Answered: Is Marco behaving ethically? Why or why…

Individual Income Taxes

43rd Edition

ISBN:9780357109731

Author:Hoffman

Publisher:Hoffman

Chapter11: Investor Losses

Section: Chapter Questions

Problem 34P

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Question

Marco decides to take $2,000 from the partnership for the

repair and record it as an expense of the partnership. He believes that this is appropriate

since he needs his car to get to work every day.

Is Marco behaving ethically? Why or why not?
Who is affected by Marco’s decision?
What other alternatives might Marco consider?

Definition Definition Arrangement between two or more people whereby they agree to manage business operations and share its profits and losses in an agreed ratio. The agreement drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, and drawings of a partner.

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Donna does not think she has an income tax problem but would like to discuss her situation with you just to make sure there is no unexpected tax liability. Base your suggestions on the following relevant financial information: a. Donnas share of the SAT Partnership income is 150,000, but none of the income can be distributed because the partnership needs the cash for operations. b. Donnas Social Security benefits totaled 8,400, but Donna loaned the cash received to her nephew. c. Donna assigned to a creditor the right to collect 1,200 of interest on some bonds she owned. d. Donna and her husband lived together in California until September, when they separated. Donna has heard rumors that her husband had substantial gambling winnings since they separated.
Alicia and Rafel are in the process of negotiating a divorce agreement to be finalized in 2019. They both worked during the marriage and contributed an equal amount to the marital assets. They own a home with a fair market value of 400,000 (cost of 300,000) that is subject to a mortgage of 250,000. They have lived in the home for 12 years. They also have investment assets with a cost of 160,000 and a fair market value of 410,000. Thus, the net worth of the couple is 560,000 (400,000 250,000 + 410,000). The holding period for the investments is longer than one year. Alicia would like to continue to live in the house. Therefore, she has proposed that she receive the residence subject to the mortgage, a net value of 150,000. In addition, she would receive 17,600 each year for the next 10 years, which has a present value (at 6% interest) of 130,000. Rafel would receive the investment assets. If Rafel accepts this plan, he must sell one-half of the investments so that he can purchase a home. Assume that you are counseling Alicia. Explain to Alicia whether the proposed agreement would be fair on an after-tax basis.

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Is Marco behaving ethically? Why or why not? Who is affected by Marco’s decision? What other alternatives might Marco consider?