Question: Discuss the various circumstances in which a

> Libretto Corporation owns a national chain of retail music stores. The corporation wants to expand into a new, extremely competitive, and highly specialized business—the composition and production of rock music videos. Can you identify any nontax reasons

> RP Inc. owns 59 percent of QV’s voting stock. RP’s board of directors elects the majority of the members of QV’s board of directors and thereby controls QV’s management. Are RP and QV an affiliated group eligible to file a consolidated corporate tax retu

> Mr. and Mrs. Dane and their six children own 100 percent of the stock in three family corporations. Do these corporations qualify as an affiliated group eligible to file a consolidated corporate tax return?

> In your own words, explain the conclusion that corporations do not pay tax—people do.

> To what extent does the corporate characteristic of limited liability protect shareholders employees who perform professional services for corporate clients?

> Why is only half of a sole proprietor’s self-employment tax deductible in the computation of taxable income?

> Define the tax base for the self-employment tax. When do sole proprietors pay the self-employment tax to the federal government?

> This year, Firm Q, a cash basis taxpayer, remitted $26,800 FICA payroll tax to the federal government. However, the firm deducted only $13,400 FICA tax on its income tax return. Can you explain this apparent inconsistency?

> A local government imposed a new 2 percent tax on the gross receipts of businesses operating within its jurisdiction. XYZ Company, which manufactures soap and other toiletries, responded to the tax by reducing the size of its bars of soap and purchasing

> This year, Mr. Pitt’s sole proprietorship generated a $17,000 net loss. Can Mr. Pitt use this loss as a net operating loss carry forward deduction?

> Ryland Company, a calendar year taxpayer, purchased commercial realty for $2 million and allocated $200,000 cost to the land and $1.8 million cost to the building. Ryland placed the real estate in service on May 21. a. Compute Ryland’s MACRS depreciation

> Mrs. Liu owns a business as a sole proprietor. Near the end of her taxable year, she is evaluating a new opportunity that would generate $25,000 additional income for her business. What marginal tax rate should Mrs. Liu use to compute the tax cost of thi

> Under what conditions can the destruction of property by casualty or theft result in an economic loss but a realized gain?

> Company W exchanged the following assets for Blackacre, investment land worth $2 million. Does Company W recognize any gain on this exchange? Company W's Basis EMV Real property used in Company W's business $800,000 $1,750,000 Marketable securities

> Firm Q, a real estate broker, exchanged 16 acres of land for a commercial warehouse owned by Company M. Company M, a light industrial business, plans to hold the land as a long-term investment. Is this exchange nontaxable to Firm Q and Company M?

> Is the substituted basis of the qualifying property received in a nontaxable exchange more or less than the cost of that property?

> In a nontaxable exchange, do the tax consequences to one party in any way depend on the tax consequences to the other party?

> In a nontaxable exchange between unrelated parties, are the amounts realized by the parties always equal?

> Why is the label “nontaxable exchange” a misnomer?

> This year, Firm B recognized a $100,000 capital gain on the sale of investment land. Toward the end of the year, the firm plans to sell stock from its investment portfolio to generate a $100,000 capital loss. It has two blocks of stock that are candidate

> In what circumstance is the before-tax cost of an expenditure equal to its after-tax cost?

> Suber Inc., a calendar year taxpayer, purchased equipment for $800,000 and placed it in service on March 1. Suber’s chief engineer determined that the equipment had an estimated useful life of 120 months and a $50,000 residual value. For financial statem

> Why doesn’t Congress extend the wash sale rule to apply to realized gains?

> Does the characterization of gain or loss as either ordinary or capital have any effect on the computation of net income per books?

> For tax purposes, what is the difference between a sale of property and an exchange of property?

> Firm F’s adjusted basis in operating asset A is $75,000. If the firm carries $75,000 of property insurance on this asset, is it adequately protected against risk of loss?

> Does a taxpayer always realize a loss on the involuntary disposition of property because of a casualty or a theft?

> Mr. K realized a loss on the sale of an asset to Mr. P, his best friend for 20 years. Does this sale represent an arm’s-length transaction? Are Mr. K and Mr. P related parties for tax purposes?

> BBB Company, which manufactures industrial plastics, owns the following assets. Characterize each asset as either a capital, ordinary, or Section 1231 asset. a. A computer system used in BBB’s main office. b. A 50 percent interest in a business partnersh

> If the tax law did not allow farming businesses to deduct soil and water conservation expenditures but required capitalization of these costs, in what year or years would farmers recover these costs?

> Can a firm have a negative tax basis in an asset?

> To what extent do cost recovery deductions based on the capitalized cost of a tangible asset reflect a decline in the economic value of that asset?

> Erwin Company, a calendar year taxpayer, made only two purchases of depreciable personality this year. The first purchase was five-year recovery property costing $312,800, and the second purchase was seven-year recovery property costing $574,000. Compute

> National governments have the authority to print their own currency. Why might governments be reluctant to finance an operating deficit (excess of spending over revenues) simply by printing more money?

> Discuss the relationship between cost recovery deductions and cash flows.

> Assume that Congress enacted legislation requiring firms to capitalize advertising costs and amortize them over 20 years. Discuss the potential effects of such legislation on the amount of advertising that firms purchase and the price that advertising co

> Under what circumstances is percentage depletion not a true cost recovery deduction?

> Firm W and Firm X both have goodwill and going-concern value worth approximately $1 million. However, only Firm X reports an amortization deduction with respect to its goodwill and going-concern value on its tax return. Can you explain this difference in

> Describe the difference in tax treatment between start-up costs of a new business and expansion costs of an existing business.

> Firm O purchased two items of business personality this year. The first item cost $35,000 and has a five-year recovery period, and the second item cost $61,500 and has a seven-year recovery period. Firm O wants to make the Section 179 election for one of

> Why do the MACRS tables published by the IRS incorporate a depreciation convention for the first year during an asset’s recovery period but not for the year of disposition?

> What is the purpose of the MACRS half-year, mid quarter, and midmonth conventions?

> How is the principle of conservatism reflected in the tax law’s premise concerning the deductibility of business expenditures?

> Knute Company purchased only one asset during its calendar taxable year. The asset cost $650,000 and has a three-year recovery period. Compute MACRS depreciation with respect to this asset over the recovery period assuming that: a. The asset was placed i

> Firm NB, which uses the cash method of accounting, recently received two cases of French wine from a client in settlement of a $1,300 bill. Does Firm NB avoid income recognition because it received a noncash item as payment?

> Identify three ways that governments can alter their tax system to increase revenues.

> Describe the book/tax difference resulting from each of the following transactions: a. Firm A spent $430 on a business dinner attended by the firm’s vice president and a potential client. b. Firm B borrowed $50,000 and invested the loan proceeds in tax e

> Corporation DB operates three different lines of business. Can the corporation elect a different overall method of accounting for each line, or must the corporation adopt one overall method?

> Net operating losses can be carried forward indefinitely. Why would a taxpayer prefer to use such losses sooner rather than later?

> Firm LK bought a warehouse of used furniture to equip several of its clerical offices. An employee discovered a cache of gold coins in a desk drawer. A local court declared Firm LK the rightful owner of the coins, which have a $72,000 fair market value (

> Tax planners often tell their clients that “a tax delayed is a tax not paid.” Can you provide a more formal explanation of this bit of wisdom?

> Corporation P owns a controlling stock interest in Subsidiary S and Subsidiary T. Corporation P’s marginal tax rate is 21 percent. It engages in one transaction that shifts $10,000 income to Subsidiary S and a second transaction that shifts a $15,000 ded

> On the basis of the discussion in this chapter and the rates schedules in Appendix C, determine the marginal tax rate for: a. A corporation with $23,000 taxable income. b. A corporation with $250,000 taxable income. c. A single (unmarried) individual wit

> Herelt Inc., a calendar year taxpayer, purchased equipment for $383,600 and placed it in service on April 1, 2018. The equipment was seven-year recovery property, and Herelt used the half-year convention to compute MACRS depreciation. a. Compute Herelt’s

> Is every business organization a taxable entity for federal income tax purposes? Explain briefly.

> Assume that Congress amends the tax law to provide for a maximum 18 percent rate on rental income generated by single-family residences. What effect might this preferential rate have on the market value of this category of real estate?

> Mrs. K is about to begin a new business activity and asks you if she can reduce taxable income by operating the activity as a corporation rather than as a sole proprietorship. How do you answer Mrs. K?

> Which assumption about the tax consequences of a future transaction is more uncertain: an assumption based on a provision that has been in the Internal Revenue Code for 25 years or an assumption based on a provision that Congress added to the Code 2 year

> Corporation N must decide between two opportunities that will generate different cash flows over a five-year period. Describe the circumstances in which the tax cost of the opportunities is a neutral factor in the corporation’s decision-making process.

> Ms. P is considering investing $20,000 in a new business. She projects that this investment should generate $3,000 income each year. In estimating her tax on this future income stream, should Ms. P use her marginal or her average tax rate?

> Firm A and Firm Z are in the same business. Both firms considered spending $10,000 for the same reason. The expenditure would be deductible for both firms. Firm A decided that the expenditure was worthwhile and spent the money, but Firm Z rejected the ex

> Does the after-tax cost of a deductible expense increase or decrease as the taxpayer’s marginal income tax rate increases?

> Firm F is negotiating to purchase a multimillion-dollar computer system from the manufacturer. Under applicable state law, Firm F is exempt from sales tax on the purchase. Because the manufacturer discovered this fact, it increased its selling price for

> Identify two reasons why a firm’s actual marginal tax rate for a year could differ from the projected marginal tax rate for that year.

> Firm J purchased a depreciable business asset for $62,500. Assuming the firm uses the half-year convention, compute its first-year MACRS depreciation if the asset is: a. A land irrigation system. b. Duplicating equipment. c. An oceangoing barge. d. Small

> The U.S. Congress has occasionally considered enacting a federal tax on the sale of consumer goods and services. This national sales tax would be in addition to any state and local sales tax. Would this new source of federal revenue affect the revenues o

> A city government increased its local sales tax from 1 percent to 2 percent of the dollar value of consumer goods purchased in the city. However, the city’s sales tax revenues increased by only 30 percent after the doubling of the tax rate. What factors

> Mrs. King is a shareholder in TK, an S corporation. What fact would be the strongest indicator that she materially participates in TK’s business?

> What is the logic for the presumption that a limited interest in a business partnership is a passive activity?

> Ms. Quint sadly concluded that a $7,500 debt owed to her by Mr. and Mrs. Lammas is uncollectible. Compare the tax consequences to Ms. Quint if the debt arose because she extended credit to Mr. and Mrs. Lammas in a business transaction or if the debt aros

> Why can people avoid paying an excise tax more readily than they can avoid paying a sales tax?

> Does the NPV of future cash flows increase or decrease as the discount rate increases?

> Refer to the individual rate schedules in Appendix C. a. What are the tax liability, the marginal tax rate, and the average tax rate for a married couple filing jointly with $51,900 taxable income? b. What are the tax liability, the marginal tax rate, an

> Refer to the individual rate schedules in Appendix C. a. What are the tax liability, the marginal tax rate, and the average tax rate for a married individual filing separately with $42,500 taxable income? b. What are the tax liability, the marginal tax r

> Monroe county levies a tax on the value of real property located within the county. The tax equals 3 percent of the property’s assessed value up to $2 million plus 1 percent of the value in excess of $2 million. a. Compute the tax on real property valued

> In its first year of operations, Lima Company manufactured 1,000 widgets, incurring direct materials and labor costs of $227,000. For book purposes, Lima capitalized $260,000 of indirect manufacturing costs. For tax purposes, it had to capitalize $315,00

> The city of Clement levies a 5 percent tax on the base price of rooms provided by hotels and motels located within the city limits. This year, the aggregate room price subject to tax was $25 million, so current year revenue was $1.25 million. Clement’s c

> The city of Lakeland levies a 2 percent tax on the value of all restaurant meals served to the public within the city limits. This year, the aggregate value subject to tax was $29.4 million, so current year revenue was $588,000. Lakeland plans to decreas

> Which of the following statements regarding the U.S. Supreme Court is FALSE? a. The Supreme Court may agree to hear an appeal (grant certiorari) or refuse to hear it (deny certiorari). b. The Supreme Court generally agrees to hear tax cases only when the

> Country M levies a 10 percent excise tax on the retail price of any automobile purchased in the country. This year, the aggregate purchase price subject to tax was $8 million, so current year revenue was $800,000. Country M plans to increase the tax rate

> Mr. Jolly received the $100,000 face amount on the redemption of a matured corporate bond. How much interest income does he recognize on redemption if: a. He purchased the bond from a broker for $93,100? b. He purchased the bond from the corporate issuer

> Refer to the preceding problem and assume that Mrs. Nunn lives in New Jersey, which taxes the interest on bonds issued by state and local jurisdictions outside New Jersey. If Mrs. Nunn’s state income tax rate is 7 percent, compute her New Jersey tax on t

> Mrs. Nunn, who has a 24 percent marginal tax rate on ordinary income, earned $2,690 interest on a debt instrument this year. Compute her federal income tax on this interest assuming that the debt instrument was: a. An unsecured note from her son, who bor

> Mr. Zeplin wants to make a cash gift to each of his five children, to each of their five spouses, and to each of his 13 grandchildren. How much total wealth can he transfer to his descendants without making a taxable gift if: a. He is an unmarried indivi

> At the beginning of the year, Mr. Olsen paid $15 per share for 620 shares of Carmel common stock. He received cash distributions totaling $840. His Form 1099 reported that $700 was a dividend and $140 was a nontaxable distribution. Compute his basis in h

> Mrs. Beard recognized a $12,290 capital loss on the sale of corporate stock this year. How much loss can she deduct in each of the following cases? a. She had no other capital transactions this year. b. She recognized a $3,780 capital gain on the sale of

> Refer to the facts in problem 10. In its second year of operations, XYZ manufactured 2,000 units of product and incurred $410,000 direct material cost and $275,000 direct labor costs. For financial statement purposes, XYZ capitalized $139,000 indirect co

> Three years ago, Mrs. Gattis loaned $10,000 to Mr. Wren in return for his interest-bearing note. She made the loan to enable him to begin his own business. This year, Mr. Wren informed Mrs. Gattis that his business had failed and he was unable to repay t

> Ten years ago, Mr. Pott paid $8 per share for 1,800 shares of Drago stock. Mr. Pott learned that Drago is in bankruptcy and can pay only 30 percent of its debt. What are the tax consequences to Mr. Pott of Drago’s bankruptcy?

> Ira Munro owns a life insurance policy that will pay $750,000 to his granddaughter Ginnie upon Ira’s death. To date, Ira has paid $69,200 total premiums on the policy, which has a current cash surrender value of $82,500. a. Assume that Ira dies and Ginni

> Sixteen years ago, Ms. Cole purchased a $500,000 insurance policy on her own life and named her son as sole beneficiary. She has paid $31,280 total premiums to keep this policy in force. a. This year, she liquidates the policy for its $38,500 cash surren

> On February 13, Mr. Dega invested $75,000 in TIPS paying 3.5 percent yearly interest. During the year, Mr. Dega received two cash interest payments totaling $2,742. On December 31, the adjusted principal amount of the TIPS was $76,038. a. How much intere

> Ms. Shaver, who has a 32 percent marginal tax rate on ordinary income, owns Benbow Inc. preferred stock in her investment portfolio. Her Form 1099 reported that she earned $19,580 qualified dividend income on her Benbow investment. Compute her income tax

> Mrs. Flay, age 57, participates in the group term life insurance plan sponsored by her corporate employer. According to Treasury tables, the cost of $1,000 of life insurance for a 57-year-old person is 43 cents per month. Determine the taxable income tha

> Ms. Ray is age 46 and single. Her employer made a $2,895 contribution to her qualified profit-sharing plan account, and she made the maximum contribution to her traditional IRA. Compute her IRA deduction if: a. Ms. Ray’s $50,000 salary is her only income

> Ms. Calhoun is age 51 and single. What is the maximum contribution that she can make to a Roth IRA if: a. Her AGI consists of an $89,400 salary from her employer? b. Her AGI consists of an $89,400 salary plus $33,000 interest and dividends from a trust f

> MN’s compensation package for its PEO consisted of a $600,000 salary plus $200,000 unfunded deferred compensation. The PEO will receive the $200,000 when he retires in 2025. He is also a participant in MN’s qualified pension plan. MN contributed $21,000

> Company XYZ manufactures a tangible product and sells the product at wholesale. In its first year of operations, XYZ manufactured 1,000 units of product and incurred $200,000 direct material cost and $130,000 direct labor costs. For financial statement p

> This year, Company LI built a light industrial facility in County G. The assessed property tax value of the facility is $20 million. To convince Company LI to locate within its jurisdiction, the county abated its 4 percent property tax for the year. Beca

> Ms. Jost participates in her employer’s Section 401(k) plan, which obligates the employer to contribute 25 cents for every dollar that an employee elects to contribute to the plan. This year, Ms. Jost’s salary is $110,000, and she elects to contribute th