Questions and Answers of Concepts In Federal Taxation

LO7 How does the wherewithal-to-pay concept affect the tax treatment of prepaid income?
LO7 Under what circumstances can the following taxpayers defer recognition of prepaid income beyond the year of receipt?a. A cash basis taxpayerb. An accrual basis taxpayer
LO7 What is an installment sale?
LO7 How is the degree of completion of a long-term construction contract determined?
LO1 Darcy borrowed $4,000 in 2007 from her employer to purchase a new computer.She repays $1,000 of the loan plus 6% interest on the unpaid balance in 2007, 2008, and 2009. After closing a big deal
LO2 Partha owns a qualified annuity that cost $52,000. Under the contract, when he reaches age 65, he will receive $500 per month until he dies. Partha turns 65 on June 1, 2010, and receives his
LO2 Minnie owns a qualified annuity that cost $78,000. The annuity is to pay Minnie$650 per month for life after she reaches age 65.Minnie turns 65 on September 28, 2010, and receives her first
LO2 Ratliff Development Corporation purchases a tract of land in 2009 at a cost of$120,000 and subdivides the land into 30 building lots. The cost of subdividing is$6,000. In 2009, Ratliff installs
LO2 The Rosco Partnership purchases a rental property in 2005 at a cost of $150,000.From 2005 through 2010, Rosco deducts $14,000 in depreciation on the rental. The partnership sells the rental
LO5 Pedro purchases 50 shares of Piper Company stock on February 19, 2007, at a cost of $4,300. He sells the 50 shares on July 2, 2010, for $9,000. On March 14, 2010, Pedro purchases 100 shares of
LO5 Rikki has the following capital gains and losses for the current year:What is the effect of the capital gains and losses on Rikki’s taxable income and her income tax liability? Assume that
LO5 Polly has the following capital gains and losses for the current year:What is the effect of the capital gains and losses on Polly’s taxable income and her income tax liability? Assume that
LO5 Erin, a single taxpayer, has a taxable income of $103,000 in the current year before considering the following capital gains and losses:In addition, Erin has an $8,000 long-term capital loss
LO5 Jason and Jill are married and have a six-year-old daughter. During the year, they sell one acre of land for $80,000. Three years ago, they paid $70,000 for two acres of land. Their other income
LO5 Jennifer is single and has the following income and expenses:Calculate Jennifer’s taxable income and income tax liability. Salary Interest income Dividend income Long-term capital gain $ 76,000
LO5 Jawan has the following capital gains and losses in the current year:What is the effect of the capital gains and losses on Jawan’s taxable income? Short-term capital gain Short-term capital
LO5 Refer to problem 71.In the following year, Jawan has the following capital gains and losses:What is the effect of the capital gains and losses on his taxable income? Short-term capital loss
LO5 Ozzello Property Management is organized as a partnership. The owners, Lorenzo, Erwin, and Michelle, share profits and losses 30:30:40. Ozzello has the following results for the current
LO5 Ramona owns 20% of the stock of Miller, Inc. Miller reports the following items for the current year:What are the effects on Ramona’s taxable income if Miller, Inc., is organized asa. A
LO5 Chloe and Emma start a new business, Cement Sidewalks and Accessories(CSA), during the current year. CSA is organized as a partnership. Chloe owns 40%of CSA; Emma owns the remaining 60%. Chloe
LO6,7 Determine how much interest income Later Federal Loan Company, a cash basis taxpayer, must recognize on each of the following loans in 2010:a. A $10,000, 8.5%, 6-month loan made on October 1,
LO6,7 In January 2010, Conan, a cash basis taxpayer, purchases for $4,000 a Series EE savings bond with a maturity value of $4,800 (a 6% annual yield). At the same time, he also purchases for $5,000
LO7 Daryl purchases land in 2006 at a cost of $65,000. In 2010, he sells the land for$100,000.a. How much gain or loss does Daryl realize on the sale of the land?b. Assume that the sales contract on
LO7 In 2007, Patricia purchases a rental property as an investment at a cost of$60,000. From 2007 through 2010, she takes $7,000 in depreciation on the property.In 2010, Patricia sells the rental
LO7 WCM Builders enters into a contract to build a shopping mall in 2010 for$6,000,000. Completion of the mall is expected to take 2 years and cost WCM$3,600,000. Upon signing the contract, WCM
During her vacation, Janita found a gold bar from a sunken ship while she was scuba diving off Texas.
Herman sells his carpet-cleaning business to Elki. As part of the sales agreement, Elki pays Herman $3,000 for his agreement not to open another carpet-cleaning business in the area for 3 years.
In 2004, Awnings, Inc., issues $200,000 of 15%, 20-year bonds payable at par. During 2010, when Awnings’ bonds are trading at 93, the company purchases and retires$100,000 par value of the bonds.
Merlene owns a bookstore. The store needs repainting, but she is short of cash to hire a painter. Fred is a painter who enjoys fine mystery novels. Merlene makes a deal with Fred to have him paint
Simon and Sherry divorce during the current year. As part of their property settlement, Simon gives Sherry 25% of the stock in his 100%-owned corporation, Hobday, Inc.The stock has a fair market
Gilbert got married this year. Because he couldn’t afford a wedding reception, his employer gave him the $5,000 he needed to pay for it.
Meek, Inc., remodeled its offices this year. Renee, the executive vice president, bought the desk, couch, and lamp set that had been in her office for $200.
RealTime Rentals leases space on its Internet server. Its standard one-year lease agreement requires new customers to pay the first and last months’ rent upon signing the lease and a $500 deposit
Tonya purchased land for investment purposes in 2007 for $21,000. In 2010, she sells the land for $36,000. The terms of the sale require the purchaser to pay Tonya$12,000 per year for three years
Capital gains of individuals are taxed at a 15% rate (5% for 10% or 15% marginal tax rate taxpayers, 0% for 2008–2010). Capital gains of corporations are taxed at the corporation’s marginal tax
Marvin and Tracy Peery’s 2009 taxable income is $67,970 before considering the effect of their investment activities. Details of their 2009 sales of investment assets follows:The Form 1099 Marvin
Nick and Jolene are married. Nick is 61 and retired in 2009 from his job with Amalgamated Company. Jolene is 56 and works part-time as a special education teacher.Nick and Jolene have a substantial
LO2 What is an arm’s-length transaction? What is its significance to income taxation?
LO2 Explain how the related party construct and the arm’s-length transaction concept interact.
LO2 Why is the pay-as-you-go concept important to the successful operation of the income tax system? What other types of taxes are based on this concept?
LO3 What is the difference between a taxable entity and a conduit entity?
LO3 Why is the tax benefit rule necessary? That is, which concept drives the need for this construct? Explain.
LO3 What are the two basic methods of accounting that may be used by taxpayers? How do the two basic methods differ?
LO4 What is the effect of the capital recovery concept on income recognition?
LO4 Chapter 1 discussed how gross income is equal to all income received, less exclusions. Which concepts form the basis for this calculation of gross income? Explain.
LO4 What is capital gain income? How is it different from ordinary income?
LO4 Why does the doctrine of constructive receipt apply only to cash basis taxpayers?
LO4 How is the wherewithal-to-pay concept different from the ability-to-pay concept?
LO5 Explain how the business purpose concept provides the basis for determining which expenses are deductible.
LO5 What is a capital expenditure?
LO4,5 The legislative grace concept is both an income concept and a deduction concept. Explain how the application of the concept differs for income items and deduction items.
LO4,5 The capital recovery concept is both an income concept and a deduction concept. Explain how the application of the concept differs for income items and deduction items.
LO2 Which of the following are based on an ability to pay? Explain.a. Local County assesses property taxes at the rate of 1% of assessed value.b. The university library lets all students, faculty,
LO3 Aiko, Lani, and Charlie own the 3-Star Partnership, sharing profits and losses 20:50:30. During the current year, 3-Star has total gross income of $500,000 and total allowable deductions of
LO3 Christie purchases a one-third interest in the Corporate Capital Partnership(CCP) in 2009 for $40,000. During 2009, CCP earns an income of $90,000, and Christie withdraws $30,000 in cash from the
LO3 For each of the following situations, determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer:a. Tindle
LO3 For each of the following situations, determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer:a. Helen
LO3 Tim has state income taxes of $4,500 withheld from his salary during 2009. On his 2009 federal income tax return, Tim properly deducts the $4,500 as state taxes paid. Upon filing his 2009 state
LO3 Jamal Corporation is an accrual basis taxpayer. In 2009, Jamal writes off a$1,000 account receivable from a customer who has died. In 2010, the former customer’s estate sends Jamal a check for
LO4 Postum Partnership purchases a building in 2007 for $250,000. It deducts$5,600 in depreciation on the building in 2007, $6,400 in 2008, $6,400 in 2009, and$3,200 in 2010. It sells the building in
LO4 Chelsea, who is single, purchases land for investment purposes in 2005 at a cost of $22,000. In 2010, she sells the land for $38,000. Chelsea’s taxable income without considering the land sale
LO4 George purchases stock in Dodo Corporation in 2006 at a cost of $50,000. In 2010, he sells the stock for $32,000. What is the effect of the sale of stock on George’s taxable income? Assume that
LO5 Sidney lives in Hayes, Kansas. He owns land in Cotulla, Texas, that he inherited from his father several years ago. The land is unimproved and has never produced income. On January 26, 2010,
LO5 Determine the taxpayer’s adjusted basis in each of the following situations. If any changes are made in the original basis of the asset, explain why they are necessary.a. Simone purchases 300
LO5 Davidson Industries manufactures golf course maintenance equipment. The equipment comes with a 4-year warranty. Davidson’s engineers estimate that approximately 10% of the equipment will be
Many legislative, administrative, and judicial resources are available on the Internet. They can be located using a search engine provided by your browser or a tax directory site located on the
Many legislative, administrative, and judicial resources are available on the Internet.They can be located using a search engine provided by your browser or a tax directory site located on the
Kimberly Cerny is a graduate student. She is 22 years old and works part-time as a graduate assistant in the biology department. In the summer, Kimberly was an intern at Neutrobio, Inc. Details
LO1 Briefly state Adam Smith’s four requirements for a good tax system.
LO1 Based on the discussion in the chapter, evaluate how well each of these taxes meets Adam Smith’s four requirements:a. Income taxb. Employment taxes
LO1,2 Based solely on the definitions in the chapter, is the Social Security tax a proportional, regressive, or progressive tax? Explain, and state how the tax might be viewed differently.
LO1,2 Based solely on the definitions in the chapter, is the sales tax a proportional, regressive, or progressive tax? Explain, and state how the tax might be viewed differently.
LO2 As stated in the text, the federal income tax is the largest revenue-producing tax in use in the United States.Why do you think the income tax produces more revenue than any other tax?
LO2 How are federal, state, and local income taxes collected by the government? Consider the cases of an employee and a self-employed taxpayer.
LO2 How is a sales tax different from an excise tax?
LO2 Who is responsible for collecting sales and excise taxes? Who actually pays the tax?
LO2 Why is a tax on real property used more often than a tax on personal property?
LO2 The estate tax is a tax on the value of property transferred at death. Why is payment of the estate tax not a common event?
LO2 What is the basis for valuing assets transferred by gift and at death?
LO2 Who is responsible for reporting and paying gift taxes? estate taxes?
LO3 Identify three primary sources of tax law.
LO3 Explain why the following statement is not necessarily true: ‘‘If the IRS disagrees, I’ll take my case all the way to the Supreme Court.’’
LO4 What is the federal income tax base?
LO4 What is an exclusion?
LO4 How is a deferral different from an exclusion?
LO4 How is gross income different from income?
LO4 What are the three basic tests that an expense must satisfy to be deductible?
LO4 What is the difference between an expense and a loss?
LO4 How is a transaction loss different from an annual loss?
LO4 How does the legislative grace concept help identify amounts that qualify for deduction?
LO4 What is the purpose of the exemption deduction?
LO4 Based on the example in Exhibit 1–2, explain how inflation can have two effects that result in a hidden tax.
LO4 Explain the pay-as-you-go system.
LO4 What is a tax credit?
LO4 How is a tax credit different from a tax deduction?
LO4 If you were in the 28% marginal tax bracket and you could choose either a $1,000 tax credit or a $3,000 tax deduction, which would give you the most tax savings?Why?
LO5 What is the statute of limitations, and what role does it play in the filing of tax returns?
LO5 Briefly describe the types of programs used by the IRS to select a return for audit.
LO5 What are the three types of IRS examinations?
LO5 What is included in the 30-day letter, and what options does the taxpayer have after receiving one?

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