Trip Garage, Inc. (459 Ellis Avenue, Harrisburg, PA 17111), is an accrual basis taxpayer that repairs automobiles. In late December 2015, the company repaired Samuel Mosley’s car and charged him $1,000. Samuel did not think the problem had been fixed, so he refused to pay; thus, Trip refused to release the auto- mobile. In early January 2016, Trip made a few adjustments under the hood; Trip then convinced Samuel that the automobile was working properly. At that time, Samuel agreed to pay only $900 because he did not have the use of the car for a week. Trip said “fine,” accepted the $900, and released the automobile to Samuel. An IRS agent thinks Trip, as an accrual basis taxpayer, should report $1,000 of income in 2015, when the work was done, and then deduct a $100 business loss in 2016. Prepare a memo to Susan Apple, the treasurer of Trip, with your recommended treatment for the disputed income.
> Determine the realized, recognized, and postponed gain or loss and the new basis for each of the following like-kind exchanges: Fair Market Value of Adjusted Basis of Old Asset Вoot Boot Given New Asset Received $ 7,000 $ -0- $12,000 $4,000 a. b. 14,
> The outstanding stock in Red, Blue, and Green Corporations, each of which has only one class of stock, is owned by the following unrelated individuals: a. Determine whether Red, Blue, and Green Corporations constitute a brother-sister controlled group.
> Cardinal Properties, Inc., exchanges real estate used in its business along with stock for real estate to be held for investment. The stock transferred has an adjusted basis of $45,000 and a fair market value of $50,000. The real estate transferred has a
> Rose Company owns Machine A (adjusted basis of $12,000 and fair market value of $15,000), which it uses in its business. Rose sells Machine A for $15,000 to Aubry (a dealer) and then purchases Machine B for $15,000 from Joan (also a dealer). Machine B wo
> What is the basis of the new property in each of the following exchanges? a. Apartment building held for investment (adjusted basis of $145,000) for office building to be held for investment (fair market value of $225,000). b. Land and building used as
> Tulip, Inc., would like to dispose of some land it acquired four years ago because the land will not continue to appreciate. Its value has increased by $50,000 over the four-year period. The company also intends to sell stock that has declined in value
> Maple Company owns a machine (adjusted basis of $90,000; fair market value of $125,000) that it uses in its business. Maple exchanges it for another machine (worth $100,000) and stock (worth $25,000). Determine Maple’s: a. Realized and recognized gain o
> Starling Corporation exchanges a yellow bus (used in its business) for Robin Corporation’s gray bus and some garage equipment (used in its business). The assets have the following characteristics: a. What are Starling’s recognized gain or loss and basis
> Tanya Fletcher owns undeveloped land (adjusted basis of $80,000 and fair market value of $92,000) on the East Coast. On January 4, 2015, she exchanges it with Martin (an unrelated party) for undeveloped land on the West Coast and $3,000 cash. Martin has
> A warehouse owned by M&S (a partnership) and used in its business (i.e., to store inventory) is being condemned by the city to provide a right-of-way for a highway. The warehouse has appreciated by $180,000 based on an estimate of fair market value. In t
> Sue exchanges a sport utility vehicle (adjusted basis of $16,000; fair market value of $19,500) for cash of $2,000 and a pickup truck (fair market value of $17,500). Both vehicles are for business use. Sue believes that her basis for the truck is $17,500
> In each of the following independent situations, determine the corporation’s income tax liability. Assume that all corporations use a calendar year for tax purposes and that the tax year involved is 2015. Taxable Income $ 65,000 Pu
> Surendra’s personal residence originally cost $340,000 (ignore land). After living in the house for five years, he converts it to rental property. At the date of conversion, the fair market value of the house is $320,000. As to the rental property, calcu
> Abby’s home had a basis of $360,000 ($160,000 attributable to the land) and a fair market value of $340,000 ($155,000 attributable to the land) when she converted 70% of it to business use by opening a bed-and-breakfast. Four years after the conversion,
> Sam owns 1,500 shares of Eagle, Inc. stock that he purchased over 10 years ago for $80,000. Although the stock has a current market value of $52,000, Sam still views the stock as a solid long-term investment. He has sold other stock during the year with
> Tyneka inherited 1,000 shares of Aqua, Inc. stock from Joe. Joe’s basis was $35,000, and the fair market value on July 1, 2015 (the date of death), was $45,000. The shares were distributed to Tyneka on July 15, 2015. Tyneka sold the stock on July 30, 201
> Sheila sells land to Elane, her sister, for the fair market value of $40,000. Six months later when the land is worth $45,000, Elane gives it to Jacob, her son. (No gift tax resulted.) Shortly thereafter, Jacob sells the land for $48,000. a. Assuming th
> Dan bought a hotel for $2,600,000 in January 2011. In May 2015, he died and left the hotel to Ed. While Dan owned the hotel, he deducted $289,000 of cost recovery. The fair market value in May 2015 was $2,800,000. The fair market value six months later w
> On September 18, 2015, Gerald received land and a building from Frank as a gift. Frank’s adjusted basis and the fair market value at the date of the gift are as follows: No gift tax was paid on the transfer. a. Determine Geraldâ
> Simon owns stock that has declined in value since acquired. He has decided either to give the stock to his nephew, Fred, or to sell it and give Fred the proceeds. If Fred receives the stock, he will sell it to obtain the proceeds. Simon is in the 15% tax
> Nicky receives a car from Sam as a gift. Sam paid $48,000 for the car. He had used it for business purposes and had deducted $10,000 for depreciation up to the time he gave the car to Nicky. The fair market value of the car is $33,000. a. Assuming that
> Roberto has received various gifts over the years. He has decided to dis- pose of the following assets he received as gifts: a. In 1951, he received land worth $32,000. The donor’s adjusted basis was $35,000. Roberto sells the land for $95,000 in 2015.
> Egret Corporation, a calendar year C corporation, was formed on March 6, 2015, and opened for business on July 1, 2015. After its formation but prior to opening for business, Egret incurred the following expenditures: Accounting …………………………………. $ 7,000 A
> Rod Clooney purchases Agnes Mitchell’s sole proprietorship for $990,000 on August 15, 2015. The assets of the business are as follows: Rod and Agnes agree that $50,000 of the purchase price is for Agnes’s five-year co
> Finch, Inc., purchases 1,000 shares of Bluebird Corporation stock on October 3, 2015, for $300,000. On December 12, 2015, Finch purchases an additional 750 shares of Bluebird stock for $210,000. According to market quotations, Bluebird stock is selling f
> Yancy’s personal residence is condemned as part of an urban renewal project. His adjusted basis for the residence is $480,000. He receives condemnation proceeds of $460,000 and invests the proceeds in stocks and bonds. a. Calculate Yancy’s realized and
> Pam owns a personal-use boat that has a fair market value of $35,000 and an adjusted basis of $45,000. Pam’s AGI is $100,000. Calculate the realized and recognized gain or loss if: a. Pam sells the boat for $35,000. b. Pam exchanges the boat for anothe
> Andy reported the following gains and losses from the sale of capital assets. Loss on Pigeon Corporation stock (held 9 months) ………………………… ($14,000) Gain on painting (held for 2 years as an investment) ………………………. 5,000 Gain on unimproved land (held for
> During the year, Olivia recorded the following transactions involving capital assets. Gain on the sale of unimproved land (held as an investment for 4 years) …………………. $ 4,000 Loss on the sale of a camper (purchased 2 years ago and used for family vacat
> Vic, who was experiencing financial difficulties, was able to adjust his debts as follows. Determine the Federal income tax consequences to Vic. a. Vic is an attorney. Vic owed his uncle $25,000. The uncle told Vic that if he serves as the executor of t
> Laura recently was diagnosed with cancer and has begun chemotherapy treatments. A cancer specialist has given Laura less than one year to live. She has incurred sizable medical bills and other general living expenses and is in need of cash. Therefore, La
> The Egret Company has a 40% combined Federal and state marginal tax rate. Egret’s board estimates that, if its current president should die, the company would incur $200,000 in costs to find a suitable replacement. In addition, profits on various project
> Tonya, a Virginia resident, inherited a $100,000 State of Virginia bond this year. Her marginal Federal income tax rate is 35%, and her marginal state tax rate is 5%. The Virginia bond pays 3.3% interest, which is not subject to Virginia income tax. Alte
> Gull Corporation, a cash method, calendar year C corporation, was formed and began business on November 1, 2015. Gull incurred the following expenses during its first year of operations (November 1, 2015–December 31, 2015): Expenses of temporary director
> Tammy, a resident of Virginia, is considering whether to purchase a North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. Tammy is aware that State of Virginia bonds of comp
> How does the tax benefit rule apply in the following cases? a. In 2013, the Orange Furniture Store, an accrual method taxpayer, sold furniture on credit for $1,000 to Sammy. Orange’s cost of the furniture was $600. In 2014, Orange took a bad debt deduct
> Vito is the sole shareholder of Vito, Inc. The corporation also employs him. On June 30, 2015, Vito borrowed $8,000 from Vito, Inc., and on July 1, 2016, he borrowed an additional $10,000. Both loans were due on demand. No interest was charged on the loa
> Indicate whether the imputed interest rules apply in the following situations. a. Mike loaned his sister $90,000 to buy a new home. Mike did not charge interest on the loan. The Federal rate was 5%. Mike’s sister had $900 of investment income for the ye
> Ridge is a generous individual. During the year, he made interest-free loans to various family members when the Federal interest rate was 3%. What are the Federal tax consequences of the following loans by Ridge? a. On June 30, Ridge loaned $12,000 to
> Brad is the president of the Yellow Corporation. He and other members of his family control the corporation. Brad has a temporary need for $50,000, and the corporation has excess cash. He could borrow the money from a bank at 9%, and Yellow is earning 6%
> Roy decides to buy a personal residence, and he goes to the bank for a $150,000 loan. The bank tells Roy that he can borrow the funds at 4% if his father will guarantee the debt. Roy’s father, Hal, owns a $150,000 CD currently yielding 3.5%. The Federal
> Alva received dividends on her stocks as follows. Amur Corporation (a French corporation whose stock is traded on an established U.S. securities market) $60,000 Blaze, Inc., a Delaware corporation 40,000 Grape, Inc., a Virginia corporation 22,000 a. Al
> Your client is a new partnership, ARP Associates, which is an engineering consulting firm. Generally, ARP bills clients for services at the end of each month. Client billings are about $50,000 each month. On average, it takes 45 days to collect the recei
> Dr. Randolph, a cash basis taxpayer, knows that he will be in a lower marginal tax bracket next year. To take advantage of the expected decrease in his tax rate, Dr. Randolph instructs his office manager to delay filing the medical insurance claims for s
> In each of the following independent situations, determine the dividends received deduction. Assume that none of the corporate shareholders owns 20% or more of the stock in the corporations paying the dividends Almond Blond Cherry Corporation Corpo
> Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effects of each of the following transactions on the company’s 2015 gross income assuming that the company uses any available options to defer
> Accounting students understand that the accrual method of accounting is superior to the cash method for measuring the income and expenses from an ongoing business for financial reporting purposes. Thus, CPAs advise their clients to use the accrual method
> Each Saturday morning, Ted makes the rounds of the local yard sales. He has developed a keen eye for bargains, but he cannot use all of the items he thinks are “real bargains.” Ted has found a way to share the benefits of his talent with others. If Ted s
> Al is a medical doctor who conducts his practice as a sole proprietor. During 2015, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2014. At the end of 2015, Al held accounts receivable of
> Determine the taxpayer’s gross income for tax purposes in each of the following situations. a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for corporate stock with a fair market value of $12,000 at the time of the
> Julie is considering three alternative investments of $10,000. Julie is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The al
> The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company actually is more concerne
> Determine Amos’s gross income in each of the following cases. a. In the current year, Amos purchased an automobile for $25,000. As part of the transaction, Amos received a $1,500 rebate from the manufacturer. b. Amos sold his business. In addition to t
> Dolly is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Dolly fulfilled the customer’s request. The cus
> Emily Patrick (36 Paradise Road, Northampton, MA 01060) formed Teal Corporation a number of years ago with an investment of $200,000 of cash, for which she received $20,000 in stock and $180,000 in bonds bearing interest of 8% and maturing in nine years.
> The roof of your corporation’s office building recently suffered some damage as the result of a storm. You, the president of the corporation, are negotiating with a carpenter who has quoted two prices for the repair work: $600 if you pay in cash (“foldin
> Determine the taxpayer’s current-year (1) economic income and (2) gross income for tax purposes from the following events. a. Sam’s employment contract as chief executive of a large corporation was terminated, and he was paid $500,000 not to work for
> Howard buys wrecked cars and stores them on his property. Recently, he purchased a 1990 Ford Taurus for $400. If he can sell all of the usable parts, his total proceeds from the Taurus will be over $2,500. As of the end of the year, he has sold only the
> Liz and Doug were divorced on July 1 of the current year after 10 years of marriage. Their current year’s income received before the divorce included: Doug’s salary ………………………………………………………………………. $41,000 Liz’s salary ……………………………………………………………………………. 55,00
> George and Aimee are married. George has wage income of $190,000 and Aimee has a sole proprietorship that generated net income of $85,000. They also have interest and dividend income of $21,000. Compute any NIIT and Additional Medicare Tax they owe for t
> Compute the 2015 tax liability and the marginal and average tax rates for the following taxpayers (use the 2015 tax rate schedules in Appendix A for this purpose). a. Chandler, who files as a single taxpayer, has taxable income of $91,000. b. Laza
> Paul and Sonja, who are married, had itemized deductions of $8,200 and $400, respectively, during 2015. Paul suggests that they file separately—he will itemize his deductions from AGI, and she will claim the standard deduction. a. Evaluate Paul’s sugges
> In 2015, Dominique and Felix are married and file a joint tax return. Their AGI is $312,650 and they claim three exemptions. Determine their total exemption amount for 2015.
> Compute the 2015 standard deduction for the following taxpayers. a. Margie is 15 and claimed as a dependent by her parents. She has $800 in dividend income and $1,400 in wages from a part-time job. b. Ruby and Woody are married and file a joint tax ret
> In 2015, Simon, age 12, has interest income of $800 and dividend income of $4,000. He has no investment expenses. His parents have taxable income of $80,200 and file a joint tax return. Assume that no parental election is made. Deter- mine Simon’s net un
> Red Corporation wants to set up a manufacturing facility in a midwestern state. After considerable negotiations with a small town in Ohio, Red accepts the following offer: land (fair market value of $3 million) and cash of $1 million. a. How much gain or
> Peyton sells an office building and the associated land on May 1, 2015. Under the terms of the sales contract, Peyton is to receive $1,600,000 in cash. The purchaser is to assume Peyton’s mortgage of $950,000 on the property. To enable the purchaser to o
> Arianna’s personal residence has an adjusted basis of $230,000 and a fair market value of $210,000. Arianna converts the personal residence to rental property. What is Arianna’s gain basis? What is her loss basis?
> Lisa sells business property with an adjusted basis of $130,000 to her son, Alfred, for its fair market value of $100,000. a. What is Lisa’s realized and recognized gain or loss? b. What is Alfred’s recognized gain or loss if he subsequently sells the pr
> Luciana, a nonshareholder, purchases a condominium from her employer for $85,000. The fair market value of the condominium is $120,000. What is Luciana’s basis in the condominium and the amount of any income as a result of this purchase?
> Logan and Johnathan exchange land, and the exchange qualifies as like kind under § 1031. Because Logan’s land (adjusted basis of $85,000) is worth $100,000 and Johnathan’s land has a fair market value of $80,000, Johnathan also gives Logan cash of $20,00
> Lefty completes the following capital asset transactions. Compute Lefty’s recognized capital gain or loss from these transactions. Long-term gain………. $10,000 Short-term gain………. 4,000 Short-term loss………. 25,000
> Leilei operates a sole proprietorship, using the accrual basis of tax accounting. Last year, she claimed a $10,000 bad debt deduction for a receivable from Jackie. But this year, Jackie sent her a check for $7,000, which Leilei accepted in full satisfact
> Lisbeth makes the following interest-free loans during the year. The relevant Federal interest rate is 5 percent, and none of the loans are motivated by tax avoidance. All of the loans were outstanding for the last six months of the tax year. Identify th
> Champ received a $10,000 distribution from NeatCo, a U.S. C corporation. NeatCo’s earnings and profits for the year totaled $6,000. How much dividend income does Champ recognize? What Federal income tax rate applies to the dividend if Champ’s ordinary in
> Ida, who has AGI of $80,000 before considering rental activities, is active in three separate real estate rental activities. I da has a marginal tax rate of 28%. She has $12,000 of losses from Activity A, $18,000 of losses from Activity B, and income of
> In January 2015, Wanda transferred machinery worth $200,000 (adjusted basis of $30,000) to a controlled corporation, Oriole, Inc. The transfer qualified under § 351. Wanda had deducted $165,000 of depreciation on the machinery while it was used in her pr
> During the current year, Gene, a CPA, performs services as follows: 1,800 hours in his tax practice and 50 hours in an apartment leasing operation in which he has a 15% interest. Because of his oversight duties, Gene is considered to be an active partic
> Bonnie and Jake (ages 35 and 36, respectively) are married with no dependents and live in Montana (not a community property state). Because Jake has large medical expenses, they seek your advice about filing separately to save taxes. Their income and exp
> You have just met with Scott Myers (603 Pittsfield Drive, Champaign, IL 61821), a successful full-time real estate developer and investor. During your meeting, you discussed his tax situation because you are starting to prepare his current Federal income
> Five years ago, Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2014, his amount at risk in the activity was $30,000. His shares of the income and losses were as follows: Year
> Jonathan, a physician, earns $200,000 from his practice. He also receives $18,000 in dividends and interest from various portfolio investments. During the year, he pays $45,000 to acquire a 20% interest in a partnership that produces a $300,000 loss. Com
> Grace acquired an activity four years ago. The loss from the activity is $50,000 in the current year (at-risk basis of $40,000 as of the beginning of the year). Without considering the loss from the activity, she has gross income of $140,000. If the acti
> A number of years ago, Lee acquired a 20% interest in the BlueSky Partner- ship for $60,000. The partnership was profitable through 2014, and Lee’s amount at risk in the partnership interest was $120,000 at the beginning of 2015. BlueSky incurred a loss
> The end of the year is approaching, and Maxine has begun to focus on ways of minimizing her income tax liability. Several years ago, she purchased an investment in Teal Limited Partnership, which is subject to the at-risk and the passive activity loss ru
> Kristin Graf (123 Baskerville Mill Road, Jamison, PA 18929) is trying to decide how to invest a $10,000 inheritance. One option is to make an additional investment in Rocky Road Excursions in which she has an at-risk basis of $0, suspended losses under t
> Rene retired from public accounting after a long and successful career of 45 years. As part of her retirement package, she continues to share in the profits and losses of the firm, albeit at a lower rate than when she was working full- time. Because Rene
> Alice and Jane form Osprey Corporation. Alice transfers property, basis of $25,000 and fair market value of $200,000, for 50 shares in Osprey Corporation. Jane transfers property, basis of $50,000 and fair market value of $165,000, and agrees to serve as
> John, an engineer, operates a separate business that he acquired eight years ago. If he participates 85 hours in the business and it incurs a loss of $34,000, under what circumstances can John claim an active loss?
> In the current year, White, Inc., earns $400,000 from operations and receives $36,000 in dividends and interest from various portfolio investments. White also pays $150,000 to acquire a 20% interest in a passive activity that produces a $200,000 loss. a
> Leon sells his interest in a passive activity for $100,000. Determine the tax effect of the sale based on each of the following independent facts: a. Adjusted basis in this investment is $35,000. Losses from prior years that were not deductible due to t
> Sarah has investments in four passive activity partnerships purchased several years ago. Last year, the income and losses were as follows: Activity Income (Loss) A ……………………………………………………. $ 30,000 B …
> Jorge owns two passive investments, Activity A and Activity B. He plans to dispose of Activity A in the current year or next year. Juanita has offered to buy Activity A this year for an amount that would produce a taxable passive gain to Jorge of $115,0
> A number of years ago, Kay acquired an interest in a partnership in which she is not a material participant. Kay’s basis in her partnership interest at the beginning of 2014 is $40,000. Kay’s share of the partnership loss is $35,000 in 2014, while her sh
> In the current year, Bill Parker (54 Oak Drive, St. Paul, MN 55164) is considering making an investment of $60,000 in Best Choice Partnership. The prospectus provided by Bill’s broker indicates that the partnership investment is not a passive activity an
> In 2014, Fred invested $50,000 in a general partnership. Fred’s interest is not considered to be a passive activity. If his share of the partnership losses is $35,000 in 2014 and $25,000 in 2015, how much can he deduct in each year?
> Mary, a single taxpayer with two dependent children, has the following items of income and expense during 2015: Gross receipts from business…………………………. $144,000 Business expenses…………………………………………. 180,000 Alimony received …………………………………………. 22,000 Interes
> In 2012, John opened an investment account with Randy Hansen, who held himself out to the public as an investment adviser and securities broker. John contributed $200,000 to the account in 2012. John provided Randy with a power of attorney to use the $20
> Early in the year, Charles, Lane, and Tami form the Harrier Corporation for the express purpose of developing a shopping center. All parties are experienced contractors, and they transfer various business assets (e.g., building materials, land) to Harrie
> Olaf lives in the state of Minnesota. A tornado hit the area and damaged his home and automobile. Applicable information is as follows: Because of the extensive damage caused by the tornado, the President designated the area a disaster area. Olaf and h
