In 2017, Gregory, a single person, had $375,000 of ordinary taxable income. He sold Section 1202 stock at a taxable gain of $45,000, his art collection at a taxable gain of $102,000, and stock at a taxable gain of $55,000. Compare the tax result if Congress would simplify the capital gains tax provisions by having a single 20 percent capital gains rate versus the current capital gains tax provisions now in effect for 2017.
> Why do the basis and at-risk rules usually prevent the same amount of losses from passing through to shareholders of S corporations?
> What is a terminating event in relation to an S corporation?
> A married couple file jointly and have a $10,000 net long-term capital gain. What are the maximum tax rates applicable to that gain if their total taxable income would otherwise be taxed at 15 percent, 25 percent, 33 percent, or 39.6 percent and the gain
> Which entities discussed in this chapter insulate the owners from the general liabilities of the entity?
> Why are corporations permitted to file consolidated returns?
> Explain the tax treatment of services transferred to a partnership in exchange for a partnership interest.
> Wally sells the auto that he used 80 percent for business and 20 percent for personal use annually for $6,000. He purchased the auto four years ago for $20,000. If used 100 percent for business, he could have claimed $16,000 in depreciation. What is his
> What are the two types of controlled groups?
> How are capital assets classified as short term and long term? How are long-term gains and losses and short-term gains and losses treated in the capital asset netting process?
> What averaging conventions exist under MACRS? How does a taxpayer determine which averaging convention should be used?
> What are the carryover periods for corporate net operating losses?
> What is a corporation’s overall charitable contribution deduction limitation?
> Indicate whether a taxpayer can claim deductions for depreciation or amortization for the following: a. Land used in the taxpayer’s ranching business. b. An automobile used in business. The taxpayer accounts for the deductible car expenses using the st
> List five desirable characteristics of the corporate form of business.
> Bob and Ray started a tree trimming business that recently became profitable. They each buy a $250,000 life insurance policy on themselves. They then exchange ownership of the policies to provide funds in case of either of their deaths. How is this excha
> Explain how a corporation’s income is subject to double taxation.
> Determine the amount of the capital gain or loss in each of the following transactions and state whether the gain or loss is long term or short term. a. 100 shares of Bilco stock bought for $8,000 on January 22 of year 3 and sold for $10,000 on January
> How are net short-term capital gains of individuals treated? How are net short-term capital gains of corporations treated?
> What additional tests must employee-owned property satisfy before the employee can claim depreciation?
> What is the unextended due date for the income tax return of a corporation whose fiscal year ends on February 28? What is its extended due date? In what months must it make estimated payments for the next tax year?
> Core Carpet Factory purchased a $40,000 binding machine (seven year property) six months ago that they expected to use for at least ten years. They began to use the machine immediately. Unfortunately, the machine kept breaking down and the company finall
> What types of realty qualify for like-kind exchange treatment? What kinds of personalty qualify for like-kind exchange treatment?
> What type of loss would be recognized on the sale of receivables to a factor at 80 percent of the face value?
> What events qualify as asset dispositions?
> How are assets classified to determine their tax treatment on disposition? What are other ways to classify assets?
> How is the amount realized on a sale or exchange determined?
> Cynthia, a sole proprietor has a loss this year and would like to claim no depreciation this year and then take double depreciation next year. Can she elect to do this?
> Linda inherited a car from her Uncle Ted, who had purchased the car two years ago for $38,000. The car’s value was $30,000 at the date of Ted’s death. What is Linda’s basis for the car?
> Why do you think Congress enacted the kiddie tax? Do you think it is achieving its goal? Can you think of a better way to achieve this goal?
> Mark’s father, Michael, loaned Mark $300,000 interest free for five years to invest in securities that yield a 10 percent annual return. At the end of the five years, Mark sells the securities to repay his father. Unfortunately, the market declined and M
> Beginning in 2012, Congress increased the top estate and gift tax rate to 40 percent and permanently increased the unified credit with inflation indexing. What (if any) changes do you think Congress might make in this area in the future?
> What types of assets are Section 1231 assets? What types of assets are capital assets? What types of assets are ordinary income assets? Give several examples of each type of asset.
> In 2010, Congress chose to repeal the estate tax for that year, but retained the gift tax. Why do you think they did that?
> Why do you think an S corporation is limited to having common stock with no differences other than voting rights?
> Why do you think services are excluded from the definition of property when a partner receives a partnership interest in exchange for property?
> Explain how a parent–subsidiary controlled group differs from an affiliated controlled group. Develop examples of each to illustrate the differences.
> Why do you think Congress requires the recognition of gain on the distribution of appreciated property but does not allow the recognition of loss on depreciated property in a nonliquidating distribution? Why do you think both gain and loss are recognized
> Bob and Jane, brother and sister, are equal partners in a family partnership that owns 400 shares of the Sibling Corporation. Their grandfather owns the remaining 100 shares of Sibling Corporation. How many shares of stock are owned directly and indirect
> The Blanton Corporation had a deficit in its current earnings and profits of $36,500 for the current year. It has $75,000 in accumulated earnings and profits. It made two distributions to its shareholders. On April 30, it distributed $40,000, and on Nove
> Waltjohn Corporation has $5,000 in CE&P and $10,000 in AE&P. It has two shareholders, Walter and John. On April 1 of the current year, Walter received a $10,000 distribution from the corporation on his Class A common stock. On July 1, John received a $10
> What policy reason do you think explains why losses on the personal-use property of individuals are nondeductible except for a limited amount of loss from involuntary conversions?
> A shareholder receives stock valued at $500,000 and $50,000 cash for two pieces of equipment as part of a Section 351 transaction. He transfers (1) Machine A with a fair market value of $330,000 and a basis of $300,000 and (2) Machine B with a fair marke
> What is Section 291 recapture? Compare this to unrecaptured Section 1250 gains.
> What is the rationale behind a corporation’s increasing its basis in property received in a Section 351 transaction for the gain recognized by the transferor shareholder?
> What is a possible reason for allowing persons to use the provision that allows the deferral of gain or loss for involuntary conversions on property that is sold under the threat of condemnation only?
> Why do you think the specifications for like-kind properties are so different for real property and for personalty?
> Mary had the following transactions involving BMN stock: a. Determine Mary’s gain or loss on each sale, assuming the shares are not specifically identified. b. Determine Mary’s gain or loss on the second sale if she s
> Beth had been using an automobile for personal purposes. In year 2, when she started a business, she began to use the car exclusively for this business at a time when it was worth $12,000. She had purchased the auto in year 1 for $16,000. a. Assuming th
> What are the policy reasons for allowing a portion of the gain on a personal residence to escape taxation?
> If the netting process for capital gains really has no impact on corporations, why do you think it still remains as part of the tax law?
> Is the treatment of purchased goodwill the same for tax and for GAAP? Explain.
> Your friend is thinking about starting up a new Internet business and would like to know how Web site development costs are treated for tax purposes. What are some of the costs involved in Web site development, and what are the issues involved in determi
> Explain the look-back procedure for Section 1231 assets. Why did this particular provision evolve?
> You are a self-employed individual thinking about buying or leasing a car to use in your business. What information is needed to properly evaluate this lease versus purchase decision?
> List at least 10 differences between taxable income and accounting income.
> Locate and read Publication 550: Investment Income and Expenses. How do you report a wash sale?
> Go to the IRS Web site (www.irs.gov) and locate the instructions for Form 709. Can spouses who elect to gift split file a joint gift tax return? Explain how they must file.
> Go to the IRS Web site (www.irs.gov) and locate the form that a corporation uses to make an S election and its related instructions. Summarize the information required on the form. Do the instructions include information on how to obtain an extension of
> Using the IRS Web site, www.irs.gov, locate the information and instructions for reporting the sale of a personal residence. Write a summary of what the taxpayer needs to do to elect Section 121 gain exclusion and how the sale is reported.
> Locate the Schedule D and the accompanying instructions for both an individual and a corporation on the IRS Web site, www.irs.gov. Compare the length of the two forms and the instructions as they appear on the Web site. Summarize your findings.
> Go to the IRS Web site (www.irs.gov) and locate Publication 538: Accounting Periods and Methods. How does a corporation make an election to use a 52-53-week tax year?
> Go to the IRS Web site (www.irs.gov) and locate instructions for Form 1120. If a corporation has less than $250,000 of total receipts and total assets at the end of the tax year, which schedules included with Form 1120 can it omit?
> Go to the IRS Web site (www.irs.gov) and locate the instructions for Form 706-NA for the estate of a nonresident alien. a. What is the definition of a nonresident alien decedent? b. Under what circumstances must the executor for a nonresident alien dece
> Chester provides you with the following income information for years 1 through 3, exclusive of capital loss carryovers: Determine the amount and type of capital loss deduction each year, if any, and identify any carryover to the following year. Shor
> Samantha is a single parent providing the sole support for her six-year-old daughter, Hillary. They live in an area where the public school is known to have problems with drugs and other crimes. Samantha wants to send Hillary to a private school to avoid
> Two years ago, Herbert, a widower, made a gift of marketable securities to his 35-year-old daughter, Sabrina, on which he paid a federal gift tax of $3 million. When Herbert died in 2017, his estate had been greatly reduced in value due to his having giv
> Joe, June, and Jim—coworkers—decide that they want to start their own business. Joe has $200,000 to contribute, June has equipment valued at $100,000 (basis = $90,000), and Jim has real estate suitable for the business valued at $200,000 (basis = $110,00
> Cheryl owned six horses that she and her family used for riding and occasionally showing in hunter-jumper competitions. At the beginning of May, one of the horses showed signs of severe illness and was diagnosed with equine encephalitis. She was required
> The partners of JPG Partnership want to change the form of entity from a partnership to a corporation. The corporation can be formed in several ways: The partnership can distribute the assets to the partners who then contribute the assets to the corporat
> Roberta Wynn has been a partner in the Cato Partnership for a number of years. With the permission of the other partners, she sells her partnership interest to a third party. At the time of sale, her basis in her partnership is only $100. For the portion
> June owned all the stock of Corporation A. Over the years, the corporation had been very successful but had never paid any dividends, although it had substantial earnings and profits. June wanted to expand into another line of business as a sole propriet
> Locate and read Internal Revenue Code Sections 267, 318, and 544. Compare the definition of family in each of these sections.
> Several years ago, Congress repealed the General Utilities Doctrine. Locate and read General Utilities & Operating Co. v. Helvering, 296 US 200 (1935). Summarize this case. What was the General Utilities Doctrine, and how did its repeal affect current tr
> Locate and read Section 385 of the Internal Revenue Code and develop a comprehensive list of factors that indicate legitimate debt. What is the status of the regulations that are to expand on this Code section?
> Sharon has salary income of $68,000, a net short-term capital gain of $15,000, and a net long-term capital loss of $24,000. What is Sharon’s adjusted gross income if she has no other income items?
> Sheralyn was in the wholesale distribution business for pecans and peanuts grown in Georgia. She and her brother owned and operated several warehouses. Seven years ago, they purchased property for another warehouse in the eastern part of Georgia because
> A subsidiary of Corporation A, an electrical utility located in Springfield, and a subsidiary of Corporation B, a diversified manufacturer also located in Springfield, formed a joint venture under the general partnership laws of their state. The partners
> A number of specific transactions do not necessarily follow the general tax provisions applicable to property transactions. Following are a group of transactions that are subject to specific tax provisions. For each of the situations, you are to answer t
> Juan owns 40 percent and Mario owns 60 percent of Crispy Donuts, Inc. (CDI). Juan wants to buy out Mario’s interest in CDI, so he arranges a stock sale agreement under which CDI will redeem (purchase) all of Mario’s shares for $900,000. This will then ma
> Jessica, a professional violinist with the Lincoln Symphony Orchestra, purchased a 100-yearold antique violin at a cost of $180,000. She thinks that it is a good investment because she knows that it will continue to appreciate in value as a treasured wor
> Robert owns some investment land that has a basis of $1,000 and a fair market value of $22,000. He expects that it will continue to appreciate in value. Robert’s uncle, Mike, has a terminal illness and is expected to survive no more than six months. Robe
> Oscar (age 70) and Maggie (age 60) were married and jointly owned a personal residence valued at $3,800,000 when Oscar died in 2017. Oscar also owned stocks valued at $4,700,000; an art collection valued at $1,400,000; a retirement account valued at $900
> You are the trustee for the Steadman Trust. The trust has $50,000 of interest income, all of which it plans to distribute to its beneficiaries in the current year. The trust also has $14,000 in net capital losses for the year that are allocated to corpus
> When Godfrey died in 2017, his assets were valued as follows: The executor sold the stock two months after the decedent’s death for $2,200,000. The bonds were sold seven months after the decedent’s death for $4,630,00
> Your client, Ted, would like your assistance in selecting one of the following assets to give to his 16-year-old daughter. The corporate stock pays only $100 in dividend income each year but has doubled in value since Ted purchased it three years ago. T
> In the current year, Serena sold investment land for $105,000 that she purchased six years ago for $61,000; a diamond engagement ring for $1,800 that her ex-fiancée had given her nine months ago (purchased for $2,500 a week before giving it to her); 2,00
> An S corporation shareholder is currently in the 28 percent tax bracket. His S corporation is going to pass a very large loss through to him that would otherwise offset other income, except for the fact that he lacks sufficient stock basis to absorb the
> Prior to BJ Corporation’s year-end, its sole shareholder comes to you for advice. BJ is an established S corporation that was profitable until two years ago when the economy faltered. Due to distributions and losses passed through in prior years, the sha
> Cynthia needs your advice regarding which form of business entity to choose for her new business. She expects the new business will have losses of approximately $80,000 in each of the first two years but anticipates profits that will grow steadily therea
> Clare and Cora have been making wedding cakes in their homes for several years. The Health Department just learned about this and now requires them to shut down or find a commercial kitchen that can be subject to the proper inspections. Clare and Cora lo
> One of Corbett Corporation’s shareholders, Gene, has severe financial problems due to extensive medical expenses. He has approached the company for a loan, but the other shareholders on the board of directors refuse to approve it. Gene owns 25 percent of
> The Cooper Corporation is trying to do some year-end tax planning due to a large bond issue that is coming due. To meet this debt payment, Cooper already has sold $4,000,000 of business assets at a gain of $2,000,000. It is considering the sale of one of
> The Overseas Corporation has taxable income of $250,000 before either a deduction for foreign taxes paid or the foreign tax credit. It paid foreign taxes of $75,000 on foreign income of $300,000. Assuming the corporation cannot carry the foreign tax cred
> The Barnard Corporation needs additional cash to improve its facilities. It can borrow $2,000,000 from a bank at 9 percent interest for 10 years, with a balloon payment of the entire principal at the end of the 10-year period. It can issue $2,000,000 in
> The Timberlake Corporation has an opportunity to sell its manufacturing facility to Carroll Corporation for $4,500,000. The property has a basis of $2,000,000, and the prospective purchaser is willing to wait up to six months for occupancy to allow Timbe
> The Glades Corporation located a building it would like to have for its new warehouse. The corporation has contacted the owner about making a trade for its existing property. The owner of the desired property is only willing to sell the building for cash
> What are the ownership and use tests that must be met to exclude the maximum gain on the sale of a personal residence? Under what circumstances may the owner of a personal residence exclude gain if the required ownership and use tests are not met?
> William, Wally, and Wilma want to form a corporation. William has cash of $100,000; Wally has property valued at $100,000 with a basis of $80,000; and Wilma has property valued at $50,000 that has a $70,000 basis. Wally doesn’t want to recognize his gain
> Refer to the material in the preceding problem. Timberlake locates suitable property that the owner would sell for $4,800,000 although the property appraises at only $4,250,000. Carroll Corporation is willing to purchase this property for the $4,800,000
> George has a short-term capital loss of $42,000 this year. His brother wants to buy a piece of land that George has owned as an investment for $60,000. The land’s basis is only $20,000. George also knows that the land is appreciating in value every year,
