Questions and Answers of Concepts In Federal Taxation

The use of a ‘‘flat tax’’ to replace the current income tax system has received a considerable amount of interest in recent years. Various flat-tax proposals have been made, but the gist of a
Sonya works as a sales representative for a computer manufacturer. Using the information below as a guide, prepare a spreadsheet calculating the amount she must report as income, her deduction for
Stephanie Zane is the sole proprietor of Shear Madness, a hair salon. Her revenue comes from two sources, haircuts and the sale of hair products. Stephanie has three employees whose compensation
Rufus and Rhonda are a married couple with 3 dependent children, all under 16 years of age. Rufus, 46, is an executive with Plowshare Corporation. Rhonda, 39, is a self-employed attorney.Rufus
LO1 What is the difference between a contributory and a noncontributory pension plan?
LO1 What are the tax advantages of using a qualified pension plan instead of a non-qualified pension plan?
LO1 What requirements must be met for a pension plan to be treated as a qualified pension plan?
LO1 Are all entities allowed to establish the same type of qualified pension plan?
LO1 Explain the difference between a defined benefit plan and a defined contribution plan.
LO1 What is the maximum amount that can be contributed to a defined contribution pension plan?
LO1 What is the maximum benefit that can be paid to an individual under a defined benefit plan?
LO2 How does a Keogh plan differ from other qualified pension plans?
LO2 What is meant by the term owner-partner?
LO2 How does being an owner-partner affect the amount that can be contributed to a Keogh plan?
LO2 Are all taxpayers (including spouses of active participants)allowed a deduction for a contribution to an individual retirement account? Explain.
LO2 How does a simplified employee pension plan differ from a Keogh plan? From a qualified pension plan?
LO2 What requirements must a taxpayer meet to establish a simplified employee pension plan?
LO3 How is the required minimum distribution(RMD) from a pension plan determined?
LO3 Generally, at what age can pension plan distributions begin? When must they begin? Explain any exceptions to these general rules.
LO3 Discuss the penalty provisions associated with qualified pension plans, Keogh plans, and IRAs.
LO3 Discuss the penalty provisions associated with Roth IRAs.
LO4 Explain the differences between a nonqualified stock option plan and an incentive stock option plan.
LO4 How is a nonqualified stock option taxed if it is subject to substantial risk of forfeiture?
LO4 What is the advantage of making a Section 83(b)election?
LO4 What requirements must a stock option meet to qualify as an incentive stock option?
LO4 What is the tax treatment of a stock option that qualifies as an incentive stock option? What is the treatment if the requirements are not met?
LO6 Why are tax credits rather than a deduction used to provide tax relief?
LO6 Why are business credits allowed to be carried forward to future tax years?
LO6 What is Congress trying to accomplish with the use of tax credits? Provide an example of a tax credit and Congress’s purpose for creating it.
LO6 What is the purpose of the research and experimental tax credit?
LO6 What types of expenditures qualify for the rehabilitation tax credit?
LO6 What restrictions are placed on the rehabilitation tax credit?
LO6 What is the purpose of the general business tax credit?
LO7 What is the purpose of the alternative minimum tax?
LO7 What is the tax base for the alternative minimum tax? Explain the general computation of the base.
LO7 What is the basic difference between an AMT adjustment and a preference?
LO7 Why can AMT adjustments be negative?
LO7 What is the AMT exemption amount? Is it available to all taxpayers?
LO7 What tax credits are allowed for AMT purposes?
LO7 What is the purpose of the AMT credit against the regular tax?
LO8 Compare and contrast how the United States taxes a U.S. citizen, a nonresident alien, a domestic corporation, and a foreign corporation.
LO8 Why does the United States establish a tax treaty with a foreign country?
LO8 Discuss how a controlled foreign corporation is taxed.
LO8 What is Subpart F income and how is it taxed?
LO8 What is the purpose of the foreign tax credit?
LO8 Why is the transfer of appreciated property to a controlled foreign corporation subject to tax?
LO8 What is the purpose of the transfer pricing rules?
LO8 Explain how foreign corporations conducting business in the United States are taxed on their business and nonbusiness income.
LO8 Why is the sale of property by a foreign corporation not subject to the withholding tax on nonbusiness income?
LO1 Manuel is an employee of Etowah Corporation and has worked for the company for 22 years. Employees are not required to contribute to the company’s defined benefit plan. Based on the plan,
LO3 Ghon is a married taxpayer who retired from his job at Smithfield Printing in 2009. During 2010, he turns 70½, and begins withdrawing the $215,000 (balance as ofDecember 31, 2009) in assets in
LO3 Felicia is a single taxpayer who retired from her job as a sales executive with Waynesville Associates, LLC. During 2009, she turns 70½ and begins withdrawing the $320,000 in assets (balance as
LO3 Suresh is a sales representative for Swinley Manufacturing. The corporation Communication Skills maintains a defined contribution profit-sharing plan on behalf of its employees. It contributes
LO2 Hector is a single taxpayer with adjusted gross income of $110,000. What is the maximum contribution that he can make to a Roth IRA for the current year?
LO3 Glenna is retired from Cherry Hills Corporation. When she retired at age 68, she decided to take her pension as a lump-sum distribution and roll over the proceeds tax-free into her IRA. On
LO4 Return to the facts of problem 64.On November 30, 2011, when the fair market value of the stock is $30, Albert sells the stock. Determine the tax consequences to both Albert and Beaconsfield
LO4 Return to the facts of problem 67.Assume that Louise sells the stock on October 31, 2011, for $35 per share. Determine the tax consequences for Louise and Somerton on the date of sale.
LO4 On July 1, 2010, Howard is granted the right to acquire 500 shares of Matoney Corporation stock for $15 per share. The option qualifies under the company’s incentive stock option plan. The
LO6 Return to the facts of problem 72.Assume that Lavinia sells the building in April 2013.a. How much of the older buildings tax credit must Lavinia recapture?b. Assuming the building qualifies for
LO7 Assume that in problem 77, Stan sells the machinery in 2016 for $28,500.Determine the effect of the sale on Stan’s regular taxable income and his alternative minimum taxable income in 2016.
LO7 Alice and Frank have the following items on their current-year tax return:Determine the amount of the adjustments that Alice and Frank will have to make in computing their alternative minimum
LO7 Pauline is considering investing in bonds. Her broker has given her two options Communication Skills to consider. The first is to invest in city bonds with an interest rate of 6%. The second
LO8 Logo Corporation, a domestic corporation, owns 100%of TAG, a foreign cor- Communication Skills poration. TAG is Logo’s only source of income. During the current year, TAG receives $80,000 of
LO8 Assume the same facts as in problem 87.In the next year, TAG distributes$5,000 to Logo. What are the tax effects of the distribution?
LO8 Norman, a U.S. corporation, owns 100% of Monterio, a foreign corporation operating in Barbados, which has no income tax. Norman ships goods directly to its foreign customers from its Atlanta
Lisa works full-time at the Snowden Corporation as a manager in quality control.She is trying to get her employer to initiate a retirement program for all Snowden employees who make more than $80,000
The Schwarzbach Corporation manufactures metal fasteners at a cost of 55 cents per fastener and sells them to wholesalers for 60 cents each. During the year, it establishes a 100%-owned CFC in
Jingling Corporation is wholly owned by Jing and Ling, who are residents of Japan.Jingling is located in Nebraska and produces home furniture. Jingling sells its furniture directly to final customers
Assume the same facts as in problem 98, except that Jingling’s royalty income is from investments located in Japan.
Use the Internet to find articles or discussions about planning aspects of Roth IRAs and regular IRAs. Trace the steps you use to find additional information (search engine or tax directory used and
The reduction in the marginal tax rates made by The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) may result in more taxpayers paying the alternative minimum tax (AMT). A Web site
The United States and the country of Bersia are about to enter into a tax treaty. The U.S. Research Skills is especially interested in establishing a treaty because many U.S. students attendmedical
Harry and Matilda are married and have the following tax return data for 2010:Do Harry andMatilda owe any income tax for 2010? Explain why they might owe tax in 2010, and discuss the items on their
William, Daniel, and Thomas are brothers who have decided to form an engineering firm. Although Thomas has an MBA degree and will function primarily as the firm’s financial expert, he has no formal
LO2 How does the allowable capital recovery period affect the potential return on the investment in an asset?
LO1Which twotestsmust bemet to claim a periodic recovery deduction on a capital expenditure?
LO1 What types of capital expenditures are not deductible over time (i.e., their cost is recovered upon disposition of the asset)?
LO1 What is the depreciable basis of an asset? What role does depreciable basis play in determining the annual cost recovery on a depreciable asset?
LO3 What was the purpose of changing from the facts and circumstances depreciation method to the ACRS method?
LO5 In general, which types of property may be expensed under Section 179, and what is the current maximum limit on the deduction?
LO5 What limitations are placed on the maximum amount to be expensed under Section 179?
LO5 Is the Section 179 election to expense an incentive to all businesses to invest in qualifying property?
LO6 What is the purpose of the acquisition- and disposition-year convention?
LO6 What acquisition- and disposition-year conventions are used in MACRS and to what types of property does each of the conventions apply?
LO6 Why is the calculation of depreciation using MACRS generally considered easier and more efficient than the calculation using the facts and circumstances method?
LO7 What is the Alternative Depreciation System? How is it different from a straight-line election under MACRS?
LO7 Why might a taxpayer elect to depreciate assets using the Alternative Depreciation System (ADS)?
LO8 Why are restrictions placed on the cost recovery of listed property?
LO8 When a taxpayer purchases an automobile for use in a trade or business, what limits are placed on the cost recovery on the automobile?
LO9 Which types of property are allowed a deduction for depletion?
LO9 How is cost depletion different from percentage depletion?
LO9 Which income tax concepts might taxpayers who take depletion deductions be violating?
LO10 How are the costs of intangible assets recovered?
LO5 A taxpayer purchases $141,000 worth of property that qualifies for the Section 179 deduction during the current year. The taxpayer would like to deduct the greatest depreciation expense possible
LO5 Firefly, Inc., acquires business equipment in July 2010 for $535,000.a. What is Firefly’s maximum Section 179 deduction for 2010? Explain.b. What happens to any portion of the annual limit not
LO5 In 2010, Terrell, Inc., purchases machinery costing $548,000. Its 2010 taxable income before considering the Section 179 deduction is $125,000.a. What is Terrell’s maximum Section 179 deduction
LO5 In 2010, Theo purchases $16,000 of Section 179 property for use in his delivery business. During 2010, he has $12,000 in taxable income from his business.a. What is Theo’s maximum Section 179
LO5 During 2010, Belk Corporation purchases $70,000 worth of equipment for use in its business. Belk’s current taxable income before considering the Section 179 deduction is $26,000.a. What is
LO5 Brad is a shareholder and full-time employee of an S corporation. During 2010, he earns a $50,000 salary from the S corporation and is allocated $12,000 as his share of its net operating loss. In
LO5 Jennifer owns a 40% interest in the Thomas Partnership. She also owns and operates an architectural consulting business. During the current year, the partnership purchases $150,000 worth of

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