Explain why the loss resulting from the sale of a computer in the following three situations is treated differently for income tax purposes: a. Monica sells her personal computer at a loss of $1,300. None of the loss is deductible. b. Omar sells a computer used in his carpeting business at a loss of $4,300. The loss is fully deductible. c. Jerry sells his computer at a loss of $3,800. Jerry used the computer to keep track of his investment portfolio. Only $3,000 of the loss is deductible.
> Evaluate the following statement: Whenever another person pays an expense for you, you are in receipt of taxable income.
> Determine whether the following taxpayers have gross income from the payment of their expenses: a. Julia's mother, Henrietta, is short of cash when it comes time to pay her property taxes. Julia pays Henrietta's property taxes of $350. b. Kurt fell asle
> On January 1, Wilton loans Andy $90,000. The loan is to be repaid in 5 years with no interest charged. The applicable federal rate is 5%. Discuss the treatment of the loan for both Wilton and Andy in each of the following independent situations: a. An
> Laura makes the following interest-free loans during the current year. Discuss the income tax implications of each loan for both Laura and the borrower. In all cases, the applicable federal interest rate is 8%. a. On April 15, Laura loans $30,000 to he
> Based on the example in Exhibit 1--2, explain how inflation can have two effects that result in a hidden tax.
> Which of the following interest-free loans are subject to the imputed interest rules? a. Alamor Corporation loans Sandy, an employee, $8,000. The loan is to be repaid over 4 years. Sandy uses the proceeds to buy a used automobile. She has $1,100 in inv
> Erica and Raphael are divorced during the current year. Because Erica made millions in the record industry while Raphael served as the homemaker and primary caretaker to baby Dexter, Erica agrees to give Raphael 20% of the stock in her record business.
> Will and Janine are divorced during the current year. Will is to have custody of their two children and will receive their house as part of the divorce settlement. The house, which Will and Janine bought for $60,000, is worth $100,000. Janine is to re
> Upon returning from lunch, you find the following message on your voice mail: This is Jarrett Ogilvie. I'm not one of your clients, but I need some advice. I received a statement in the mail from the Social Security Administration reporting the $8,500
> Hermano and Rosetta are a retired couple who receive $10,000 in Social Security benefits during the current year. They also receive $3,000 in interest on their savings account and taxable pension payments of $28,000. What is their gross income if a. Th
> Elwood had to retire early because of a job-related injury. During the current year, he receives $10,000 in Social Security benefits. In addition, he receives $6,000 in cash dividends on stocks that he owned and $8,000 in interest on tax-exempt bonds.
> Does the tax treatment of below market-rate loans violate any income tax concepts? If so, how? Explain.
> Chapter 1 discussed how gross income is equal to all income received, less exclusions. Which concepts form the basis for this calculation of gross income? Explain.
> Determine whether the taxpayer in each of the following situations has a claim of right to the income received: a. Trigger, Inc., receives a $5,000 stud fee for services rendered by one of its prized horses. Under its standard contract, Trigger will ret
> Shannon signs a $100,000 contract to develop a plan for integrating the computer operations of State University in December. Under the contract, she receives a $30,000 advance against future payments on the contract upon signing the contract.The contrac
> Determine whether the taxpayer in each of the following situations has realized income. Explain why there has or has not been a realization, and determine the amount of income to be reported: a. Ramrod Development Company purchases land costing $230,000.
> Determine whether the taxpayer in each of the following situations has realized income. Explain why there has or has not been a realization, and determine the amount of income to be reported. a. Alfredo owns a one-third interest in Bayou Partnership. D
> George purchases stock in Dodo Corporation in 2013 at a cost of $50,000. In 2017, he sells the stock for $32,000. What is the effect of the sale of stock on George's taxable income? Assume that George sells no other assets in 2017.
> Explain why the following statement is not necessarily true: "If the IRS disagrees, I'll take my case all the way to the Supreme Court."
> Chelsea, who is single, purchases land for investment purposes in 2012 at a cost of $22,000. In 2017, she sells the land for $38,000. Chelsea's taxable income without considering the land sale is $100,000. What is the effect of the sale of the land on
> Postum Partnership purchases a building in 2014 for $250,000. It deducts $5,600 in depreciation on the building in 2014, $6,400 in 2015, $6,400 in 2016, and $3,200 in 2017. It sells the building in 2017 for $260,000. What is the partnership’s gain or
> For each of the following tax treatments, determine the concept, construct, or doctrine that provides the rationale for the treatment: a. During the current year, Trafalger Corporation pays $475,000 in estimated tax payments. Trafalger determines that it
> Only mortgage interest paid on valid debts is deductible. Because Angela's parents loaned her the money with the stipulation that she would return it to them shortly thereafter, there is no economic significance to the debts created. The only purpose o
> Angela enrolls as a student at Local College during the current year. Before she starts school, her parents lend Angela $80,000 with the stipulation that she will lend the entire $80,000 back to them. The loan is evidenced by a non-interest-bearing not
> Jamal Corporation is an accrual basis taxpayer. In 2016, Jamal writes off a $1,000 account receivable from a customer who has died. In 2017, the former customer's estate sends Jamal a check for $600. What are the tax effects of the receipt of the $600
> Tim has state income taxes of $4,500 withheld from his salary during 2017. On his 2016 federal income tax return, Tim properly deducts the $4,500 as state taxes paid. Upon filing his 2016 state income tax return, he determines that his actual state inco
> For each of the following situations, determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer: a. Helen fixes Mark's plumbing in November 2017. Mark receives the
> For each of the following situations determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer: a. Tindle Corporation purchases office supplies costing $600 on Dece
> Esmeralda is an attorney. Before 2017, she is employed by the law firm of Ellis and Morgan (E&M). Esmeralda is not a partner in E&M; her compensation consists of a fixed salary and a percentage of any fees generated by clients she brings or refers to t
> Identify three primary sources of tax law.
> Arnie is a self-employed handyman. During the current year, customers pay him $10,000 in cash for his services. Arnie gives the $10,000 to his daughter, Ariel, who uses it to pay college expenses. Is Arnie or Ariel taxed on the $10,000? Explain.
> Christie purchases a one-third interest in the Corporate Capital Partnership (CCP) in 2016 for $40,000. During 2016, CCP earns an income of $90,000, and Christie withdraws $30,000 in cash from the partnership. In 2017, CCP suffers a loss of $30,000, an
> Binh owns several businesses. The total income generated by all his businesses puts him in the highest marginal tax bracket. Seeking to lower the overall tax on his business income, Binh is thinking of creating two S corporations and putting half his b
> Wendy owns 20% of the common stock of Britton Company. During the current year, Britton reported a taxable income of $90,000 and paid $40,000 in cash dividends. What are the income tax effects for Wendy of her investment in Britton Company if Britton i
> Aiko, Lani, and Charlie own the 3-Star Partnership, sharing profits and losses 20:50:30. During the current year, 3-Star has total gross income of $500,000 and total allowable deductions of $300,000. How should each of the following taxpayers account for
> Jie owns a lawn mower repair business. Her repair shop is in a building she constructed on the lot on which her personal residence is located. How should Jie account for each of the following? a. Interest paid on her home mortgage, $9,200. Interest of
> Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? a. Cash received from repair services, $28,000. b. Interest paid on his home mortgage, $7,300. c. Power jack hois
> Doiko Corporation owns 90% of the stock in Nall, Inc. Trebor owns 40% of the stock of Doiko. Trebor's sister owns the remaining 60% of Doiko. During the current year, Trebor purchased land from Nall for $43,000. Nall had purchased the land for $62,00
> In each of the following cases, determine whether Inez is a related party: a. Inez owns 500 shares of XYZ Corporation's common stock. XYZ has 50,000 shares of common stock outstanding. b. Inez owns a 40% interest in the Tetra Partnership. The other 60%
> Which of the following are related parties? a. Harvey and his sister Janice? b. Harvey and the Madison Partnership? Harvey owns a 60% interest in the partnership. Three of Harvey’s friends own the remaining partnership interest. c. Harvey and his gran
> Who is responsible for reporting and paying gift taxes? Estate taxes?
> Andrew and Barbara each receive a salary of $80,000. Neither Andrew nor Barbara has any other source of income. During the current year, Barbara paid $800 more in tax than Andrew. What might explain why Barbara paid more tax than Andrew when they both
> Sheila, a single taxpayer, is a retired computer executive with a taxable income of $100,000 in the current year. She receives $30,000 per year in tax-exempt municipal bond interest. Adam and Tanya are married and have no children. Adam and Tanya's $10
> Which of the following are based on an ability to pay? Explain. a. Local County assesses property taxes at the rate of 1% of assessed value. b. The university library lets all students, faculty, and staff members check out books for free. Students who d
> Which of the following are based on an ability to pay? Explain. a. State Y collects a sales tax of 5% on all purchases of goods and services. b. State X collects a sales tax of 5% on all purchases of goods and services but gives low-income families a tax
> Davidson Industries manufactures golf course maintenance equipment. The equipment comes with a 4-year warranty. Davidson’s engineers estimate that approximately 10% of the equipment will be defective and require payment under the warranty. Discuss the
> Determine the taxpayer's adjusted basis in each of the following situations. If any changes are made in the original basis of the asset, explain why they are necessary. a. Simone purchases 300 shares of Wilguess Inc., stock in 2015 for $6,300. In 2015
> Determine the proper treatment of each of the following expenditures: a. Zoe purchases land costing $8,000. During the current year, she pays $2,000 to have utilities and sewer lines installed on the property. Zoe also pays $600 in interest on the loan u
> A truck owned by Duster Demolition Services is involved in an accident. The truck originally cost $40,000, and $25,000 of depreciation had been taken on the truck as of the date of the accident. The cost of repairing the truck is $10,000, for which the
> Explain why the legal fees paid in the following three situations are treated differently for income tax purposes: a. Jim pays $10,000 in legal fees in obtaining a divorce. None of the $10,000 is deductible. b. Camella invents and patents a device that
> Based on the discussion in the chapter, evaluate how well each of these taxes meets Adam Smith's four requirements: a. Income tax b. Employment taxes
> Sidney lives in Hayes, Kansas. He owns land in Cotulla, Texas, that he inherited from his father several years ago. The land is unimproved and has never produced income. On January 26, 2017, Sidney receives a statement of delinquent taxes on the prope
> For each of the following situations, determine the deduction concepts involved, and explain how they form the basis for the tax treatment described: a. Jamie sells her personal residence at a loss of $9,000. She is not allowed a deduction for the loss.
> For each of the following situations, determine the deduction concepts involved, and explain how they form the basis for the tax treatment described: a. Individuals are allowed to deduct medical expenses. b. Happy Burgers, Inc., owns a chain of drive-in
> During the current year, Errol starts a management consulting service which he operates from an office in his home. He uses one room of the house as his office. He purchases office furniture for $6,000 and a computer for $3,000. He uses the computer p
> For each tax treatment described, determine the applicable income tax concept(s), and explain how it forms the basis for the treatment: a. Jackson owned coupon bonds with detachable interest coupons. He detached coupons worth $5,000 and gave them to his
> Nina leases a building to Downtown Computer Systems for $5,000 per month under a 5-year lease. The terms of the lease provide that any improvements to the building made by Downtown revert to Nina upon termination of the lease. Downtown remodels the bui
> Using the income concepts presented in this chapter, discuss whether the taxpayer has realized income in each of the following situations: a. Adco Corporation pays the health insurance premiums for all its employees. Adrian is an employee of Adco. Heal
> Determine whether the taxpayer in each of the following situations is in constructive receipt of income. If not, explain when the income will be constructively received. a. Norman is president of Wright Company. On December 14, 2017, the board of direc
> Consider the following two situations. Although they are similar, their treatments are exactly opposite. Identify the concept underlying both treatments, and explain why the concept treats the two situations differently. a. Sam is an employee of Dunbar
> Determine whether the taxpayer in each of the following situations has a claim of right to the income received: a. Sulley's Spa Spot sells hot tubs that have a 2-year warranty. The warranty provides for the replacement of all parts and the cost of labor
> The estate tax is a tax on the value of property transferred at death. Why is payment of the estate tax not a common event?
> Milton is an inventor who has also written several successful mystery novels. Because he didn't really need the income from the novels, Milton wrote them under an assumed name and had the royalties paid to Hammer Corporation. When Milton incorporated Ham
> Henrietta is the president and sole shareholder of Clutter Corporation. In 2014, Henrietta transferred ownership of her personal residence to the corporation. As part of the transfer, Clutter Corporation assumed Henrietta's mortgage on the house. At t
> Junior bought some stock several years ago for $8,000. He is thinking of selling and has 2 offers. His broker told him he could sell the stock for $8,300 and would have to pay a $600 commission, for a net realization of $7,700. His sister Bonnie offer
> Kimberly Cerny is a graduate student. She is 22 years old and works part-time as a graduate assistant in the biology department. She had health insurance for the full year under her parents’ insurance. In the summer, Kimberly was an i
> Under a reimbursement plan that has been in effect for 5 years, Simmons Corporation advances travel expenses to its sales employees. The advances are deducted from the employees' commissions as they are earned. The employees have an unconditional oblig
> The assignment of income doctrine states that income is taxed to the entity owning the income, regardless of who actually receives the income. That is, income taxation cannot be escaped by assigning the payment of income to another entity. Find the cou
> Many legislative, administrative, and judicial resources are available on the Internet. They can be located using a search engine provided by your browser or a tax directory site located on the Internet. The purpose of this assignment is to practice se
> Many legislative, administrative, and judicial resources are available on the Internet. They can be located using search engines provided by your browser or a tax directory site located on the Internet. The purpose of this assignment is to practice sea
> Use the RIA Checkpoint research database to answer the following questions. Cut and paste the relevant Internal Revenue Code and Treasury Regulation section(s) into your solution and explain how the authority answers the tax issue in question. Give the
> Use the RIA Checkpoint research database to answer the following questions. Cut and paste the relevant Internal Revenue Code and Treasury Regulation section(s) into your solution and explain how the authority answers the tax issue in question. Give the
> The gift tax is supposed to tax the transfer of wealth from one taxpayer to another. However, the payment of gift tax on a transfer of property is relatively rare. Why is gift tax not paid on most gifts?
> Doris purchases a ski cabin in Montana during the current year. She hires a real estate management company to rent out the cabin on a daily basis. The real estate management company tells Doris to expect an average of 70 rental days per year. Doris in
> Arnold is a college professor specializing in robotics. During the current year, he attends a meeting on robotics in San Diego. Because of the desirable location of the meeting, he takes along his wife, Hortense, and their 2 children. The meeting last
> Aretha is an executive vice president of Franklin, Inc. On December 18, 2017, the Franklin, Inc., board of directors awards her a $20,000 bonus. Aretha asks Franklin's controller to delay processing the bonus check until January. The controller agrees
> Ayah signs a contract to write a book for East Publishing Company in the current year. Under its terms, she receives a $5,000 advance against future royalty payments upon signing the contract. The contract provides that if Ayah does not write a suitabl
> The Perry Development Partnership purchases 40 acres of land for $30,000. It spends $8,000 subdividing the land into 2-acre parcels and $17,000 to install a sewer line and utilities to each parcel. Perry intends to sell the 2-acre parcels for $12,000,
> Jerry and his wife, Joanie, own a successful concrete company that is organized as a corporation. Jerry spends all his time running the company, whereas Joanie has a full-time job as a legal secretary. The corporation pays Joanie a salary of $45,000 a
> You are a CPA who has been preparing tax returns for Sign, Seal, and Deliver, a mid-size CPA Firm for the last 5 years. During the current year, you are assigned the individual return of a new client, Guadalupe Piaz. Guadalupe has completed and returne
> Chapter 1 discussed how gross income is equal to all income received, less exclusions. Which concepts form the basis for this calculation of gross income? Explain.
> Why is the pay-as-you-go concept important to the successful operation of the income tax system? What other types of taxes are based on this concept?
> Explain how the related party construct and the arm's-length transaction concept interact.
> Why is a tax on real property used more often than a tax on personal property?
> a. What is a value-added tax and how does it work? b. Evaluate the rate structures of the two proposed taxes. Are they proportional, progressive, or regressive? c. What, if anything, is wrong with Tom's and/or Joe's point of view? Be sure to explain th
> True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variance of the individual assets in the portfolio. Explain.
> In recent years, it has been common for companies to experience significant stock price changes in reaction to announcements of massive layoffs. Critics charge that such events encourage companies to fire longtime employees and that Wall Street is cheeri
> If a market is semi strong form efficient, is it also weak form efficient? Explain.
> As a shareholder of a firm that is contemplating a new project, would you be more concerned with the accounting break-even point, the cash break-even point, or the financial break-even point? Why?
> Airlines offer an example of an industry in which the degree of operating leverage is fairly high. Why?
> At one time at least, many Japanese companies had a “no-layoff” policy (for that matter, so did IBM). What are the implications of such a policy for the degree of operating leverage a company faces?
> A coworker claims that looking at all this marginal this and incremental that is just a bunch of nonsense, saying, “Listen, if our average revenue doesn’t exceed our average cost, then we will have a negative cash flow, and we will go broke!” How do you
> As indicated by a number of examples in this chapter, earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First, earnings announcements concern past periods. If the
> What is the essential difference between sensitivity analysis and scenario analysis?
> What is forecasting risk? In general, would the degree of forecasting risk be greater for a new product or a cost-cutting proposal? Why?
> Joey Moss, a recent finance graduate, has just begun his job with the investment firm of Covili and Wyatt. Paul Covili, one of the firm’s founders, has been talking to Joey about the firm’s investment portfolio. As with any investment, Paul is concerned
> Mark Sexton and Todd Story have been discussing the future of S&S Air. The company has been experiencing fast growth, and the two see only clear skies in the company’s future. However, the fast growth can no longer be funded by internal sources, so Mark
> We have seen that over long periods, stock investments have tended to substantially outperform bond investments. However, it is common to observe investors with long horizons holding entirely bonds. Are such investors irrational?
> Mark Sexton and Todd Story, the owners of S&S Air, have been in discussions with a light aircraft dealer in Monaco about selling the company’s planes in Europe. Jarek Jachowicz, the dealer, wants to add S&S Air to his current retail line. Jarek has told
> You recently graduated from college, and your job search led you to S&S Air. Because you felt the company’s business was taking off, you accepted a job offer. The first day on the job, while you are finishing your employment paperwo
