Tawana owns and operates a sole proprietorship and has a 40 percent marginal tax rate. She provides her son, Jonathon, $8,000 a year for college expenses. Jonathon works as a pizza delivery person every fall and has a marginal tax rate of 15 percent. a. What could Tawana do to reduce her family tax burden? b. How much pretax income does it currently take Tawana to generate the $8,000 after-taxes given to Jonathon? c. If Jonathon worked for his mother’s sole proprietorship, what salary would she have to pay him to generate $8,000 after taxes (ignoring any Social Security, Medicare, or self-employment tax issues)? d. How much money would this strategy save?
> Francine’s mother Donna and her father Darren separated and divorced in September of this year. Francine lived with both parents until the separation. Francine does not provide more than half of her own support. Francine is 15 years old at the end of the
> John and Tara Smith are married and have lived in the same home for over 20 years. John’s uncle Tim, who is 64 years old, has lived with the Smiths since March of this year. Tim is searching for employment but has been unable to find any—his gross income
> The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents’ home for three months of the year, and he w
> What is the difference between gross income and adjusted gross income, and what is the difference between adjusted gross income and taxable income?
> Compare and contrast for and from AGI deductions. Why are for AGI deductions likely more valuable to taxpayers than from AGI deductions?
> Are taxpayers allowed to deduct net capital losses (capital losses in excess of capital gains)? Explain.
> Are all capital gains (gains on the sale or disposition of capital assets) taxed at the same rate? Explain.
> Is it easier to describe what a capital asset is or what it is not? Explain.
> Why should a taxpayer be interested in the character of income received?
> How are realized income, gross income, and taxable income similar, and how are they different?
> What is the constructive receipt doctrine? What types of taxpayers does this doctrine generally affect? For what tax planning strategy is the constructive receipt doctrine a potential limitation?
> For tax purposes, why is the married filing jointly tax status generally preferable to the married filing separately filing status? Why might a married taxpayer prefer not to file a joint return with the taxpayer’s spouse?
> What requirements do an abandoned spouse and qualifying widow or widower have in common?
> Isabella provides 30% of the support for her father Hastings who lives in an apartment by himself and has no gross income. Is it possible for Isabella to claim a dependency exemption for her father? Explain.
> How do two taxpayers determine who has priority to claim the dependency exemption for a qualifying child of both taxpayers when neither taxpayer is a parent of the child (assume the child does not qualify as a qualifying child for either parent)? How do
> In general terms, what are the differences in the rules for determining who is a qualifying child and who qualifies as a dependent as a qualifying relative? Is it possible for someone to be a qualifying child and a qualifying relative of the same taxpaye
> Compare and contrast the relationship test requirements for a qualifying child with the relationship requirements for a qualifying relative.
> Emily and Tony are recently married college students. Can Emily qualify as her parents’ dependent? Explain.
> If a person is considered to be a qualifying child or qualifying relative of a taxpayer, is the taxpayer automatically entitled to claim a dependency exemption for the person?
> Identify three ways taxpayers can pay their income taxes to the government.
> What types of federal income-based taxes, other than the regular income tax, might taxpayers be required to pay? In general terms, what is the tax base for each of these other taxes on income?
> Several judicial doctrines limit basic tax planning strategies. What are they? Which planning strategies do they limit?
> What is the difference between a tax deduction and a tax credit? Is one more beneficial than the other? Explain.
> Why are some deductions called “above-the-line” deductions and others are called “below-the-line” deductions? What is the “line”?
> Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Janine, Michael, and Candice). The couple received salary income of $100,000 and they sold their home this year. They initially pu
> Marc and Michelle are married and earned salaries this year of $64,000 and $12,000, respectively. In addition to their salaries, they received interest of $350 from municipal bonds and $500 from corporate bonds. Marc and Michelle also paid $2,500 of qual
> Tiffany is unmarried and has a 15-year-old qualifying child. Tiffany has determined her tax liability to be $3,525, and her employer has withheld $1,500 of federal taxes from her paycheck. Tiffany is allowed to claim a $1,000 child tax credit for her qua
> Camille Sikorski was divorced last year. She currently owns and provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camille’s home for the entire year and Camille paid for all the costs of maintaining t
> Using the facts from the previous problem, how would your answer change if Manny’s after-tax rate of return were 8 percent?
> Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume
> Using the facts from the previous problem, how would your answer change if Isabel’s after-tax rate of return were 8 percent?
> Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $20,000 bill any
> What is an “implicit tax” and how does it affect a taxpayer’s decision to purchase municipal bonds?
> Tesha works for a company that pays a year-end bonus in January of each year (instead of December of the preceding year) to allow employees to defer the bonus income. Assume Congress recently passed tax legislation that decreases individual tax rates as
> Billups, a physician and cash-method taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, Billups plans to establish a new policy that allows all his clients to wait two years to p
> Yong recently paid his accountant $10,000 for elaborate tax planning strategies that exploit the timing strategy. Assuming this is an election year and there could be a power shift in the White House and Congress, what is a potential risk associated with
> Jayanna, an advertising consultant, is contemplating instructing some of her clients to pay her in cash so that she does not have to report the income on her tax return. Use an available tax service to identify the three basic elements of tax evasion and
> Alan inherited $100,000 with the stipulation that he “invest it to financially benefit his family.” Alan and Alice decided they would invest the inheritance to help them accomplish two financial goals: purchasing a Pa
> Komiko Tanaka invests $12,000 in LymaBean, Inc. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 10 percent before-tax rate of return. She plans to invest for the long term. a. How much cash will Komiko retain, a
> Irene is saving for a new car she hopes to purchase either four or six years from now. Irene invests $10,000 in a growth stock that does not pay dividends and expects a 6 percent annual before-tax return (the investment is tax deferred). When she cashes
> Anne’s marginal income tax rate is 30 percent. She purchases a corporate bond for $10,000 and the maturity, or face value, of the bond is $10,000. If the bond pays 5 percent per year before taxes, what is Anne’s annual after-tax rate of return from the b
> Helen holds 1,000 shares of Fizbo Inc. stock that she purchased 11 months ago. The stock has done very well and has appreciated $20/share since Helen bought the stock. When sold, the stock will be taxed at capital gains rates (long-term rate is 15% and s
> Dennis is currently considering investing in municipal bonds that earn 6 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 8 percent. If Dennis’ tax rate is 20 percent, which bond should he choose? Which bond should he choose
> Laurie is thinking about investing in one or several of the following investment options: Corporate bonds (ordinary interest paid annually) Dividend-paying stock (qualified dividends) Life insurance (tax-exempt) Savings account Growth stock a. Assuming a
> Using the facts in the previous problem, what are some ways that Bendetta could shift some of the rental income to Jenine? What are the disadvantages associated with these income-shifting strategies?
> Bendetta, a high-tax-rate taxpayer, owns several rental properties and would like to shift some income to her daughter, Jenine. Bendetta instructs her tenants to send their rent checks to Jenine so Jenine can report the rental income. Will this shift the
> Hyundai is considering opening a plant in two neighboring states. One state has a corporate tax rate of 10 percent. If operated in this state, the plant is expected to generate $1,000,000 pretax profit. The other state has a corporate tax rate of 2 perce
> Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $300,000, of which $125,000 is attributed to the sole proprietorship. Orie and Jane are contemplating incorporating their sole proprietorship
> Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is contemplating incorporating her sole proprietorship. Using the si
> Geraldo recently won a lottery and chose to receive $100,000 today instead of an equivalent amount in ten years, computed using an 8 percent rate of return. Today, he learned that interest rates are expected to increase in the future. Is this good news f
> Using the facts from the previous problem, when should Hank send the bill if he expects his marginal tax rate to be 33 percent next year? 25 percent next year?
> Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume hi
> Using the facts from the previous problem, when should Reese pay the bill if she expects her marginal tax rate to be 33 percent next year? 25 percent next year?
> Under what circumstances would you expect the after-tax return from an investment in a capital asset to approach that of tax-exempt assets assuming equal before-tax rates of return?
> Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Reese can pay the $20,000 bill any ti
> Why is understanding the time value of money important for tax planning?
> Describe the ways in which the timing strategy has limitations.
> How do changing tax rates affect the timing strategy? What information do you need to determine the appropriate timing strategy when tax rates change?
> What factors increase the benefits of accelerating deductions or deferring income?
> What are some common examples of the timing strategy?
> In this chapter we discussed three basic tax planning strategies. What different features of taxation does each of these strategies exploit?
> Describe the three parties engaged in every business transaction and how understanding taxes may aid in structuring transactions.
> “Tax avoidance is discouraged by the courts and Congress.” Is this statement true or false? Please explain.
> Distinguish earned income from unearned income, and provide an example of each.
> What is the difference between tax avoidance and tax evasion?
> Jim purchased 100 shares of stock this year and elected to participate in a dividend reinvestment program. This program automatically uses dividends to purchase additional shares of stock. This year Jim’s shares paid $350 of dividends and he used these f
> Randy has found conflicting authorities that address a research question for one of his clients. The majority of the authorities provide an unfavorable answer for his client. Randy estimates that if the client takes the more favorable position on its tax
> Latrell recently used his Delta Skymiles to purchase a free round trip ticket to Milan, Italy (value $1,200). The frequent flyer miles used to purchase the ticket were generated from Latrell’s business travel as a CPA. Latrell’s employer paid for his bus
> J.C. has been a professional gambler for many years. He loves this line of work and believes the income is tax-free. a. Use an available tax research service to determine whether J.C.’s thinking is correct. Is the answer to this question found in the In
> Georgette has identified a 1983 court case that appears to answer her research question. What must she do to determine if the case still represents “current” law?
> Justine would like to clarify her understanding of a code section recently enacted by Congress. What tax law sources are available to assist Justine?
> For each of the following citations, identify the type of authority (statutory, administrative, or judicial) and explain the citation. a. IRC Sec. 280A(c)(5) b. Rev. Proc. 2004-34, 2004-1 C.B. 911 c. Lakewood Associates, RIA TC Memo 95-3566. d. TAM 20042
> For each of the following citations identify the type of authority (statutory, administrative, or judicial) and explain the citation. a. Reg. Sec. 1.111-1(b) b. IRC Sec. 469(c)(7)(B)(i) c. Rev. Rul. 82-204, 1982-2 C.B. 192 d. Amdahl Corp., 108 TC 507 (19
> Robert has found a “favorable” authority directly on point for his tax question. If the authority is a court case, which court would he prefer to have issued the opinion? Which court would he least prefer to have issued the opinion?
> Juanita, a Texas resident (5th Circuit), is researching a tax question and finds a 5th Circuit case ruling that is favorable and a 9th Circuit case that is unfavorable. Which circuit case has more “authoritative weight” and why? How would your answer cha
> Under what circumstances would the IRS issue an acquiescence? A nonacquiescence? An action on decision?
> Benita is concerned that she will not be able to complete her tax return by April 15. Can she request an extension to file her return? By what date must she do so? Assuming she requests an extension, what is the latest date that she could file her return
> What is the key factor in shifting income from a business to its owners? What are some methods of shifting income in this context?
> What are the basic differences between regulations, revenue rulings, and private letter rulings?
> Jackie has just opened her copy of the Code for the first time. She looks at the table of contents and wonders why it is organized the way it is. She questions whether it makes sense to try and understand the Code’s organization. What are some reasons wh
> Compare and contrast the three trial-level courts.
> What are the tax practitioner’s standards to avoid a penalty for recommending a tax return position?
> What are some of the most common civil penalties imposed on taxpayers?
> What are the basic differences between civil and criminal tax penalties?
> What is Circular 230?
> Levi is recommending a tax return position to his client. What standard must he meet to satisfy his professional standards? What is the source of this professional standard?
> How are citators used in tax research?
> Describe some ways in which taxes affect the political process in the United States.
> Armando identifies a tax research question as being a question of fact. What types of authorities should he attempt to locate in his research?
> What are some ways that a parent could effectively shift income to a child? What are some of the disadvantages of these methods?
> Discuss the basic differences between annotated and topical tax services. How are these services used in tax research?
> Amber is a tax expert, whereas Rob is a tax novice. Explain how their process in identifying tax issues may differ.
> In writing a research memo, what types of facts should be included in the memo?
> What is the difference between open and closed facts? How is this distinction important in conducting tax research?
> Locate the IRS Web site at http://www.irs.gov/. For every $100 the IRS collected, how much was spent on the IRS collection efforts? What tax system criterion does this information help you to evaluate with respect to the current U.S. tax system?
> Congress would like to increase tax revenues by 10 percent. Assume that the average taxpayer in the United States earns $65,000 and pays an average tax rate of 15 percent. If the income effect is in effect for all taxpayers, what average tax rate will re
> Lorenzo is considering starting a trucking company either in Texas or Oklahoma. He will relocate his family, which includes his wife, children, and parents, to reside in the same state as his business. What types of taxes may influence his decision of wh
> Jorge is puzzled that the IRS and his CPA could legitimately reach different conclusions on a tax issue. Why does this happen?
> What are some aspects of business that require knowledge of taxation? What are some aspects of personal finance that require knowledge of taxation?
> George and Weezy received $30,200 of Social Security benefits this year ($12,000 for George; $18,200 for Weezy). They also received $5,000 of interest from jointly owned City of Ranburne Bonds and dividend income. What amount of the Social Security benef
