Questions and Answers of Concepts In Federal Taxation

LO1 Why do sole proprietors not include all the items of income and deductions related to their business in the calculation of the business’s operating income?
LO1 Why must a partnership separately state certain items in reporting its income to the partners?
LO1 Partners can generally deduct losses from the partnership.What are the three limitations on the deduction of partnership losses?
LO2 Explain how a partner’s basis in a partnership can differ from the partner’s at-risk amount.
LO1 Under what circumstances can a partner transact with a partnership at arm’s length?
LO2 Explain the general rationale for adjusting the basis of partners and S corporation shareholders.
LO1 Are passive losses treated the same for all types of entities?
LO1 How does the recapture of depreciation on a Section 1250 property for a corporation differ from that of other entities?
LO1 What is the purpose of the dividends-received deduction?
LO1,2 What are the similarities and differences in the income tax treatment of a partnership and an S corporation?
LO4 Explain the advantages to taxpayers of hiring their children to work in their businesses.The following information is to be used for problems 14–17:Wrigley Juice has the following income,
LO1 Assume that Wrigley Juice is owned by Calvin as a sole proprietorship. Explain the effect of Wrigley’s results on Calvin’s tax return.
LO1 Assume that Wrigley Juice is a partnership owned equally by Vinnie and Chandra. Explain the effect of Wrigley’s results on Vinnie’s and Chandra’s tax returns.
LO1 Assume that Wrigley Juice is a corporation owned by Cora. Explain the effect of Wrigley’s results on Cora’s tax return.
LO1 Assume thatWrigley Juice is an S corporation owned equally by Henry, Iris, and Communication Skills Jasmine. Prepare a memo explaining the effect of Wrigley’s results on Henry’s, Iris’s,
LO1 EndLand Company reports the following results for the current year:a. Assume that EndLand is a partnership owned by Kira (60%) and Justin (40%).Kira receives a salary of $70,000, and Justin
LO1,2 Binh has a 50% interest in the Lamonica Partnership with a basis of $10,000 at the end of the year before accounting for his share of the current year’s losses. The partnership suffers
LO1,2 Assume the same facts as in problem 23, except that the $45,000 debt is a loan that Annabell made to Purity. How would your answers to parts a and c change?Assume that the beginning basis
LO1 Louis is the president and 40% owner of Adams Company. His basis in Adams at the beginning of the year is $8,000. Adams suffers a net operating loss of $15,000 during the current year. Louis
LO1 Lacy Corporation sells equipment and a building during the current year. The equipment, which cost $14,000 in 2007, is sold for $9,000. The equipment was expensed using the Section 179 election
LO1 The Baker Corporation has the following entries on its books for the current tax year:What is the maximum charitable contribution deduction for the current year? What is Baker’s taxable income
LO1 Fairplay Corporation has gross income of $150,000 and taxable income of Communication Skills$50,000. The company includes no special deductions in the calculation of its taxable income. While
LO1 The Viking Corporation has the following items of income for 2010:a. Calculate the corporation’s 2010 taxable income and its tax liability.b. Assume that Viking is, and always has been, an S
LO1 Charger, Inc., has the following items for the current year:a. What are the corporation’s taxable income and tax liability?b. Assume that Charger is, and always has been, an S corporation
LO3 The Hartford Group is a partnership owned and operated by June and Joyce. June Communication Skills owns a 60% interest, and her basis in the partnership is $33,000. Joyce owns a 40%interest, and
LO3 Toy Corporation distributes $175,000 in cash ($1.75 per share) when its cur- Communication Skills rent and accumulated earnings and profits are $40,000. What is the effect of the distribution for
Lydia owns 75% of Flower Farms, a partnership. She also owns land that she leases to Flower Farms for $6,000 per month.
Michael buys a piece of property from JFK Partnership for $60,000 that has a$70,000 basis. Michael owns 80% of JFK partnership.
Irene contributes land to Micro Development Partnership for a 30% interest. The land’s basis is $20,000, and it has a fair market value of $80,000. Micro reports a net operating loss of $100,000
Powell owns a 20% interest in Cooke Partnership. At the beginning of 2009, Powell’s basis is $22,000. Cooke reports a $90,000 operating loss in 2009, and Powell withdraws$10,000 from the
Ramrod, Inc., sells a warehouse for $350,000. It purchased the warehouse 10 years ago for $250,000 and had taken $75,000 in depreciation on the building to the date of sale.
Myrtle Coast Corporation has a $35,000 operating loss during the current year. Not included in the loss is a $40,000 dividend it received from a corporation in which it owns a 15% interest.
LMC, Inc., is equally owned by Larry, Maurice, and Charles. The owners are sports agents. LMC’s income consists solely of fees from the owners’ clients. During the current year, LMC’s net
Assume the same facts as in problem 63, except that LMC, Inc., is an electing S corporation.
Kummell Corporation reports a $200,000 taxable income in the current year.Included in the taxable income calculation are $20,000 in dividends received from less-than-20%-owned corporations, and
Milena owns a 25% interest in Davis Company, an S corporation. Her basis in the Davis stock is $40,000. Davis reports an operating loss of $200,000 in the current year. Davis owes Milena $25,000 on a
Charlene owns a 70% interest in Maupin Mopeds, which is organized as a partnership.She wants to open another business and needs office space for it. She has Maupin distribute a building worth
Ballou Corporation distributes $200,000 in cash to its shareholders during the current year. Accumulated earnings and profits at the beginning of the year are $45,000, and current year earnings and
A limited liability company is becoming a common business form, with most states Internet Skills having passed legislation allowing this entity form. Use the Internet to find out more information
In addition to the federal income tax, a corporation is subject to the laws of the state in Internet Skills which it is incorporated, including state income tax. Use the Internet to locate sources of
Tim and his daughter, Mary, own and operate Tamar Corporation. Tim is nearing Research Skills retirement and would like to transfer ownership of the corporation to Mary but would like to stay on as a
ADC, Inc., is a corporation that was formerly a three-person partnership. It is in the Research Skills business of acquiring software and distributing it to accounting firms that need specialized
Astrid, who is single, is a sales representative for several sporting goods manufacturers.She operates her enterprise as a sole proprietorship. Astrid has one employee, Melvin, who serves as office
LO1 How are deductions and losses different? How are they similar? Explain.
LO1 Discuss the basic differences between annual losses and transaction losses.
LO2 Habiby, Inc., has the following income and expenses for 2008 through 2011.What is the amount of tax that Habiby should pay each year? Use the corporate tax rate schedules in (Appendix B) to
LO4 Return to the facts of problem 21.In the next year, Carlos has a loss from the dry cleaning store of $18,000. How much of the loss can Carlos deduct? Explain.
LO4 Wayne owns 30% of Label Maker Corporation. Label Maker is organized as an S corporation. During 2010, Label Maker has a loss of $160,000. At the beginning of 2010, Wayne’s at-risk amount in
LO4,5 Sidney and Gertrude own 40% of Bearcave Bookstore, an S corporation. The remaining 60% is owned by their son Boris. Sidney and Gertrude do not participate in operating or managing the store,
LO7 Mort is the sole owner of rental real estate that produces a net loss of $18,000 in 2009 and $20,000 in 2010 and income of $6,000 in 2011. His adjusted gross income, before considering the rental
LO7 Katrina is the sole owner of rental real estate that produces a net loss of $18,000 in 2009 and $22,000 in 2010 and income of $9,000 in 2011. Her adjusted gross income, before considering the
LO7 Mason owns a passive activity that generates a loss of $14,000 in 2009, $12,000 in 2010, and income of $4,000 in 2011. In 2010, Mason purchases a second passive activity that has passive income
LO7 Return to the facts of problem 37.At the end of 2011, Mason sells the passive activity that generated the losses for $16,000. What is the effect on his taxable income if his basis in the activity
LO10 During 2010, Yoko has total capital gains of $8,000 and total capital losses of$16,000. What is the effect of the capital gains and losses on Yoko’s 2010 taxable income? Explain.a. Assume that
LO10 Goldie sells 600 shares of Bear Corporation stock for $9,000 on December 14, 2010. She paid $27,000 for the stock in February 2007. Assuming that Goldie has no other capital asset transactions
LO8 Labrador Corporation has total capital gains of $18,000 and total capital losses of $35,000 in 2010. Randy owns 25% of Labrador’s outstanding stock. What is the effect on Labrador’s and
LO8 Bongo Corporation is incorporated in 2008. It has no capital asset transactions in 2008. From 2009 through 2012, Bongo has the following capital gains and losses:Assuming that Bongo’s marginal
LO10 Rick, a single taxpayer, owns 30,000 shares of qualifying small business stock that he had purchased for $300,000. During the current year, he sells 10,000 of the shares for $25,000. What are
LO10 Howard Company is 100% owned by Rona. During the current year, Howard sells some land to Rona for $50,000 that had cost Howard $80,000 and that had a fair market value of $100,000. Write a
LO10 Leona owns 300 shares of Ross Industries. She acquired the shares on February 17, 2008, for $6,500. On September 17, 2010, she acquires another 200 shares of Ross for $4,800. Two weeks later, a
LO9,12 Jamila is involved in an auto accident during the current year that totally destroys her car. She purchased the car two years ago for $28,000. Jamila used the car in her business 75% of the
LO10,11 Andy sells the following assets during the year.What is Andy’s deductible loss? Explain. Personal automobile ABC stock Personal furniture BCCI bonds Gain (Loss) $(2,000) 4,800 1,200 (9,600)
LO10,11 Faith, who is single, sells the following assets during 2010:l 20,000 shares of qualified small business stock at a loss of $62,000. Faith bought the stock in 2005.l 1,200 shares ofGeelong
Anton is single and a self-employed plumber. His net income from his business is$56,000. He has dividend income of $6,000 and an $8,000 loss from a rental property in which he actively participates.
Rita is the sole owner of Video Plus, a local store that rents video games, software, and movies. She works 40 hours a week managing the store.
Emma owns and operates Conway Camera. One night someone breaks into the store and steals cameras that cost $2,200. The retail price of the cameras is $3,500.
Mike’s Pizza decides to replace one of its delivery vehicles. The vehicle has a basis of$2,700 and Mike’s is able to sell it for $2,100.
Zoriana sells stock that she acquired in 2006 for $7,500. Her basis in the stock is$14,000. She has a $2,000 long-term capital loss carryover from 2009.
LO3 Chai is self-employed and travels to New Orleans for a business conference.The following facts are related to the trip:a. If Chai spends 4 days at the conference and 2 days sightseeing, what
LO3 Floyd owns an antique shop. During the year, he and his wife, Amanda, who works as a real estate broker, attend a 3-day antique show in Boston. The following facts are related to the trip:*The
LO5 The following information is from the financial records of the Adham Corporation at the end of the year:The allowance for bad debts account is based on an aging of the corporation’s accounts
LO6 KOM pays the following insurance premiums during 2010:a. If KOM uses the accrual method of accounting, what is the insurance expense deduction for 2010?b. If KOM uses the cash method of
LO11 During the current year, the Coetzer Corporation hires Marcelo, and agrees to reimburse him for all of his moving costs. Marcelo submits the following expenses to Coetzer for reimbursement:a.
LO1 What are the two reasons most commonly advanced for excluding items from income? Give examples of each, and explain how they accomplish the purpose of the exclusion.
LO1 What is the difference between an exclusion of income and a deferral of income?
LO2 How can gifts be used to lower the overall tax paid by a family?
LO2 Why are life insurance proceeds excluded from the gross income of the beneficiary of the policy?
LO2 Explain the circumstances under which a scholarship would not be excluded from gross income.
LO3 What tax relief is provided to U.S. citizens who earn income in a foreign country and pay taxes in that country?
LO4 How do employees benefit from payments made into a qualified pension plan on their behalf?
LO4 Distinguish group term life insurance from whole life insurance.
LO4 What is the difference in the tax treatment of a medical insurance plan that is purchased from a thirdparty insurer and a self-insured medical reimbursement plan?
LO4 What is a Health Savings Account?
LO4 What is the difference between a qualified employee discount and a bargain purchase by an employee?
LO4 What is the difference between a cafeteria plan and a flexible benefits (salary reduction) plan?
LO5 Why are workers’ compensation payments treated differently from unemployment compensation payments for tax purposes?
LO5 What is a personal physical injury for purposes of excluding damage payments received?
LO5 Are punitive damages taxable? Explain.
LO5 Are payments for loss of income taxable? Explain.
LO6 What is the purpose of excluding municipal bond interest from gross income?
LO6 Are all stock dividends received excluded from gross income?
LO2 Assume the same facts as in problem 27, except that Earl is not a residence hall assistant and his general scholarship is for 10,000.
LO3 Joan is a single individual who works for Big Petroleum, Inc. During all of 2010, she is stationed in West Africa. She pays West African taxes of $19,000 on her Big Petroleum salary of $88,000.
LO4 Tia is married and is employed by Carrera Auto Parts. In 2010, Carrera established high-deductible health insurance for all its employees. The plan has a $2,400 deductible for married taxpayers.
LO6 Determine Rona’s gross income from the following items she receives during the current year:In addition, Rona owns 1,000 shares of Cochran Corporation common stock.Cochran has a dividend
LO6 Fran and Tom purchase a home in 2006 for $1,500,000. To finance the purchase, they borrow $1,450,000 from Buttars Mortgage Brokers. In 2007, they borrow an additional $100,000 from Buttars,
A tornado extensively damaged the community in which Bodine Company had its primary manufacturing facilities. Bodine gives $1,000 to each household that suffered damage from the tornado to help
Kermit receives a $1,000, 6% bond of General Foods, Inc., from his uncle Ed as a graduation present. The bond pays interest on June 30 and December 31.Kermit receives the bond on May 1.
Hersh inherits $50,000 from his grandfather. He receives the money on January 1 and immediately invests $25,000 in General Motors bonds that pay 8% annual interest and $25,000 in Lane County highway
Than’s grandmother dies and leaves him jewelry worth $40,000. In addition, he is the beneficiary of a $100,000 life insurance policy that his grandmother had bought before she retired.

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