Questions and Answers of Essentials Federal Taxation

7. LO.3 Kim owns an interest in an activity that produces $100,000 of income during the year. Would Kim prefer to have the activity classified as active or passive? Discuss.
6. LO.3 Carlos owns an interest in an activity that produces a $100,000 loss during the year. Would he prefer to have the activity classified as active or passive? Explain.
5. LO.3 Explain the meaning of the terms active income, portfolio income, and passive income.
4. LO.2, 3 Roberto invested $18,000 in a chicken production operation. Using nonrecourse notes, the business purchases $120,000 worth of grain to feed the chickens. If Roberto’s share of the
3. LO.2 List some events that increase and decrease an investor’s at-risk amount. What are some strategies that a taxpayer can employ to increase the at-risk amount to claim a higher deduction for
1. LO.1 Identify two provisions designed to limit the tax benefits a taxpayer may obtain from a tax shelter investment. Describe how these rules reduce or defer the recognition of tax losses.
LO.11 Suggest tax planning strategies to minimize the effect of the passive loss limitations.
LO.10 Identify restrictions placed on the deductibility of other investor losses and deductions, including those that apply to investment interest.
LO.9 Determine the proper tax treatment upon the disposition of a passive activity.
LO.8 Recognize the special treatment available to real estate activities.
LO.7 Determine the relationship between the at-risk and passive activity limitations.
LO.6 Demonstrate the nature of rental activities under the passive loss rules.
LO.5 Identify and apply the tests for material participation.
LO.4 Define passive activities and review the rules for identifying an activity.
LO.3 Describe how the passive loss rules limit deductions for losses and identify the taxpayers subject to these restrictions.
LO.2 Explain the at-risk limitation.
LO.1 Explain the tax shelter problem and the reasons for at-risk and passive loss limitations.
LO.2 Identify the circumstances under which various items are excludible from gross income.
32. LO.2 Selma operates a contractor’s supply store. She maintains her books using the cash method. At the end of the year, her accountant computes her accrual basis income that is used on her tax
30. LO.1, 2 Determine Amos Watkins’s gross income in each of the following cases:a. In the current year, Amos purchased an automobile for $25,000. As part of the transaction, Amos received a $1,500
29. LO.1 Determine the taxpayer’s gross income for tax purposes in each of the following situations:a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for
28. LO.1, 2, 5 A taxpayer is considering three alternative investments of $10,000. Assume that the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains
26. LO.1 Determine the taxpayer’s current-year (1) economic income and (2) gross income for tax purposes from the following events:a. Sam’s employment contract as chief executive of a large
42. LO.3, 4 Faye, Gary, and Heidi each have a one-third interest in the capital and profits of the FGH Partnership. Each partner had a capital account of $50,000 at the beginning of the tax year. The
LO.1 Be aware that statutory authority is required to exclude an item from gross income.
58. LO.3, 4 Donna does not think she has an income tax problem but would like to discuss her situation with you just to make sure she will not get hit with an unexpected tax liability. Base your
49. LO.2, 4 Ridge is a generous individual. During the year, he made interest-free loans to various family members when the Federal rate was 3%. What are the tax consequences of the following loans
46. LO.4 Samantha and Harold are in the process of negotiating a divorce. They have tentatively agreed on all of the terms, and Samantha is to pay Harold $240,000 over a threeyear period.
23. LO.4 On July 1, 2000, when Betty was 65 years old, she purchased an annuity contract for $108,000. The annuity was to pay Betty $9,000 on June 30 each year for the remainder of her life. Betty
22. LO.2, 4 Brad is the president of the Yellow Corporation. He and other members of his family control the corporation. Brad has a temporary need for $50,000, and the corporation has excess cash. He
2. LO.1 Compare and contrast the economist’s concept used to recognize income with the concept employed in measuring taxable income.
1. LO.1 According to the Supreme Court, would it be good tax policy to use income as computed by financial accounting principles as the correct measure of income for Federal income tax purposes?
LO.5 Identify tax planning strategies for minimizing gross income.
LO.4 Apply the Internal Revenue Code provisions on alimony, loans made at below-market interest rates, annuities, prizes and awards, group term life insurance, unemployment compensation, and Social
LO.3 Identify who should pay the tax on a particular item of income in various situations.
LO.2 Describe the cash and accrual methods of accounting and the related effects of the choice of taxable year.
LO.1 Explain the concepts of gross income and realization and distinguish between the economic, accounting, and tax concepts of gross income.
LO.9 Evaluate tax planning opportunities associated with the individual tax formula.
LO.8 Formulate the fundamentals of property transactions.
LO.7 Identify and report kiddie tax situations.
LO.6 Demonstrate the proper procedures for determining the tax liability.
LO.5 List the filing requirements and choose the proper filing status.
LO.4 Explain the rules for determining dependency exemptions.
LO.3 Apply the rules for arriving at personal exemptions.
LO.2 Explain the standard deduction and evaluate its choice in arriving at taxable income.
LO.1 Recognize and apply the components of the Federal income tax formula.
49. LO.6 Using the legend provided, classify each of the following statements:Legend A = Tax avoidance E = Tax evasion N = Neithera. Sue writes a $707 check for a charitable contribution on December
19. LO.4, 5 Patrick and Eva are planning to divorce. Patrick has offered to pay Eva$12,000 each year until their 11-year-old daughter reaches age 21. Alternatively, Patrick will transfer to Eva
17. LO.4 Evaluate the following statement: “In dividing up assets when a couple divorces, the basis of the assets is not relevant because the property division is nontaxable.”
16. LO.4 What are the tax consequences if the alimony recapture rules apply to a cash payment to a former spouse?
12. LO.3, 5 Wade paid $7,000 for an automobile that needed substantial repairs. He worked nights and weekends to restore the car and spent $2,400 on parts for it. He knows he can sell the car for
11. LO.2 The taxpayer performs services with payment due from the customer within 30 days. All customers pay within the time limit. What would be the benefit to the taxpayer using the cash method of
8. LO.2 How does the hybrid method of accounting differ from the cash method and the accrual method?
7. LO.2 What is the purpose of the constructive receipt doctrine?
6. LO.2, 3 On December 29, 2013, an employee received a $5,000 check from her employer’s client. The check was payable to the employer. The employee did not remit the funds to the employer until
11. LO.1 Mary Kate owns a building that she leases to an individual who operates a grocery store. Rent income is $10,000, and rental expenses are $6,000. On what Form 1040 schedule or schedules are
52. LO.2 Tonya, who lives in Virginia, inherited a $100,000 State of Virginia bond in 2013.Her marginal Federal tax rate is 35%, and her marginal state tax rate is 5%. The Virginia bond pays 3.3%
49. LO.2 George is a U.S. citizen who is employed by Hawk Enterprises, a global company.Beginning on June 1, 2013, George began working in London. He worked there until January 31, 2014, when he
46. LO.2, 5 Bluebird, Inc., does not provide its employees with any tax-exempt fringe benefits.The company is considering adopting a hospital and medical benefits insurance plan that will cost
43. LO.2 Does the taxpayer recognize gross income in the following situations?a. Ava is a filing clerk at a large insurance company. She is permitted to leave the premises for lunch, but she usually
41. LO.2 Belinda spent the last 60 days of 2013 in a nursing home. The cost of the services provided to her was $16,000. Medicare paid $8,500 toward the cost of her stay. Belinda also received $9,500
38. LO.2 Rex, age 55, is an officer of Blue Company, which provides him with the following nondiscriminatory fringe benefits in 2013:• Hospitalization insurance premiums for Rex and his dependents.
55. LO.2 Albert established a qualified tuition program for each of his twins, Kim and Jim.He started each fund with $20,000 when the children were 5 years old. Albert made no further contributions
Research Problem 1. Murray reported to the Environmental Protection Agency that his employer was illegally dumping chemicals into a river. His charges were true, and Murray’s employer was fined. In
10. LO.1 Dave uses the second floor of a building for his residence and the first floor for his business. The uninsured building is destroyed by fire. Are the tax consequences the same for each part
9. LO.1 In the determination of whether a business expense is deductible, the reasonableness requirement applies only to salaries. Evaluate this statement.
8. LO.1 List three items that § 162 specifically excludes from classification as a trade or business expense.
7. LO.1 Nanette is a first-grade teacher. Potential deductions are charitable contributions of $800, personal property taxes on her car of $240, and various supplies purchased for use in her
4. LO.1 Classify each of the following expenditures as a deduction for AGI, a deduction from AGI, or not deductible:a. Sam gives $5,000 to his father as a birthday gift.b. Sandra gives $1,000 to her
2. LO.1 Aaron has AGI of $85,000 and deductions of $9,500. Does it matter to Aaron whether the deductions are for or from AGI? Why or why not?
1. LO.1 “All income must be reported, and all deductions are allowed unless specifically disallowed in the Code.” Discuss.
LO.3 Apply the Internal Revenue Code deduction disallowance provisions associated with the following:public policy limitations, political activities, excessive executive compensation, investigation
LO.2 Describe the cash and accrual methods of accounting.
LO.1 Differentiate between deductions for and from adjusted gross income and describe the relevance of the differentiation.
Research Problem 5. Your client works for a defense contractor and was assigned to work on a military base in Australia. As a condition of his employment, he was required to live in housing that was
Research Problem 4. Aubrey Brown is a decorated veteran of the Vietnam War. As a result of his exposure to Agent Orange during the war, Aubrey developed lung cancer and is unable to work. He received
Research Problem 3. A taxpayer was diagnosed with multiple sclerosis when she was 27 years old. She was employed full-time for several more years after the condition was discovered.However, her
Research Problem 2. The employees of the city of Greenville must make mandatory contributions to the city’s postretirement health benefit plan. The employees’ contributions are placed in a trust
37. LO.2 Determine the effect on gross income in each of the following cases:a. Eloise received $150,000 in settlement of a sex discrimination case against her former employer.b. Nell received
15. LO.2 What is the difference between a cafeteria plan and an employee flexible spending plan?
13. LO.2 Melba’s employer provides a flexible spending plan for medical and dental expenses not covered by insurance. Melba contributed $1,500 during 2013, but by the end of December 2013, she
8. LO.2 Sarah, who has a terminal illness, cashed in her life insurance policy (cost of$24,000 and proceeds of $50,000) to go on an around-the-world cruise. Ed paid $24,000 of life insurance premiums
5. LO.2 Dolly is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate
1. LO.2 Fred specified in his will that his nephew John should serve as executor of Fred’s estate. John received $10,000 for serving as executor. Can John exclude the $10,000 from his gross income?
LO.5 Identify tax planning strategies for obtaining the maximum benefit from allowable exclusions.
LO.4 Describe the circumstances under which income must be reported from the discharge of indebtedness.
26. LO.4 Harry purchased equipment for his business and gave the seller cash and a note due in two years. Larry also purchased business equipment, but financed the transaction with a bank loan.
21. LO.2 Brad is a single individual with $25,000 in taxable interest income and a salary of$86,000 from working in a foreign country for the past 12 months. What tax rate is applied to Brad’s
LO.3 Determine the extent to which receipts can be excluded under the tax benefit rule.
19. LO.3, 4 What are stealth taxes? What purpose do they serve, and why are they used?
49. LO.1, 3, 7 Paige, age 17, is claimed as a dependent on her parents’ 2013 return, on which they report taxable income of $120,000 (no qualified dividends or capital gains).Paige earned $3,900
48. LO.3, 4, 5 Nadia died in 2012 and is survived by her husband, Jerold (age 44); her married son, Travis (age 22); and her daughter-in-law, Macy (age 18). Jerold is the executor of his wife’s
47. LO.4, 5 Christopher died in 2011 and is survived by his wife, Chloe, and their 18-yearold son, Dylan. Chloe is the executor of Christopher’s estate and maintains the household in which she and
45. LO.5, 6, 9 Roy and Brandi are engaged and plan to get married. During 2013, Roy is a full-time student and earns $9,000 from a part-time job. With this income, student loans, savings, and
43. LO.1, 2, 3, 4, 5, 6 Morgan (age 45) is single and provides more than 50% of the support of Rosalyn (a family friend), Flo (a niece, age 18), and Jerold (a nephew, age 18).Both Rosalyn and Flo
42. LO.1, 2, 3, 4, 5, 6 Charlotte (age 40) is a surviving spouse and provides all of the support of her four minor children who live with her. She also maintains the household in which her parents
41. LO.4, 9 Walter and Nancy provide 60% of the support of their daughter (age 18) and son-in-law (age 22). The son-in-law (John) is a full-time student at a local university, while the daughter
40. LO.3, 7 Taylor, age 18, is claimed as a dependent by her parents. For 2013, she has the following income: $4,000 wages from a summer job, $1,800 interest from a money market account, and $2,000
39. LO.4, 9 Wesley and Myrtle (ages 90 and 88, respectively) live in an assisted care facility and for 2012 and 2013 received their support from the following sources:Percentage of Support Social
38. LO.3, 4 Sam and Elizabeth Jefferson file a joint return and have three children—all of whom qualify as dependents. If the Jeffersons have AGI of $322,000, what is their allowable deduction for

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