Which of the following communications between an accountant and client are not privileged? a. In a closed-door meeting, the accountant orally advises the client to set up a foreign subsidiary to shift taxable income to a low-tax jurisdiction. b. In a closed-door meeting, the accountant submits to the client a plan for shifting taxable income to a low-tax jurisdiction. c. In soliciting professional advice relating to criminal fraud, the client informs the accountant that he (the client) lied to the IRS.
> A simple trust has the following receipts and expenditures for the current year. The trust instrument classifies gains, losses, and trustee’s fees as part of principal. Dividends……â€&b
> List some major differences between the taxation of individuals and trusts.
> Suellen Symmes died on January 15, 2017. Her estate elected a November 30 year end. The executor projects that the estate will receive interest income of $50,000 by November 30, 2017, and will have no other gross income. In addition, it will have no dedu
> A complex trust has taxable income of $29,900 in 2017. The $29,900 includes $5,000 of rental income and $25,000 of taxable interest income, reduced by the $100 personal exemption. The trust makes no distributions during the year. What is the trust’s tota
> Raj Kothare funded an irrevocable simple trust in May of last year. The trust benefits Raj’s son for life and grandson upon the son’s death. One of the assets he transferred to the trust was Webbco stock, which had a $35,000 FMV on the transfer date. Raj
> For the first five months of its existence (August through December 2017), the Estate of Amy Ennis had gross income (net of expenses) of $7,000 per month. For January through July 2018, the executor estimates that the estate will have gross income (net o
> Art Rutter sold an apartment building in May 2017 for a small amount of cash and a note payable with payments beginning in 2018. Principal and interest payments are due annually on the note in April of 2018 through 2022. Art died in August 2017. He wille
> a. When are fiduciary income tax returns due? b. Must estates and trusts pay estimated income taxes?
> What is the benefit of the 65-day rule?
> Amelia, a widow, is in the top marginal income tax bracket and has considerably more income than she can spend. She is considering creating a trust for the benefit of her adult son Jason but is reluctant to make it irrevocable, at least presently. If she
> Can a client escape the grantor trust rules by providing in a trust instrument that income is payable to a nephew for 20 years and that the trust assets pass at the end of 20 years to the client’s spouse?
> Describe three situations that cause trusts to be subject to the grantor trust rules.
> Given the tax rate schedule for trusts, what reasons (tax and/or nontax) exist today for creating a trust?
> a. Describe to a client what income in respect of a decedent (IRD) is. b. Describe to the client one tax disadvantage and one tax advantage that occur because of the classification of a receipt as IRD.
> Determine the accuracy of the following statement: Under the tier system, beneficiaries who receive mandatory distributions of income are more likely to be taxed on the entire distributions they receive than are beneficiaries who receive discretionary di
> Describe the tier system for taxing trust beneficiaries.
> The Mary Morgan Trust, a simple trust governed by the Uniform Act, sells one capital asset in the current year. The sale results in a loss. a. When will the capital loss produce a tax benefit for the trust or its beneficiary? Explain. b. Would the resu
> When does the NOL of a trust or estate produce tax deductions for the beneficiaries?
> a. Describe the shortcut approach for verifying that the amount calculated as a simple trust’s taxable income is correct. b. Can a shortcut verification process be applied for trusts and estates that accumulate some of their income? Explain.
> The IRS is disputing a deduction reported on your Year 1 tax return, which you filed on April 12 of Year 2. On April 4 of Year 5, the IRS audit agent asks you to waive the statute of limitations for the entire return so as to give her additional time to
> Harold and Betty, factory workers who until this year prepared their own individual tax returns, purchased an investment from a broker last year. Although they reviewed the prospectus for the investment, the broker explained the more complicated features
> Art is named executor of the Estate of Stu Stone, his father, who died on February 3 of the current year. Art hires Larry to be the estate’s attorney. Larry advises Art that the estate must file an estate tax return but does not mention the due date. Art
> Assume that a trust collects rental income and interest income on tax-exempt bonds. Will a portion of the rental expenses, such as repairs, have to be allocated to tax-exempt income and thereby become nondeductible? Explain.
> Five years ago, Spyros Dietrich wanted to sell IMPEXT, Inc., his wholly owned import export business. He also wanted to avoid recognizing the substantial gain that would result from his selling his IMPEXT shares on the open market. Spyros’ basis in the s
> A colleague comes to you with the following investment proposal that he would like to market for Client: • Client obtains cash of $60,000 from Bank. • Bank loan agreement specifies that $40,000 of this amount represents principal; the remaining $20,
> On April 15 of Year 2, Adam and Renee Tyler jointly filed a Year 1 return that reported AGI of $68,240 ($20,500 attributable to Renee) and a tax liability of $3,050. They paid this amount in a timely fashion. On their return, the Tylers claimed a $18,405
> Gene employed his attorney to draft identical trust instruments for each of his three minor children: Judy (age 5), Terry (age 7), and Grady (age 11). Each trust instrument names the Fourth City Bank as trustee and states that the trust is irrevocable. I
> The IRS audits Tan’s individual return for the current year and assesses a $9,000 deficiency, $2,800 of which results from Tan’s negligence. What is the amount of Tan’s negligence penalty? Does the penalty bear interest?
> Ed’s tax liability for last year was $24,000. Ed projects that his tax for this year will be $34,000. Ed is self-employed and, thus, will have no withholding. His AGI for last year did not exceed $150,000. How much estimated tax should Ed pay for this ye
> Ted’s current year return reported a tax liability of $1,800. Ted’s wage withholding for the current year was $2,200. Because of his poor memory, Ted did not file his current year return until May 28 of the following year. What penalties (if any) does Te
> Amy files her current year tax return on August 13 of the following year. She pays the amount due without requesting an extension. The tax shown on her return is $24,000. Her current year wage withholding amounts to $15,000. Amy pays no estimated taxes a
> Which of the following communications between an accountant and client are privileged? a. For tax preparation purposes only, client informs the accountant that she contributed $10,000 to a homeless shelter. b. Client informs the accountant that he forg
> Your client, Envirocosmetics, recently has filed for bankruptcy. In the course of bankruptcy proceedings, you (a) prepare a plan of reorganization that alters the rights of preferred stockholders, (b) notify the Envirocosmetics’ creditors of an impending
> a. Are net accounting income and DNI always the same amount? b. If not, explain a common reason for a difference. c. Are capital gains usually included in DNI?
> Your client, Meade Technical Solutions, proposes to merge with Dealy Cyberlabs. In advance of the merger, you (a) issue an opinion concerning the FMV of Dealy, (b) prepare pro forma financials for the merged entity to be, (c) draft Meade shareholder reso
> Maria, a calendar year taxpayer, files her Year 1 individual return on March 12 of Year 2 and pays the amount of tax due. She later discovers that she overlooked some deductions that she should have reported on the return. By what date must she file a cl
> Frank, a calendar year taxpayer, reports $100,000 of gross income and $60,000 of taxable income on his Year 1 return, which he files on March 12 of Year 2. He fails to report on the return a $52,000 long-term capital gain and a $10,000 short term capital
> Luis, a bachelor, owes $56,000 of additional taxes, all due to fraud. a. What is the amount of Luis’ civil fraud penalty? b. What criminal fraud penalty might the government impose on Luis under Sec. 7201?
> Refer to Part c of the previous problem. Assume that Carmen discloses her position, which is not frivolous. How would your original answer change assuming the item does not involve a tax shelter? From problem 50 Part C: c. How would your answer to Parts
> The IRS audits Pearl’s current year individual return and determines that, among other errors, she negligently failed to report dividend income of $8,000. The deficiency relating to the dividends is $2,240. The IRS proposes an additional $12,000 deficien
> Amir’s projected tax liability for the current year is $23,000. Although Amir has substantial dividend and interest income, he does not pay any estimated taxes. Amir’s withholding for January through November of the current year is $1,300 per month. He w
> Pam’s prior year (Year 1) income tax liability was $23,000. Her current year (Year 2) AGI did not exceed $150,000. On April 2 of next year (Year 3), Pam, a calendar year taxpayer, timely files her current year individual return, which indicates a $30,000
> Refer to the preceding problem. Assume that Ed expects his income for this year to decline and his tax liability for this year to be only $15,000. What minimum amount of estimated taxes should Ed pay this year? What problem will Ed encounter if he pays t
> Refer to the preceding problem. a. Will Carl owe interest? If so, on what amount and for how many days? Assume that any interest period begins on April 16 of a non–leap year. b. Assume the applicable interest rate is 6%. Compute Carl’s interest payable
> A client inquires about the significance of distributable net income (DNI). Explain.
> Carl’s tax liability for last year was $19,000, and his AGI did not exceed $150,000. Carl requests an automatic extension for filing his current year individual return but does not pay any additional tax with his extension request. By April 15 of the fol
> Bob, a calendar year taxpayer, files his current year individual return on July 17 of the following year without having requested an extension. His return indicates an amount due of $5,100. Bob pays this amount on November 3 of the following year. What a
> The taxes shown on Hu’s tax returns for Year 1 and Year 2 are $5,000 and $8,000, respectively. Hu’s wage withholding for Year 2 was $5,200, and she paid no estimated taxes. Hu filed her Year 2 return on March 18 of Year 3, but she did not have sufficient
> In the preceding problem, how would your answers change if Amy instead files her return on June 18 and, on September 8 pays the amount due? Assume her wage withholding tax amounts to a. $19,000 b. $24,500 c. How would your answer to Part a change if A
> Joe and Joan file a joint return for the current year. They are in the 35% marginal tax bracket. Unbeknownst to Joe, Joan fails to report on the return the $8,000 value of a prize she won. She, however, used the prize to buy Joe a new boat. Is Joe entitl
> Wilma earns no income in the current year but files a joint return with her husband, Hank. The return reports $40,000 of gross income and AGI, and $24,000 of taxable income. Hank realized $12,000 of gambling winnings (no losses) in the current year but f
> Refer to the previous problem. Assume Frank subsequently commits fraud with respect to his Year 1 return as late as October 8 of Year 3. When does the limitations period for charging Frank with criminal tax fraud expire? From problem 54: Frank, a calend
> Hal and Wanda, his wife, are in the 35% marginal tax bracket in the current year. Wanda fraudulently omits from their joint return $50,000 of gross income. Hal does not participate in or know of her fraudulent act. Hal, however, overstates his deductions
> Carmen’s current year individual return reports a $6,000 deduction for a questionable item not relating to a tax-shelter. Carmen does not make a disclosure regarding this item. The IRS audits Carmen’s return, and she consents to a deficiency. As a result
> What is the amount of the personal exemption for trusts and estates?
> Explain to a client in laymen’s language what portion of the income of an estate or trust is subject to taxation at the fiduciary level.
> What assets do money market mutual funds acquire? Could an individual investor with $12,345 to invest in a safe, short-term security acquire these assets?
> What differentiates a traditional savings account at a commercial bank from a money market mutual fund? Are investments in money market funds as safe as savings accounts and certificates of deposit with a commercial bank?
> If an investor buys shares in a no-load mutual fund for $31.40 and the share appreciate to $44.60 in a year, what would be the percentage return on the investment? If the fund charges an exit fee of 1 percent, what would be the return on the investment?
> You are given the following information concerning several mutual funds: During the time period, the Standard & Poor’s stock index exceeded the Treasury bill rate by 10.5 percent (i.e., rm 2 rf 5 10.5%). a) Rank the performance of
> Consider the following four investments. a) You invest $3,000 annually in a mutual fund that earns 10 percent annually, and you reinvest all distributions. How much will you have in the account at the end of 20 years? b) You invest $3,000 annually in a m
> How does arbitrage pricing theory advance our understanding of security returns?
> If an investor desires diversification, should he or she seek investments that have a high positive correlation?
> What are the sources of return on an investment? What are the differences among the expected return, the required return, and the realized return?
> What is a diversified portfolio? What type of risk is reduced through diversification? How many securities are necessary to achieve this reduction in risk? What characteristics must these securities possess?
> What is the difference between non diversifiable (systematic) risk and diversifiable (unsystematic) risk?
> A stock sells for $10 per share. You purchase 100 shares for $10 a share (i.e., for $1,000), and after a year the price rises to $17.50. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement wa
> How are the capital market line and the security market line different? What does each represent?
> If the correlation coefficient for a stock and the market equals 0, what is the market risk associated with the stock?
> What is a beta coefficient? What do beta coefficients of 0.5, 1.0, and 1.5 mean?
> Indifference curves used in portfolio theory relate risk and return. How is the portfolio’s risk measured? If one investor’s indifference curves are steeper than another investor’s, what does that indicate about their respective willingness to bear risk?
> If the expected returns of two stocks are the same but the standard deviations of the returns differ, which security is to be preferred?
> You are given the following information: a) What are the expected returns and standard deviations of a portfolio consisting of: 1. 100 percent in stock A? 2. 100 percent in stock B? 3. 50 percent in each stock? 4. 25 percent in stock A and 75 percent in
> You are given the following information concerning two stocks: a) What is the expected return on a portfolio consisting of 40 percent in stock A and 60 percent in stock B? b) What is the standard deviation of this portfolio? c) Discuss the risk and retu
> A portfolio consists of assets with the following expected returns a) What is the expected return on the portfolio? b) What will be the expected return if the individual reduces the holdings of the AT&T stock to 15 percent and puts the funds into re
> You are considering three stocks with the following expected dividend yields and capital gains: a) What is the expected return on each stock? b) How may transactions costs and capital gains taxes affect your choices among the three securities? Divid
> Given the returns on a domestic stock and a foreign stock, what are the correlation coefficients relating the returns for the 20 years and for each five-year time period:1993–1997, 1998–2002, 2003–200
> A speculator sells a stock short for $50 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $42. What is the percentage return on the position (excluding the impact of any interest expens
> This problem illustrates how beta coefficients are estimated and uses material covered in the appendix to this chapter. It may be answered using any program that performs linear regression analysis such as Excel. The following information is given: Using
> Using the material on the standard deviation and the coefficient of variation presented in the appendix to this chapter, rank the following investments with regard to risk. a) Investment Returns b) Investment Returns Stock A Stock B Stock A Stock B
> You are considering purchasing two stocks with the following possible returns and probabilities of occurrence: Compare the expected returns and risk (as measured by the standard deviations) of each investment. Which investment offers the higher expected
> What is the return on a stock according to the security market line if the risk-free rate is 6 percent, the return on the market is 10 percent, and the stock’s beta is 1.5? If the beta had been 2.0, what would be the return? Is this higher return consist
> What is the beta of a portfolio consisting of one share of each of the following stocks, given their respective prices and beta coefficients? How would the portfolio beta differ if (a) the investor purchased 200 shares of stocks B and C for every 100 sh
> Floria Scarpia believes that many of her clients could benefit from using international investments to diversify their portfolios, but many are reluctant to invest abroad—especially since they may be unfamiliar with foreign economies an
> Although investing requires the individual to bear risk, the risk can be controlled through the construction of diversified portfolios and by excluding any portfolio that offers an inferior return for a given amount of risk. While this concept seems obvi
> In Chapter 1, you selected ten stocks and invested $10,000 in each. This assignment adds to what you have already done. a. What does your portfolio’s beta coefficient tell you about the tendency of the portfolio to move with the market? b. Find the beta
> What is a capital gain, and is it subject to taxation? May capital losses be used to offset capital gains and income from other sources?
> What is a tax shelter? Does a tax shelter imply that the individual avoids paying taxes?
> An investor sells a stock short for $36 a share. A year later, the investor covers the position at $30 a share. If the margin requirement is 60 percent, what is the percentage return earned on the investment? Redo the calculations, assuming the price of
> What is the difference between an individual’s forecasted balance sheet and forecasted cash budget? Which of the following should be part of an individual’s balance sheet and which should be part of the cash budget? a) Mortgage b) Principal repayment to
> What are the steps for constructing a financial plan? What role do financial statements play in the construction of financial plans?
> What are the three forms of the efficient market hypothesis? What are possible exceptions (anomalies) to the efficient market hypothesis?
> Does the efficient market hypothesis suggest that an investor cannot outperform the market? What effect does the dissemination of information (as required by the full disclosure laws) have on the efficiency of financial markets? How rapidly do securities
> Taxes affect financial planning. Go to an Internet site such as the IRS website (www.irs.ustreas.gov) and answer the following questions. Other possible sites include TurboTax (www.turbotax.intuit.com) or 1040.com (www.1040.com). a) What are the margina
> What differentiates a deductible IRA from a Roth IRA? What conditions favor the Roth IRA?
> What are IRA, 401(k), and Keogh plans? What are their primary advantages for investors?
> Which of the following illustrates a tax shelter? a) Dividend income b) Interest earned on a savings account c) A stock purchased for $10 that is currently worth $25 d) An IRA e) A Roth account f) The sale of a stock purchased in 2005 for a $1,000 capita
> You are in the 25 percent income tax bracket. What are the taxes owed or saved if you a) Contribute $2,000 to a 401(k) plan b) Contribute $2,000 to a Roth IRA c) Withdraw $2,000 from a traditional IRA d) Withdraw $2,000 from a Keogh account
> You are in the 28 percent income tax bracket and pay long-term capital gains taxes of 15 percent. What are the taxes owed or saved in the current year for each of the following sets of transactions? a) You buy 100 shares of ZYX for $10 and after seven mo
> Ms. Tejal Gandhi has decided that the stock of Small Cap Inc is overvalued at $4 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms. Gandhi must put up the entire value of the stock when
