Questions and Answers of Concepts In Federal Taxation

At the beginning of 2010, Heather owns the following stocks:In addition to these stocks, Heather received 400 shares of Poor Boy preferred stock from her grandfather as a gift on December 25, 2009.
Rosie has owned a successful luncheonette for several years. Tired of the long hours Communication Skills and eager to try another way of life, she decides to buy a fishing boat and start a charter
LO2 How does the wherewithal-to-pay concept affect the recognition of gains on asset dispositions? What else is necessary for nonrecognition of a gain upon disposition of an asset?
LO2 How is the tax treatment of a deferred gain similar to and different from the treatment of an excluded gain?
LO3 When a gain on a property disposition is deferred, the basis of the replacement property is reduced by the amount of gain deferred. Which concept supports this treatment? Explain.
LO6 What is boot? How does boot affect the recognition of gains or losses on like-kind exchanges?
LO4 What constitutes an exchange of assets?
LO4 Does an exchange have to occur simultaneously to qualify for nonrecognition? Explain.
LO4 Define like-kind property as it applies to like-kind exchanges, and give examples of like-kind properties and properties that are not of like-kind.
LO6 Why does the assumption of a mortgage when exchanging related assets constitute boot?
LO5 Discuss the restrictions placed on like-kind exchanges between related parties. Include the reasoning behind the restriction in your discussion.
LO4 What is the recapture potential of an asset?
LO7 How long does a taxpayer who suffers an involuntary conversion of an asset have to replace the asset to qualify for nonrecognition? Explain.
LO8 What is a principal residence of a taxpayer?
LO9 What are the requirements for excluding gain on the sale of a principal residence?
LO2,3 Honre Corporation’s warehouse and Filip Company’s office building were located side by side until a fire raced through both structures, completely destroying them. The warehouse has an
LO4,6 Jalapeno Company trades in its old delivery van for a new delivery van. The old van cost $22,000 and has an adjusted basis of $15,000. Jalapeno is given a$13,000 trade-in allowance on the new
LO4,5,6 Shirley has an old tractor that has an adjusted basis of $9,000 and a fair Communication Skills market value of $5,000. She wants to trade it in on a new tractor that costs $25,000.Write a
LO4,5,6 Jerry sells his delivery truck, which has a basis of $25,000, to Tom’s Truck Company for $10,000. On the same day, he purchases a new truck from Tom’s Truck Company at a cost of
LO4,6 Return to the facts of problem 34.Two years after acquiring the new computer, Olga sells it for $6,000. The adjusted basis of the computer is $3,800. What is the character of the recognized
LO4,5,6 On July 8, 2010, Cynthia and her daughter Constance agree to exchange land they held for investment. Both tracts are worth $18,000. Cynthia acquired her land 4 years earlier for $9,000.
LO3 Why does the computation of adjusted gross income apply only to individual taxpayers and not to other tax entities such as corporations?
LO1 What is the fundamental requirement that must be satisfied to deduct a business expense?
LO3 What are the two primary categories of business expense? Why is it necessary to classify business expenses in these two categories?
LO3 Why must a conduit entity report certain deductions separately?
LO2 Discuss how well the rules for deducting expenses implement the ability-to-pay concept.
LO4 How are mixed-use expenditures and expenses related to mixed-use assets treated for tax reporting?
LO3 What is the difference between a trade or business and a production of income activity and why is it important to distinguish between these two types of activities?
LO5 What requirements must be met to deduct a trade or business expense? an expense related to the production of income?
LO6 When are capital expenditures deductible?
LO6 How do you distinguish a currently deductible expenditure from a capital expenditure? Give examples of each type of expenditure.
LO6 Why are start-up costs related to the investigation of a business opportunity treated differently depending on the current trade or business of the taxpayer?
LO6 Explain the rationale for not allowing a deduction for political and lobbying expenditures.
LO6 Explain why the income tax concepts support a deduction for some expenses of an illegal business.
LO6 Why are expenses related to the production of taxexempt income not deductible?
LO7 Explain the rationale for the treatment of deductions related to hobbies, vacation homes, and home offices.
LO7 What is/are the requirement(s) for determining whether a residence used for personal purposes is a vacation home or a true rental property?
LO7 Under what circumstances can a taxpayer deduct the costs of a home office?
LO8 What is/are the criterion (criteria) for the deduction of an expense by a cash basis taxpayer?
LO8 What constitutes the payment of an expense by a cash basis taxpayer?
LO8 What are the criteria for the current deduction of a prepaid expense by a cash basis taxpayer?
LO8 What tests must be met for an accrual basis taxpayer to deduct an expense?
LO8 What is the general purpose of the economic performance test?
LO2 Andy, Azim, and Ashwin operate the Triple-A Steak House, a popular restaurant and bar. The three, who have been friends since childhood, are equal partners in the establishment. For the year,
LO2 Manuel and Fernando own and operate an electronics store, Electronica, as an S corporation. Manuel owns 70%, and Fernando owns 30%. For the current year, the store reports the following:a. How
LO7 In 2010, RayeAnn acquires a car for $14,000. She uses the car in her advertising business and for personal purposes. Her records indicate the car is used 70% for business and that her total
LO7 Sharon is single and a data-processing manager for the phone company. She also owns and operates a sports memorabilia store. Sharon goes to shows, subscribes to numerous magazines on sports
LO7 Lee and Sally own a winter retreat in Harlingen, Texas, that qualifies as their second home. This year they spent 40 days in their cabin. Because of its ideal location, it is easy to rent at $120
LO7 Mel and Helen own a beachfront home in Myrtle Beach, S.C. During the year, they rented the house for 5 weeks (35 days) at $800 per week and used the house for personal purposes 65 days. The costs
LO7 Matilda owns a condominium on the beach in Rehoboth, Delaware. During the current year, she incurs the following expenses related to the property:Determine the amount of Matilda’s deductions in
LO7 Hassad owns a rental house on Lake Tahoe. He uses a real estate firm to screen prospective renters, but he makes the final decision on all rentals. He also is responsible for setting the weekly
LO7 Ray, 83, is a used car dealer. He lives in a rural community and operates the business out of his home. One room in his 6-room house is used exclusively for his business office. He parks the cars
LO7 Charlotte owns a custom publishing business. She uses 500 square feet of her home (2,000 square feet) as an office and for storage. All her business has come from telemarketing (telephone sales),
LO8 On July 1, 2010, Andaria borrows $30,000 from the First Financial Bank. The loan is for 1 year at an annual interest rate of 10%. How much interest can Andaria deduct under each of the following
LO8 Damon’s Lawn and Garden Supply, an accrual basis taxpayer, is the exclusive dealer for Tru-Cut lawn mowers. In 2010, Damon’s agrees to pay the Dash Corporation, the manufacturer of Tru-Cut,
LO8 Joy incurs the following expenses in her business. When can she deduct the expenses if she uses the accrual method of accounting? the cash method?a. Joy rents an office building for $750 a month.
LO8 The Parr Corporation incurs the following expenses. When can it deduct the expenses if it uses the accrual method of accounting? the cash method?a. Parr Corporation mails a check for $5,000 to
LO9 Kai, a cash basis taxpayer, is a 75% owner and president of Finnigan Fish Market.Finnigan, an S corporation, uses the accrual method of accounting. On December 28, 2010, Finnigan accrues a bonus
LO10 During the current year, Covino Construction makes $5,000 in political contributions to ten political candidates. What amount can Covino deduct for financial accounting purposes? for tax
Shuana works as a lawyer for a large law firm where professional dress is expected.Her friend, Carissa, is a nurse at a local hospital. Shuana spends $1,500 a year on clothing, shoes, and accessories
Angela owns a duplex. She rents out one unit and lives in the other. During the current year, she pays $4,500 in interest on the loan she used to buy the duplex, $900 in property taxes on the duplex,
Harry and Sydney each inherited 50% of the stock in their father’s corporation when he died. Harry had been working for his father and wanted to retain control of the business. Sydney was not
Leonard owns an apartment complex. During the current year, he pays $14,000 to have all the apartments painted and recarpeted. Gena purchases an apartment complex during the current year. Before she
In auditing the Philbin Corporation’s repair expense account, Sara finds a $28,000 entry. Since the amount is so large, she obtains supporting documentation. The invoice lists the Fradin Roofing
Gary and Wes operate a wholesale meat company. The company sells to restaurants, golf clubs, and other dining establishments. Recently they spent $20,000 for market and demographic surveys, financial
Marcus is the vice president of human resources for Griffin Industries. He spent one week testifying before Congress on the impact health care legislation will have on small business. His trip cost
Russell is employed as a prosecutor for the town of Swansee. He also works 15–20 hours a week raising purebred Labradors. Over the last 7 years, he has reported an average net income from this
Chin, a cash basis taxpayer, borrows $25,000 on a 2-year loan from State Bank to purchase business equipment. Under the terms of the loan, State Bank deducts $4,500 in interest on the loan and gives
RIA RESEARCH EXERCISE Use the RIA Checkpoint database to answer the following questions. Cut and paste the relevant Internal Revenue Code and Regulation section(s) into your solution and explain how
Many legislative, administrative, and judicial resources are available on the Internet.Court cases can be located using a search engine provided by your browser or a tax directory site on the
Calvin and Lorna live in Nebraska and own rental property in the Ozark Mountains.They have always prepared their own tax return and have allocated their rental expenses including their mortgage
Teresa owns a condominium in Florida. During the current year, she incurs the following expenses related to the property:Prepare a spreadsheet calculating Teresa’s rental income or loss for each of
Mark Pari is a self-employed electrician who exclusively uses a room in his home to Tax Form perform the administrative functions related to his business. The room is 250 square feet of the 2,500
Conrad purchases a condominium in Aspen, Colorado. Because of his hectic work schedule, Conrad is unsure how much he will be able to use the condo over the next few years. A friend of his who has a
Allison and Paul are married and have no children. Paul is a lawyer who earns a salary of $80,000. In November 2009, Allison quit her job as a copy editor and began exploring the possibility of
LO7 Refer to the facts of problem 44.Write a letter to Grant Industries explaining Communication Skills why it might want to recognize the entire gain on the condemnation.
LO7 Alley’s automobile dealership, which has an adjusted basis of $400,000, is Communication Skills destroyed by a hurricane in the current year. Alley’s receives $600,000 from its insurance
LO9 Kerri and John are married. On May 12, 2010, they sell their home for$190,000 and purchase another residence costing $225,000. What are Kerri and John’s realized gain and recognized gain in
LO9 Gary and Gertrude are married on April 8, 2009. They use Gertrude’s home as their residence. Gertrude purchased the home on November 14, 2007, for $60,000.On February 19, 2010, Gertrude is
Erica owns A-1 Landscaping Services. She trades a lawn tractor with a basis of $200 for a powered post hole digger worth $300.
Johann exchanges an apartment building for an office building worth $100,000. The apartment building has an adjusted basis of $80,000 and is encumbered by a $30,000 mortgage, which the owner of the
Lorraine is an avid baseball card collector. She gives a card dealer $50 and a Roger Maris card for a Sammy Sosa card.
Stephanie owns 75% of the Gould Corporation. She exchanges land that she owns as an investment for an office building owned by Gould that has a fair market value of$130,000. In the exchange,
Festus Farmers Cooperative truck barn, which has a $50,000 adjusted basis, is destroyed by a fire. Festus receives $80,000 from its insurance company for the barn and uses the proceeds as a down
Raylene’s personal automobile is destroyed by a tornado. Her insurance company paid her $5,000, which she used to purchase a new automobile costing $10,000.Raylene received the automobile that was
Laurie bought a home in 2007 for $65,000. On November 2, 2010, she sells it for$114,000. Laurie uses the proceeds to purchase a duplex costing $200,000. She uses one unit in the duplex as her
Harvey sells his personal residence on March 18, 2010, for $78,000. He paid $86,000 for it on April 22, 2008.
Eva and Mario are married on June 14, 2009. They use Eva’s home as their principal residence. Eva purchased the home for $97,000 in 2006. On January 13, 2010, Eva and Mario are divorced. As part of
The Internal Revenue Service provides information on a variety of tax issues in its publication series. These publications can be found on the IRS World Wide Web
Taxpayers can structure transactions through third parties that qualify as like-kind exchanges if certain time requirements for identifying the properties and closing the transaction are met. This
Will owns residential rental property that is destroyed by a tornado in March 2009. He files a claim with his insurance company and receives $90,000 for the property. The building is fully
In October 2010, fire completely destroys the principal residence of Olaf, who is 63 Communication Skills and single, and lives in Bemidji, Minnesota. He owned the home for 16 years; his adjusted
LO1 What are the primary nontax factors to consider when choosing a form for doing business?
LO2 Discuss the comparative advantages and disadvantages of general partnerships and limited partnerships.
LO2 What are the nontax differences between a corporation and an S corporation?
LO2 What are the requirements to qualify for the S corporation election?
LO2 How is a limited liability company different from a corporation?
LO2 How is a limited liability partnership different from a partnership?
LO3 Compare the incidence of taxation for each of the following entities:a. Sole proprietorshipb. Partnershipc. Corporationd. S corporation
LO3 What are the tax differences between a corporation and a personal service corporation?

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