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business
federal taxation

Questions and Answers of Federal Taxation

Income earned by C corporations is taxed twice, once when the income is earned and again when it is distributed. If so, how is it possible that operating a business as a C corporation can reduce
a. Explain the principal difference in the tax treatment of an S corporation and a C corporation.b. Why would a C corporation be used if an S corporation is generally exempt from tax?
Under what circumstances, if any, can a married person file as a head of household?
Explain what is meant by the phrase maintain a household.
What conditions must be met by a married couple before they can file a joint return?
Summarize the rules that explain which parent receives the dependency exemption for children in cases of divorce.
Explain the purpose of the multiple support agreement.
Can a scholarship qualify as support?
Can tax-exempt income qualify as support? Explain.
Sometimes taxpayers may not be able to file their tax returns by the normal due date. Are extensions available? How long are the extensions? Do extensions enable taxpayers to delay paying the tax
What is the normal due date for the tax return of calendar-year taxpayers? What happens to the due date if it falls on a Saturday, Sunday, or holiday?
Tax rules are often very precise. For example, a taxpayer must ordinarily provide “over 50%” of another person’s support in order to claim a dependency exemption. Why is the threshold “over
Many homeowners itemize deductions while many renters claim the standard deduction. Explain.
a. What determines who must file a tax return?b. Is an individual required to file a tax return if he or she owes no tax?
Under what circumstances must a taxpayer use a rate schedule instead of a tax table?
a. Briefly explain the concept of support.b. If a taxpayer provides 50% or less of another person’s support, is it possible for the taxpayer to claim a dependency exemption? Explain.c. Does support
List the conditions that must be met in order to claim a dependency exemption for qualifying children and qualifying relatives. Briefly explain each one.
a. Explain the distinction between a deduction and a credit.b. Which is worth more, a $10 deduction or a $10 credit?c. Explain the difference between refundable and nonrefundable credits.
Explain the distinction between income and gross income.
a. The tax law refers to gross income, yet the term gross income is not found on Form 1040. Explain.b. Why is it important to understand the concept of gross income even though the term is not found
Read the following two cases and explain why the Supreme Court reached different conclusions for cases involving similar facts and issues:CIR v. Court Holding Co., 33 AFTR 593, 45-1 USTC ¶9215
Rick Cabela, a high income client, has contacted you for advice regarding two new proposed business ventures and other tax planning ideas. Rick already operates a highly successful consulting
Pedro Bourbone is the founder and owner of a highly successful small business and, over the past several years, has accumulated a significant amount of personal wealth. His portfolio of stocks and
In April 2017, Dan is audited by the IRS for the year 2015. During the course of the audit, the agent discovers that Dan’s deductions for business travel and entertainment are unsubstantiated and a
Which of the following individuals is most likely to be audited?a. Connie has a $20,000 net loss from her unincorporated business (a cattle ranch). She also received a $200,000 salary as an executive
In 2016, Paul, who is single, has a comfortable salary from his job as well as income from his investment portfolio. However, he is habitually late in filing his federal income tax return. He did not
a. Keith Thomas and Thomas Brooks began a new consulting business on January 1, 2017. They organized the business as a C corporation, KT, Inc. During 2017, the corporation was successful and
Clay, who was single, died in 2017 and has a gross estate valued at $8,500,000. Six months after his death, the gross assets are valued at $9,000,000. The estate incurs funeral and administration
Betty, a married taxpayer, makes the following gifts during the current year (2017): $20,000 to her church, $50,000 to her daughter, and $40,000 to her husband. What is the amount of Betty’s
Jill and George are married and file a joint return. They expect to have $425,000 of taxable income in the next year and are considering whether to purchase a personal residence that would provide
Based on the amounts of taxable income below, compute the federal income tax payable in 2017 on each amount assuming the taxpayers are married filing a joint return. Also, for each amount of taxable
The profession of tax practice involves four principal areas of activity. Discuss these four areas.
In reference to tax research, what is meant by the best possible defensibly correct solution?
What is the statute of limitations for transactions involving:a. Fraud (e.g., failure to file a tax return)b. Dis-allowance of tax deduction itemsc. The omission of rental income that is greater than
If a taxpayer files his or her tax return and receives a tax refund from the IRS, does this mean that the IRS feels that the return is correct and will not be subject to a future audit.
a. What does the term “hazards of litigation” mean in the context of taxation?b. Why would the IRS or a taxpayer settle or compromise a case based on the “hazards of litigation”?
Anya is concerned that she will be audited by the IRS.a. Under what circumstances is it possible that the IRS will review each line item on her tax return?b. Is it likely that all items on Anya’s
What types of taxpayers are more likely to be audited by the IRS?
What is the primary service function provided by the National Office of the IRS?
Congressional committee reports are an important source of information concerning the legislative enactment of tax law.a. Name the three Congressional committee reports that are issued in connection
The Internal Revenue Code is the most authoritative source of income tax law. In trying to resolve an income tax question, however, a tax researcher also consults administrative rulings (Income Tax
Why is a thorough knowledge of sources of tax law so important for a professional person who works in the tax area?
The PDQ Partnership earned ordinary income of $150,000 in 2017. The partnership has three equal partners, Pete, Donald, and Quint. Quint, who is single, uses the standard deduction, and has other
Partnerships and S corporations are flow-through entities. In connection with filing annual tax returns, these entities must include Form K-1 in the returns. What is Form K-1, what is its purpose,
For flow-through entities, such as partnerships, how does the tax law use partner basis adjustments to prevent double taxation of partnership income?
Limited liability companies (LLCs) are very popular today as a form of organization. Assume a client asks you to explain what this type of organization is all about. Prepare a brief description of
Discuss what is meant by the term “double taxation” of corporations. Develop an example of double taxation using a corporation and shareholder.
The Bruin Corporation, a C corporation, is owned 100% by John Bean and had taxable income in 2017 of $500,000. John is also an employee of the corporation. In December 2017, the corporation has
Sally and Tom are married, have three dependent children, and file a joint return in 2017. If they have adjusted gross income (AGI) of $90,000 and itemized deductions of $10,000, what is their
Distinguish between taxpaying entities and flow through entities from the standpoint of the federal income tax law.
If the objectives of the federal tax system are multifaceted and include raising revenues, providing investment incentives, encouraging certain industries, and meeting desired social objectives, is
The primary objective of the federal income tax law is to raise revenue. What are its secondary objectives?
Two commonly-recognized measures of the fairness of an income tax structure are “horizontal equity” and “vertical equity.”a. Discuss what is meant by horizontal equity and vertical equity as
A “good” tax structure has five characteristics.a. Briefly discuss the five characteristics.b. Using the five characteristics, evaluate the following tax structures:1. Federal income tax2. State
The three different levels of government (federal, state, and local) must impose taxes to carry out their functions. For each of the types of taxes below, discuss which level of government primarily
Most estates are not subject to the federal estate tax.a. Why is this the case?b. Do you believe most estates should be subject to the federal estate tax?
Latesha, a single taxpayer, had the following income and deductions for the tax year 2017:INCOME:Salary $ 80 Business Income25 Interest income from bonds10 Tax-exempt bond
Explain how a computer can assist a tax practitioner in tax planning activities and making complex tax calculations.
Is the principal goal of tax planning to absolutely minimize the amount of taxes that a taxpayer must pay?
Many tax professionals have moved into the field of financial planning for their clients.a. How do taxes impact financial planning for a client?b. Why do tax professionals have a perfect opportunity
During 2017, Julio attended school for much of the year but was supported by his parents. Julio married Jillian in December 2017. Julio graduated and began working full-time in 2018. Jillian worked
Carolyn operates a consulting business as a sole proprietor (unincorporated). Carolyn has been approached by one of her major clients to become an employee. If she accepts the new job, she would no
Indicate which of the following taxes are generally progressive, proportional, or regressive:a. State income taxesb. Federal estate taxc. Corporate state franchise taxd. Property taxese. State and
Cathy, who is single, makes gifts of $50,000 to each of her two adult children.a. Who is primarily liable for the gift tax on the two gifts, Cathy or the two children?b. If Cathy has never made a
Carlos inherits 100 shares of Allied Corporation stock from his father. The stock cost his father $8,000 and had a $25,000 FMV on the date of his father’s death in 2017. The alternate valuation
Why are the gift and estate taxes called wealth transfer taxes? What is the tax base for computing each of these taxes?
Carmen has computed that her average tax rate is 16% and her marginal tax rate is 25% for the current year. She is considering whether to make a charitable contribution to her church before the end
The governor of your state stated in a recent political speech that he has never supported any income tax increases as the tax rates have remained at the same level during his entire term of office.
Congressman Patrick indicates that he is opposed to tax proposals that call for a flat tax rate because the structure would not tax those individuals who have the ability to pay the tax. Discuss the
Why was pay-as-you-go withholding needed in 1943?
The Supreme Court in 1895 ruled that the income tax was unconstitutional because the tax needed to be apportioned among the states in proportion to their populations. Why would the requirement of

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