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ACCT 346 Summer 2016 NAME: This test contains 31-questions: Questions 1-15 are true/false. Questions 16-28 are multiple-choice. 1-points each Various points each Questions 29-31 are short essay involving a tax simulation. Total Points 15 49 16 Total 80 The following sequence must be adhered to: 1. Record your answers to questions in the appropriate places on this exam. 2. Submit your test document via Canvas (for grading the short- essay questions). 3. Record your answers on the appropriate input form on Canvas for grading. If you do not follow these instructions for completing and submitting the exam, you will receive zero points for the exam. WARNING This test is to be an individual effort, not a team effort. You can use any resources you have except for help from other individuals. If the evidence suggests collaboration, the guilty parties will receive an \"F\" for the course. If you have questions, send me email. True-False QUESTION ANSWER 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Multiple-Guess QUESTION ANSWER 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. pg. 1 ACCT 346 Summer 2016 TRUE/FALSE QUESTIONS Indicate whether each of the following is true (T) or false (F). Record your answer in the appropriate location on the answer packet. Answers Question 1. Regulations are arranged in the same sequence as the Internal Revenue Code. 2. By minimizing taxes, a taxpayer will always maximize the net present value of his or her after tax wealth. 3. A revenue ruling is an judicial source of federal tax law. 4. It is possible for an individual taxpayer to use both the cash and the accrual methods when computing taxable income on a Form 1040. 5. If a taxpayer or the IRS seeks judicial remedy for a tax dispute, they start the process with an appellate court. 6. A taxpayer can recognize the gains from an installment sale in the year of the sale if he or she attaches an election to do so to the income tax return for that year. 7. A taxpayer may avoid paying income tax on interest income that has accrued on an investment in corporate bonds, by instructing the payee corporation to pay the interest to another individual. 8. The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes. 9. The amount of loss for partial destruction of business property is its adjusted basis. 10. For personal property placed in service in 2016, the 179 maximum deduction is limited to $2,000,000. 11. In years when both are available, the deduction under 179 is determined before taking the deduction under 168(k). 12. The nonrecognition of gains and losses under 1031 is mandatory for gains and losses. 13. The Code contains two major depreciation recapture provisions1245 and 1250. 14. If there is a net 1231 gain, it is treated as a long-term capital gain. 15. The exchange of unimproved real property located in Topeka (KS) for improved real property located in Atlanta (GA) qualifies as a like-kind exchange. pg. 2 ACCT 346 Summer 2016 MULTIPLE CHOICE QUESTIONS Select the single best answer for each of the questions below. Record your answer in the appropriate location on the answer packet. Pts 3 Floyd, a cash basis taxpayer, sold land in which he had a basis of $10,000, for $100,000 cash. He received $25,000 on January 1 of the year of the sale. On December 31 of the 16. year after the sale he received a payment of $75,000 plus interest on that amount at 8% per year. How much after-tax cash will Floyd have in the first year if the property was a capital asset and his MTR on ordinary income was 10%? a $22,500. b $25,000 c $79,980. d $102,480 4 For questions 17 and 18, refer to the case, Wal-Mart Stores, Inc. and Subsidiaries v. CIR (TC Memo 1997-1). 17. For the 1983 and 1986 tax years combined, what was the total change to the tax base per the CIR? a $18,144,507. b c $25,473,039. d 4 18. For the 1983 and 1986 tax years combined, what was the total change to the tax liability per the CIR? a $18,144,507. b c $25,473,039. d 4 19. What is the main tax concept (not the metaphor) that we discussed in class, with respect to the \"sole question for decision\" in the case of Guy T. Helvering v. Paul R. G. Horst (40-2 USTC 9787). a Fruit and the tree. b Tax-free recovery of basis. c Assignment of income. d Wherewithal to pay. pg. 3 ACCT 346 5 Summer 2016 20. According to the Court in Rodriguez v. CIR (TC Memo 2012-286), which section of the IRC supersedes the general rule of the Cohan case (8 AFTR 10552)? a 280F. b 274(d). c 1.274-5T(a). d 162. 4 21. As reported in the Tax Court Memorandum case of Cynthia M. Carlson, how much did the Grand Jury determine that the taxpayer owed for additional tax? a $-0b $5,284. c $7,007. d $19,583. 3 22. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in the current year. Ivory's domestic production activities deduction is: a $36,000. b $42,000. c $54,000. d $63,000. 4 Lily exchanges a small storage shed she uses in her rental business for an assortment of 23. vehicles and tools owned by Kendall, which she will use in her rental business. The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000. Which of the following statements is correct? a Lily's recognized gain is $50,000 and her basis for the vehicles and tools received is $120,000. b Lily's recognized gain is $50,000 and her basis for the vehicles and tools received is $170,000. c Lily's recognized gain is $0 and her basis for the vehicles and tools received is $120,000. d Lily's recognized gain is $0 and her basis for the vehicles and tools received is $170,000. pg. 4 ACCT 346 4 Summer 2016 Joyce's office building was completely destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, 24. Joyce uses $310,000 to purchase a new building and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss and her basis in the new building? a $0 and $350,000. b $10,000 loss and $350,000. c $10,000 gain and $310,000. d $40,000 gain and $310,000. 4 25. Seamus had $16,000 of net short-term capital loss in 2015. In 2016, Seamus has $17,000 of long-term capital loss and $26,000 of long-term capital gain. Which of the following statements is correct? a Seamus had a $13,000 short-term capital loss carryover to 2016. b Seamus has a $9,000 2016 net long-term capital gain. c Seamus has a $4,000 2016 net short-term capital loss. d a. and b. e a. and c. 5 White Company acquires a new machine (seven-year property) on January 10, 2016, at a cost of $600,000. White makes the election to expense the maximum amount under 26. 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2016 assuming White has taxable income of $800,000. a $557,145. b $390,868. c $128,610. d $71,593. pg. 5 ACCT 346 4 Summer 2016 White Company acquires a new machine for $35,000 and uses it in White's manufacturing operations. A few months after White places the machine in service, it discovers that the machine is not suitable for White's business. White had fully 27. expensed the machine in the year of acquisition using 179. White sells the machine for $5,000 in the tax year after it was acquired, but held the machine only for a total of 13 months. What was the tax status of the machine when it was disposed of and the amount of the gain or loss? a A capital asset and $5,000 gain. b An ordinary asset and $5,000 gain. c A 1231 asset and $5,000 gain. d A 1231 asset and $5,000 loss. 4 28. Copper Corporation sold machinery for $27,000 on December 31, 2015. The machinery had been purchased on January 2, 2012, for $30,000 and had an adjusted basis of $21,000 at the date of the sale. For 2015, what should Copper Corporation report? a Ordinary income of $6,000. b A 1231 gain of $3,000 and $3,000 of ordinary income. c A 1231 gain of $6,000. d A 1231 gain of $6,000 and $3,000 of ordinary income. pg. 6 ACCT 346 Summer 2016 Tax Planning Simulation, Questions 29-31 Facts Justin is a single taxpayer who owns IMC, Inc. (a C corporation). Both entities use the calendar year and cash basis for tax reporting purposes. Based on current year-end tax planning, the corporation expects to earn taxable income (before paying Justin's salary) of $300,000. The corporation plans to pay 60% of that amount as compensation to Justin, in some combination of salary and dividend. Justin has ordinary taxable income from other sources of $50,000. Issue How should Justin's \"compensation package\" be allocated between salary and dividend? The only alternatives to be considered are: Salary Dividends #1 0% 100% #2 50% 50% #3 100% 0% Authorities IRC 1 imposes a tax on an individual's taxable income while IRC 11 imposes a tax on a corporation's taxable income. In addition, 3101 and 3111 impose taxes under the Federal Insurance Contributions Act on employees and employers, respectively. For both individuals and corporations, IRC 63 defines taxable income to mean gross income (which generally includes all income from whatever source derived, per 61) minus allowable deductions and excluding items specifically identified in 101-140. Section 162 authorizes deductions for the ordinary and necessary expenditures incurred in the conduct of a trade or business. More specifically, 162(a)(1) allows a deduction for "reasonable allowance for salaries or other compensation." pg. 7 ACCT 346 Summer 2016 Analysis ASSUMPTIONS: Corporate Taxable Income before Officer Compensation $ 300,000 Percentage of Corporate TI for Officer Compensation 60% Alternative #1 Percentage of Payment to be Paid as Salary Alternative #2 Alternative #3 0% 50% 100% 300,000 300,000 300,000 Officer's Salary 0 (90,000) (180,000) FICA Tax on Officer's Salary 0 (6,885) (9,232) 300,000 203,115 110,768 Corporate Income Tax (100,250) (62,465) (26,450) Corporate Dividends Paid (180,000) (90,000) 19,750 50,650 84,318 50,000 50,000 50,000 0 90,000 180,000 Officer's Dividends 180,000 90,000 0 Officer's Taxable Income 230,000 230,000 230,000 (8,688) (32,920) (61,043) (27,000) (13,500) 0 0 (6,885) (9,232) 194,313 176,695 159,726 CORPORATION Corporate Income before Deducting Officer's Salary Corporate Taxable Income Corporation's After Tax Wealth OWNER/OFFICER Officer'sTaxable Income before Corporate Compensation Officer's Salary Officer's Income Tax (ordinary) Officer's Income Tax (dividends) FICA Tax on Corporate Salary Officer's After Tax Wealth pg. 8 ACCT 346 Summer 2016 Instructions Answer the questions below in the text boxes provided (they will expand to accommodate your answers). 29. Briefly identify the general tax planning concepts that you must consider when deciding which option any taxpayer should use when practicing effective tax planning. This should be a general answer that applies to any taxpayer and any tax and any tax planning. (6-pts) Enter your answer here (Note: There is no partial credit for this answer. It is either correct, in its entirety, or it is incorrect.): 30. Based on the analysis, briefly explain which alternative you would advise the client to take. (4-points) Enter your answer here : 31. Briefly explain the difference between the outcomes in the alternatives. (6-points) Enter your answer here : pg. 9