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business
federal taxation

Questions and Answers of Federal Taxation

Peter Baumann, your client, wants to sell a printing press to Chamberlain Corporation for $50,000. Pete has used the press in his business for two years and its adjusted basis is $90,000. The Coxmann
Danielle Anderson, your client and a cash method taxpayer, works full-time at a music store located in a mall. She assists the manager in buying decisions, serves customers on the sales floor, and
Using the following facts, answer the questions below concerning Jaron’s 2017 tax liability.1. Two years ago, in November 2015, when his wife died, Jaron left the CPA firm he was working for and
Bryce, a bank official, is married and files a joint return. During 2017 he engages in the following activities and transactions:a. Being an avid fisherman, Bryce develops an expertise in tying
During the current year, Kim incurs the following expenses with respect to her beachfront condominium in Hawaii:Item
Assume the same facts as in Problem I:6-53, except that the income from the sale of rabbits is $1,200.a. What is the total amount of deductions Chuck may take during the year with respect to the
Chuck, a dentist, raises prize rabbits for breeding and showing purposes. Assume that the activity is determined to be a hobby. During the year the activity generates the following items of income
Emily is an interior decorator who does consulting work for several furniture stores. Additionally, she has been designing and creating rubber stamps for the past several years. She sells the stamps
Rachel Schurtz is a high school English teacher. In her spare time, she likes to make her own body lotion, lip gloss, and bath and shower gel. She uses the bath products herself and gives them to her
During the current year, CVI Corporation sells a tract of land for $75,000. The sale is made to Sandi, CVI Corporation’s sole shareholder. CVI Corporation originally purchased the land five years
Sally is an attorney who computes her taxable income using the cash method of accounting. Sage Corporation, owned 40% by Sally’s brother, 40% by her cousin, and 20% by her grandmother, uses the
PIB Partnership is owned 20% by Sara, 40% by Steve, and 40% by Thann. Burnham, Inc. is owned 70% by PIB Partnership, 10% by Ralph, 10% by Thann, and 10% by Sara. Ralph and Thann are brothers. All
During the current year, Troy sells land to Berry Corporation for $165,000. Troy purchased the land for investment in 2002 for $170,000. Berry Corporation is owned as follows:Owner
Cougar Corporation owns 1,000 shares of Western Corporation common stock, which it purchased on March 8, 2011, for $12,000. On October 3, 2017, Cougar purchases an additional 300 shares for $3,000.
Broward Corp. owns 1,500 shares of Silver Fox Corporation common stock. Broward Corp. purchased the 1,500 shares on April 17, 2011, for $20,000. On December 8, 2016, Broward sells 750 shares for
During the current year, Richard and Alisha, a married couple who use the cash method of accounting, purchased a principal residence for $320,000. They paid $40,000 down and financed the remaining
Pamello, Inc., an engineering consulting firm, uses the cash method of accounting and is a calendar year taxpayer. Compute the amount of Pamello’s current year deductions for the following
Solutions Corporation, a computer vendor and consulting company, uses the accrual method of accounting. Its tax year is the calendar year. The following are three of the corporation’s transactions
Assume the same facts as in Problem I:6-40, except that Big Bang LLC incurs $41,000 in expenses, it does not already own the other entertainment galleries and it does not own anything similar.a. What
During January and February of the current year, Big Bang LLC incurs $3,000 in travel, feasibility studies, and legal expenses to investigate the feasibility of opening a new entertainment gallery in
Indicate whether Glenda can deduct the $5,000 payment in each of the following independent situations.a. Glenda is a supplier of medical supplies. In order to secure a large sales contract to the
Damian Corporation is engaged in the business of purchasing and importing carpets from Iran. Importing these carpets from Iran is illegal. Following is a list of income and expense items for the
Sam is a sole proprietor who owns, leases, and manages several apartment complexes and office buildings. During the current year, Sam incurs the following expenses. Which of these expenditures are
Eljay, LLP owns several apartment complexes and office buildings. The leasing and management of these buildings constitutes Eljay’s only business activity. During the current year Eljay incurred
Sam owns a small apartment building (this is the only rental building Sam owns). During the year Sam incurs the following expenditures:Item
During 2017, Kent, a 40-year-old single taxpayer, reports the following items of income and expense:Income:Salary
Roberta is an accountant employed by a local firm. During the year, Roberta incurs the following unreimbursed expenses:Item
Katie and Alan are avid boaters and water skiers. They also enjoy parasailing. This year, they started a new parasailing venture to give rides to patrons. Katie and Alan are both employed full-time
Kathleen pays $3,000 mortgage interest on the home that she and her husband live in. Kathleen and her husband live with Molly, Kathleen’s mother. The title to the home is in Kathleen’s name.
Gus, a football player who was renegotiating his contract with the Denver Broncos, paid his ex-girlfriend $50,000 to drop a sexual assault complaint against him and keep the matter confidential. The
David, a CPA for a large accounting firm, often works 10- to 12-hour days. As a requirement for his position, he must attend social events to recruit new clients. In addition to his job with the
Under Sec. 280A, how will a taxpayer report the income and expenses of a vacation home if it is rented out for only 12 days during the year?
Under Sec. 280A, how are expenses allocated to the rental use of a vacation home? In what order must the expenses be deducted against the gross income of the property?
Under Sec. 280A, what constitutes personal use of a vacation home by the taxpayer?
Assume that Jill is engaged in painting as a hobby. During the year, she earns $1,000 from sales of her paintings and incurs $1,300 expenses for supplies and lessons. Jill’s salary from her job is
If property is sold at a loss to a related taxpayer, under what circumstances can at least partial benefit be derived from the disallowed loss?
Under the related party rules of Sec. 267, why has Congress imposed the concept of constructive ownership?
Under Sec. 267, current deductions may not be taken for certain transactions between related parties.a. Who is considered a member of a taxpayer’s family under the related party transaction rules
The wash sale rules disallow a loss in the year of sale when substantially identical stock or securities are acquired by the taxpayer within a 61-day period. What types of stock or securities are
Why did Congress enact the wash sale provisions?
The timing of when the economic performance test is satisfied depends on the type of transaction and whether the transaction is recurring.a. When does economic performance occur for a taxpayer who
Under what circumstances would a taxpayer use both the cash method and the accrual method of accounting at the same time?
Under what circumstances can prepaid expenses be deducted in the year of payment by a taxpayer using the cash method of accounting?
What documentation is required in order for a travel or entertainment expense to be deductible?
During November and December of last year, Tommy’s, Inc., incurred the following expenses in investigating the feasibility of opening a new restaurant in town:Expenses to do a market
Otter Corporation sends people to the state capital to lobby the legislature to build a proposed highway that is planned to run through the area where its business is located.a. If Otter Corp. incurs
Michelle pays a CPA $400 for the preparation of her federal income tax return. Michelle’s only sources of income are her salary from employment and interest and dividends from her investments.a. Is
Under what circumstances may a taxpayer deduct an illegal bribe or kickback?
Why are expenses related to tax-exempt income disallowed?
What are the criteria for distinguishing between a deductible expense and a capital expenditure?
In order for a business expense to be deductible it must be ordinary, necessary, and reasonable. Explain what these terms mean.
Because expenses incurred both in a business and for the production of investment income are deductible, why is it important to determine in which category a particular activity falls?
If an activity does not generate a profit in three out of five consecutive years, is it automatically deemed to be a hobby? Why or why not?
Deductible business or investment expenses must be related to a profit-motivated activity.a. What are the factors used in determining whether an activity is profit-motivated?b. Why are these factors
For 2017, Mario, a single individual with no dependents, receives income of $55,000 and incurs deductible expenses of $9,000.a. What is Mario’s taxable income assuming that the expenses are
Joe is a single, self-employed individual who owns his own business. During the current year, Joe reported $200,000 gross income and $60,000of business expenses. He also paid $30,000 in alimony to
During the year, Sara sold a capital asset at a loss of $2,000. She had held the asset as an investment. This is the only capital asset she sold during the year. Is her deduction for this capital
Sam owns a small house that he rents out to students attending the local university. Are the expenses associated with the rental unit deductions for or from AGI?
Why was pay-as-you-go withholding needed in 1943?
Why is the distinction between deductions for AGI and deductions from AGI important for individuals?
Web Baker was hired three years ago by the Berry Corporation to serve as CEO for the company. As part of his employment contract, the corporation had agreed to purchase his residence at FMV in the
Jack, a tenured university professor, has been a malcontent for many years at Rockport University. The university has recently offered to pay $200,000 to Jack if he will relinquish his tenure
Lynette, a famous basketball player, is considering the possibility of transferring the sole right to use her name to promote basketball shoes produced and sold by the NIK Corporation. NIK will pay
Tom Williams is an equal partner in a partnership with the Kansas Corporation. Williams, an inventor, produced a new process while working for the partnership, which has been patented by the
Your client, Apex Corporation, entered into an agreement with an executive to purchase his personal residence at its current FMV in the event that his employment is terminated by the company during a
As a political consultant for an aspiring politician, you have been hired to evaluate the following statements that pertain to capital gains and losses. Evaluate the statement and provide at least a
Dallas, whose tax rate is 35%, has recognized an STCL of $11,000 and an LTCG of $10,200 due to the sale of stock. In late December, he is considering the sale of an antique chair held for investment
On December 20 of the current year, Winneld has decided to sell all of the stock that she owns and reinvest the proceeds in state of Minnesota bonds. Without considering the sales, her taxable income
Calvin, whose tax rate is 35% is considering two alternative investments on January 1, 20Y1. He can purchase $100,000 of 10% bonds due in five years or purchase $100,000 of Hobbes, Inc. common stock.
Dale purchased Blue Corporation stock four years ago for $1,000 as an investment. He intended to hold the stock until funds were needed to help pay for his daughter’s college education. Today the
Betty incurs the following transactions during the current year. Without considering the transactions, her 2017 AGI is $40,000. Analyze the transactions and answer the following questions:On March
In 2012, the Ryan Corporation sold a capital asset and incurred a $40,000 LTCL that was carried forward to subsequent years. That sale was the only sale of a capital asset that Ryan made until 2017,
Without considering the following capital gains and losses, Charlene, who is single, has taxable income of $460,000 and a marginal tax rate of 39.6%. During the year, she sold stock held for nine
Martha has $40,000 AGI without considering the following information. During the year, she incurs an LTCL of $10,000 and has a gain of $14,000 due to the sale of a capital asset held for more than a
On January 1, 2016, Sean purchased an 8%, $100,000 corporate bond for $92,277. The bond was issued on January 1, 2016, and matures on January 1, 2021. Interest is paid semiannually, and the effective
Determine the taxable income for the Columbia Corporation for the following independent cases: Income from STCG (NSTCL) NLTCG (NLTCL) Operations Case A B $110,000 100,000 $30,000 $44,000 65,000
Dan owns 500 shares of Rocket Corporation common stock. The stock was acquired two years ago for $30 per share. On October 2, 2017, Dan writes five calls on the stock, which represent options to buy
On February 10, 2017, Gail purchases 20 calls on Red Corporation for $250 per call. Each call represents an option to buy 100 shares of Red stock at $42 per share any time before November 25, 2017.
During 2017, Gary receives a $50,000 salary and has no deductions for AGI. In 2016, Gary had a $5,000 STCL and no other capital losses or capital gains. Consider the following sales and determine
On January 1, 2015, Swen paid $184,000 for $200,000 of the 8%, 20-year bonds of Penn Corporation, issued on January 1, 2011, at par. The bonds are held as an investment. Determine the gain and the
On December 31, 2016, Phil purchased $20,000 of newly issued bonds of Texas Corporation for $16,568. The bonds are dated December 31, 2016. The bonds are 9%, 10-year bonds paying interest
The Michigan Corporation owns 20% of the Wolverine Corporation. The Wolverine stock was acquired eight years ago to ensure a steady supply of raw materials. Michigan also owns 30% of Spartan
To better understand the rules for offsetting capital losses and how to treat capital losses carried forward, analyze the following data for an unmarried individual for the period 2014 through 2017.
Consider the four independent situations below for an unmarried individual, and analyze the effects of the capital gains and losses on the individual€™s AGI. For each case, determine AGI
An investor in a 28% tax bracket owns land that is a capital asset with a $50,000 basis and a holding period of three years. The investor wishes to sell the asset at a price high enough so that he
Wayne is single and has no dependents. Without considering his $11,000 adjusted net capital gain (ANCG), his taxable income, which includes no investment income, in 2017 is as follows:a. What is
Donna files as a head of household in 2017 and has taxable income of $90,000, including the sale of a stock held as an investment for two years at a gain of $20,000. Only one asset was sold during
Trisha, whose tax rate is 35%, sells the following capital assetsin 2017 with gains and losses as shown:a. Determine Trisha€™s increase in tax liability as a result of the three sales. All
Mr. and Mrs. Dunbar have taxable income of $260,000 without considering the following sales. Consider the following independent cases where capital gains are recognized and determine the marginal tax
Beth acquired only one tract of land seven years ago as an investment. In order to sell the land at a higher price, she decides to subdivide it into 20 lots. She pays for improvements such as
Martha Lou owns 100 shares of Blain Corporation common stock. She purchased the stock on July 25, 1986, for $4,000. On May 2 of the current year, she receives a nontaxable distribution of 100 stock
Kathleen owns 500 shares of Buda Corporation common stock which was purchased on March 20, 1999, for $48,000. On October 10 of the current year, she receives a distribution of 500 stock rights. Each
Tally owns a house that she has been living in for eight years. She purchased the house for $245,000 and the FMV today is $200,000. She is moving into her friend’s house and has decided to convert
Daniel receives 400 shares of A&M Corporation stock from his aunt on May 20, 2017, as a gift when the stock has a $60,000 FMV. His aunt purchased the stock in 2007 for $42,000. The taxable gift
Irene owns a truck costing $15,000 and used for personal activities. The truck has a $9,600 FMV when it is transferred to her business, which is operated as a sole proprietorship.a. What is the basis
Bud received 200 shares of Georgia Corporation stock from his uncle as a gift on July 20, 2016, when the stock had a $45,000 FMV. His uncle paid $30,000 for the stock on April 12, 2001. The taxable
During the current year, Stan sells a tract of land for $800,000. The property was received as a gift from Maxine on March 10, 1995, when the property had a $310,000 FMV. The taxable gift was
Doug receives a duplex as a gift from his uncle. The uncle’s basis for the duplex and land is $90,000. At the time of the gift, the land and building have FMVs of $40,000 and $80,000, respectively.
Tracy owns a nondepreciable capital asset held for investment. The asset was purchased for $250,000 six years earlier and is now subject to a $75,000 liability. During the current year, Tracy
Sylvia, a dentist with excellent skills as a carpenter, started the construction of a house that she planned to give to her son as a surprise when he returned from Afghanistan, where he is serving in

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