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business
taxation of individuals

Questions and Answers of Taxation of Individuals

Helen holds 1,000 shares of Fizbo Inc. stock that she purchased 11 months ago.The stock has done very well and has appreciated $20/share since Helen bought the stock. When sold, the stock will be
Dennis is currently considering investing in municipal bonds that earn 6 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 8 percent.If Dennis’s tax rate is 20 percent,
Daniel is considering selling two stocks that have not fared well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a
Using the facts in the previous problem, what are some ways that Bendetta could shift some of the rental income to Jenine? What are the disadvantages associated with these income-shifting strategies?
Bendetta, a high-tax-rate taxpayer, owns several rental properties and would like to shift some income to her daughter, Jenine. Bendetta instructs her tenants to send their rent checks to Jenine so
Hyundai is considering opening a plant in two neighboring states. One state has a corporate tax rate of 10 percent. If operated in this state, the plant is expected to generate $1,000,000 pretax
Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $300,000, of which $125,000 is attributed to the sole proprietorship. Orie and Jane
Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is
Tawana owns and operates a sole proprietorship and has a 40 percent marginal tax rate. She provides her son, Jonathon, $8,000 a year for college expenses.Jonathon works as a pizza delivery person
Bob’s Lottery Inc. has decided to offer winners a choice of $100,000 in 10 years or some amount currently. Assume that Bob’s Lottery Inc. earns a 10 percent after-tax rate of return. What amount
Jonah has the choice of paying Rita $10,000 today or $40,000 in 10 years.Assume Jonah can earn a 12 percent after-tax rate of return. Which should he choose?
Assume Ellina earns a 10 percent after-tax rate of return, and that she owes a friend $1,200. Would she prefer to pay the friend $1,200 today or $1,750 in four years?
Assume Rafael can earn an 8 percent after-tax rate of return. Would he prefer$1,000 today or $1,500 in five years?
Geraldo recently won a lottery and chose to receive $100,000 today instead of an equivalent amount in 10 years, computed using an 8 percent rate of return.Today, he learned that interest rates are
Using the facts from the previous problem, when should Hank send the bill if he expects his marginal tax rate to be 33 percent next year? 25 percent next year?
Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $20,000 of legal services for a client. Hank typically requires his
Using the facts from the previous problem, when should Reese pay the bill if she expects her marginal tax rate to be 33 percent next year? 25 percent next year?
Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $20,000 bill from her accountant for consulting services related to
Using the facts from the previous problem, how would your answer change if Manny’s after-tax rate of return were 8 percent?
Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Manny typically requires his
Using the facts from the previous problem, how would your answer change if Isabel’s after-tax rate of return were 8 percent?
Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to
Tesha works for a company that pays a year-end bonus in January of each year (instead of December of the preceding year) to allow employees to defer the bonus income. Assume Congress recently passed
Billups, a physician and cash-method taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, Billups plans to establish a new
Yong recently paid his accountant $10,000 for elaborate tax planning strategies that exploit the timing strategy. Assuming this is an election year and there could be a power shift in the White House
“Tax avoidance is discouraged by the courts and Congress.” Is this statement true or false? Please explain.
What are the rewards of tax avoidance? What are the rewards of tax evasion?
What is the difference between tax avoidance and tax evasion?
Describe the business purpose, step-transaction, and substance-over-form doctrines.What types of tax planning strategies may these doctrines inhibit?
Relative to arm’s-length transactions, why do related-party transactions receive more IRS scrutiny?
Explain the assignment of income doctrine. In what situations would this doctrine potentially apply?
What is the constructive receipt doctrine? What types of taxpayers does this doctrine generally affect? For what tax planning strategy is the constructive receipt doctrine a potential limitation?
Several judicial doctrines limit basic tax planning strategies. What are they?Which planning strategies do they limit?
What is an “implicit tax” and how does it affect a taxpayer’s decision to purchase municipal bonds?
Laurie is thinking about investing in one or several of the following investment options:Corporate bonds (ordinary interest paid annually)Dividend-paying stock (qualified dividends)Life insurance
Under what circumstances would you expect the after-tax return from an investment in a capital asset to approach that of tax-exempt assets assuming equal before-tax rates of return?
Cameron purchases stock in Corporation X and in Corporation Y. Neither corporation pays dividends. The stocks both earn an identical before-tax rate of return. Cameron sells stock in Corporation X
Do after-tax rates of return for investments in either interest or dividend paying securities increase with the length of the investment? Why or why not?
Clark owns stock in BCS Corporation that he purchased in January of the current year. The stock has appreciated significantly during the year. It is now December of the current year, and Clark is
Explain how implicit taxes may limit the benefits of the conversion strategy.
What is needed to implement the conversion strategy?
What are some of the common examples of the conversion strategy?
Explain why paying dividends is not an effective way to shift income from a corporation to its owners.
What is the key factor in shifting income from a business to its owners? What are some methods of shifting income in this context?
What are some ways that a parent could effectively shift income to a child?What are some of the disadvantages of these methods?
Name three common types of income shifting.
What factors have to be present for income shifting to be a viable strategy?
What two factors increase the difference between present and future values?
Why is understanding the time value of money important for tax planning?
The concept of the time value of money suggests that $1 today is not equal to$1 in the future. Explain why this is true.
Describe the ways in which the timing strategy has limitations.
How do changing tax rates affect the timing strategy? What information do you need to determine the appropriate timing strategy when tax rates change?
What factors increase the benefits of accelerating deductions or deferring income?
What are some common examples of the timing strategy?
Why is the timing strategy particularly effective for cash-method taxpayers?
What are the two basic timing strategies? What is the intent of each?
In this chapter we discuss three basic tax planning strategies. What different features of taxation does each of these strategies exploit?
Describe the three parties engaged in every business transaction and how understanding taxes may aid in structuring transactions.
“The goal of tax planning is to minimize taxes.” Explain why this statement is not true.
Maurice has a client that recently asked him about the odds of the IRS detecting cash transactions not reported on a tax return. What are some of the issues that Maurice should discuss with his
Sasha owes additional tax imposed in a recent audit. In addition to the tax, will she be assessed other amounts? If so, how will these amounts be determined?
Using the same facts from the previous problem, how would your answer change if Randy estimates that there is only a 20 percent chance that the position will be sustained upon audit or judicial
Randy has found conflicting authorities that address a research question for one of his clients. The majority of the authorities provide an unfavorable answer for his client. Randy estimates that if
Benjamin, a new staff accountant for Local Firm CPAs LLC takes a CPA review course to help prepare for the CPA exam. Benjamin is not reimbursed for the cost of the course ($1,500), but his firm
Latrell recently used his Delta Skymiles to purchase a free round-trip ticket to Milan, Italy (value $1,200). The frequent flyer miles used to purchase the ticket were generated from Latrell’s
Shaun is a huge college football fan. In the past, he has always bought football tickets on the street from ticket scalpers. This year, he decided to join the university’s ticket program, which
Matt and Lori recently were divorced. Although grief stricken, Matt was at least partially comforted by his monthly receipt of $10,000 alimony. He was particularly excited to learn from his friend,
Paris was happy to provide a contribution to her friend Nicole’s campaign for mayor, especially after she learned that charitable contributions are tax deductible.a) Use an available tax service to
Pierre recently received a tax penalty for failing to file a tax return. He was upset to receive the penalty, but he was comforted by the thought that he will get a tax deduction for paying the
Katie recently won a ceramic dalmatian valued at $800 on a television game show. She questions whether this prize is taxable since it was a “gift” she won on the show.a) Use an available tax
J. C. has been a professional gambler for many years. He loves this line of work and believes the income is tax-free.a) Use an available tax research service to determine whether J. C.’s thinking
Sandy has determined that her research question depends upon the interpretation of the phrase “not compensated by insurance.” What type of research question is this?
Georgette has identified a 1983 court case that appears to answer her research question. What must she do to determine if the case still represents“current” law?
Aldina has identified conflicting authorities that address her research question.How should she evaluate these authorities to make a conclusion?
Justine would like to clarify her understanding of a code section recently enacted by Congress. What tax law sources are available to assist Justine?
For each of the following citations, identify the type of authority (statutory, administrative, or judicial) and explain the citation.a) IRC Sec. 280A(c)(5)b) Rev. Proc. 2004-34, 2004-1 C.B. 911c)
For each of the following citations, identify the type of authority (statutory, administrative, or judicial) and explain the citation.a) Reg. Sec. 1.111-1(b)b) IRC Sec. 469(c)(7)(B)(i)c) Rev. Rul.
Jamareo has found a “favorable” authority directly on point for his tax question.If the authority is an administrative authority, which specific type of authority would he prefer to answer his
Robert has found a “favorable” authority directly on point for his tax question.If the authority is a court case, which court would he prefer to have issued the opinion? Which court would he
Faith, a resident of Florida (11th Circuit) recently found a circuit court case that is favorable to her research question. Which two circuits would she prefer to have issued the opinion?
Juanita, a Texas resident (5th Circuit), is researching a tax question and finds a 5th Circuit case ruling that is favorable and a 9th Circuit case that is unfavorable.Which circuit case has more
The IRS recently completed an audit of Shea’s tax return and assessed $15,000 additional tax. Shea requested an appeals conference but was unable to settle the case at the conference. She is
Jackie has a corporate client that has recently received a 30-day notice from the IRS with a $100,000 tax assessment. Her client is considering requesting an appeals conference to contest the
Randy deducted a high level of itemized deductions two years ago relative to his income level. He recently received an IRS notice requesting documentation for his itemized deductions. What audit
Yong’s tax return was audited because he calculated his tax liability incorrectly.What IRS audit procedure identified his tax return for audit?
Campbell’s tax return was audited because she failed to report interest she earned on her tax return. What IRS audit selection method identified her tax return?
Sophia recently won a tax case litigated in the 7th Circuit. She recently heard that the Supreme Court denied the writ of certiorari. Should she be happy or not, and why?
In choosing a trial-level court, how should a court’s previous rulings influence the choice? How should circuit court rulings influence the taxpayer’s choice of a trial-level court?
Paula could not reach an agreement with the IRS at her appeals conference and has just received a 90-day letter. If she wants to litigate the issue but does not have sufficient cash to pay the
Using the facts from the previous problem, how would your answer change if Latoya understated her income by 40 percent? How would your answer change if Latoya intentionally failed to report as
Latoya filed her tax return on February 10 this year. When will the statute of limitations expire for this tax return?
Shane has never filed a tax return despite earning excessive sums of money as a gambler. When does the statute of limitations expire for the years in which Shane has not filed a tax return?
Jamarcus, a full-time student, earned $2,500 this year from a summer job. He had no other income this year and will have zero federal income tax liability this year. His employer withheld $300 of
The estate of Monique Chablis earned $450 of income this year. Is the estate required to file an income tax return?
Molto Stancha Corporation had zero earnings this fiscal year; in fact, they lost money. Must they file a tax return?
Ahmed does not have enough cash on hand to pay his taxes. He was excited to hear that he can request an extension to file his tax return. Does this solve his problem? What are the ramifications if he
What are the tax practitioner’s standards to avoid a penalty for recommending a tax return position?
What are the taxpayer’s standards to avoid the substantial understatement of tax penalty?
What are some of the most common civil penalties imposed on taxpayers?
What are the basic differences between civil and criminal tax penalties?

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