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All Textbook Solutions for Individual Income Taxes

1DQ 2DQ 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?4DQ How does the pay-as-you-go procedure apply to wage earners? To persons who have income from sources other than wages?Jane, a tax practitioner, has reviewed the law on how State Xs income tax applies to a clients web-based consulting business but is unable to reach a conclusion for which she has a high level of confidence. Assuming that Jane is a knowledgeable and experienced tax professional, which Guiding Principles of Good Tax Policy might not be followed by State X?7DQ 8DQ 9DQ 10DQ Sophia lives several blocks from her parents in the same residential subdivision, Sophia is surprised to learn that her ad valorem property taxes for the year were raised but those of her parents were lowered. What is a possible explanation for the difference?12DQ 13DQ 14DQ 15DQ 16DQ 17DQ 18DQ 19DQ 20DQ Elijah and Anastasia are husband and wife who have five married children and nine minor grandchildren. For 2019, what is the maximum amount they can give to their family (including the sons- and daughters-in-law) without using any of their unified transfer tax credit?What is the difference between the Federal income tax on individuals and that imposed on corporations?As to those states that impose an income tax, comment on the following: a. Piggyback approach and possible decoupling from this approach. b. Use of IRS audit results as part of a state tax audit. c. Credit for taxes paid to other states.24DQ 25DQ 26DQ 27DQ 28DQ Contrast FICA and FUTA as to the following: a. Purpose of the tax. b. Upon whom imposed. c. Governmental administration of the tax. d. Reduction of tax based on a merit rating system.30DQ 31DQ 32DQ 33DQ 34DQ 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 some of the tax problems Serena might have? b. Assess Serenas chances of audit by the IRS.36DQ 37DQ 38DQ 39DQ 40DQ 41DQ 42DQ 43DQ 44DQ 45DQ In terms of tax policy, what do the following mean? a. Revenue neutrality. b. Sunset provision. c. Indexation.47DQ 48DQ 49DQ 50DQ Using information from this chapter as well as information from the tax agency in your state (likely called the Department of Revenue) and your local government, find all of the taxes to which a sole proprietor is subject. Create a table that lists all of these taxes, the rate(s), and the level(s) of government that imposes each tax.3RP 4RP A large part of tax research consists of determining what?Why do taxpayers often have more than one alternative for structuring a business transaction?3DQ 4DQ 5DQ 6DQ Rank the following items from the lowest to highest authority in the Federal tax law system: a. Interpretive Regulation. b. Legislative Regulation. c. Letter ruling. d. Revenue Ruling. e. Internal Revenue Code. f. Proposed Regulation.8DQ 9DQ 10DQ 11DQ 12DQ Sanjay receives a 90-day letter after his discussion with an appeals officer. He is not satisfied with the 101,000 settlement offer. Identify the relevant tax research issues facing Sanjay.14DQ 15DQ 16DQ 17DQ 18DQ 19DQ 20DQ 21DQ 22DQ 23DQ 24DQ 25DQ 26DQ 27DQ 28DQ 29DQ 30DQ 31DQ For her tax class, Yvonne must prepare a research paper discussing the tax aspects of qualified stock options. Explain to Yvonne how she can research this topic using various tax research resources.33DQ 34DQ 35DQ 36DQ 37P 38P 39P 40P 41P Using the legend provided, classify each of the following citations as to publisher: a. 832 USTC 9600. b. 52 AFTR 2d 835954. c. 67 T.C. 293 (1976). d. 39 TCM 32 (1979). e. 416 U.S. 938. f. RIA T.C. Memo. 80,582. g. 89 S.Ct. 501. h. 40 Fed.Cl. 172. i. 415 F2d 488. j. 592 E.Supp. 18. k. 7737, 19772 C.B. 568. l. S. Rep. No. 1622, 83rd Cong., 2d Sess. 42 (1954).43P 1RP 2RP When Oprah gave away Pontiac G6 sedans to her TV audience, was the value of the cars taxable? On Labor Day weekend in 2006, World Furniture Mall in Plano, Illinois, gave away 275,000 of furniture because the Chicago Bears shut out the Green Bay Packers in the teams football season opener at Lambeau Field in Green Bay (260). Was the free furniture in the form of a discount or rebate taxable, or should the furniture company have handed the customers a Form 1099MISC?4RP (1) Go to taxalmanac.org, and use the website to find 61(a). What is defined in this Code Section? Is the definition broad or narrow? (2) Go to legalbitstream.com, and find the case in which Mark Spitz, the former Olympic gold medalist, is the petitioner. Answer the following questions about the case: a. What tax years are at issue in the case? b. In what year was the case decided? c. Did the court decide in favor of Mr. Spitz or the IRS? d. Were any penalties imposed on Mr. Spitz? Why or why not?1DQ Which of the following items are inclusions in gross income? a. During the year, stock that the taxpayer purchased as an investment doubled in value. b. Amount an off-duty motorcycle police officer received for escorting a funeral procession. c. While his mother was in the hospital, the taxpayer sold some of her jewelry to help pay for the hospital bills. d. Child support payments received. e. A damage deposit the taxpayer recovered when he vacated the apartment he had rented. f. Interest received by the taxpayer on an investment in general purpose bonds issued by IBM. g. Amounts received by the taxpayer, a baseball Hall of Famer, for autographing sports equipment (e.g., balls and gloves). h. Tips received by a bartender from patrons. (Taxpayer is paid a regular salary by the cocktail lounge that employs him.) i. Taxpayer sells his Super Bowl tickets for three times what he paid for them. j. Taxpayer receives a new BMW from his grandmother when he passes the CPA exam.Which of the following items are exclusions from gross income? a. Alimony payments received (relates to a divorce settlement in 2016). b. Damages award received by the taxpayer for personal physical injurynone were for punitive damages. c. A new golf cart won in a church raffle. d. Amount collected on a loan previously made to a college friend. e. Insurance proceeds paid to the taxpayer on the death of her uncleshe was the designated beneficiary under the policy. f. Interest income on City of Chicago bonds. g. Jury duty fees. h. Stolen funds the taxpayer had collected for a local food bank drive. i. Reward paid by the IRS for information provided that led to the conviction of the taxpayers former employer for tax evasion. j. An envelope containing 8,000 found (and unclaimed) by the taxpayer in a bus station.4DQ In choosing between taking the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following have? a. The age of the taxpayer(s). b. The health (i.e., physical condition) of the taxpayer. c. Whether taxpayers rent or own their residence. d. Taxpayers filing status (e.g., single, married, filing jointly). e. Whether married taxpayers decide to file separate returns. f. The taxpayers uninsured personal residence was recently destroyed by a wildfire (the region was declared a disaster area by the Federal government). g. The number of dependents the taxpayer can claim.6DQ 7DQ 8DQ Caden and Lily are divorced on March 3, 2018. For financial reasons, however, Lily continues to live in Cadens apartment and receives her support from him. Caden does not claim Lily as a dependent on his 2018 Federal income tax return but does so on his 2019 return. Explain.10DQ 11DQ 12DQ 13DQ 14DQ 15DQ 16DQ 17DQ 18DQ During the year, Brandi had the following transactions: a long-term capital gain from the sale of land, a short-term capital loss from the sale of stock, and a long-term capital gain from the sale of a gun collection. a. How are these transactions treated for income tax purposes? b. Does this treatment favor the taxpayer or the IRS? Explain.Sam and Abby are dependents of their parents, and each has income of 2,100 for the year. Sams standard deduction for the year is 1,100, and Abbys is 2,450. Because their income is the same, what causes the difference in the amount of the standard deduction?Compute the 2019 standard deduction for the following taxpayers. a. Ellie is 15 and claimed as a dependent by her parents. She has 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 return. Ruby is age 66, and Woody is 69. Their taxable retirement income is 10,000. c. Shonda is age 68 and single. She is claimed by her daughter as a dependent. Her earned income is 500, and her interest income is 125. d. Frazier, age 55, is married but is filing a separate return. His wife itemizes her deductions.Paul and Sonja, who are married, had itemized deductions of 13,200 and 400, respectively, during 2019. Paul suggests that they file separatelyhe will itemize his deductions from AGI, and she will claim the standard deduction. a. Evaluate Pauls suggestion. b. What should they do?Compute the 2019 tax liability and the marginal and average tax rates for the following taxpayers (use the 2019 Tax Rate Schedules in Appendix A for this purpose): a. Chandler, who files as a single taxpayer, has taxable income of 94,800. b. Lazare, who files as a head of household, has taxable income of 57,050.In 2019, Simon, age 12, has interest income of 4,900 and no earned income. He has no investment expenses. Determine Simons net unearned income and total tax liability.25CE During the year, Tamara had capital transactions resulting in gains (losses) as follows: Determine Tamaras net capital gain or loss as a result of these transactions.Compute the taxable income for 2019 in each of the following independent situations: a. Drew and Meg, ages 40 and 41, respectively, are married and file a joint return. In addition to four dependent children, they have AGI of 125,000 and itemized deductions of 27,000. b. Sybil, age 40, is single and supports her dependent parents who live with her, as well as her grandfather who is in a nursing home. She has AGI of 80,000 and itemized deductions of 8,000. c. Scott, age 49, is a surviving spouse. His household includes two unmarried stepsons who qualify as his dependents. He has AGI of 75,000 and itemized deductions of 10,100. d. Amelia, age 33, is an abandoned spouse who maintains a household for her three dependent children. She has AGI of 58,000 and itemized deductions of 10,650. e. Dale, age 42, is divorced but maintains the home in which he and his daughter, Jill, live. Jill is single and qualifies as Dales dependent. Dale has AGI of 64,000 and itemized deductions of 9,900.Compute the taxable income for 2019 for Emily on the basis of the following information. Her filing status is single.Compute the taxable income for 2019 for Aiden on the basis of the following information. Aiden is married but has not seen or heard from his wife since 2017.30P Analyze each of the characteristics in considering the indicated test for dependency as a qualifying child or qualifying relative. In the last two columns, after each listed test (e.g., gross income), state whether the particular test is Met, Not Met, or Not Applicable (NA).32P 33P 34P 35P 36P Taylor, age 18, is claimed as a dependent by her parents. For 2019, she has the following income: 4,000 wages from a summer job, 1,800 interest from a money market account, and 2,000 interest from City of Boston bonds. a. What is Taylors taxable income for 2019? b. What is Taylors tax for 2019?LO.4, 9 Walter and Nancy provide 60% of the support of their daughter (age 18) and son-in-law (age 22). The son-in-law (John) is a full-time student at a local university, and the daughter (Irene) holds various part-time jobs from which she earns 11,000. Walter and Nancy engage you to prepare their tax return for 2019. During a meeting with them in late March 2020, you learn that John and Irene have filed a joint return. What tax advice would you give based on the following assumptions? a. All parties live in Louisiana (a community property state). b. All parties live in New Jersey (a common law state).39P LO.1, 2, 3, 4, 5, 6 Morgan (age 45) is single and provides more than 50% of the support of Tammy (a family friend), Jen (a niece, age 18), and Jerold (a nephew, age 18). Both Tammy and Jen live with Morgan, but Jerold (a French citizen) lives in Canada. Morgan earns a salary of 95,000, contributes 5,000 to a traditional IRA, and receives sales proceeds of 15,000 for an RV that cost 60,000 and was used for vacations. She has 8,200 in itemized deductions. Using the Tax Rate Schedules, compute Morgans 2019 tax liability.41P LO.5, 6, 9 Roy and Brandi are engaged and plan to get married. During 2019, Roy is a full-time student and earns 9,000 from a part-time job. With this income, student loans, savings, and nontaxable scholarships, he is self-supporting. For the year, Brandi is employed and has wages of 61,000. How much income tax, if any, can Brandi save if she and Roy marry in 2019 and file a joint return?In each of the following independent situations, determine Winstons filing status for 2019. Winston is not married. a. Winston lives alone, but he maintains a household in which his parents live. The mother qualifies as Winstons dependent, but the father does not. b. Winston lives alone but maintains a household in which his married daughter, Karin, lives. Both Karin and her husband (Winstons son-in-law) qualify as Winstons dependents. c. Winston maintains a household in which he and a family friend, Ward, live. Ward qualifies as Winstons dependent. d. Winston maintains a household in which he and his mother-in-law live. Winstons wife died in 2018. e. Same as part (d), except that Winstons wife disappeared (i.e., she did not die) in 2017.44P Nadia died in 2018 and is survived by her husband, Jerold (age 44); her married son, Travis (age 22); and her daughter-in-law, Macy (age 18). Jerold is the executor of his wifes estate. He maintains the household where he, Travis, and Macy live and furnishes all of their support. During 2018 and 2019, Travis is a full-time student, and Macy earns 7,000 each year from a part-time job. Travis and Macy do not file jointly during either year. What is Jerolds filing status for 2018 and 2019 if all parties reside in: a. Idaho (a community property state)? b. Kansas (a common law state)?Paige, age 17, is a dependent of her parents. During 2019, Paige earned 3,900 pet sitting and 4,200 in interest on a savings account. What are Paiges taxable income and tax liability for 2019?47P LO.8 During 2019, Inez (a single taxpayer) had the following transactions involving capital assets: a. If Inez has taxable income of 158,000, how much income tax results? b. If Inez has taxable income of 35,000, how much income tax results?During 2019, Inez (a single taxpayer) had the following transactions involving capital assets: a. If Inez has taxable income of 158,000, how much income tax results? b. If Inez has taxable income of 35,000, how much income tax results?50P Lance H. and Wanda B. Dean are married and live at 431 Yucca Drive, Santa Fe, NM 87501. Lance works for the convention bureau of the local Chamber of Commerce, and Wanda is employed part-time as a paralegal for a law firm. During 2018, the Deans had the following receipts: Wanda was previously married to John Allen. When they divorced several years ago, Wanda was awarded custody of their two children, Penny and Kyle. (Note: Wanda has never issued a Form 8332 waiver.) Under the divorce decree, John was obligated to pay alimony and child supportthe alimony payments were to terminate if Wanda remarried. In July, while going to lunch in downtown Santa Fe, Wanda was injured by a tour bus. Because the driver was clearly at fault, the owner of the bus, Roadrunner Touring Company, paid her medical expenses (including a one-week stay in a hospital). To avoid a lawsuit, Roadrunner also transferred 90,000 to her in settlement of the personal injuries she sustained. The Deans had the following expenditures for 2018: The life insurance policy was taken out by Lance several years ago and designates Wanda as the beneficiary. As a part-time employee, Wanda is excluded from coverage under her employers pension plan. Consequently, she provides for her own retirement with a traditional IRA obtained at a local trust company. Because the mayor is a member of the local Chamber of Commerce, Lance felt compelled to make the political contribution. The Deans household includes the following, for whom they provide more than half of the support: Penny graduated from high school on May 9, 2018, and is undecided about college. During 2018, she earned 8,500 (placed in a savings account) playing a harp in the lobby of a local hotel. Wayne is Wandas widower father who died on December 20, 2017. For the past few years, Wayne qualified as a dependent of the Deans. Federal income tax withheld is 4,200 (Lance) and 2,100 (Wanda). The proper amount of Social Security and Medicare tax was withheld. Determine the Federal income tax for 2018 for the Deans on a joint return by completing the appropriate forms. They do not want to contribute to the Presidential Election Campaign Fund. All members of the family had health care coverage for all of 2018. If an overpayment results, it is to be refunded to them. Suggested software: ProConnect Tax Online.52CP Kathy and Brett Ouray married in 2001. They began to experience marital difficulties in 2015 and, in the current year, although they are not legally separated, consider themselves completely estranged. They have contemplated getting a divorce. However, because of financial concerns and because they both want to remain involved in the lives of their three sons, they have not yet filed for divorce. In addition, their financial difficulties have meant that Kathy and Brett cannot afford to live in separate residences. So although they consider themselves emotionally estranged, they and their three sons all reside in a single-family home in Chicago, Illinois. Although Brett earns significantly more than Kathy, both contribute financially to maintaining their home and supporting their teenage sons. In one of their few and brief conversations this year, they determined that Brett had contributed far more than Kathy to the maintenance of their home and the support of their sons. Thus, Brett has decided that for the current tax year, they will file separate Federal income tax returns and that he will claim head-of-household filing status. Although they live under the same roof, Brett believes that he and Kathy should maintain separate households. Given this fact and the fact that he provides significantly more for the support of their sons, he believes that he is eligible for head-of-household filing status. Advise Brett on which filing status is most appropriate for him in the current year. His address is 16 Lahinch, Chicago, IL 60608.2RP 5RP 1CPA Jane is 20 years old and is a sophomore at Lake University. She is a full-time student and does not have any gross income. Jane spends the holidays and summers at home with her parents. Her total support for the current tax year is 30,000, including a scholarship for 5,000 to cover her tuition. Jane used 12,000 of her savings, and her grandparents provided 13,000. Which of the following statements regarding the dependency rules for Jane is true? a. If Janes parents (rather than her grandparents) provided the 13,000, then they would not be able to claim Jane as a dependent because Jane provided more than half of her own support. b. Janes grandparents can claim her as a dependent because Jane did not provide more than half of her own support. c. Janes grandparents cannot claim her as a dependent because Jane provided more than half of her own support. d. Jane does not qualify as a dependent for either her parents or grandparents.3CPA Jeff and Rhonda are married and have two children, Max and Jen. Max is 20, attends college in the Los Angeles area hill-time, and works as a stunt double for a television show while he is in school. Max earns 15,000 per year as a stunt double and lives at home when school is not in session. Jeff and Rhonda pay for Maxs tuition and all of his living expenses. Jen, who lives at home, is 18 years old and makes 18,000 per year working full-time as an office administrator. Jeff and Rhonda pay for 65 percent of Jens living expenses. In addition, Rhondas mother, Joanne (a widow), resides with the family, earns 3,000 per year in interest and dividends from her investments, and receives 9,000 per year in Social Security benefits. Jeff and Rhonda receive no rent from Joanne and provide all the support she needs for the year. Everyone mentioned is a U.S. citizen. How many people qualify as dependents for Jeff and Rhondas income tax return? a. Two b. Three c. Four d. Five 5CPA Bill and Anne Chambers are married and file a joint return. They have no children. Their college friend Ryan lived with them for the entire current tax year. Ryan is 40 years old and earned 2,000 at a part-time job and received 25,000 in municipal bond interest. Ryan is a citizen of the United States and is unmarried. Which of the following statements is true regarding claiming Ryan as a dependent on the Chamberses tax return? a. If Ryan earns 15,000 in self-employment income in addition to the part-time job and municipal bond interest, he will qualify as a dependent on the Chamberses tax return. b. Ryan qualifies as a dependent for the Chamberses under the qualifying child rules. c. As long as Ryan does not provide more than half of his own support, he qualifies as a dependent for the Chamberses under the qualifying relative rules because he lived with them for the entire year. d. As long as the Chamberses provide more than half of Ryans support, he qualifies as a dependent for the Chamberses under the qualifying relative rules.7CPA Heather is single and has one son, Rhett, who is 19 years old. Rhett lived at home for four months of the current tax year before moving away to take a full-time job in another city. Heather provided more than half of Rhetts support for the taxable year. Rhett earned 20,000 in gross income and is unmarried. Which of the following statements regarding the dependency rules for Rhett is true? a. Heather may claim Rhett as a dependent because he is a qualifying child. b. Heather may claim Rhett as a dependent because he is a qualifying relative. c. Rhett fails the age limit test for a qualifying child. d. Rhett must live with Heather for the entire year to meet the qualifying relative test.10CPA 11CPA According to the Supreme Court, would it be good tax policy to use income as computed by financial accounting principles as the correct measure of income for Federal income tax purposes? Explain.2DQ 3DQ Ben lost his job when his employer moved its plant. During the year, he collected unemployment benefits for three months, a total of 1,800. While he was waiting to hear from prospective employers, he painted his house. If Ben had paid someone else to paint his house, the cost would have been 3,000. The cost of the paint Ben used was 800. What is Bens gross income for tax purposes from the above events?Howard buys wrecked cars and stores them on his property. Recently, he purchased a 1991 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 radio for 75 and he does not know how many, if any, of the remaining parts will ever be sold. What are Howards income recognition issues?On December 29, 2019, an employee received a 5,000 check from her employers client. The check was payable to the employer. The employee did not remit the funds to the employer until December 30, 2019. The employer deposited the check on December 31, 2019, but the bank did not credit the employers bank account until January 2, 2020. When is the cash basis employer required to include the 5,000 in gross income?7DQ A Series EE U.S. government savings bond accrues 3.5% interest each year. The bond matures in three years, at which time the principal and interest will be paid. The bank will pay the taxpayer at a 3.5% interest rate each year if he agrees to leave money on deposit for three years. What tax advantage does the Series EE bond offer that is not available with the bank deposit?The taxpayer performs services with payment due from the customer within 30 days. All customers pay within the time limit. What would be the benefit to the taxpayer using the cash method of accounting rather than the accrual method?Wade paid 7,000 for an automobile that needed substantial repairs. He worked nights and weekends to restore the car and spent 2,400 on parts for it. He knows that he can sell the car for 13,000, but he is very wealthy and does not need the money. On the other hand, his daughter, who has very little income, needs money to make the down payment on a house. a. Would it matter, after taxes, whether Wade sells the car and gives the money to his daughter or whether he gives the car to his daughter and she sells it for 13,000? Explain. b. Assume that Wade gave the car to his daughter after he had arranged for another person to buy it from his daughter. The daughter then transferred the car to the buyer and received 13,000. Who is taxed on the gain?11DQ 12DQ A divorce agreement entered into in 2017 requires Alice to pay her former spouse 50,000 a year for the next ten years. Will the payments qualify as alimony? Why or why not?14DQ Patrick and Eva are planning to divorce in 2019. Patrick has offered to pay Eva 12,000 each year until their 11-year-old daughter reaches age 21. Alternatively, Patrick will transfer to Eva common stock that he owns with a fair market value of 100,000. What factors should Eva and Patrick consider in deciding between these two options?16DQ 17DQ 18DQ 19DQ 20DQ On January 1, 2019, Kunto, a cash basis taxpayer, pays 46,228 for a 24-month certificate. The certificate is priced to yield 4% (the effective interest rate) with interest compounded annually. No interest is paid until maturity, when Kunto receives 50,000. In your computations: a. Compute Kuntos gross income from the certificate for 2019. b. Compute Kuntos gross income from the certificate for 2020. Round any amounts to the nearest dollar.Bigham Corporation, an accrual basis calendar year taxpayer, sells its services under 12-month and 24-month contracts. The corporation provides services to each customer every month. On July 1, 2019, Bigham sold the following customer contracts: Determine the income to be recognized in taxable income in 2019 and 2020.LO.3 Simba and Zola are married but file separate returns. Simba received 80,000 of salary and 1,200 of taxable dividends on stock he purchased in his name and paid from the salary he earned since the marriage. Zola collected 900 in taxable interest on a certificate of deposit she inherited from her aunt. Compute Zolas gross income under two assumptions as to the state of residency of the couple. If an amount is zero, enter 0.Casper and Cecile divorced in 2018. As part of the divorce settlement, Casper transferred stock to Cecile. Casper purchased the stock for 25,000, and it had a market value of 43,000 on the date of the transfer. Cecile sold the stock for 40,000 a month after receiving it. In addition, Casper is required to pay Cecile 1,500 a month in alimony. He made five payments to her during the year. What are the tax consequences for Casper and Cecile regarding these transactions? a. How much gain or loss does Casper recognize on the transfer of the stock? b. Does Casper receive a deduction for the 7,500 alimony paid? c. How much income does Cecile have from the 7,500 alimony received? d. When Cecile sells the stock, how much does she report?LO.4 Elizabeth made the following interest-free loans during the year. Assume that tax avoidance is not a principal purpose of any of the loans. Assume that the relevant Federal rate is 5% and that the loans were outstanding for the last six months of the year. What are the effects of the imputed interest rules on these transactions? Compute Elizabeths gross income from each loan: a. Richard b. Woody c. Irene 26CE 27CE 28P 29P Determine the taxpayers 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 exchange. Debs cost of the bond was 10,000. The value of the stock had decreased to 11,000 by the end of the year. b. Deb needed 10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the 10,000. Debs cost of the stock was 3,000. Based on her brokers advice, instead of selling the stock, she borrowed the 10,000 using the stock as collateral for the debt. c. Debs boss gave her two tickets to the Rabid Rabbits rock concert because she met her sales quota. At the time she received the tickets, each ticket had a face price of 200 and was selling on eBay for 300. On the date of the concert, the tickets were selling for 250 each. Deb and her son attended the concert.31P 32P 33P Your client is a 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 receivables. ARPs expenses are primarily for salary and rent. Salaries are paid on the last day of each month, and rent is paid on the first day of each month. The partnership has a line of credit with a bank, which requires monthly financial statements. These must be prepared using the accrual method. ARPs managing partner, Amanda Sims, has suggested that the firm also use the accrual method for tax purposes and thus reduce accounting fees by 600. Assume that the partners are in the 35% (combined Federal and state) marginal tax bracket. Write a letter to your client explaining why you believe it would be worthwhile for ARP to file its tax return on the cash basis even though its financial statements are prepared on the accrual basis. ARPs address is 100 James Tower, Denver, CO 80208.Trip Garage, Inc. (459 Ellis Avenue, Harrisburg, PA 17111), is an accrual basis taxpayer that repairs automobiles. In late December 2019, the company repaired Samuel Mosleys car and charged him 1,000. Samuel did not think the problem had been fixed and refused to pay; thus, Trip refused to release the automobile. In early January 2020, Trip made a few adjustments and 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 2019, when the work was done, and then deduct a 100 loss in 2020. Prepare a memo to Susan Apple, the treasurer of Trip, with the recommended treatment for the disputed income.36P Marlene, a cash basis taxpayer, invests in Series EE U.S. government savings bonds and bank certificates of deposit (CDs). Determine the tax consequences of the following on her 2019 gross income: a. On September 30, 2019, she cashed in Series EE bonds for 10,000. She purchased the bonds in 2009 for 7,090. The yield to maturity on the bonds was 3.5%. b. On July 1, 2018, she purchased a CD for 10,000. The CD matures on June 30, 2020, and will pay 10,816, thus yielding a 4% annual return. c. On July 1, 2019, she purchased a CD for 10,000. The maturity date on the CD was June 30, 2020, when Marlene would receive 10,300.Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effect of each of the following transactions on the companys 2019 gross income assuming that the company uses any available options to defer its taxes. a. In December 2018, the company received a 1,200 advance payment from a customer for an appliance that Drake special ordered from the manufacturer. The appliance did not arrive from the manufacturer until January 2019, and Drake immediately delivered it to the customer. The sale was reported in 2019 for financial accounting purposes. b. In October 2019, the company sold a 6-month service contract for 240. The company also sold a 36-month service contract for 1,260 in July 2019. c. On December 31, 2019, the company sold an appliance for 1,200. The company received 500 cash and a note from the customer for 700 and 260 interest, to be paid at the rate of 40 a month for 24 months. Because of the customers poor credit record, the fair market value of the note was only 600. The cost of the appliance was 750.Freda is a cash basis taxpayer. In 2019, she negotiated her salary for 2020. Her employer offered to pay her 21,000 per month in 2020 for a total of 252,000. Freda countered that she would accept 10,000 each month for the 12 months in 2020 and the remaining 132,000 in January 2021. The employer accepted Fredas terms for 2020 and 2021. a. Did Freda actually or constructively receive 252,000 in 2020? b. What could explain Fredas willingness to spread her salary over a longer period of time? c. In December 2020, after Freda had earned the right to collect the 132,000 in 2020, the employer offered 133,000 to Freda at that time, rather than 132,000 in January 2021. The employer wanted to make the early payment so as to deduct the expense in 2020. Freda rejected the employers offer. Was Freda in constructive receipt of the income in 2020? Explain.40P 41P Troy, a cash basis taxpayer, is employed by Eagle Corporation, also a cash basis taxpayer. Tray is a full-time employee of the corporation and receives a salary of 60,000 per year. He also receives a bonus equal to 10% of all collections from diems he serviced during the year. Determine the tax consequences of the following events to the corporation and to Troy: a. On December 31, 2019, Troy was visiting a customer. The customer gave Troy a 10,000 check payable to the corporation for appraisal services Troy performed during 2019. Troy did not deliver the check to the corporation until January 2020. b. The facts are the same as in part (a), except that the corporation is an accrual basis taxpayer and Troy deposited the check on December 31, but the bank did not add the deposit to the corporations account until January 2020. c. The facts are the same as in part (a), except that the customer told Troy to hold the check until January 2020 when the customer could make a bank deposit that would cover the check.43P 44P 45P Nell and Kirby are in the process of negotiating their divorce agreement, to be finalized in 2019. What should be the tax consequences to Nell and Kirby if the following, considered individually, became part of the agreement? a. In consideration for her one-half interest in their personal residence. Kirby will transfer to Nell stock with a value of 200,000 and 50,000 of cash. Kirbys cost of the stock was 150,000, and the value of the personal residence is 500,000. They purchased the residence three years ago for 300,000. b. Nell will receive 1,000 per month for 120 months. If she dies before receiving all 120 payments, the remaining payments will be made to her estate. c. Nell is to have custody of their 12-year-old son. Bobby. She is to receive 1,200 per month until Bobby (1) dies or (2) attains age 21 (whichever occurs first). After either of these events occurs, Nell will receive only 300 per month for the remainder of her life.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.48P 49P 50P 51P 52P For each of the following, determine the amount that should be included in gross income: a. Peyton was selected the most valuable player in the Super Bowl. In recognition of this, he was awarded an automobile with a value of 60,000. Peyton did not need the automobile, so he asked that the title be put in his parents names. b. Jacob was awarded the Nobel Peace Prize. When he was presented the check for 1,400,000, Jacob said, I do not need the money. Give it to the United Nations to use toward the goal of world peace. c. Linda won the Craig County Fair beauty pageant. She received a 10,000 scholarship that paid her 6,000 for tuition and 4,000 for meals and housing for the academic year.54P 55P Linda and Don are married and file a joint return. In 2019, they received 12,000 in Social Security benefits and 35,000 in taxable pension benefits and interest. a. Compute the couples adjusted gross income on a joint return. b. Don would like to know whether they should sell for 100,000 (at no gain or loss) a corporate bond that pays 8% in interest each year and use the proceeds to buy a 100,000 nontaxable State of Virginia bond that will pay 6,000 in interest each year. Assume that their marginal tax rate is 12%. c. If Linda in part (a) works part-time and earns 30,000, how much will Linda and Dons adjusted gross income increase?Charles E. Bennett, age 64, will retire next year and is trying to decide whether to begin collecting his Social Security benefits at that time. His monthly benefits will increase if he defers his starting date for the benefits. He has asked you to estimate how much his income tax will increase as a result of collecting Social Security. Charles and his wife Bernice B., file a joint return, have no other dependents, and claim the standard deduction. Their only income other than the Social Security benefits are: The Social Security benefits for the year would be 12,000. a. Complete Worksheet 1, Figuring Your Taxable Benefits, included in IRS Publication 915 to determine the taxable portion of this couples taxable Social Security benefits (the publication includes a blank worksheet). b. What is the taxable portion of the 12,000 in Social Security benefits?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.1RP 2RP 3RP 1CPA Fred and Wilma were divorced in year 1 (before 2019). Fred is required to pay Wilma 12,000 of alimony each year until their child turns 18. At that time, the payment will be reduced to 10,000 per year. In year 3, in accordance with the divorce agreement, Fred paid 6,000 directly to Wilma and 6,000 directly to the law school Wilma is attending. What amount of the payments received in year 3 is income to Wilma? a. 6,000 b. 10,000 c. 12,000 d. 0 Bill and Jane Jones were divorced on January 1, 2018. They have no children. In accordance with the divorce decree, Bill transferred the title of their house over to Jane. The home had a fair market value of 250,000 and was subject to a 100,000 mortgage. Under the divorce agreement, Bill is to make 1,000 monthly mortgage payments on the home for the remainder of the mortgage. In the current year, Bill made 12 mortgage payments. What amount is taxable to Jane in the current year? a. 12,000 b. 250,000 c. 100,000 d. 0 Jake pays the following amounts to his former spouse during the current year: What amount can Jake deduct as alimony for the current year? Assume that the divorce occurred before 2019. a. 0 b. 12,000 c. 22,000 d. 137,000 Mary purchased an annuity that pays her 500 per month for the rest of her life. She paid 70,000 for the annuity. Based on IRS annuity tables, Marys life expectancy is 16 years. How much of the first 500 payment will Mary include in her gross income (round to two decimals)? a. 0 b. 135.42 c. 364.58 d. 500.00 1DQ 2DQ 3DQ 4DQ 5DQ 6DQ 7DQ Holly was injured while working in a factory and received 12,000 as workers compensation while she was unable to work because of the injury. Jill, who was self-employed, was also injured and unable to work. Jill collected 12,000 on an insurance policy she had purchased to replace her loss of income while she was unable to work. How much are Holly and Jill each required to include in their gross income?9DQ 10DQ Ted works for Azure Motors, an automobile dealership. All employees can buy a car at the companys cost plus 2%. The company does not charge employees the 300 dealer preparation fee that nonemployees must pay. Ted purchased an automobile for 29,580 (29,000 + 580). The companys cost was 29,000. The price for a nonemployee would have been 33,900 (33,600 + 300 preparation fee). What is Teds gross income from the purchase of the automobile?12DQ Eagle Life Insurance Company pays its employees 0.30 per mile for driving their personal automobiles to and from work. The company reimburses each employee who rides the bus 100 a month for the cost of a pass. Tom collected 100 for his automobile mileage, and Mason received 100 as reimbursement for the cost of a bus pass. a. What are the effects of the above on Toms and Masons gross income? b. Assume that Tom and Mason are in the 24% marginal tax bracket and the actual before-tax cost for Tom to drive to and from work is 0.30 per mile. What are Toms and Masons after-tax costs of commuting to and from work?Several of Egret Companys employees have asked the company to create a hiking trail that employees could use during their lunch hours. The company owns vacant land that is being held for future expansion but would have to spend approximately 50,000 if it were to make a trail. Nonemployees would be allowed to use the facility as part of the companys effort to build strong community support. What are the relevant tax issues for the employees?15DQ Tammy, a resident of Virginia, is considering purchasing 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. She is aware that State of Virginia bonds of comparable risk are yielding 4.5%. However, the Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia. Which of the two options will provide the greater after-tax return to Tammy? Tammy can deduct any state taxes paid on her Federal income tax return. In your analysis, assume that the bond amount is 100,000.Andrea entered into a 529 qualified tuition program for the benefit of her daughter, Joanna. Andrea contributed 15,000 to the fund. The fund balance had accumulated to 25,000 by the time Joanna was ready to enter college. However, Joanna received a scholarship that paid for her tuition, fees, books, supplies, and room and board. So Andrea withdrew the funds from the 529 plan and bought Joanna a new car. a. What are the tax consequences to Andrea of withdrawing the funds? b. Assume instead that Joannas scholarship did not cover her room and board, which cost 7,500 per academic year. During the current year, 7,500 of the fund balance was used to pay for Joannas room and board. The remaining amount was left in the 529 plan to cover her room and board for future academic years. What are the tax consequences to Andrea and to Joanna of using the 7,500 to pay for the room and board?18DQ 19DQ Valentino is a patient in a nursing home for 45 days of 2019. While in the nursing home, he incurs total costs of 13,500. Medicare pays 8,000 of the costs. Valentino receives 15,000 from his long-term care insurance policy, which pays while he is in the facility. Assume that the Federal daily excludible amount for Valentino is 370. Of the 15,000, what amount may Valentino exclude from his gross income?21CE Ellie purchases an insurance policy on her life and names her brother, Jason, as the beneficiary. Ellie pays 32,000 in premiums for the policy during her life. When she dies, Jason collects the insurance proceeds of 500,000. As a result, how much gross income does Jason report?23CE Leland pays premiums of 5,000 for an insurance policy in the face amount of 25,000 upon the life of Caleb and subsequently transfers the policy to Tyler for 7,500. Over the years, Tyler pays subsequent premiums of 1,500 on the policy. Upon Calebs death, Tyler receives the proceeds of 25,000. As a result, what amount is Tyler required to include in his gross income?Jarrod receives a scholarship of 18,500 from Riggers University to be used to pursue a bachelors degree. He spends 12,000 on tuition, 1,500 on books and supplies, 4,000 for room and board, and 1,000 for personal expenses. How much may Jarrod exclude from his gross income?26CE 27P 28P 29P LO.2 What is the taxpayers gross income in each of the following situations? a. Darrin received a salary of 50,000 from his employer, Green Construction. b. In July, Green gave Darrin an all-expense-paid trip to Las Vegas (value of 3,000) for exceeding his sales quota. c. Megan received 10,000 from her employer to help her pay medical expenses not covered by insurance. d. Blake received 15,000 from his deceased wifes employer to help him in his time of greatest need. e. Clint collected 50,000 as the beneficiary of a group term life insurance policy when his wife died. The premiums on the policy were paid by his deceased wifes employer.LO.2 Donald was killed in an accident while he was on the job. Darlene, Donalds wife, received several payments as a result of Donalds death. What is Darlenes gross income from the items listed below? a. Donalds employer paid Darlene an amount equal to Donalds three months salary (60,000), which is what the employer does for all widows and widowers of deceased employees. b. Donald had 20,000 in accrued salary that was paid to Darlene. c. Donalds employer had provided Donald with group term life insurance of 480,000 (twice his annual salary), which was payable to his widow in a lump sum. Premiums on this policy totaling 12,500 had been included in Donalds gross income under 79. d. Donald had purchased a life insurance policy (premiums totaled 250,000) that paid 600,000 in the event of accidental death. The proceeds were payable to Darlene, who elected to receive installment payments as an annuity of 30,000 each year for a 25-year period. She received her first installment this year.32P 33P 34P LO.2 Leigh sued an overzealous bill collector and received the following settlement: a. What effect does the settlement have on Leighs gross income? b. Assume that Leigh also collected 25,000 of damages for slander to her personal reputation caused by the bill collector misrepresenting the facts to Leighs employer and other creditors. Is this 25,000 included in Leighs gross income? Explain.LO.2 Determine the effect on gross income in each of the following cases: a. Eloise received 150,000 in settlement of a sex discrimination case against her former employer. b. Nell received 10,000 for damages to her personal reputation. She also received 40,000 in punitive damages. c. Orange Corporation, an accrual basis taxpayer, received 50,000 from a lawsuit filed against its auditor who overcharged for services rendered in a previous year. d. Beth received 10,000 in compensatory damages and 30,000 in punitive damages in a lawsuit she filed against a tanning parlor for severe burns she received from using its tanning equipment. e. Joanne received compensatory damages of 75,000 and punitive damages of 300,000 from a cosmetic surgeon who botched her nose job.37P 38P 39P LO.2 Belinda spent the last 60 days of 2019 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 policy she purchased. Assume that the Federal daily excludible amount is 370. What is the effect on Belindas gross income?LO.2 Tim is the vice president of western operations for Maroon Oil Company and is stationed in San Francisco. He is required to live in an employer-owned home, which is three blocks from his company office. The company-provided home is equipped with high-speed internet access and several telephone lines. Tim receives telephone calls and e-mails that require immediate attention any time of day or night because the companys business is spread all over the world. A full-time administrative assistant resides in the house to assist Tim with the urgent business matters. Tim often uses the home for entertaining customers, suppliers, and employees. The fair market value of comparable housing is 9,000 per month. Tim is also provided with free parking at his companys office. The value of the parking is 355 per month. Calculate the amount associated with the company-provided housing and free parking that Tim must include in his gross income for 2019.LO.2 Does the taxpayer recognize gross income in the following situations? a. Ava is a filing clerk at a large insurance company. She is permitted to leave the premises for lunch, but she usually eats in the companys cafeteria because it is quick and she is on a tight schedule. On average, she pays 2 for a lunch that would cost 12 at a restaurant and it cost her employer 10 to prepare. However, if the prices in the cafeteria were not so low and the food was not so delicious, she would probably bring her lunch at a cost of 3 per day. b. Scott is an executive for an international corporation located in New York City. Often he works late, taking telephone calls from the companys European branch. Scott often stays in a company-owned condominium when he has a late-night work session. The condominium is across the street from the company office and has the technology needed to communicate with employees and customers throughout the world. c. Ira recently moved to take a job. For the first month on the new job, Ira was searching for a home to purchase or rent. During this time, his employer permitted Ira to live in an apartment the company maintains for customers during the buying season. The month that Ira occupied the apartment was not during the buying season, and the apartment would not otherwise have been occupied.43P 44P 45P LO.2, 5 Rosas employer has instituted a flexible benefits program. Rosa will use the plan to pay for her daughters dental expenses and other medical expenses that are not covered by health insurance. Rosa is in the 24% marginal tax bracket and estimates that the medical and dental expenses not covered by health insurance will be within the range of 4,000 to 5,000. Her employers plan permits her to set aside as much as 5,000 in the flexible benefits account. Rosa does not itemize her deductions. a. Rosa puts 4,000 into her flexible benefits account, and her actual expenses are 5,000. What is her cost of underestimating the expenses? b. Rosa puts 5,000 into her flexible benefits account, and her actual expenses are only 4,000. What is her cost of overestimating her expenses? c. What is Rosas cost of underfunding as compared with the cost of overfunding the flexible benefits account? d. Does your answer in part (c) suggest that Rosa should fund the account closer to the low end or to the high end of her estimates?47P 48P 49P 50P LO.2 Tonya, who lives in California, inherited a 100,000 State of California bond in 2019. Her marginal Federal tax rate is 35%, and her marginal state tax rate is 5%. The California bond pays 3.3% interest, which is not subject to California income tax. She can purchase a corporate bond of comparable risk that will yield 5.2% or a U.S. government bond that pays 4.6% interest. Which investment will provide the greatest after-tax yield?52P 53P 54P 55P 56P LO.4 Vic, who was experiencing financial difficulties, was able to adjust his debts as follows: a. Vic is an attorney. Vic owed his uncle 25,000. The uncle told Vic that if he serves as the executor of the uncles estate, Vics debt will be canceled in the uncles will. b. Vic borrowed 80,000 from First Bank. The debt was secured by land that Vic purchased for 100,000. Vic was unable to pay, and the bank foreclosed when the liability was 80,000, which was also the fair market value of the property. c. The Land Company, which had sold land to Vic for 80,000, reduced the mortgage on the land by 12,000. Determine the tax consequences to Vic.1RP 2RP 3RP 4RP 1CPA Jeffrey Dean, a Masters Degree candidate at North State Central University, was awarded a 15,000 scholarship from North State Central in the current year. During the current year, he paid the following expenses: In addition, he received 6,000 for teaching two undergraduate accounting courses. What amount must be included in Deans gross income? a. 0 b. 6,000 c. 7,500 d. 21,000 Linda is an employee of JRH Corporation. Which of the following would be included in Lindas gross income? a. Premiums paid by JRH Corporation for a group term life insurance policy for 50,000 of coverage for Linda. b. 1,000 of tuition paid by JRH Corporation to State University for Lindas masters degree program. c. A 2,000 trip given to Linda by JRH Corporation for meeting sales goals. d. 1,200 paid by JRH Corporation for an annual parking pass for Linda.Kim was seriously injured at her job. As a result of her injury, she received the following payments: 5,000 reimbursement from employer-provided health insurance for medical expenses paid by Kim. The premiums this year paid by Kims employer totaled 6,000. 15,000 disability pay. Kim has disability insurance provided by her employer as a nontaxable fringe benefit. Kims employer paid 6,000 in disability premiums this year on behalf of Kim. 10,000 received for damages for personal physical injury. 200,000 for punitive damages. What amount is taxable to Kim? a. 215,000 b. 225,000 c. 236,000 d. 0 Danny received the following interest and dividend payments this year. What amount should Danny include in his gross income? a. 2,500 b. 1,500 c. 3,700 d. 2,200 6CPA 1DQ

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