Murray reported to the Environmental Protection Agency that his employer was illegally dumping chemicals into a river. His charges were true, and Murray’s employer was fined. In retaliation, Murray’s employer fired him and made deliberate efforts to prevent Murray from obtaining other employment. Murray sued the employer, claiming that his reputation had been damaged. Murray won his lawsuit and received an award for “damages to his personal and professional reputation and for his mental suffering.” Now he would like to know whether the award is taxable. He argues that he was awarded damages as a recovery of his human capital and that a recovery of capital is not income. Therefore, the Federal government does not have the power to tax the award.
> Janice, age 22, is a student who earns $10,000 working part-time at the college ice cream shop in 2017. She has no other income. Her medical expenses for the year total $3,000. During the year, she suffers a casualty loss of $3,500 when her apartment cat
> Daniel, age 38, is single and has the following income and expenses in 2017. Salary income………………………………………………………………………………………..$60,000 Net rent income……………………………………………………………………………………….6, 000 Dividend income……………………………………………………………………………………...3,500 Payment
> Amos is a self-employed tax attorney. He and Monica, his employee, attend a conference in Dallas sponsored by the American Institute of CPAs. The following expenses are incurred during the trip: a. Amos pays for all of these expenses. Calculate the eff
> Determine Hazel’s gross income from the following receipts for the year: Gain on sale of Augusta County bonds…………………………………………..$800 Interest on U.S. government savings bonds……………………………………400 Interest on state income tax refund………………………………………………..200 Int
> During the current year, Robert pays the following amounts associated with his own residence: Property taxes………………………………………$3, 000 Mortgage interest…………………………………..8, 000 Repairs…………………………………………………..1, 200 Utilities…………………………………………………..2, 700 Replacement
> Gordon anticipates that being positively perceived by the individual who is elected mayor will be beneficial for his business. Therefore, he contributes to the campaigns of both the Democratic and the Republican candidates. The Republican candidate is el
> Stuart, an insurance salesperson, is arrested for allegedly robbing a convenience store. He hires an attorney who is successful in getting the charges dropped. Is the attorney’s fee deductible? Explain.
> Clear, Inc., is a bottled water distributor. Clear’s delivery trucks frequently are required to park in no-parking zones to make their deliveries. If the trucks are occasionally ticketed, can Clear deduct the fines that it pays? Explain.
> What is the difference between an excise tax and a general sales tax? a. Do all states impose a general sales tax? b. Does the Federal government impose a general sales tax?
> Use www.congress.gov or another reliable website to find a proposal for a carbon tax or a financial transactions tax. Draft a summary of the tax, and analyze it against five of the principles of good tax policy.
> Mary Kate owns a building that she leases to an individual who operates a grocery store. Rent income is $10,000, and rental expenses are $6,000. On what Form 1040 schedule or schedules are the income and expenses reported?
> Boston Clothing Limited was a private company that experienced cash flow difficulties and hired new management to turn the company around. The company then went public and the shares sold at $15 per share. Within months, however, the share price plummete
> Larry and Susan each invest $10,000 in separate investment activities. They each incur deductible expenses of $800 associated with their respective investments. Explain why Larry’s expenses might be properly classified as deductions from AGI (itemized de
> Classify each of the following expenditures as a deduction for AGI, a deduction from AGI, or not deductible: a. Amos contributes to his H.R. 10 plan (i.e., a retirement plan for a self-employed individual). b. Keith pays child support to his former wife,
> George is a U.S. citizen who is employed by Hawk Enterprises, a global company. Beginning on June 1, 2017, George began working in London. He worked there until January 31, 2018, when he transferred to Paris. He worked in Paris the remainder of 2018. His
> Classify each of the following expenditures as a deduction for AGI, a deduction from AGI, or not deductible: a. Sam gives cash to his father as a birthday gift. b. Sandra gives cash to her church. c. Albert pays Dr. Dafashy for medical services rendered.
> “All income must be reported, and all deductions are allowed unless specifically disallowed in the Code.” Discuss.
> Ella owns 60% of the stock of Peach, Inc. The stock has declined in value since she purchased it five years ago. She is going to sell 5% of the stock to a relative. Ella is also going to make a gift of 10% of the stock to another relative. Identify the r
> Edna incurs various legal fees in obtaining a divorce. Which types of expenses associated with the divorce are deductible by Edna, and which are not?
> Ray loses his job as a result of a corporate downsizing. Consequently, he falls behind on the mortgage payments on his personal residence. His friend Ted would like to make the delinquent mortgage payments for him. a. Could the payments be structured so
> Hank was transferred from Arizona to North Dakota on March 1 of the current year. He immediately put his home in Phoenix up for rent. The home was rented May 1 to November 30 and was vacant during the month of December. It was rented again on January 1 f
> Why do taxpayers often have more than one alternative for structuring a business transaction?
> Karen and Andy own a beach house. They have an agreement with a rental agent to rent it up to 200 days per year. For the past three years, the agent has been successful in renting it for 200 days. Karen and Andy use the beach house for one week during th
> Paul operates a restaurant in Cleveland. He travels to Columbus to investigate acquiring a business. He incurs expenses as follows: $1,500 for travel, $2,000 for legal advice, and $3,500 for a market analysis. Based on the different tax consequences list
> What limits exist on the deductibility of executive compensation? Do the limits apply to all types of business entities? Are there any exceptions to the limitations? Explain.
> Sparrow Corporation would like you to review its employee fringe benefits program with regard to the tax consequences of the plan for the company’s president (Polly), who is also the majority shareholder. a. The company has a qualified retirement plan. T
> Melissa, the owner of a sole proprietorship, does not provide health insurance for her 20 employees. She plans to spend $1,500 lobbying in opposition to legislation that would require her to provide such insurance. Discuss the tax advantages and disadvan
> Linda operates an illegal gambling operation. Which of the following expenses that she incurs can reduce taxable income? a. Bribes paid to city employees. b. Salaries to employees. c. Security cameras. d. Kickbacks to police. e. Rent on an office. f. Dep
> Ted, an agent for an airline manufacturer, is negotiating a sale with a representative of the U.S. government and with a representative of a developing country. Ted’s company has sufficient capacity to handle only one of the orders. Both orders will have
> Aubry, a cash basis and calendar year taxpayer, decides to reduce his taxable income for 2017 by buying $65,000 worth of supplies for his business on December 27, 2017. The supplies will be used up in 2018. a. Can Aubry deduct the expenditure for 2017? E
> What is the “actually paid” requirement for the deduction of an expense by a cash basis taxpayer? Does actual payment ensure a deduction? Explain.
> Boston Clothing Limited was a private company that experienced cash flow difficulties and hired new management to turn the company around. The company then went public and the shares sold at $15 per share. Within months, however, the share price plummete
> Nanette is a first-grade teacher. Potential deductions are charitable contributions of $800, personal property taxes on her car of $240, and various supplies purchased for use in her classroom of $225 (none reimbursed by her school). How will these items
> After his first business trip to a major city, Herman is alarmed when he reviews his credit card receipts. Both the hotel bill and the car rental charge are in excess of the price he was quoted. Was Herman overcharged, or is there an explanation for the
> Michael earned $20,000 at the K-M Resort Golf Club during the summer prior to his senior year in college. He wants to make a contribution to a traditional IRA, but the amount is dependent on whether it reduces his taxable income. If Michael is going to c
> Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret’s interest payments on the
> Rosa’s employer has instituted a flexible benefits program. Rosa will use the plan to pay for her daughter’s dental expenses and other medical expenses that are not covered by health insurance. Rosa is in the 28% marginal tax bracket and estimates that t
> John and Mary Jane Diaz are married, filing jointly. Their address is 204 Shoe Lane, Blacksburg, VA 24061. John is age 35, and Mary Jane is age 30. They are expecting their first child in early 2018. John’s salary in 2017 was $105,000, from which $20,800
> Roberta Santos, age 41, is single and lives at 120 Sanborne Avenue, Springfield, IL 60781. Her Social Security number is 123-45-6789. Roberta has been divorced from her former husband, Wayne, for three years. She has a son, Jason, who is 17, and a daught
> Murphy has a brokerage account and buys on the margin, which resulted in an interest expense of $20,000 during the year. Income generated through the brokerage account was as follows: Municipal interest………………………………………$ 50,000 Taxable dividends and inter
> Printer Company pays a $25,000 annual membership fee to a trade association for paper wholesalers. The trade association estimates that 60% of its dues are allocated to lobbying activities. a. What are Printer’s total deductible expenses for tax purposes
> Vella owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year: Rent………………………………………………. $ 24,000 Bribes………………………….………..…….…….40, 000 Travel expenses……………………………………4,000 Utiliti
> Maud, a calendar year taxpayer, is the owner of a sole proprietorship that uses the cash method. On February 1, 2017, she leases an office building to use in her business for $120,000 for an 18-month period. To obtain this favorable lease rate, she pays
> Falcon, Inc., paid salaries of $500,000 to its employees during its first year of operations. At the end of the year, Falcon had unpaid salaries of $45,000. a. Calculate the salary deduction if Falcon is a cash basis taxpayer. b. Calculate the salary ded
> Glenda, a calendar year and cash basis taxpayer, rents property from Janice. As part of the rental agreement, Glenda pays $8,400 rent on April 1, 2017, for the 12 months ending March 31, 2018. a. How much is Glenda’s deduction for rent expense in 2017? b
> List an advantage and a disadvantage of using the U.S. Tax Court as the trial court for Federal tax litigation.
> Stanford owns and operates two dry cleaning businesses. He travels to Boston to discuss acquiring a restaurant. Later in the month, he travels to New York to discuss acquiring a bakery. Stanford does not acquire the restaurant but does purchase the baker
> Bluebird, Inc., does not provide its employees with any tax-exempt fringe benefits. The company is considering adopting a hospital and medical benefits insurance plan that will cost approximately $9,000 per employee. To adopt this plan, the company may h
> Your client, John Butler, is an avid Houston Astros fan. Last March at the Astros’ home opener, as a result of a random drawing of those in attendance at the game, John won 300 Shipley Do-Nut coupons. Each coupon entitled him to a cup of coffee and a fre
> Aubrey Brown is a decorated veteran of the Vietnam War. As a result of his exposure to Agent Orange during the war, Aubrey developed lung cancer and is unable to work. He received $12,000 of Social Security disability payments in the current year. He rea
> Belinda spent the last 60 days of 2017 in a nursing home. The cost of the services provided to her was $18,000 ($300 per day). Medicare paid $8,500 toward the cost of her stay. Belinda also received $5,500 of benefits under a long-term care insurance pol
> Caden and Lily are divorced on March 3, 2016. For financial reasons, however, Lily continues to live in Caden’s apartment and receives her support from him. Caden does not claim Lily as a dependent on his 2016 Federal income tax return, but he does so on
> Mia owns a warehouse that has a cost basis to her of $80,000. The city condemns the warehouse to make room for a new fire station. It pays Mia $400,000 for the property, its agreed-to fair market value. Shortly after the condemnation, Mia purchases anoth
> Heather, age 12, lives in the same household with her mother, grandmother, and uncle. a. Who can claim Heather as a dependent on a Federal income tax return? b. Which of Heather’s relatives takes precedence in claiming the exemption?
> Discuss the probable justification for each of the following aspects of the tax law: a. A tax credit is allowed for amounts spent to furnish care for minor children while the parent works. b. Deductions for interest on home mortgage and property taxes on
> Patsy maintains a household that includes her eldest son (age 30) and one of Patsy’s cousins (age 28). She can claim the cousin as a dependent but not her son. Explain.
> Some tax rules can be justified on multiple grounds (e.g., economic and social). In this connection, comment on the possible justification for the rules governing the following: a. Pension plans. b. Education. c. Home ownership.
> Jayden calculates his Federal income tax by using both the Tax Tables and the Tax Rate Schedules. Because the Tax Rate Schedules yield a slightly lower tax liability, he plans to pay this amount. a. Why is there a difference? b. Is Jayden’s approach perm
> In terms of tax policy, what do the following mean? a. Revenue neutrality. b. Pay-as-you-go, or “paygo.” c. Sunset provision. d. Indexation.
> Comment on the availability of head-of-household filing status in each of the following independent situations. a. Al lives alone but maintains the household of his parents. In July, the parents use their savings to purchase a new BMW for $62,000. b. Bre
> Rex, age 55, is an officer of Blue Company, which provides him with the following nondiscriminatory fringe benefits in 2017: • Hospitalization insurance premiums for Rex and his dependents. The cost of the coverage for Rex is $2,900 per year, and the add
> The Benson CPA firm is considering utilizing an offshore service provider to prepare many of its tax returns. In this regard, what ethical considerations must be taken into account?
> Interpret this Regulation citation: Reg. § 1.163–10(a)(2).
> Mario, who is single, is a U.S. citizen and resident. He provides almost all of the support of his parents and two aunts, who are citizens and residents of Guatemala. Mario’s parents and aunts are seriously considering moving to and becoming residents of
> In March 2017, Jim asks you to prepare his Federal income tax returns for tax years 2014, 2015, and 2016. In discussing this matter with him, you discover that he also has not filed for tax year 2013. When you mention this fact, Jim tells you that the st
> David is age 78, is a widower, and is being claimed as a dependent by his son. How does this situation affect the following? a. David’s own individual filing requirement. b. David’s personal exemption. c. The standard deduction allowed to David. d. The a
> For tax year 2014, the IRS assesses a deficiency against David for $500,000. Disregarding the interest component, what is David’s penalty if the deficiency is attributable to: a. Negligence? b. Fraud?
> In choosing between the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following variables have? a. The age of the taxpayer(s). b. The health (i.e., physical condition) of the taxpayer(s). c. Whether the taxpa
> Isabella files her income tax return 35 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $40,000, which is the balance of the tax she owes. Disregarding the interest element,
> Late in the tax year, the Polks come to you for tax advice. They are considering selling some stock investments for a loss and making a contribution to a traditional IRA. In reviewing their situation, you note that they have large medical expenses and a
> On a Federal income tax return filed five years ago, Andy inadvertently omitted a large amount of gross income. a. Andy seeks your advice as to whether the IRS is barred from assessing additional income tax in the event he is audited. What is your advice
> Fran, who is in the 35% tax bracket, recently collected $100,000 on a life insurance policy she carried on her father. She currently owes $120,000 on her personal residence and $120,000 on business property. National Bank holds the mortgage on both piece
> Which of the following items can be exclusions from gross income? a. Alimony payments received. b. Award received by the taxpayer for compensatory damages from her broken leg. c. A new golf cart won in a church raffle. d. Amount collected on a loan previ
> Brianna, a calendar year taxpayer, files her income tax return for 2016 on February 3, 2017. Although she makes repeated inquiries, she does not receive her refund from the IRS until May 28, 2017. Is Brianna entitled to interest on the refund? Explain.
> World War II converted the Federal income tax into a mass tax. Explain bankruptcy.
> Which of the following items can be inclusions in gross income? a. During the year, shares of stock that the taxpayer had purchased as an investment doubled in value. b. Amount an off-duty motorcycle police officer received for escorting a funeral proces
> Regarding the statute of limitations on additional assessments of tax by the IRS, determine the applicable period in each of the following situations. Assume a calendar year individual with no fraud or substantial omission involved. a. The income tax ret
> During the year, Addison is involved in the following transactions. What are the possible Federal income tax effects of these transactions? a. Lost money gambling on a trip to a casino. b. Helped pay for her neighbor Howie’s dental bills. Howie is a good
> What purpose is served by a statute of limitations? How is it relevant in the case of tax controversies?
> Sam and Abby are dependents of their parents, and each earns gross income of $2,100 for the year. Sam’s standard deduction for the year is $1,050, while Abby’s is $2,450. As their income is the same, what causes the difference in the amount of the standa
> Aldo has just been audited by the IRS. He does not agree with the agent’s findings but believes that he has only two choices: pay the proposed deficiency or resort to the courts. Do you agree with Aldo’s conclusion? Why or why not?
> Determine the net effect on Tamara’s adjusted gross income with regard to these capital asset transactions that occurred this year. • Sold ABCCo stock, acquired 2 years ago, for a $1,500 loss. • Sold collectible coins, held for 17 months, for a $2,000 ga
> How does the tax benefit rule apply in the following cases? a. In 2015, the Orange Furniture Store, an accrual method taxpayer, sold furniture on credit for $1,000 to Sammy. The cost of the furniture was $600. In 2016, Orange took a bad debt deduction fo
> With regard to the IRS audit process, comment on the following: a. The audit is resolved by mail. b. The audit is conducted at the office of the IRS. c. A “no change” RAR results. d. A special agent joins the audit team.
> Rebecca sells her personal scooter for $550. She purchased the scooter for $700 three years ago. In addition, Rebecca sells a painting for $1,200 that she acquired five years ago for $900. What are the tax implications attributable to these sales?
> Serena operates a gift shop. To reduce costs of credit card transactions, she offers customers a discount if they pay in cash. For the holiday rush, she hires some short-term workers, but pays them cash and does not add them to the payroll. a. What are s
> Butch Bishop operates a small international firm named Tile, Inc. A new treaty between the United States and Spain conflicts with a Section of the Internal Revenue Code. Butch asks you for advice. If he follows the treaty position, does he need to disclo
> Simon, age 12, generates $800 interest income and $4,000 dividend income for 2017. He incurs no investment expenses. His parents report $80,200 taxable income and file a joint tax return. Determine the following. a. Simon’s net unearned income. b. Simon’
> Both a value added tax (VAT) and a national sales tax have been criticized as being regressive in their effect. a. Explain. b. How could this shortcoming be remedied?
> Paul and Sonja, who are married, reported 2017 itemized deductions of $8,200 and $400, respectively. Paul suggests that they file their Federal income tax returns separately—he will itemize his deductions from AGI, and she will claim the standard deducti
> Regarding the value added tax (VAT), comment on the following: a. Popularity of this type of tax. b. Nature of the tax. c. Effect on government spending.
> In 2017, Dominique and Felix are married with one dependent and file a joint Federal income tax return. Their AGI is $316,550, and they claim three dependency exemptions. Compute the taxpayers’ total deduction for exemptions for the year.
> Describe the nature and purpose of the following taxes: a. Severance taxes. b. Franchise taxes. c. Occupational fees. d. Customs duties. e. Export duties.
> Albert established a qualified tuition program for each of his twins, Kim and Jim. He started each fund with $20,000 when the children were 5 years old. Albert made no further contributions to his children’s plans. Thirteen years later, both children hav
> Compute the 2017 standard deduction for the following taxpayers. a. Margie is 15 and claimed as a dependent by her parents. She reports $800 in dividends income and $1,400 in wages from a part-time job. b. Ruby and Woody are married and file a joint tax
> One of the tax advantages of hiring family members to work in your business is that FICA taxes are avoided. Do you agree with this statement? Explain.
> Describe simulation questions on the CPA exam.
> In connection with the Medicare component of FICA, comment on the following: a. Any dollar limitation imposed. b. The applicability of the .9% increase in the 1.45% regular tax rate.
> The Sixteenth Amendment to the U.S. Constitution was passed to overturn a Supreme Court decision that had invalidated the Federal income tax. Do you agree? Why or why not?
> What is the primary purpose of effective tax planning? Explain.
