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business
federal taxation

Questions and Answers of Federal Taxation

LO.2 Periwinkle is a corporation that buys and sells financial assets. It purchases accounts receivable from merchants that need cash immediately and cannot wait to collect the receivables.
LO.2, 4 Gail purchased a toy bank for $15 at a yard sale in May. She is not in the business of buying and selling anything. She researched the toy on the Internet and discovered that it was worth
LO.2 Gaylord is the owner of numerous office buildings. His intention is to hold the buildings until they increase in value and then sell them. He rents the buildings to tenants while he is holding
LO.2, 5 Revez owns an antique shop. He buys property from estates, often at much less than the retail value of the property. Recently, Revez sold for $4,000 an antique clock for which he had paid
LO.2 During the year, Eugene had the four property transactions summarized below.Eugene is a collector of antique glassware and occasionally sells a piece to get funds to buy another. What are the
LO.2, 5, 7 Near the end of 2012, Byron realizes that he has a net short-term capital loss of $13,000 for the year. Byron has taxable income (not including the loss) of$123,000 and is single. He owns
LO.2, 5 Ian sells his antique golf club collection at a profit. He had acquired all of the clubs for his personal pleasure and sold all of them for more than he paid for them.What is the tax status
LO.5 After netting all of her short-term and long-term capital gains and losses, Minerva has a net short-term capital gain and a net long-term capital gain. Can she net these against each other? Why
LO.4 At the date of a short sale, Betty had not held substantially identical securities for more than 12 months. What is the nature of any gain or loss from the close of her short sale?
LO.4 Siva purchased corporate stock for $20,000 on April 10, 2010. On July 14, 2012, when the stock was worth $12,000, he gave it to his son, Mithra. What has to happen to the value of the property
LO.3 Green Corporation and Red Corporation are engaged in a contract dispute over the use of Green’s trademarked name, Big Blue Taco. For a one-time payment of$45,000, Green licensed Red to use the
LO.3 Hubert purchases all of the rights in a patent from the inventor who developed the patented product. After holding the patent for two years, Hubert sells all of the rights in the patent for a
LO.3 Tony receives $58,000 from a real estate developer for an option to purchase land Tony is holding for homesite development. Fourteen months later, the option expires unexercised. How is the
LO.3 Gina purchased an original issue discount bond several years ago. She paid$138,000 for the $200,000 face value bond. She sold the bond this year for $173,000. Is all of Gina’s gain long-term
LO.3 What is the difference between a “worthless security” and “§ 1244 stock”?
LO.2 Anwar owns vacant land that he purchased many years ago as an investment. After getting approval to subdivide it into 35 lots, he made minimal improvements and then sold the entire property to a
LO.2 Michel is a “bond trader” who buys and sells bonds regularly for his own account.His cousin, who purports to be a tax expert but is not a CPA, has told Michel that because the bonds Michel
LO.2 Why do court decisions play an important role in the definition of capital assets?
LO.2 Is a note receivable that arose in the ordinary course of the taxpayer’s retail business a capital asset? Why or why not?
LO.2 Is a song that is owned by its creator always an ordinary asset? Why or why not?
LO.2, 4 Alison owns a painting that she received as a gift from her aunt 10 years ago.The aunt created the painting. Alison has displayed the painting in her home and has never attempted to sell it.
LO.2 An individual taxpayer sells some used assets at a garage sale. Why are none of the proceeds taxable in most situations?
LO.2, 4, 5 Sheila inherited 300 shares of stock, 100 shares of Magenta and 200 shares of Purple. She has a stockbroker sell the shares for her, uses the proceeds for personal expenses, and thinks
LO.2 Orange Corporation acquired new office furniture on August 15, 2012, for$130,000. Orange did not elect immediate expensing under §
Orange takes additional first-year depreciation. Determine Orange’s cost recovery for 2012.
LO.2 Weston acquires a new office machine (seven-year class asset) on November 2, 2012, for $75,000. This is the only asset acquired by Weston during the year. He does not elect immediate expensing
He does take additional first-year depreciation.On September 15, 2013, Weston sells the machine.a. Determine Weston’s cost recovery for 2012.b. Determine Weston’s cost recovery for 2013.
LO.2 Juan acquires a new five-year class asset on March 14, 2012, for $150,000. This is the only asset acquired by Juan during the year. He does not elect immediate expensing under §
He elects not to take additional first-year depreciation. On July 15, 2013, Juan sells the asset.a. Determine Juan’s cost recovery for 2012.b. Determine Juan’s cost recovery for 2013.
LO.2 Debra acquired the following new assets during 2012:Date Asset Cost April 11 Furniture $40,000 July 28 Trucks 40,000 November 3 Computers 70,000 Determine the cost recovery for the current year.
She does take additional first-year depreciation.
LO.2 On August 2, 2012, Wendy purchased a new office building for $3.2 million. On October 1, 2012, she began to rent out office space in the building. On July 15, 2016, Wendy sold the office
LO.2 On April 3, 2012, Terry purchased and placed in service a building. The building cost $2 million. An appraisal determined that 25% of the total cost was attributed to the value of the land. The
LO.2 On May 5, 2012, Christy purchased and placed in service a hotel. The hotel cost$2.8 million. Calculate Christy’s cost recovery for 2012 and for 2022.
LO.2 Janice acquired an apartment building on June 4, 2012, for $1.6 million. The value of the land is $300,000. Janice sold the apartment building on November 29, 2018.a. Determine Janice’s cost
LO.2 On April 20, 2012, Ralph purchased used equipment to be used in his farming business. The cost of the equipment is $150,000. Ralph does not elect immediate expensing under § 179; nor does he
LO.2 During March 2012, Sam constructed new agricultural fences on his farm. The cost of the fencing was $80,000. Sam does not elect immediate expensing under § 179, but an election not to have the
LO.2 As a condition of leasing a 10-year-old warehouse, Martha had to make capital improvements to the interior of the building to accommodate the lessee. These improvements cost Martha $300,000. The
LO.2 On January 1, 2005, Jim leased a building to be used in his business as an office building. The lease will terminate on December 31, 2012. On February 2, 2006, Jim made a capital improvement to
LO.2, 3, 10 Lori, who is single, purchased five-year class property for $100,000 and seven-year class property for $200,000 on May 20, 2012. Lori expects the taxable income derived from her business
She elects not to take additional first-year depreciation.a. Determine Lori’s total deduction if the § 179 expense is first taken with respect to the five-year class asset.b. Determine Lori’s
LO.2, 3 Olga is the proprietor of a small business. In 2012, the business income, before consideration of any cost recovery or § 179 deduction, is $250,000. Olga spends$600,000 on new seven-year
LO.2, 3, 10 On June 5, 2012, Dan purchased and placed in service a seven-year class asset costing $250,000. Determine the maximum deduction Dan can take on this asset.
LO.3, 4 John Johnson is considering acquiring an automobile at the beginning of 2012 that he will use 100% of the time as a taxi. The purchase price of the automobile is$35,000. John has heard of
LO.2, 4 On October 15, 2012, Jon purchased and placed in service a used car. The purchase price was $25,000. This was the only business use asset Jon acquired in 2012.He used the car 80% of the time
LO.4 On June 5, 2012, Leo purchased and placed in service a new car that cost$20,000. The business use percentage for the car is always 100%. He does take additional first-year depreciation. Compute
LO.2, 3, 4 On March 15, 2012, Helen purchased and placed in service a new Escalade.The purchase price was $62,000, and the vehicle had a rating of 6,500 GVW. The vehicle was used 100% for business.a.
LO.2, 4 On May 28, 2012, Mary purchased and placed in service a new $20,000 car.The car was used 60% for business, 20% for production of income, and 20% for personal use in 2012. In 2013, the usage
She elects not to take additional first-year depreciation. Compute the cost recovery and any cost recovery recapture in 2013.
LO.2, 4, 10 Sally purchased a new computer (five-year property) on June 1, 2012, for$4,000. Sally could use the computer 100% of the time in her business, or she could allow her family to also use
LO.1, 9 Lucy and Ethan are married and file a joint return. The return for 2011 included a Form 2106 for Lucy and a Schedule C for Ethan. The return for 2012, however, included a Schedule C for each
LO.1, 9 Yolanda is employed but is not reimbursed by her employer for her job-related expenses. If Yolanda always claims the standard deduction, she can never deduct any of these expenses. Do you
LO.1 Jacob performs services for Rail Corporation. In determining whether Jacob is an employee or an independent contractor, discuss the relevance of each of the independent factors listed below:a.
LO.1, 11 In mid-2012, Madison goes to work for Knot Corporation. In January 2013, she receives a Form 1099 from Knot reflecting her classification as an independent contractor.Madison disagrees with
LO.1 In terms of characteristics, how are statutory employees similar to common law employees? To independent contractors?
LO.2 In 2010, Emma purchased an automobile, which she uses for both business and personal purposes. Although Emma does not keep records as to operating expenses(e.g., gas, oil, and repairs), she can
LO.2 Anthony just purchased a new automobile, which he plans to use primarily for business. As he had to finance the purchase, Anthony is planning to deduct the interest expense on the car loan. Is
LO.2, 3 Explain the difference between travel expenses and transportation expenses.
LO.5, 10 Jamie has an undergraduate degree in finance and is employed full-time by a bank. She is taking courses at a local university leading to an MBA degree.a. Is the cost of this education
LO.5, 10 In connection with § 222 (deduction for qualified tuition and related expenses), comment on the relevance of the following:a. The standard deduction is claimed.b. Enrollment at a college
LO.6 At the last minute, a law firm purchases 10 tickets to the Super Bowl to entertain certain key clients. Comment on some possible tax ramifications of this situation.
LO.7 In connection with the office in the home deduction, comment on the following:a. The exclusive use requirement.b. The distinction between direct and indirect expenses.c. The effect on deduction
LO.4, 7 Trent, a resident of Florida, attends Purdue University. After graduation, he moves to Dallas, where he begins a job search. Shortly thereafter, he accepts a position with a local radio
LO.6, 9, 10, 11 Ava recently graduated from college and is interviewing for a position in marketing. Kite Corporation has offered her a job as a sales representative that will require extensive
LO.4, 11 Ralph plans to retire and move to New Mexico. Discuss Ralph’s deduction for moving expenses under the following circumstances:a. He is a self-employed physician living and practicing in
LO.10 Comment on the deductibility of each of the following items:a. Gambling losses that are less than gambling gains. Taxpayer is not a professional gambler.b. Club dues for the Coronado Club.
LO.2, 3 During the year, Kristen holds two jobs. After an eight-hour day at the first job, she works three hours at the second job. On Fridays of each week, she returns home for dinner before going
LO.2, 5 Kirk is employed by an accounting firm and uses his automobile in connection with his work. During the month of October 2012, he works at the office for 3 days and participates in the audit
LO.2 Kim is the regional sales manager for a fast-food chain. She starts her work day by driving from home to the regional office, works there for several hours, and then visits the three sales
LO.2 On July 1, 2009, Rex purchases a new automobile for $40,000. He uses the car 80% for business and drives the car as follows: 8,000 miles in 2009, 19,000 miles in 2010, and 20,000 miles in 2011.
The recovery limitation for 2009 is as follows: $2,960 (first year), $4,800(second year), and $2,850 (third year).]
LO.3 Olivia, the regional manager for a national hardware chain, is based in Atlanta.During March and April of this year, she has to replace temporarily the district manager in Jackson (Mississippi).
LO.1, 3, 6 Abigail works for a clothing manufacturer as a dress designer. She travels to New York City to attend four days of fashion shows and then spends four days sightseeing.Her expenses are as
LO.5 Marlo is employed as a full-time high school teacher. The school district where he works recently instituted a policy requiring all of its teachers to start working on a master’s degree.
LO.5 In each of the following independent situations, determine how much, if any, qualifies as a deduction for AGI under § 222 (qualified tuition and related expenses):a. Sophia is single and is
LO.6, 9 Dexter is a licensed commercial pilot who works for Kite Charter Jet Service.Typically, Dexter, who lives near the airport, flies a charter out of Frankfort, Kentucky, to either Las Vegas or
LO.6 Snipe Associates paid $70,000 for a 20-seat skybox at Veterans Stadium for eight professional football games. Regular seats to these games range from $80 to $200 each.At one game, an employee of
LO.7 Melanie is employed full-time as an accountant for a national hardware chain.She also has a private consulting practice, which provides tax advice and financial planning to the general public.
LO.1 In most nontaxable exchanges, is the nonrecognition of the realized gain or loss temporary or permanent? Explain.
LO.1 Distinguish between a loss that is not recognized on a nontaxable exchange and a loss that is not recognized on the sale or exchange of a personal use asset.
LO.2 What are the three requirements that must be satisfied for a transaction to qualify for nontaxable exchange treatment under § 1031?
LO.2 Karla exchanges personal use property for property to be held for productive use in her business. Can this transaction qualify for like-kind exchange treatment? Explain.
LO.2, 6 Amos owns a lathe (adjusted basis of $40,000) that he uses in his business. He exchanges the lathe and $20,000 in cash for a new lathe worth $50,000. May Amos avoid like-kind exchange
LO.2 Which of the following qualify as like-kind exchanges under § 1031?a. Improved for unimproved real estate.b. Vending machine (used in business) for inventory.c. Rental house for personal
LO.2 Address the following issues:a. Melissa owns a residential lot in Spring Creek, Louisiana, that has appreciated substantially in value. She holds the lot for investment. She is considering
LO.2 What is boot? How does it affect the recognition of gain or loss on a like-kind exchange when received by the taxpayer? How is recognition of gain or loss affected when boot is given?
LO.2 Felicia exchanges undeveloped real estate for developed real estate on August 3, 2012. The fair market value of each property is $295,000. Felicia purchased the undeveloped real estate on
LO.3 What constitutes an involuntary conversion?
LO.3 On June 5, 2012, Azure, Inc., a calendar year taxpayer, receives cash of $630,000 from the county upon condemnation of its warehouse building (adjusted basis of$400,000 and fair market value of
LO.3 Reba, a calendar year taxpayer, owns an office building that she uses in her business.The building is involuntarily converted on November 15, 2012. On January 5, 2013, Reba receives enough
LO.3 When does the holding period begin for replacement property acquired in an involuntary conversion?
LO.4 Debbi wants to retire, sell the house she has occupied as her residence for 25 years, and travel. She would have a $95,000 realized loss on the sale of the residence.She intends to use the net
LO.4 Arnold, who is single, sold his principal residence on April 10, 2012, and excluded the realized gain under § 121 (exclusion on the sale of a principal residence).On April 12, 2012, he
LO.4 Explain how the following are determined on the sale or exchange of a principal residence:a. Realized gain.b. Recognized gain.c. Postponed gain.d. Basis of new residence.
LO.4 What is a principal residence? Can a taxpayer have several principal residences at the same time?
LO.5 On May 5, 2012, Samantha sells her stock (adjusted basis of $45,000) in Rose, Inc., a publicly traded company, for $60,000. On May 31, 2012, she pays $65,000 for stock in Lime, Inc., a
LO.2 Libby owns undeveloped land with an adjusted basis of $500,000. She exchanges it for undeveloped land worth $750,000.a. What are Libby’s realized and recognized gain or loss?b. What is
LO.2 Tanya Fletcher owns undeveloped land (adjusted basis of $80,000 and fair market value of $92,000) on the East Coast. On January 4, 2012, she exchanges it with her sister, Lisa, for undeveloped
LO.2 Tasha owns an SUV that she uses exclusively for personal purposes. Its original cost was $48,000, and the fair market value is $29,000. She exchanges the SUV and$21,000 cash with an online
LO.2 Stephanie owns a machine (adjusted basis of $60,000; fair market value of$95,000) that she uses in her business. She exchanges it for another machine (worth$70,000) and stock (worth $25,000).

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