Questions and Answers of Concepts In Federal Taxation

Robert and Susan (both 39) are married and have 2 children. Their son, Dylan, is 8 and their daughter, Harper, is 3.Susan sells pharmaceuticals for the Bendigo Drug Company. Robert is a teacher at
In integrative problem 85 in Chapter 4, you were asked to calculate Carmin’s gross income for 2010. This is the second phase, which provides the additional information necessary for you to
LO1 What effect does a property’s use have on the cost recovery allowable on the property?
LO1 What is the difference between a property’s use and its type?
LO1 Explain the difference between tangible property and intangible property.
LO1 How is personal property different from personal use property?
LO4 Explain the role an asset’s initial basis plays in determining the income to be recognized upon disposal of the asset.
LO3,5 Explain the difference between a property’s initial basis and its adjusted basis.
LO5 What tax problems does a taxpayer encounter when purchasing more than one asset for a single price?Explain.
LO5 What are the tax implications of a taxpayer’s selfconstruction of assets for use in the taxpayer’s trade or business?
LO5 List some costs that are normally expensed that must be capitalized when a taxpayer self-constructs an asset for use in a trade or business.
LO7 Why are gifts of property not income to the person receiving the gift?
LO7 What is the general rule for determining the basis of gift property?
LO7 What is the general rule for determining when the holding period of an asset begins?
LO7 What type(s) of asset acquisitions do not follow the general rule for determining when the holding period of the asset begins?
LO7 When is the primary valuation date for valuing inherited property? Does the executor of the estate have to do anything to use the primary valuation date?
LO7 When is the alternate valuation date for valuing inherited property? When elected, are all assets valued on the alternate date? Explain.
LO8 Are commissions paid to acquire securities a deductible expense? If not, are they ever deductible?
LO3 Determine the adjusted basis of each of the following assets:a. Andre´ purchased a parcel of land three years ago for $17,000. In the current year, the adjoining property owner sues him,
LO3 Luana pays $40 per share for 100 shares of Manano Corporation common stock. At the end of the year, the market price of the stock is $60 per share. During the year, she receives a cash dividend
LO3 Carl Corporation acquires a business use warehouse for $200,000 on January 2, 2003. From 2003 through 2008, Carl Corporation properly deducts a total of$30,000 in depreciation. Carl incurs a net
LO3 Hannibal owns a farm. He purchases a tractor in 2006 at a cost of $25,000.Because 2006 is a bad year, he does not deduct any depreciation on the tractor in 2006. He sells the tractor in 2010 for
LO3 Troy owns 600 of the 1,000 outstanding shares of Oiler Corporation. His adjusted basis in the Oiler stock at the beginning of the current year is $88,000. Oiler Corporation is organized as an S
LO5 Izzy is an employee of Kosmo’s Kustom Kars, Inc. The company rebuilds classic automobiles for resale. Last year, Izzy bought a rebuilt 1956 Thunderbird for $15,000 from the company. A car like
LO5 Nathaniel purchases a house by paying $25,000 in cash and securing a home mortgage for $75,000. He also incurs $3,000 in legal fees, title search, and closing costs. He agrees to pay the property
LO7 Calculate the basis for gain and basis for loss and the taxable gain or deductible loss for the following gifts which are received and sold in the current year: a. Donor's Adjusted Basis FMV at
LO7 Taylor dies on February 19 of the current year. Among the assets in his estate are 500 shares of Dane Company preferred stock. Taylor paid $14 per share for the stock on August 13, 2000. Market
LO7 Phong would like to begin planning her estate. She owns marketable securities Communication Skills that cost $10,000 twelve years ago. The market value is $40,000. She wonders whether she should
LO7 Return to the facts in problem 60.Assume that the securities have a fair market value of $2,000. What positive tax strategy exists in this situation? Explain.
LO7 Phoebe opens a bait delivery service during the current year. In starting up the Communication Skills business, she decides to use her personal truck as a delivery vehicle. She had paid$16,000
LO8 On January 5, 2010, Henry purchases 500 shares of Wichmann, Inc., common stock at a cost of $24,700. On April 1, 2010, he purchases an additional 300 shares for $19,500. On November 13, 2010,
LO8 On September 5 of last year, Edwina purchases 100 shares of Atlantis Corporation common stock for $5,000. In December of the current year, she receives a nontaxable stock dividend of 10 shares of
LO8 Eric owns 600 shares of Razor, Inc., stock for which he paid $3,500 in 2006. On December 14, 2010, he sells the 600 shares for $4 per share and pays a commission of$200 on the sale. On January 3,
Leineia owns 1,000 shares of Serous Corporation common stock. She paid $26 per share several years ago. On December 31 of the current year, Serous distributes a $5 per share cash dividend. It reports
During the current year, Horace’s personal residence is damaged by a tornado. It had an adjusted basis of $40,000 before the tornado. The cost of repairing the damage is$11,000. Horace’s
Jolene owns a dry-cleaning business. During the current year, a rainstorm causes a roof leak that shorts out a dry-cleaning machine. The cost of repairing the machine is$300, none of which is
Charles buys a car for $15,000 that has a fair market value of $10,000.
Kendrick pays a construction company $20,000 to remodel a house.
The Lester Partnership wants to develop a shopping mall on a former farm. The farmer wanted $260,000 for the land, $80,000 for the farm buildings, and $130,000 for the farmhouse. Although it wanted
Carter wants to retire from his florist business, and his long-time employee, Howard, would like to take over the business.
For his 18th birthday, Kevin gave his son, Gabe, 5 gold coins for which he paid $500 each 2 years earlier. On Gabe’s birthday, coins were selling for $450. One month after his birthday, Gabe sells
Tommi inherits Dierhopf Corporation common stock from her uncle, Norvel. Norvel’s adjusted basis in the stock is $200,000, and the fair market value is $380,000.Six months after Norvel’s death,
On September 14 of last year, Wenona purchased 100 shares of Campbell Corporation common stock at a total cost of $8,000. In December of the current year, Campbell pays a nontaxable stock dividend of
Monica owns 1,400 shares of Northeast Utilities common stock. In August of this year, when its stock was selling for $10 per share, Northeast announced a 20% stock dividend. In lieu of receiving the
RIA RESEARCH EXERCISE Use the RIA Checkpoint database to answer the following questions. Cut and paste the relevant Internal Revenue Code and Treasury Regulation section(s) into your solution and
In the United States, gifts of property are subject to the gift tax. To avoid double taxation, the income tax excludes the receipt of a gift from taxable income. To ensure that a subsequent sale of
The basis of inherited property is generally the fair market value at the date of death.This enables the person who inherits the property to receive a ‘‘step-up’’ in basis. Use the Internet
Luther, 72, is a lifelong bachelor who has been very successful in his business and Communication Skills investment endeavors. He realizes that he should begin to do some tax planning for his death.
Your client, Dale, is the president and sole stockholder of a steel fabrication company.He has been planning to buy a new piece of equipment for $500,000. He is upset to learn that the $500,000 cost
LO2 What are the net operating loss carryback and carryforward periods? Does a taxpayer have a choice of the years towhich a net operating loss can be carried? Explain.
LO3 What are the characteristics of a tax shelter, as the term is commonly used by tax practitioners?
LO4 How is a taxpayer’s amount at risk in an activity different from the taxpayer’s basis in the same activity?What purpose does the amount at risk serve in regard to losses?
LO4 What is a nonrecourse debt? How is financing using nonrecourse debt different from financing using recourse debt?
LO5 What is the purpose of the passive loss rules?
LO5 Are the passive loss rules disallowance-of-loss provisions or are they loss deferral provisions? Explain.
LO8,10 What are the limitations on the deductibility of capital losses by individuals? How do the limitations compare with those for corporations?
LO10 Most sales of securities at a loss result in capital losses. Under what circumstances would a loss on the sale of a security be treated as an ordinary loss? Explain the rationale for this
LO10 What is the purpose of the related party rules as they apply to sales of property?
LO10 What is a wash sale? How is the treatment of a wash sale different from the treatment of other sales of securities?
LO12 How are the rules for deducting personal casualty and theft losses different from the rules for business casualty and theft losses? Explain the difference in treatments and the rationale for the
LO2 The Graves Corporation was incorporated in 2009 and incurred a net operating loss of $35,000. The company’s operating income in 2010 was $47,000. Because of a downturn in the local economy, the
LO2 Post Haste, incorporated in 2008, suffers a net operating loss of $80,000 in 2010. Post Haste had a net operating loss of $30,000 in 2008 and operating income of$65,000 in 2009. Allison, the
LO7 Jacqueline is a 60% owner of a rental property and has a significant role in the management of the property. During the current year, the property has a rental loss of$21,500. What is the effect
LO5 Return to the facts of problem 39.Assume that Jeremy dies when the passive activity has a fair market value of $37,000. What is the effect on Jeremy’s taxable income for the year he dies?
LO5 Return to the facts of problem 39.Assume that Jeremy dies when the passive activity has a fair market value of $25,000. What is the effect on Jeremy’s taxable income for the year he dies?
LO8 Newcastle Corporation was incorporated in 2009. For the years 2009 through 2011, Newcastle has the following net capital gain or loss.If Newcastle is in the 34% marginal tax bracket for each of
LO10 Katelyn purchased 300 shares of Condine, Inc., stock in 2008 for $9,000.During 2010, she sells 200 shares of Condine to her brother, Jon, for $3,600 and the remaining 100 shares to an unrelated
The Readyhough Corporation was incorporated in 2002. During 2009, the corporation had operating income of $80,000. Because of a strike at its major supplier, the corporation had an operating loss of
Celine opens a jewelry store during the current year. She invests $20,000 of her own money and receives a nonrecourse bank loan of $80,000. During the current year, the store has a loss of $24,000.
Margery owns a passive activity with a basis of $15,000. The activity has a $9,000 suspended loss. Margery sells the passive activity for $22,000.
Alphonse sells stock with a basis of $5,500 to his brother, Conner, for $4,000. His brother sells it later in the year for $5,100.
On January 1, 2010, Brenda acquires 200 shares of Disney stock for $8,000. She sells the 200 shares on September 2, 2010, for $30 per share. On September 23, 2010, Brenda acquires 400 shares of
George is single and has adjusted gross income of $37,000. He discovers termites in the basement of his house and pays $6,200 to fix the damage. His insurance company will not reimburse him for the
Articles on tax topics are often useful in understanding the income tax law. CPA firms and other organizations publish tax articles on the Internet. Using the ‘‘Guides-Tips-Help’’ section of
Adela owns rental real estate that generated a $27,000 loss during the current year.Using the information below as a guide, prepare a spreadsheet calculating her adjusted gross income. It should be
Rick and Debbie Siravo own a beachfront home in Wrightsville Beach, N.C. During the year, they rent it for 20 weeks (140 days) at $1,100 per week and use it 10 days for personal purposes. Rick
Jay is single and works as a salesperson. In December of the current year, he is selected as the company’s outstanding salesperson. In recognition of this honor, he receives a$75,000 bonus, which
LO1 How is the definition of income for income tax purposes different from the definition used by economists to measure income?
LO1 One of Adam Smith’s four criteria for evaluating a tax is certainty. Does the income tax definition of gross income promote certainty in the U.S. tax system?Explain.
LO1 What is the difference between realized income and recognized income?
LO1 What is a cash equivalent? How does a cash equivalent affect the reporting of income?
LO2 What type of income does a sole proprietor of a business receive?
LO2 What is the difference between earned income and unearned income?
LO2 How is the gross income from a rental property or a royalty property determined?
LO2 Explain how the capital recovery concept applies to the taxation of annuities. Consider both purchased annuities and pension payments in your answer.
LO2 Explain the difference in determining the amount of income recognized from a conduit entity versus a taxable entity.
LO2 What effect does an asset’s adjusted basis have in determining the gain or loss realized upon its sale?
LO3 Prizes and awards are generally taxable. Under what conditions is the receipt of a prize or award not taxable?
LO3 Are Social Security benefits taxable? Explain.
LO3 How is the taxation of an alimony payment different from the taxation of a child support payment?
LO3 What incentive does a taxpayer have to disguise a property settlement as an alimony payment?
LO4 Does the tax treatment of below market-rate loans violate any income tax concepts? If so, how? Explain.
LO4 Evaluate the following statement: Whenever another person pays an expense for you, you are in receipt of taxable income.
LO4 What is a bargain purchase?
LO5 How is capital gain income treated differently from other forms of income?
LO5 What is the purpose of the capital gain-and-loss netting procedure?
LO5 Are all losses realized on the sale of capital assets deductible?
LO5 Why is it important that a conduit entity separate the reporting of its capital gains and losses from its report of other forms of income?
LO6 Detail any significant differences in the recognition of income using the cash method and using the accrual method of accounting.
LO6 Explain the hybrid method of accounting.

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