Charles visits Reno, Nevada, once each year to gamble. This year his gambling loss was $15,000. He commented to you, At least I did not have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $2,500. What are the relevant tax issues for Charles? 2. Determine the taxpayers gross income for tax purposes in each of the following situations: a. Dana, a cash basis taxpayer, sold a corporate bond with accrued interest of $200 for $10,500. Danas cost of the bond was $10,000. b. Dana needed $10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the $10,000. Danas cost for the stock is $3,000. Based on her brokers advice, instead of selling the stock, she borrowed the $10,000 using the stock as collateral for the debt. c. Dana owns a vacant lot that has been zoned for residential housing. She spends $900 in attorney fees to get the property rezoned as commercial. The propertys value increases by $10,000 as a result of the rezoning. 3. Determine the effect of the following on a cash basis taxpayers gross income for 2017. a. Received his paycheck for $3,000 from his employer on December 31, 2017. He deposited the paycheck on January 5, 2018. b. Received a dividend check from IBM on November 28, 2017. He mailed the check back the next day to IBM requesting that additional IBM stock be issued to him under IBMs dividend reinvestment plan. 4. Kevin, a cash basis taxpayer, received the following from his employer during 2018: Salary of $80,000; 2017 bonus of $12,000 received in 2018 (the 2017 bonus was not paid until 2018 because Kevins employer suffered a computer crash and could not complete the bonus calculations in a timely manner). In addition, Kevin earned a 2018 bonus of $15,000 that was to be paid by the end of December 2018. However, in December, Kevin told his employer to delay the payment of the bonus until January 2019, when Kevin plans to retire. Determine the effect of the above on Kevins gross income in 2018? 5. Color Paint Shop, Inc. is an accrual basis taxpayer that paints automobiles. During 2017, the company painted Sams car and was to receive $1,000 payment from his insurance company. Sam was not satisfied with the work, however, and the insurance company refused to pay. In December 2017, Color and Sam agreed that Color would receive $800 for the work, subject to final approval by the insurance company. In the past, Color had come to terms with customers only to have the insurance company negotiate an even smaller amount. In May 2018, the insurance company reviewed the claim and paid the $800 to Color. An IRS agent thinks that Color should report $1,000 of income in 2015 and deduct a $200 loss in 2018. Prepare a memo to your tax partner with the recommended treatment for the disputed income. Communication. 6. The Oak Apartments, an accrual basis taxpayer, is in the apartment leasing business and is in the process of re-structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company is actually more concerned about damage than about tenants not paying their rent. Discuss the tax effects of the following alternatives and identify the recommended option to Oak Apartments. a. $400 damage deposit & $400 rent for the final month of the 24 month lease b. $800 rent for the final two months of the lease and no damage deposit. c. $800 damage deposit with no rent prepayment. 7. Atlas Appliance Inc., an accrual basis taxpayer, sells home appliances and service contracts. Determine the effects of each of the following transactions on the companys 2017 and 2018 gross income assuming that the company uses any available option to defer its taxes. a. In December 2017, the company received a $1,200 advance payment from a customer for an appliance that Atlas special ordered from the manufacturer. The appliance did not arrive from the manufacturer until January 2018, and Atlas immediately delivered it to the customer. The sale was reported in 2018 for financial accounting purposes. b. On June 1, 2017, the company sold a 12 month service contract for $240. The company also sold a 24 month service contract for $480 on December 1, 2017. 8. Michael is the president of the T Corporation. He and other members of his family control the corporation. Michael has a temporary need for $45,000, and the corporation has excess cash. He could borrow the money from a bank at 9%, and T Corporation is earning 6% on its temporary investments. The federal published lending rate is 8%. T Corporation has made loans to other employees on several occasions. Therefore, Michael is considering borrowing $45,000 from the corporation. He will repay the loan principal in two years plus interest at 5%. a. Is the corporation required to impute interest income on the loan to Michael? b. Is Michael required to recognize income from the loan proceeds? c. Is Michael required to recognize income with respect to the favorable interest rate? 9. Donavan & Rex Landscaping is a Limited Liability Company (LLC). How does the tax benefit rule apply to Donavan & Rex in the following transactions: a. In 2017, Donovan & Rex paid Liz $5,000 for referring a client. The deal fell through, and in 2018, Liz refunded the $5,000 to the LLC b. In 2017, Donovan and Rex paid a title company $400 for services in connection with a title search. Because the title company was negligent, the LLC incurred some additional costs in acquiring the building. In 2016, the title company refunded the $400 fee to Donovan and Rex. 10. Mingfang and Kiren are partners in a law firm. The partners have entered into an arms length agreement requiring Mingfang to purchase Kirens partnership interest from Kirens estate if she dies before him. The price is set at 125% of the book value of Kirens partnership interest at the time of her death. Mingfang purchased an insurance policy on Kirens life to fund this agreement. After Mingfang had paid $20,000 in premiums, Kiren died due to lung cancer, and Mingfang collected one million dollars of life insurance proceeds. Mingfang used the life insurance proceeds to purchase Kirens partnership interest. a. What amount should Mingfang include in his gross income from receiving the life insurance proceeds? b. The insurance company paid $10,000 interest on the life insurance proceeds during the period Kirens estae was in administration. During this period, Mingfang had left the insurance proceeds with the insurance company. Is this interest taxable? c. When Mingfang purchased Kirens partnership interest for one million dollars, as determined by the agreement, the fair market value of Kirens interest was $1.5 million. How much should Mingfang include in his gross income from this bargain purchase? 11. Determine the taxable life insurance proceeds in the following cases: a. When Jared died, his wife, who was the beneficiary, collected $50,000 on a group term insurance policy purchased by Jareds employer. Jared had never included the premiums in gross income. b. The Matador Software Company purchased an insurance policy on the life of one of its officers. After his passing, the company, which already previously paid $50,000 in premiums, collected $750,000 of insurance proceeds. 12. Rick owed Dennis $20,000. In payment of this debt, Rick transferred to Dennis a life insurance policy on Rick. Dennis paid Rick $10,000 to acquire ownership of the life policy. The face value of the policy is $200,000. Dennis names himself as the beneficiary of the policy and continues to make the premium payments. After Dennis has paid $25,000 in premiums, Rick dies and Dennis collects $200,000. Is any of the $200,000 Dennis received taxable? In answering this question, you must identify a relevant Internal Revenue Code section. Research 13. Private G.I. Eddie was a soldier in the Iraq war. His salary was $4,500 per month, and he was in the war zone near Baghdad for ten months as the American army invaded the country. How much of his salary is taxable for the ten months? In answering this question use only the Internal Revenue Code for your research. Research 14. Derek is a cash basis taxpayer. He sold 100 shares of Zinc Inc., stock for $20,000. The cost to him was $1,000. Shortly before Derek sold the stock, Zinc Inc. decided to distribute unneeded assets to its shareholders. Therefore, Zinc Inc. declared a large dividend. Derek would have been entitled to a $10,000 dividend, but he sold his after the dividend declaration date and before the record date. What are the effects of the stock sale and the dividends on Dereks gross income?