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business
federal taxation

Questions and Answers of Federal Taxation

LO.2, 5 What are the similarities between the crop method used for farming and the completed contract method used for long-term construction?
LO.4, 7 In December 2012, Carl Corporation sold land it held as an investment. The corporation received $50,000 in 2012 and a note payable (with adequate interest) for$150,000 to be paid in 2014.
LO.4, 7 On June 1, 2010, Father sold land to Son for $300,000. Father reported the gain by the installment method, with the gain to be spread over five years. In May 2012, Son received an offer of
LO.4 A seller and buyer agree that the sales/purchase price for land is $150,000 down and five payments of $50,000 each. In addition, the seller would like the contract to read that the total selling
LO.4 Arnold gave land to his son, Bruce. Arnold’s basis in the land was $100,000, and its fair market value at the date of the gift was $150,000. Bruce borrowed $130,000 from a bank that he used to
LO.4, 7 Irene has made Sara an offer on the purchase of a capital asset. Irene will pay(1) $200,000 cash or (2) $50,000 cash and a 6% installment note for $150,000 guaranteed by City Bank of New
LO.2 Emerald Motors is an automobile dealer. The company has made a special offer to its new car customers for 2012. The dealer will not charge for the first four manufacturer’s recommended service
LO.8 Discuss how the cost of mineral rights enters into the calculation of cost depletion.
LO.2 Samantha, an accrual basis taxpayer, subscribes to a service that updates a database used in her business. In December 2012, Samantha paid the $120,000 subscription for the period January 2012
LO.2 Edgar uses the cash method to report the income from his software consulting business. A large publicly held corporation has offered to invest in Edgar’s business as a limited partner. What
LO.2 Compare the cash and accrual methods of accounting for the following events:a. Purchased new equipment, paying $50,000 cash and giving a note payable for$30,000 due next year.b. Paid $3,600 for
LO.2 Osprey Corporation, an accrual basis taxpayer, had taxable income for 2012. The company filed its 2012 state income tax return in August 2013 and paid the $8,000 state income tax due for 2012.
LO.2 In 2012, the taxpayer became ineligible to use the cash method of accounting. At the beginning of the year, accounts receivable totaled $240,000, accounts payable for merchandise totaled
LO.2 In December 2012, Nell, Inc., an accrual basis taxpayer, paid $12,000 for insurance premiums for her business for the 2013 calendar year. How much of the premiums can Nell, Inc., deduct in 2012?
LO.1 Under what conditions would the cash method of accounting be advantageous as compared to the accrual basis?
LO.1 Fred, a cash basis taxpayer, received a $75,000 bonus from his employer in 2012.The bonus was based on the company’s profits for the year 2011. In 2013, the company discovered that its 2011
LO.1 Pale Hotel, Inc., was a C corporation using a fiscal year ending April 30 for tax purposes for all tax years through April 30, 2012. In May 2012, the corporation made an S election. What are the
LO.1 A law practice was incorporated on January 1, 2012, and expects to earn $25,000 per month before deducting the lawyer’s salary. The lawyer owns 100% of the stock. The corporation and the
LO.1 Assume that a partnership is profitable and that its tax year ends on December 31, but one of the partners tax year ends on September 30.Does the partner enjoy a tax benefit or detriment from
LO.1 Would a tax year ending December 31 be appropriate for a department store?Why or why not?
LO.1, 2 On November 4, 2010, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2010 and 2011, respectively, Blue took $642 and $5,128 of
LO.7 Is a § 1245 gain that is reported on 2011 Form 4797, Part II, line 18(b), included on 2011 Form 1040 Schedule D? Is it included in AGI? Explain.
LO.7 Ernie has a 2011 net long-term capital loss of $45,000 on his Form 1040 Schedule D, line 16, and a 2011 net § 1231 loss of $37,000 on Form 4797. Where is the last place the $37,000 would be
LO.2, 7 Terri provided depreciable furniture for a furnished apartment she owned and rented to tenants. She sold the furniture after owning it for two years and had a $4,000 loss on the disposition.
LO.4, 7 Sasha and Tara are married, filing jointly. Their correctly determined 2012 taxable income is $127,000. This taxable income includes a $5,000 § 1231 gain from the sale of business land that
LO.4 Jasmine owned rental real estate that she sold to her tenant in an installment sale. Jasmine had acquired the property in 2000 for $400,000, had taken $178,000 of depreciation on it, and sold it
LO.4, 7 Jeremiah is the tenant of a shopping center. In 2010, he installed $450,000 of capitalized leasehold improvements in his store at the mall. He took $316,508 of depreciation on the leasehold
LO.2, 3, 6 Tan Corporation purchased depreciable tangible personal property for$100,000 in 2010 and immediately expensed the entire cost under § 168(k). In 2012, when the property was worth $80,000,
LO.2, 3, 5 Dedriea contributes to her wholly owned corporation some tangible personal property that she had used in her sole proprietorship business and depreciated. She had acquired the property for
LO.5 David contributes to charity some tangible personal property that he had used in his business and depreciated. At the date of the donation, the property has a fair market value of $233,000 and
LO.2, 3, 5 Miguel receives tangible personal property as an inheritance in 2010. The property was depreciated by the deceased (Miguel’s father), and Miguel will also depreciate it. At the date of
LO.2, 3, 5 Anna received tangible personal property with a fair market value of$65,000 as a gift in 2010. The donor had purchased the property for $77,000 and had taken $77,000 of depreciation. Anna
LO.2, 3, 5, 8 Joanne is in the 35% tax bracket and owns depreciable business equipment that she purchased several years ago for $135,000. She has taken $100,000 of depreciation on the equipment, and
LO.2, 4 On January 1, 2003, Stephanie Bridges acquired depreciable real property for$50,000. She used straight-line depreciation to compute the asset’s cost recovery. The asset was sold for $96,000
LO.2, 3, 4 Larry is the sole proprietor of a trampoline shop. During 2012, the following transactions occurred:• Unimproved land adjacent to the store was condemned by the city on February 1.The
LO.2, 3, 4 On May 2, 1986, Hannah acquired residential rental real estate for$450,000. Of the cost, $100,000 was allocated to the land and $350,000 to the building.On January 20, 2012, the building,
LO.2, 4 On June 1, 2008, Skylark Enterprises (not a corporation) acquired a retail store building for $500,000 (with $100,000 being allocated to the land). The store building was 39-year real
LO.2, 3 On December 1, 2010, Lavender Manufacturing Company (a corporation)purchased another company’s assets, including a patent. The patent was used in Lavender’s manufacturing operations;
LO.2, 3 Copper Industries (a sole proprietorship) sold three § 1231 assets during 2012. Data on these property dispositions are as follows:Asset Cost Acquired Depreciation Sold for Sold on Rack
LO.2, 3 Amber Industries (a sole proprietorship) sold three § 1231 assets during 2012.Data on these property dispositions are as follows:Asset Cost Acquired Depreciation Sold for Sold on Rack
LO.1, 2, 3 Siena Industries (a sole proprietorship) sold three § 1231 assets during 2012. Data on these property dispositions are as follows:Asset Cost Acquired Depreciation Sold for Sold on Rack
LO.2, 8 Jinjie owns two parcels of business land (§ 1231 assets). One parcel can be sold at a loss of $60,000, and the other parcel can be sold at a gain of $70,000. Jinjie has no nonrecaptured §
LO.2 Keshara has the following net § 1231 results for each of the years shown. What would be the nature of the net gains in 2011 and 2012?Tax Year Net § 1231 Loss Net § 1231 Gain 2007 $18,000 2008
LO.2 A sculpture that Korliss Kane held for investment was destroyed in a flood. The sculpture was insured, and Korliss had a $60,000 gain from this casualty. He also had a$17,000 loss from an
LO.2 Bob owns a farming sole proprietorship. During the year, Bob sold a milk cow that he had owned for 15 months and a workhorse that he had owned for 66 months.The cow had an adjusted basis of
LO.1, 2 Jenny purchased timber on a 100-acre tract of land in South Dakota in March 2010 for $100,000. On January 1, 2012, the timber had a fair market value of $135,000.Because of careless cutting
LO.7 Refer to Form 4797 near the end of this chapter. Where would a § 1231 lookback loss be entered on the form?
LO.7 Refer to Form 4797 near the end of this chapter. Where would a § 1231 gain on the disposition of business land be entered on the form?
LO.7 Refer to Form 4797 near the end of this chapter. Where would a § 1231 loss be entered on the form?
LO.6 A corporation distributes a truck it has owned for three years to its sole shareholder.The shareholder will use the truck for business activity. The truck’s fair market value at the time of
LO.3, 5 A corporation distributes a truck it has owned for three years to its sole shareholder.The shareholder will use the truck for personal use activity. The truck’s fair market value at the
LO.3, 5 Desiree contributes to her wholly owned corporation some tangible personal property that she had used in her sole proprietorship business and depreciated. At the date of the contribution, the
LO.3, 5 Dino contributes to charity some tangible personal property that he had used in his business and depreciated. At the date of the donation, the property has a fair market value greater than
LO.3, 5 Thomas receives tangible personal property as an inheritance from a decedent who died in 2012. The property was depreciated by the deceased, and Thomas will also depreciate it. At the date of
LO.3, 5 Mary receives tangible personal property as a gift. The property was depreciated by the donor, and Mary will also depreciate it. At the date of the gift, the property was worth more than the
LO.4 An individual taxpayer has $25,000 of § 1231 gain from the disposition of nonresidential real estate. Straight-line depreciation of $43,000 was deducted on the real estate.The taxpayer also has
LO.4 Nonresidential real estate was acquired in 2009. What is the maximum amount of unrecaptured § 1250 gain from the disposition of the real estate if the building is sold for a loss and the land
LO.4 Residential real estate was acquired in 1994. What is the maximum amount of unrecaptured § 1250 gain from the disposition of the real estate if the real estate is sold at a gain?
LO.1, 2 José purchased a house for $300,000 in 2009. He used the house as his personal residence. In March 2012, when the fair market value of the house was $250,000, he converted the house to
LO.4 Nonresidential real estate leasehold improvements are sold at a gain. In what circumstances would the gain be subject to § 1250 depreciation recapture?
LO.3 A retailer’s store is destroyed by a tornado, but is insured for its replacement cost.Consequently, the retailer has a $40,000 gain after receiving the insurance proceeds.The store is not
LO.3 A professional football player’s contract is sold at a gain after it has been held for two years. What issues should the team consider in determining the nature of this gain?
LO.1, 3 If depreciable equipment used in a business is sold at a recognized gain on July 10, 2012, and it was purchased on August 21, 2011, does § 1245 depreciation recapture apply to the asset?
LO.1, 2, 3 Sissie owns two items of business equipment. They were both purchased in 2008 for $100,000, both have a seven-year recovery period, and both have an adjusted basis of $37,490. Sissie is
LO.3 A depreciable business dump truck has been owned for four years and is no longer useful to the taxpayer. What would have to be true for the disposition of the dump truck to generate at least
LO.3 A taxpayer owns depreciable business real property held for the short-term holding period. What would have to be true for the real property to generate a § 1231 loss when it is sold?
LO.2 Review Examples 4 and 6 in the text. In both examples, the taxpayer’s AGI is$129,400 even though in Example 6 there is $700 of nonrecaptured § 1231 loss from 2011. Explain why the two AGI
LO.2 An individual taxpayer had a net § 1231 loss in 2009 and a net § 1231 gain in 2010, 2011, and 2012. What factors will influence whether any of the 2012 net § 1231 gain will be treated as
LO.2 As a result of a casualty event, Thelma disposed of tangible personal property (a§ 1231 asset) at a realized and recognized gain. At the time of the casualty, the property was worth
LO.1, 2 Sammy established a sole proprietorship in 2004. He sold § 1231 assets at a loss in 2010 and 2011. He had not sold any § 1231 assets before 2010. In 2012, he could sell a § 1231 asset at a
LO.1, 2 Hakim’s rental building was not insured when it was destroyed by a hurricane.His adjusted basis for the building was substantial, but was less than he had paid for the building in 2008. The
LO.1, 2 Bernice, a sole proprietor, sold two business assets during the year. As a result, she has an ordinary loss and a § 1231 gain. The loss asset was office furniture that was held for eight
LO.1, 2 Nate, a farmer, is thinking about raising llamas. Llama milk is highly sought after because it is high in protein and low in saturated fat. Nate would like to know what tax issues he would
LO.2 When is land a § 1231 asset?
LO.1 If a net § 1231 gain is treated as a long-term capital gain, how will a net shortterm capital loss affect the computation of the net long-term capital gain?
LO.1 If there is a net loss from § 1231 transactions, what is the character of the loss?How is it deducted (for or from AGI)?
LO.1, 2 Alex, a farmer, sells three assets during the year: the unharvested crops on his 200 acres of farmland, the 200 acres of farmland, and a harvesting machine. How does Alex determine the tax
LO.5 Jane and Blair are married filing jointly and have 2012 taxable income of$97,000. The taxable income includes $5,000 of gain from a capital asset held for five years, $2,100 of gain from a
LO.5 For 2012, Ashley has gross income of $8,350 and a $5,000 long-term capital loss.She claims the standard deduction. Ashley is 35 years old and single with two dependent children. How much of
LO.5 Heloise has the following long-term capital gains and losses for 2012: $45,000 28% gain, $53,000 28% loss, $18,000 25% gain, and $34,000 0%/15% loss. She also has a $23,000 short-term loss and a
LO.5 Phil has the following long-term capital gains and losses for 2012: $32,000 28% gain,$11,000 28% loss, $18,000 25% gain, and $34,000 0%/15% gain. He also has a $23,000 short-term loss and a
LO.5 Phil and Susan are married, filing a joint return. The couple have two dependent children. Susan has wages of $34,000 in 2012. Phil does not work due to a disability, but he is a buyer and
LO.2, 4, 5 Bridgette is known as the “doll lady.” She started collecting dolls as a child, always received one or more dolls as gifts on her birthday, never sold any dolls, and eventually owned
LO.3, 5 In 2012, Betty (head of household with three dependents) had a $28,000 loss from the sale of a personal residence. She also purchased from an individual inventor for $18,000 (and resold in
LO.5 Elaine Case (single with no dependents) has the following transactions in 2012:AGI (exclusive of capital gains and losses) $240,000 Long-term capital gain 22,000 Long-term capital loss
LO.5 Dennis sells short 100 shares of ARC stock at $20 per share on January 15, 2012.He buys 200 shares of ARC stock on April 1, 2012, at $25 per share. On May 2, 2012, he closes the short sale by
LO.4 Sarah received a gift of farmland from her father. The land was worth $4 million at the date of the gift, had been farmed by her father for 40 years, and had a tax basis for her father of
LO.4 Roger inherited 100 shares of Puce stock when his mother, Emily, died. Emily had acquired the stock for a total of $30,000 on November 15, 2008. She died on August 10, 2012, and the shares were
LO.4 Cherie held vacant land that qualified as an investment asset. She purchased the vacant land on April 10, 2008. She exchanged the vacant land for an apartment building in a qualifying like-kind
LO.3 Sylvia was a tenant in a campus apartment. She is a student at State University.Her lease began on August 1, 2012, and was due to expire on July 31, 2013. However, her landlord sold the
LO.3 Tricia owns numerous office buildings. A major tenant of one of the buildings wanted to cancel its lease because it was moving to another city. After lengthy negotiations, the tenant paid Tricia
LO.3 Freys, Inc., sells a 12-year franchise to Reynaldo. The franchise contains many restrictions on how Reynaldo may operate his store. For instance, Reynaldo cannot use less than Grade 10 Idaho
LO.3, 4, 7 Mac, an inventor, obtained a patent on a chemical process to clean old aluminum siding so that it can be easily repainted. Mac has a $50,000 tax basis in the patent.Mac does not have the
LO.3 Hilde purchased all of the rights to a patent on a new garden tool developed by a friend of hers who was an amateur inventor. The inventor had obtained the patent rights, set up a manufacturing
LO.3 Carla was the owner of vacant land that she was holding for investment. She paid$2 million for the land in 2010. Raymond was an investor in vacant land. He thought Carla’s land might be the
LO.3 Fred is an investor in vacant land. When he thinks he has identified property that would be a good investment, he approaches the landowner, pays the landowner for a“right of first refusal”
LO.2, 3 Jason purchased $400,000 of Cherry Corporation face value bonds for$320,000 on November 13, 2011. The bonds had been issued with $80,000 of original issue discount because Cherry was in
LO.3, 5 Kate has had a bad year with her investments. She lent a friend $5,700; the friend did not repay the loan when it was due and then declared bankruptcy. The loan is totally uncollectible. Kate
LO.2 Maria meets all of the requirements of § 1237 (subdivided realty). In 2012, she begins selling lots and sells four separate lots to four different purchasers. She also sells two contiguous lots
LO.2 Faith Godwin is a dealer in securities. She has spotted a fast-rising company and would like to buy and hold its stock for investment. The stock is currently selling for $2 per share, and Faith

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