james and Molly are married couples, both 62 years old and both retired from their respective companies last year. Both james and Molly rolled their employer retirement accounts over into self-directed individual retirement accounts. james is starting withdrawals from his account this year. They are planning to hold off on withdrawals from Molly's account until the required age of 701/2. Their daughter jane has a child, a three year-old named Nancy. Molly and her husband are in the 25% tax bracket. When Nancy was born, the Powers set up a Crummey trust for her, which they funded with a tax-exempt joint gift of $20,000 and a subsequent gift of $8,000 the following year. After spending the last six months traveling around Europe and the Caribbean, the Powers would like to settle down and establish a counseling service for high school students planning to enter college and for college students looking forward to entering the job market. They have discussed this with another couple with similar interests and backgrounds and jointly feel there is a large potential market in their metropolitan area. Net annual income from the counseling service is estimated at $60,000. ThePowers own their own home and a hillside vacation lodge in Vermont. The use the lodge infrequently, no more than a week or ten days per year, and manage the rental and maintenance of the property themselves. The Powers are interested in getting into their own business, having significant income, and in minimizing their tax burden. 4. In October of this year, the Powers plan to start their counseling business in a spacious spare room on the first floor of their large house. Even though the work to convert the room will have been completed and all the necessary equipment purchased and installed prior to their starting business, the Powers do not anticipate any income from the business until early in the following year. Which of the following percentages ofhome office business expenses will be deductible this year? A. 0% B. 10% c. 25% D. 50% E. 100% 5. If the Powers proceed with their counseling activity with an anticipated annual income of $60,000, which of the following forms of business organization would be the least favorable from a tax point of view? A. Sole proprietorship B. Partnership C. S corporation D. C corporation E. Limited partnership Appendix - Powers Case - Application Questions 6. The Powers realize the desirability of a business form which provides for limited liability. Which of the following forms of business organization is (are) most suitable to minimize the Powers' concern? (1) Sole proprietorship 7. Which of the following is the best grouping of organizational forms with the attributes of limited liability, ease of formation, business continuity, and flow through of income and losses for income tax purposes? . - (2) C corporation (3) S corporation (4) Partnership A. (1) only B. (2) only A. Sole proprietorship Partnership S corporation C corporation Business continuity Limited liability Ease of formation Conduit for income/ loss C. (1) and (3) only D. (2) and (3) only E. (2) and (4) only B. Sole proprietorship Ease of formation Partnership Conduit for income/ loss S corporation Limited liability C corporation Business continuity c. Sole proprietorship Conduit for income/ loss Partnership Ease of formation S corporation Business continuity C corporation Limited liability D. Sole proprietorship Limited liability Partnership Business continuity S corporation Conduit for income/ loss C corporation Ease of formation E. Sole proprietorship Ease of formation Partnership Limited liability S corporation Business continuity C corporation Conduit for income/ loss t Appendix - Powers Case -Application Questions 8. Which of the following business fonns is most suitable for the Powers, particularly if they establish and conduct the counseling business in conjunction with their like-minded friends? A. Sole proprietorship B. Partnership C. S corporation D. C corporation E. General partnership 9. The Powers decide to start their counseling business this year by purchasing office furniture in the 7-year MACRS class for $12,000, and computer and copying equipment in the 5-year class, costing $13,000. Using the MACRS rates (half-year convention), which of the following amounts is the total first-year depreciation that can be claimed under MACRS? A portion of the MACRS table is as follows: MACRS DEPRECIATION RATES HALF-YEAR CONVENTION 10. If the Powers had decided to obtain a greater first-year depreciation deduction (using the information in question 9), they could have made use of the Section 179 deduction. Had they done so, which of the following amounts is the maximum deduction available - again, using the MACRS table previously shown? A. $12,000 B. $13,000 c. $13,715 D. $15,600 E. $25,000 11. Assume for this question that the Powers rent their lodge in Vermont and do not make personal use of it. They are considering trading it for a lakeside lot on which they would operate a boat rental business. The Powers' basis in their lodge is $30,000, and its current fair market value is $40,000. They feel they could exchange the lodge for the lot, which has a basis of$28,000 and a fair market value of $39,000. The Powers are confident they could make the exchange and receive Recovery Year I 2 5-Year Property 20.00% 32.00 7-Year Property 14.29% 24.49 S1,000 in cash. If the exchange is made on this basis, which of the following amounts is the gain realized by the Powers? 3 19.20 17.49 A. $0 4 11.52 12.49 B. $1,000 5 11.52 8.93 c. $8,000 6 5.76 8.92 D. $10,000 7 8.93 E. $11.000 8 4.46 A. $1,715 B. $2,158 C. $2,600 D. $4,315 E. $25,000 Appendix - Powers Case - Application Questions 12. Based on the information from the like kind exchange in Question 11, which of the following amounts is the taxable gain which must be recognized by the Powers? A. $0 B. $1,000 C. $2,000 D. $3,000 E. $4,000 13.Again, based on the information provided in Question 11, which of the following amounts is the Powers' basis in their newly acquired lakeside lot? A. $28,000 B. $30,000 c. $38,000 D. $39,000 E. $40,000 14.Assume that the Powers had established their counseling business this year, and as a result, their adjusted gross income was $140,000. Which of the following amounts is the maximum reduction in gross income attainable by their actively participating in the rental of an apartment complex which Alice had inherited several years ago from her father? A. $0 B. $5,000 c. $10,000 D. $15,000 E. $25,000