As such he spends 3 weeks in the woods in a forest service watchtower and then gets a week off. Because of the remoteness of the location, groceries are flown in by helicopte
> Tia is married and is employed by Carrera Auto Parts. In 2017, Carrera established high-deductible health insurance for all its employees. The plan has a $2,600 deductible for married taxpayers. Carrera also contributes 5% of each employee's salary to
> Hamid’s employer provides a high-deductible health plan ($1,300 deductible) and contributes $500 to each employee’s Health Savings Account. Hamid makes the maximum allowable contribution to his HSA. During the year, he spends $300 on qualified medical e
> Faldo, Inc., provides medical coverage to employees through a self-insured plan. Nick, the president of Faldo, receives $3,400 in medical expense reimbursements from the plan during the current year. Discuss the tax consequences to Nick under the follow
> Abe is an employee of Haddock, Inc. Haddock provides basic health and accident insurance to all its employees through a contract with Minor Accident Insurance Company. Because the Minor policy does not cover 100% of medical costs, Haddock provides all
> Horace is an employee of Ace Electric Co. Ace provides all employees with group term life insurance equal to twice their annual salary. How much gross income does Horace have under each of the following assumptions? a. Horace is 26 and earns $16,000 pe
> Bear Company provides all its employees with a $10,000 group term life insurance policy. Elk Company does not provide any life insurance but pays $10,000 to survivors of employees who die. Jackie, an employee of Bear Company, and her sister-in-law, Rose
> Under what circumstances can the following taxpayers defer recognition of prepaid income beyond the year of receipt? a. A cash basis taxpayer b. An accrual basis taxpayer
> Erwin works for Close Corporation for 24 years. Close has a qualified, noncontributory pension plan that pays employees with more than 5 years of service $100 per month per year of service when they reach age 65. Erwin turns 65 in February of this year
> Zoie has worked for Humple Manufacturing for 16 years. Humple has a pension plan that matches employee contributions by up to 4% of an employee’s salary. Zoie, age 60, is ready to retire. She has contributed $20,000 to the plan. Under Humple’s pensio
> Boris is an unmarried systems specialist with a public accounting firm. During all of 2017, he is on temporary assignment in London. He pays $21,000 in British income tax on his $100,000 salary. Boris knows little about taxes and seeks your advice on
> What does the 90-day letter represent, and what are the choices the taxpayer has after receiving one?
> Joan is a single individual who works for Big Petroleum, Inc. During all of 2017, she is stationed in West Africa. She pays West African taxes of $20,000 on her Big Petroleum salary of $92,000. Her taxable income without considering her salary from Big i
> Lucinda, a welder for Big Auto Inc. dies in an automobile accident on March 14 of this year. Big Auto has a company policy of paying $5,000 to the spouse of any employee who dies. In addition to the $5,000 payment, Big Auto pays Harvey, Lucinda's husba
> Armando, a manager for Petros Pizza Pies (PPP), dies in an accident on July 12. PPP pays his wife, Penelope, $600 in salary that had accrued before Armando died. Armando was covered by a $90,000 group term life insurance policy, which is also paid to P
> Determine whether the taxpayers in each of the following situations have realized taxable income: a. Alexander inherited a tract of land from his uncle who died during the current year. A friend of Alexander's who is a petroleum engineer told him he tho
> Fawn receives a $2,500 scholarship to State University. Discuss the taxability of the scholarship under each of the following assumptions: a. The scholarship is paid from a general scholarship fund and is awarded to students with high academic potential
> Earl is a student at Aggie Tech. He receives a $5,000 general scholarship for his outstanding grades in previous years. Earl is also a residence hall assistant, for which he receives a $1,000 tuition reduction and free room and board worth $6,000 per y
> How does the wherewithal-to-pay concept affect the tax treatment of prepaid income?
> Biko owns a snowmobile manufacturing business, and Miles owns a mountain bike manufacturing business. Because each business is seasonal, their manufacturing plants are idle during their respective off-seasons. Biko and Miles have decided to consolidate
> Allison dies during the current year. She is covered by a $1,000,000 life insurance policy payable to her husband Bob. Bob elects to receive the policy proceeds in 10 annual installments of $120,000. Write a letter to Bob explaining the tax consequenc
> Fatima inherits a rental property with a fair market value of $90,000 from her aunt on April 30. On May 15, the executor of the estate sends her a check for $7,000. A letter accompanying the check states that the $7,000 comes from the rent received on
> Herman inherits stock with a fair market value of $100,000 from his grandfather on March 1. On May 1, Herman sells half of the stock at a gain of $10,000 and invests the $60,000 proceeds in Jordan County school bonds. The bonds' annual interest rate is
> During the current year, Alexis gives her daughter Tabatha stocks worth $80,000 on the condition that she pays her son Rory the first $7,000 in dividends on the stock each year. Discuss the taxability of this arrangement in each of the following cases.
> What is included in the 30-day letter, and what options does the taxpayer have after receiving one?
> On May 1, Raisa received a $10,000, 9% bond of Altomba Corporation as a graduation present from her Aunt Lenia. The bond pays interest on June 30 and December 31. What are the tax effects of this transfer for Raisa and Lenia for the current year?
> A fire extensively damaged a small Alaska town where Intech Company had its primary plant. Intech decided to give $200 to each household that lost its residence. About 12% of the payments were made to Intech employees. Is the receipt of $200 by some I
> Throughout the textbook, it has been stated that tax relief can come in several forms. Assuming that the taxpayer in question is in a 28% marginal tax rate bracket and the time-value of money is 6%, determine the tax value of the following forms of relie
> Jonas owns a building that he leases to Dipper, Inc., for $5,000 per month. The owner of Dipper has been complaining about the condition of the restrooms and has proposed making improvements that will cost $24,000. Dipper's owner is willing to pay to h
> Paulsons Partnership owns a building that it has rented out to Corner Grocery Store for the last 10 years. Corner went out of business and returns the property to Paulsons. Corner had made improvements to the store costing $30,000 during the 10-year le
> Explain the hybrid method of accounting.
> Fran and Tom purchase a home in 2011 for $1,500,000. To finance the purchase, they borrow $1,450,000 from Buttars Mortgage Brokers. In 2012 they borrow an additional $100,000 from Buttars, secured by the residence, to add a game room. They become unemplo
> Helena has assets of $130,000 and liabilities of $160,000. One of her debts is for $120,000. Discuss the tax consequences of the reduction of this debt in each of the following circumstances: a. The debt was incurred by Helena for medical school expens
> Determine the amount of income that must be recognized in each discharge of indebtedness situation that follows. a. Marvin owes Central State Bank $80,000. The bank agrees to reduce the debt to $60,000. Prior to the debt reduction, Marvin’s assets total
> Vito is having financial difficulties. Among other debts, he owes More Bank $300,000. Rather than lend Vito more money to help him out, More Bank agrees to reduce his debt to $200,000. a. How much gross income must Vito recognize if his assets total $6
> Return to the facts of problem 58. Assume that Maysa bought $5,000 par value of Rondo Corporation bonds for $4,500. The bonds pay 8% interest annually. Three years later, the price of the bonds has increased to $6,200. Maysa can purchase municipal bo
> What are the three types of IRS examinations?
> Maysa is considering making an investment in municipal bonds yielding 4%. What would the yield on a taxable bond have to be to provide a higher after-tax return than the municipal bond if Maysa is in a 33% marginal tax rate bracket?
> Determine the amount of gross income Elbert must recognize in each of the following situations: a. In October, Elbert sells city of Norfolk bonds with a face value of $6,000 for $5,800. Elbert had purchased the bonds 2 years ago for $5,200, and had rece
> Horatio owns Utah general purpose bonds with a face value of $50,000 that he purchased last year for $52,000. During the current year, Horatio receives $2,400 in interest on the bonds. In December, Horatio sells the bonds for $48,000. What is the effe
> Determine Rona's gross income from the following items she receives during the current year: Interest on savings account…………………………………………$ 300 Dividends on Microsoft stock …………………………………………....200 Interest on Guam development bonds…………………………..2,000
> Detail any significant differences in the recognition of income using the cash method and using the accrual method of accounting.
> Determine the tax treatment of the payments received in each of the following cases: a. Anastasia is covered by her employer's medical insurance policy. During the current year, the policy reimburses her for $960 of the $1,200 in medical costs she incurr
> Bill was severely injured when he was hit by a car while jogging. He spent one month in the hospital and missed three months of work because of the injuries. Total medical costs were $60,000. Bill received the following payments as a result of the acc
> Determine the taxability of the damages received in each of the following situations: a. Helio Corporation sues Wrongo Corporation, charging that Wrongo made false statements about one of Helio's products. Helio claims that the statements injured its bus
> Janet, 43, is an employee of Primus University. Her annual salary is $44,000. Primus provides all employees with health and accident insurance (Janet's policy cost $1,800) and group term life insurance at twice their annual salary rounded up to the nea
> Becky, 45, is a senior vice president for South Publishing Co. During the current year, her salary is $125,000 and she receives a $25,000 bonus. South matches employee contributions to its qualified pension plan up to 10% of an employee's annual salary
