these are exercises i need help with. I see there is already bunch of solutions posted here. Would you be able to copy them to my file and send it back to me please?

Determine the amount of gross income the taxpayer must report in each of the following situations. Explain why the amount is taxable and how you determined the taxable amount. a. National Corporation receives a $12,000 bill for legal fees from its attorney in December. National paid the bill promptly and deducted the $12,000 as a legal expense for its year ending December 31. During the audit of its financial statements, the auditor determines that the attorney had double billed the corporation for $3,000 of expenses. National sent a copy of the auditor's findings in March. The attorney agrees with the auditor and sends National a check for $3,000 in April. b. Greta spends a week in Las Vegas. While cashing in some of her chips at the cashier's window, she looks down and sees a $1,000 bill lying crumpled on the floor. She picks up the bill and puts it in her pocket. c. Akron Living, Inc., an accrual basis corporation, owns an apartment building. On November 1, it rents an apartment for $400 per month. Per the terms of the rental agreement, the tenant pays the corporation $1,100 on November. The $1,100 consists of the first and last months rent and a $300 cleaning deposit. The cleaning deposit will be rused at the end of the lease and any amount not used for cleaning will be returned to the tenant. Very little is usually returned. d. Anthony is an employee of the Channel Company. Channel Company institutes a computer upgrade and offers its old computers for sale for $700. Anthony offers Channel $500 for one of the computers. Because they have not been selling well, Channel accepts Anthony's offer and sells him a computer for $500. e. James owns Argyle Co. as a sole proprietorship. In November, James pays a $600 bill for supplies and deducts it on his tax return. The following February, the supplier sends James a check for $120. A letter accompanying the check indicated that the supplier had overcharged Argyle Co. and the check was to adjust for the overcharge. Discuss whether the following persons are currently engaged in a trade or business: a. Darlene has expenses related to managing her portfolio of securities. The trading of the securities generates most of her annual income. She generally does not hold securities longterm. She buys and sells continuously. She has no other job. b. Mark incurs expenses related to investing in stocks and bonds. Mark is a Sociology professor at Indiana University but spends 10-15 hours per week on his investments. Approximately 70% of Mark's annual income come from his investments as dividends and interest. c. Paul leases real estate to Floyd's Barber Shop for a parking lot. The only expense he incurs is legal expense regarding the lease, which he renegotiates annually. d. Mandy owns several rental apartments. She arranges for repairs and maintenance, pays for the expenses related to the properties, and handles all leasing activities. Discuss whether the following persons are currently engaged in a trade or business: a. Katerina owns 35 home sites in and around Orlando. She bought these vacant lots several years ago in hopes to developing them into a subdivision. She begins to develop the lots in the current year. b. John spends 2 hours a day, 5 days a week, managing his investment portfolio. He watches the market and buys and sells securities when he thinks the market is right. His investment strategy is to realize dividends, interest, and long-term gains from holding the investments. c. Bill lives in Miami and works full-time betting on dog races. Although he intends to win large sums, he has failed to win the big one. He considers his betting activities his job and relies on his meager winnings to support his family. He is devoted to the races and has rarely missed a day betting in over 3 years. Larry is a history teacher. He subscribes to several periodicals about teaching history and judging history fairs. This year Larry spends $285 on subscriptions to various periodicals. Discuss the deductibility of the expenditures for tax purposes. Discuss whether the following expenditures meet the ordinary, necessary, and reasonable requirements for deductibility. a. Mortimer owns a shoe store. Every August Mortimer has a "Back-to-School" sale. To promote that event Mortimer spends $2,000 on newspaper and radio advertising. Generally, this event generates about $85,000 in sales. These sales revenues are about twice the level of sales in other months. b. Wilma bought a small manufacturing business that had been declared bankrupt. To retain the current sales force, she pays some of the obligations owed to these people by the former owners. Wilma has no legal obligation to pay these debts. c. Ned owns a large sporting goods store. Nick's 17-year-old son, Tony, works in the store when time permits. Nick pays Tony $10 per hour because he has worked in the store several years. Other high school age individuals also work at the store and perform functions requiring less experience than Tony. They are paid $8 per hour. d. Art is a self-employed CPA. Last month he attended an AICPA Continuing Education course that cost him $750. In addition to the course registration fee, Art incurred $800 in travel expenses to attend the course. e. Elvira is a stockholder in over 100 different corporations. However, she does not own more than 10 shares of stock in any one company. She enjoys attending annual stockholder meetings and often gives her "two cents worth" about issues affecting the companies' operations. In the past year Elvira spent $7,540 to attend the stockholder meetings to help protect her investments. . Using the tests for deductibility discussed in Chapter 5, explain why the following expenses are not deductible. a. Mel is a sprint car racer. He does repair and maintenance on his cars in the garage at his home. After repairing the cars, he tests them on city streets. He received 15 citations (totaling $2,900) for speeding, running stop signs, and reckless driving. b. Albert, a carpenter, pays his 10-year-old son $150 a week to empty waste cans in his work shop. Albert's son works each evening and two hours on Saturday morning. c. Sharon contributes $25 to a local organization that is campaigning against a foreign trade bill. The legislation would damage Sharon's business. d. Marline borrows $5,000 and pays $500 in interest. The loan is used to purchase bonds issued by the City of Lafayette School District. e. Christine is the wife of a physician, and she is an experienced horseman. She has raised horses for ten years and occasionally shows them for prize money. She also boards horses for monthly fees. She enjoys her horse activity but has never made a profit in any year. Her horses are appraised at $200,000. Using the general tests for deductibility, explain why the following expenses are not fully deductible. a. Irene spends $1,600 on a trip to Florida to investigate opening up a consulting firm. Irene currently works for a consulting firm. Because Irene is already in the consulting trade, she may be able to deduct the trip as a business expense. But she will have to substantiate that the trip was primarily for the business trip, and was not mainly personal pleasure. b. Augie and his wife divorce during the current year. Augie pays $3,000 in legal fees related to the divorce. The primary purpose of the legal fees is personal. Only those personal expenditures that are specifically allowed by the tax law are deductible. There is no provision that allows the deduction of personal legal fees. c. Peter owns a hardware store. During the current year, he pays $328,000 to acquire a new warehouse. The warehouse is a capital expenditure. Therefore, the $328,000 cost is capitalized and deducted over the tax life of the warehouse using the appropriate depreciation method under the tax regulations. d. Paul contributes $25 to a fund to be used for advertising to persuade voters to vote against a candidate running for Congress. Expenditures that frustrate public policy are disallowed. Political contributions and amounts paid to influence public opinion are specifically disallowed. . Using the tests for deductibility discussed in Chapter 5, explain why the following expenses may not be fully deductible in the current year a. Janet pays $900 in interest on debt she incurred to purchase municipal bonds. The bonds pay $1,500 of interest in the current year. Expenses paid to produce tax-exempt income are not deductible. Because the interest on the municipal bonds is excluded from gross income, Janet cannot deduct the interest on the loan to purchase the bonds. b. Andrew owns a retail-clothing store. Andrew has the opportunity to obtain a franchise to operate a discount sporting goods store. He spends $5,000 investigating the possibility of opening a sporting goods store in a neighboring town. Capital expenditures are not deductible. Because the sporting goods store is not in the same line of business as Andrew's clothing store, the $5,000 is a start-up cost. If Andrew opens the sporting goods store, the $5,000 is currently deductible. If Andrew does not open the sporting goods store, the $5,000 is a personal, nondeductible expenditure. c. Jane owns a fitness center. She employs the star basketball player at Local University as an aerobics instructor. Because of his reputation, she pays him $20 an hour. Jane pays her other aerobics instructors $10 an hour. Deductible expenses must be reasonable in amount. If the extra 10 is not reasonable under circumstances, then she can't deduct extra 10. d. Alvin makes a vacation trip to Florida, and while there spends two days investigating the feasibility of opening up a new office of his optometry practice. Personal expenses are not deductible. Most of his trip will not be deductible. The Wilson Corporation incurs the following expenses. Explain whether the following expenses should be capitalized or deducted in the current period. Paid $2,500 to blacktop a gravel parking lot. Capital expenditure that will benefit the a. corporation in more than 1 accounting year and increases the value are not currently deductible. Should be capitalized b. Paid $1,900 for new tires on the truck. Repair and maintenance is currently deductible expense. Needed to keep the business now. Expensed now c. Paid $3,000 for a new fire and security alarm system for the factory. Will increase the value and be used for more than 1 accounting period. Capitalized d. Paid $6,250 to paint the interior and exterior of the office and factory building that it just acquired. Part of acquisition cost and will benefit the business and increase value. Capitaliszed. e. Paid $1,200 for a new compressor for the factory's central air conditioning system. Need to maintain the ac now. Current expense. . Using the tests for deductibility discussed in Chapter 5, explain why the following expenses may not be fully deductible in the current year. a. Antonio is the owner of a restaurant. His business has been growing, and Antonio determines that he needed to add more seating capacity. He builds a patio garden section onto the back of the restaurant at a cost of $70,000. This is a capital improvement that will benefit in the future. Depreciated over time b. Tina owns a construction company. Because she is behind schedule on a project, she pays a city building inspector $500 to get him to come out and do his inspection a week before he had scheduled the inspection. This is not a necessary business expense. Therefor can't be treated as a business but personal expense. Not deducted c. Claude is a graduate of State University and an avid supporter of the school's athletic program. During the summer he employed State's star running back in his pool cleaning business. He paid the football player $15 an hour, although other employees doing similar work are only paid $10 per hour. It is not reasonable in amount, nor it is necessary to pay 15. Violation of arms-length doctrine. $5 not deductible. d. Melody owns a chain of coffeehouses. When she opened a coffeehouse in a new city this year, she spent $20,000 advertising the new store. Even though this is much more than she typically spends on advertising, she felt that it was reasonable because the new coffeehouse has the potential to be a very profitable venture for many years. Since Melody is branching and expanding her own line of business, related expenses should be deductible. However they need to reasonable in amount, and melody may not be able to deduct all of the expenses incurred. . Explain the rationale for disallowing the deduction for interest expense attributable to money borrowed to acquire tax-exempt municipal bonds. ANSWER: Municipal bond interest is excluded from gross income. A double benefit would result if the current rules did not exist. For example, a taxpayer in the 35% tax bracket could borrow funds at 7%, invest the money in municipal bonds at 5%, and realize a profit simply because the interest expense is deductible. The after-tax interest cost to a taxpayer in the 35% tax bracket is 4.55% [7% (1 - tax rate of .35)]. . Cornelius owns a condominium in Orlando. During the year, Cornelius uses the condo a total of 25 days. The condo is also rented to vacationers for a total of 75 days and generates rental income of $9,000. Cornelius incurs the following expenses: Mortgage interest $4,000 Property taxes 1,800 Utilities 2,000 Insurance 1,200 Depreciation 10,000 Determine Cornelius's deduction related to the condominium. Indicate the amount of each expense that can be deducted and how it would be deducted. Wilson owns a condominium in Gatlinburg, Tennessee. During the current year, she incurs the following expenses before allocation related to the property: Mortgage interest $10,000 Property taxes 4,000 Utilities 1,000 Maintenance fees 1,300 Repairs 800 Depreciation 6,000 a. For each of the following scenarios indicate whether Wilson would treat the condominium for income tax purposes as personal use property, a rental or a vacation home. Case Rental Income Rental Days A $10,000 300 Personal Personal, rental, Use Days or vacation rental 0 B 7,000 60 10 rental C 15,000 60 20 vacation D 2,000 10 40 E 11,000 280 20 b. Consider Case C. Determine Wilson's deductions related to the condominium. Indicate the amount of each expense that can be deducted and how it would be deducted. For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer's return (if there are alternatives possible, discuss the conditions which would determine the treatment) and any limitations that might be placed on the deduction. a. Monica took a client out to dinner to discuss the tax aspects of the client's proposed acquisition of a rival company. After dinner, Monica took the client to see a play. 1. 2. Assume Monica is self-employed Assume Monica is an employee of GHQ Corporation. GHQ does not reimburse its employees for entertaining clients. b. Sergio owes Edward $5,000. During the current year, Sergio files for bankruptcy. Sergio's attorney indicates that due to Sergio's poor financial condition his creditors will be lucky to get $.80 on the dollar for their debts. 1. Assume Sergio is a customer of Edward's (an accrual basis taxpayer) and the $5,000 debt is from an account receivable related to Edward's business. Assume Sergio is a business associate of Edward's. Edward loans Sergio the $5,000 to pay off some gambling debts. Edward owns a meat packing plant. 2. Phong is a life insurance salesman for Swan Insurance and spends 4 days a month in the office. His office is 12 miles from home. He also has a part-time job as a salesman in a clothing store. Typically, he works 2 nights during the week and 1 day on the weekend. The clothing store where he works is 6 miles from his office and 7 miles from his home. What portion(s) of Phong's travel is (are) considered business? Jerry recently graduates with an MBA degree from a leading university and will be going to work as an employee of a major stock brokerage firm. Jerry is unsure of the circumstances under which he can legitimately deduct the costs of entertaining and dining with clients and prospective clients. Jerry will spend approximately $5,000 a year on such activities for which he will not be reimbursed. It is important that he be able to derive tax benefit for these costs. Advise Jerry of the general rules in this area of the tax law. Include a brief discussion of substantiation requirements for such business expenses. . For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer's return (if there are alternatives possible, discuss the conditions which would determine the treatment) and any limitations which might be placed on the deduction. a. Cassie sells insurance and other financial products for Bison Assurance Company. During the current year, she gives each client who has been with her for three years 2 tickets to a Willie Nelson concert. The tickets have a face value of $75 each, but Cassie has to pay $100 per ticket to obtain a block of 100 tickets. Cassie was out of town and did not attend the concert. b. Randolph was the CEO and chairman of the board of directors of Vison Inc., until his retirement 5 years ago. Although he still owns 5% of Vison's stock, he has no other active involvement in the company. While playing golf one day he learns that 4 of the company's biggest customers are coming to town to close a big deal. Randolph had been responsible for bringing 3 of the customers to the business 30 years earlier when he started working for the company. Because he has developed a solid business relationship with them through the years and to help the company out, he holds a reception for the 4 customers and top executives of the company at his country club. The cost of the reception is $2,000. Randolph did not ask for, nor did Vison offer, a reimbursement for the reception. c. Ai-leng is an engineer employed by Boiler Corporation. While having lunch with one of Boiler's clients, she learns of a new relaxation technique that the client felt had greatly reduced his job-related stress. Ai-leng enrolls in a night course at the local community college to learn the new relaxation technique. The cost of the course is $200. For each of the following situations explain why the expenditure is or is not deductible and any limitations that may be placed on the amount of the deduction. a. Akira is self-employed as a personal financial planner. He went out-of-town for two days to visit three of his best clients and incurs the following expenses: Airfare Rental car Lodging Incidentals Meals Entertainment $350 160 240 90 220 130 b. Woodrow is President and CEO of ISPEP, a closely held corporation with assets of $20,000,000. Woodrow, who owns 60% of the company, decides to hire his twin daughters who have just completed their freshman year at Aztec State to work in the promotions department of the company. His daughters will be paid $5,000 each for the summer. Other college students who are hired for the summer to perform similar tasks will be paid $4,000. c. Felix is a Realtor. To show his appreciation, he gives each client who buys a home from him a $75 wall clock. During the year Felix gives 64 clocks to his clients. d. Sandy sues Harrison for divorce. Originally, Sandy asks for one-half of all their assets, including 50% of Harrison's car dealership. Harrison's lawyer has worked out a compromise with Sandy and her attorney that allows Harrison to retain 100% ownership of the dealership. Harrison pays his lawyer $10,000 in legal fees. . For each of the following situations explain why the expenditure is or is not deductible and any limitations that may be placed on the amount of the deduction. a. Ellis is a part-time bookkeeper for Gilmore Company. The owner of Gilmore told Ellis that if he earns an accounting degree and passes the CPA exam, he would hire him as Gilmore's accountant. Ellis spends $5,600 taking classes towards an accounting degree at City College. b. Harry owns Circus City Condiments, a wholesaler of circus food. In 2010 he loaned his friend Joanna $8,000 at 6% annual interest with the balance due in 5 years. Joanna used the loan to open a beauty salon. In December 2015, Joanna tells Harry that she has filed for bankruptcy and that he will be lucky to get $2,000 of his money back. The bankruptcy proceedings had not been completed at the end of 2015. c. Audrey is a self-employed computer consultant. Harvey calls Audrey and asks her for information on installing a new Lan-based workstation system in his business. Audrey meets Harvey at Franco's Chop House. They have dinner while Audrey explains how such a system will work and what it will cost. Audrey pays for the dinner, which costs $100. Harvey calls Audrey the next day and tells her that he has decided that the system costs too much and that he will not need her services. . Roscoe is a religion professor. During the summer, he spends 3 months in Israel touring historical landmarks. The cost of the summer trip includes $1,300 for airfare, $2,750 for lodging, $1,175 for meals, and $850 for incidental expenses. The following semester he incorporates many of the items he collected and the knowledge he gained from his experiences into his lectures. How much of the travel costs can Roscoe deduct? Explain. . For each of the following situations, determine whether the item is deductible, and discuss any limitations, which might be placed on the deduction. a. b. c. Carl owns an office building that he rents out to various businesses. During the current year, rental income from the building is $95,000. Carl's allowable expenses relating to the office building are $150,000. Edward sells stock to an unrelated party at a $70,000 loss during the current year. Lee sold furniture at a loss of $5,000 during the current year. For each of the following situations, determine whether the item is deductible, and discuss any limitations that might be placed on the deduction. Rioters damage Margarita's business building, which has an adjusted basis of $50,000, during the current year. a. Assume the building is totally destroyed. The cost of replacing the building is estimated to be $55,000. Margarita's insurance reimburses her $32,000. b. Assume the building is severely damaged. Before the riot, the building is worth $55,000. The insurance adjuster estimates the value of the building after the damage at $20,000. Margarita's insurance reimbursed her $32,000. During the year Wilbur has the following capital gains and losses: Short-term capital gains $4,500 Short-term capital losses (6,000) Long-term capital gains 4,200 Long-term capital losses (7,500) What is the effect of the capital gains and losses on Wilbur's taxable income? the Corinth Corporation is incorporated in 2012 and had no capital asset transactions during the year. From 2012 through 2015, the company had the following capital gains and losses: 2012 2013 2014 2015 Capital Gains $18,000 $12,000 $20,000 $21,000 Capital Losses (7,000) (16,000) (26,000) (31,000) If Corinth's marginal tax rate during each of these years is 34%, what is the effect of Corinth's capital gains and losses on the amount of tax due each year? ANSWER: The gains and losses must be netted together. Net capital gains are subject to the corporate tax. Net capital losses may not be deducted in the year of the loss. Losses may be carried back three years and forward five years and used to offset net capital gains in the carryover period. Carrybacks result in a tax refund. The carryforward's reduce the tax paid in future periods on net capital gains. For Corinth: Net gain (loss) 2012 $11,000 2013 $(4,000) 2014 $(6,000) 2015 $(10,000) The 2013 loss is carried back to 2012 and a $1,360 ($4,000 34%) refund is obtained. The 2014 loss is also carried back to 2012 and results in a $2,040 ($6,000 34%) refund. In 2015, $1,000 of the $10,000 loss is carried back to 2012 resulting in a $340 ($1,000 34%) refund. The remaining $9,000 ($10,000 - $1,000) net capital loss from 2015 is carried forward to 2016 and may be used to reduce capital gains for a maximum of five years. 110. Fowler sells stock he had purchased for $22,000 to his brother, Phil, for $15,000. What is the tax consequence of the sale to Fowler and Phil? Explain the three possible tax consequences if Phil sells the stock two years later to his neighbor? ANSWER: Fowler and his brother are related parties. Fowler is not allowed to deduct any of the $7,000 loss on the sale of the stock to his brother. (1) If sale proceeds from Phil's sale of the stock to his neighbor are less than his basis, $15,000, his realized and recognized loss is determined by subtracting the sale proceeds from his basis, $15,000. (2) If Phil sells the stock to his neighbor for more than $15,000 but less than his brother's original cost, $22,000, Phil can use his brother's disallowed loss to offset his gain but cannot reduce the gain below zero. The net effect is that Phil will not realize any gain or loss on the sale. (3) If Phil sells the stock to his neighbor for more than his brother's original cost, $22,000, Phil's gain on the sale is computed by subtracting the sum of his basis, $15,000, and his brother's disallowed loss of $7,000 from the sale proceeds. Gloria owns 750 shares of the Greene Company that she acquired in 2008 for $9,000. On June 12 of the current year, she sells 500 shares of Greene for $4,000. Two weeks later on June 26, Gloria purchases 200 shares of Greene for $2,200. What are the effects of the June 12 sale? Explain. ANSWER: The sale of the 500 shares results in a realized loss of $2,000. However, 200 of the 500 shares sold are replaced within the 30-day period that defines a wash sale. Therefore, the loss on the 200 shares replaced is disallowed and added to the basis of the 200 replacement shares purchased on June 26. The loss on the 300 shares that are not replaced is allowed as a capital loss. The disallowed loss is $800 and the allowable loss is $1,200: Amount realized $4,000 Basis [($9,000 750 = Less: (6,000) $12) 500 shares] Realized loss $(2,000) Disallowed loss on 200 shares 800 [(200 500) $2,000] Allowable loss on 300 shares $(1,200) not replaced The basis of the 200 shares purchased on June 26 is $3,000 ($2,200 cost + $800 disallowed loss on wash sale). Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain? Hubert and Jared are both involved in automobile accidents, which totally destroy their automobiles this year. Hubert and Jared purchased the automobiles at the same time for the same cost, and neither of them receives any insurance reimbursement for the destruction of their automobiles. Before considering the effect of their casualties, Hubert and Jared have identical adjusted gross incomes. Although Hubert and Jared are seemingly alike in every aspect regarding the automobiles, Hubert is allowed a deduction of $2,000 for the destruction of his automobile and Jared is not allowed any deduction for his automobile. What causes this disparity of treatments between Hubert and Jared? Explain. Use examples if necessary. Sara constructs a small storage shed for resale to customers and incurs the following costs: $3,000 Direct labor 1,500 Direct materials 700 Other direct costs 300 Allocated indirect costs a. b. a. What is Sara's basis in this storage shed? Sara normally sells the storage sheds for $7,000 each. John, one of the workers who builds the storage sheds, buys one for $5,000. What is John's basis in his storage shed? . Determine the adjusted basis of the following assets. Dennis buys land by paying $45,000 in cash and assuming a loan for $45,000. He incurs legal fees and commissions of $5,000. He pays $3,000 to have tree seedlings planted on the property. A flood causes $6,000 of damage to the property. Dennis does not carry flood insurance, so he deducts the total loss on his tax return. His property tax liability for this year is $750 and his interest on the loan is $1,850. b. Tyler buys 100 shares of Oliver Corporation stock at $150 per share plus commissions of $300. At the end of the year, Oliver pays a $10 per share cash dividend and informs shareholders that $6 per share is taxable as a dividend and $4 is a nontaxable dividend. c. Taylor Corporation acquires an asset for $8,000 in its first year of operation. Since the company suffers a loss during this first year of operation, the bookkeeper decides to deduct only half of the depreciation that was allowable on this asset and claims a depreciation deduction of $800, instead of $1,600. Tony receives an automobile from his uncle, Ned, as a graduation gift. Ned used the vehicle only for commuting to his office during the 3 years he owned it. Ned paid $20,000 for the vehicle. It is valued at $8,000 on the date of the gift. Tony will use the automobile 100% of the time for his business. Determine Tony's basis in the automobile for depreciation purposes. Explain your answer in terms of the concepts of taxation. For each of the following situations, identify the property's adjusted basis and briefly explain how you determined the adjusted basis amount. a. Mei-ling purchased 150 shares of MAPCO stock for $5,400 in 2004. On February 28, 2015, Mei-ling purchased another lot of 150 shares of identical stock for $3,750. Mei-ling sells the original 150 shares of MAPCO stock for $3,300 on March 15, 2015. What is Mei-ling's basis in the 150 shares she purchased February 28, 2015? b. Ralph gives Linda 500 shares of Money Maker common stock. The stock cost Ralph $30,000 several years earlier. The stock is worth $50,000 on the date it is given to Linda, and Ralph pays $1,500 of gift tax on the transfer. What is Linda's basis in the stock if she sells it for $20,000? c. Assume the same facts as in part b, except that the fair market value of the stock on the date of the gift is $25,000. d. Leon receives a van as a gift from his father. His father's basis in the van is $30,000. The fair market value at the date of the gift is $20,000. A gift tax of $2,000 is paid on the gift. Geroge uses the van in his pizza delivery service for three years, at which time he sells it for $8,000. During the three years he used the van in his business, Geroge deducts $10,000 in depreciation on the van. e. Bonita owns a house that she used as a residence until this year. She paid $150,000 for the house on November 4, 2002. On April 4, 2015, Bonita purchases a new residence and converts the former residence into office space to use in her real estate business. The former residence is worth $180,000 on April 4, 2015. Samantha receives 100 shares of Burnet Corporation stock as a gift from her cousin. At the date of the gift the stock is valued at $60 per share. It cost her cousin $10 per share several years before. One month later, Samantha's uncle dies and she inherits 100 shares of Crockett Corporation stock from her uncle's estate. The stock cost her uncle $10 per share twenty-five years ago. On the date of death the stock has a value of $60 per share. Samantha needs money to invest in her business, but she does not need to sell both blocks of stock this year. Which stock would you recommend Samantha to sell? Jose is exploring his options to minimize his tax liability for this year. Earlier in the year Jose sold a substantial number of his securities and recognized a $15,000 gain. He would like to mitigate the tax effects of that gain. The remainder of Jose's portfolio consists of 1,000 shares of Garfield Corporation stock. Jose has not sold it because it has a history of paying large dividends. Jose paid $20,000 for the stock, but it is currently trading for $5 per share. Jose is considering selling all of his Garfield stock, realizing the loss, netting it against his capital gains, and then repurchasing 1,000 shares a few days later. He knows he will lose some money due to transaction and brokerage costs, but he feels it may be worth it. Discuss Jose's plan. Relate your analysis to the basic tax concepts that help drive your position. Morrison received a gift of income-producing property with an adjusted basis of $50,000 to the donor and a fair market value of $40,000 on the date of the gift (December 31, 2015). The donor paid a gift tax of $1,000. Morrison sells the property on September 17, 2015 for $45,000. What is the gain or loss on the property? Randall is given five acres of land in 2005. At the time of the gift, the land had a fair market value of $182,000, and its adjusted basis to the donor was $160,000. What is Randall's gain if he sells the land for $184,000? Perry inherits stock from his Aunt Margaret that had a basis of $40,000 to Margaret and a fair market value of $54,000 on May 20, 2015, the date of her death. Paul sells the stock on June 21, 2015 for $65,000. What is the amount and character of the gain or loss on the sale? Gordon is the sole shareholder of Whitman Corporation, an S corporation. At the beginning of the year, Gordon's basis in his Whitman stock is $100,000. During the year, Whitman Corporation has operating income of $50,000; dividends from domestic corporations of $15,000; tax-exempt interest of $5,000; nontaxable life insurance proceeds of $10,000 on the death of a key employee; and a capital loss of $15,000. Whitman pays no dividends. What is Gordon's year-end basis in Whitman stock (after the distribution)? . Eduardo is a single taxpayer with a farming operation that suffered a net loss of $30,000 in 2015. In addition, he earned $50,000 from his accounting firm. Eduardo purchased $50,000 of equipment for his farm. He wants to maximize his cost recovery deduction and believes the Section 179 election will help achieve that goal. What is the amount of the maximum Section 179 deduction Eduardo can use? Explain the optimum approach to attain his goal. Assume Eduardo's total taxable business income in 2016 will be $60,000, and he plans to add about $20,000 of equipment to the farm operation. Why would a taxpayer ever elect to use the alternative depreciation system (ADS) rather than the MACRS? Determine the MACRS cost recovery deductions for 2015 and 2016 on the following assets that were purchased for use in a farming business on July 15, 2015. The taxpayer does not wish to use the Section 179 election. Assets Breeding hogs Dairy cattle Tractor a. Cost $20,000 20,000 20,000 Breeding hogs depreciation: Total 2015 Breeding hogs Cost Recovery Deduction (show your calculations) Total 2016 Breeding hogs Cost Recovery Deduction (show your calculations) b. Dairy cattle depreciation: Total 2015 Dairy Cattle Cost Recovery Deduction (show your calculations) Total 2016 Dairy Cattle Cost Recovery Deduction (show your calculations) c. Tractor depreciation: Total 2015 Tractor Cost Recovery Deduction (show your calculations) Total 2016 Tractor Cost Recovery Deduction (show your calculations) d. Assume the Breeding hogs are sold for $25,000 on February 1, 2017. Determine the adjusted basis of the hogs as of the sale date and the realized gain (loss) on the sale. Show your calculations. Adjusted basis __________ Realized gain (loss) __________ Determine the largest possible MACRS cost recovery deduction for 2015 on the following assets, which were purchased for use in Greg's Accounting Services on July 1, 2015. Asset Cost Office equipment $86,000 Computer and printers 40,000 Office building (exclusive of land) 150,000 a. b. c. Office equipment depreciation for 2015: MACRS recovery period Depreciable basis Depreciation __________ __________ __________ Computer and printer depreciation for 2015: MACRS recovery period Depreciable basis Depreciation __________ __________ __________ Office building depreciation for 2015: MACRS Class Life Depreciable basis Depreciation __________ __________ __________ d. Assume the office equipment is sold on December 2, 2017. Determine the cost recovery deduction for the year 2017. Depreciation: e. Assume the building is sold on December 2, 2017. Determine the cost recovery deduction for the year 2017. Depreciation: ANSWER: a. 7 $86,000. Use Section 179 and deduct $25,000 of office equipment cost of $86,000 and reduce basis to $61,000, which would be multiplied by .1429 for depreciation of $8,717. Total depreciation is $33,717 [$25,000 + $8,717] b. c. d. e. 5 $40,000 $8,000 = ($40,000 20% = $8,000) 39 $150,000 $1,766 = ($150,000 1.177%) $61,000 x .1749 x .5 = $5,334 $3,686 = ($150,000 2.564% 11.5 /12) Fonzi purchases a personal computer for $4,000 on March 19, 2015. He used it personally for correspondence, keeping track of personal finances, and on-line data base services. His children used it for schoolwork and games. On June 1, 2015, Fonzi starts a new secretarial service business and he converts the personal computer to 100% business use. The computer is worth $2,500 at the time (similar computers were selling for that amount in the used-computer market). a. What is Fonzi's depreciable basis? Briefly explain your reasoning. b. Fonzi desires to minimize depreciation deductions on the computer. What is the minimum allowable depreciation for 2015? Kuo Corporation uses the following assets in its business in 2015: Asset Office Building Furniture Equipment Truck Computer Date Purchased 5-12-2010 6-19-2013 6-15-2011 (sold 9-9-15) 7-1-2012 12-24-2012 Cost $400,000 15,000 10,000 30,000 30,000 MACRS Life 39 yr 7 yr 7 yr 5 yr 5 yr Assume Kuo Corporation does not utilize Sec 179 expense, has not disposed of any asset since 2002, and has never expensed an asset previously. The equipment was sold on 9-9-15 for $4,000. What is Kuo's 2015 depreciation expense using MACRS and for ADS? Building Furniture Equipment Truck Computer 2015 MACRS _____________ _____________ _____________ _____________ _____________ 2015 ADS ____________ ____________ ____________ ____________ ____________ . Dragonian Corporation sells a depreciable asset. Dragonian paid $50,000 for the asset. Accelerated depreciation on the asset is $12,000 up to the date of sale. Straight-line depreciation is $8,000. Determine the amount and character of the gain (loss) on the sale under each of the following assumptions: a. The asset is equipment. Dragonian deducted the maximum depreciation and the sales b. c. price is $44,000. The asset is an office building purchased in 1984. Dragonian deducted the maximum depreciation and the sales price is $54,000. The asset is an office building purchased in 2006. Dragonian deducted straight-line depreciation and the sales price is $54,000. Nicole has the following transactions related to her investments and her sole proprietorship during 2015: (1) Stock that was purchased in 2009 is sold at a loss of $12,000. (2) Bonds that were purchased in 2015 are sold at a gain of $6,000. (3) A building used in her business is sold at a gain of $17,000. The building was purchased in 1996 and $24,000 of depreciation had been taken on the building. (4) Equipment purchased in 2009 is sold at a loss of $16,000. Depreciation of $25,000 had been taken prior to the sale. (5) A delivery van is destroyed in an accident. Nicole realizes a gain of $5,000 on the van. She had deducted $3,000 of depreciation on the van prior to the accident. She does not intend to replace the van. a. b. Determine the character of each gain or loss: Determine the effect of the gains and losses on Nicole's current-year adjusted gross income. Milton has the following transactions related to his investments and his business during 2015: (1) (2) (3) (4) (5) a. b. Stock purchased in 2003 is sold at a gain of $2,000. Bonds purchased in 2015 are sold at a loss of $7,000. A building used in his business is sold at a loss of $6,000. The building had been purchased in 1996 and $18,000 of depreciation had been taken on the building. Equipment purchased in 2009 is sold at a gain of $12,000. Depreciation of $9,000 had been taken before the sale. A delivery van is destroyed in an accident. Milton realizes a loss of $5,000 on the van. He uses the $13,000 of insurance proceeds as a down payment on a new van costing $28,000. Determine the amount and character of each gain or loss. Determine the effect of the gains and losses on Milton's 2014 adjusted gross income. You must present the calculations in proper form to receive full credit. Mario is a real estate and financial consultant who owns and operates his own business as a sole proprietor. His adjusted gross income, excluding the items below is $48,000. The following information relates to his current year activities and income tax. a. Land adjacent to his office was purchased during 2015 for an anticipated expansion. It cost $10,000 but was sold later in the year for $17,000. b. His office building is sold for $250,000 in anticipation of moving to a different location. The building was purchased in 1994 for $200,000 with 10% of the cost allocated to the land. Depreciation taken on the building was $100,000. c. Office furniture that cost $20,000 and was fully depreciated is sold for $6,000. d. A color copier purchased two years ago for $50,000 is traded for 200 shares of Microsoft stock that were worth $24,000 on the date of the exchange. The copier had a basis to Mario of $35,000 but is worth only $24,000 on the date of the exchange. e. Mario's automobile, which he used 100% for business and had cost him $18,000 in 2010 is sold for $8,000. Depreciation of $6,000 had been taken on the automobile. REQUIRED: Fill in the following table by listing the amount and proper treatment of the recognized gain or loss from each of the above transactions. Identify by letter a-e. Ordinary Income Sec. 1231 Gain (Loss) Capital Gain (Loss) Unrecaptured Short-term/Long Sec. 1250 Gain term a. b. c. d. e. What is Mario's net Capital Gain (Loss) for the current year? _____________ Maria acquired a personal computer to use 100% in her business for $6,000. She took MACRS deductions of $2,880 before selling it in current year. Determine the amount and character of the gain (loss) recognized on the sale of the computer, assuming a sales price that differs in each of the three independent situations: a. b. c. Sales Price $2,400 $6,350 $4,600 Amount of Gain (Loss) Character (1231,1245,1250) ____________________________________ ____________________________________ ____________________________________ Robbie and Mike exchange machinery in a qualified like-kind exchange. Robbie's old machine, which originally cost $42,000, has an adjusted basis of $26,000. His old machine is worth $32,000. Since the machine Mike is trading is worth only $27,000 (Mike's basis is $18,000), Mike will even up the exchange by giving Robbie $5,000 in cash. a. What is Robbie's realized gain (loss) on the machine? b. What is Robbie's recognized gain (loss) on the machine? c. What is the character of Robbie's gain or loss on the machine? d. What is Robbie's basis in his new machine? 88. Benito owns an office building he purchased five years ago at a cost of $600,000. The property is currently worth $800,000, has an adjusted basis of $300,000 and is encumbered by a $400,000 mortgage. Mitch owns an apartment complex he purchased three years ago at a cost of $600,000. The property is currently worth $750,000, has an adjusted basis of $500,000 and is encumbered by a $325,000 mortgage. Benito and Mitch would like to exchange the properties and their respective mortgages. Answer the following questions regarding the exchange. a. Any boot is to be paid in cash. Who must pay the boot and how much must be paid? b. Does Benito have to recognize any gain on the exchange? If so, indicate the amount of gain to be recognized and why it must be recognized. Jason and Mark exchange equipment each use in their business. In the trade, Jason receives Mark's equipment that is worth $20,000. Mark also assumes the $10,000 loan Jason had on the equipment. Jason purchased his equipment for $25,000 and had taken $12,000 of depreciation on the equipment up to the date of the exchange. Mark's adjusted basis in his equipment is $16,000 on the date of the exchange. a. What is Jason's realized gain on the exchange? b. What are the amount and the character of the gain Jason must recognize on the exchange? c. What is Jason's basis in the equipment acquired in the exchange? A flood destroys Franklin's manufacturing facility. The building had a basis of $600,000 when destroyed. Franklin's insurance company reimburses him $850,000, the appraised replacement cost of the building. Franklin purchases a qualified replacement facility for $1,100,000. Discuss the tax effects of these transactions applying the concepts of taxation that drive your answers. Mavis is a schoolteacher with an annual salary of $28,000. Last year she sold a substantial block of securities that she had inherited from her grandmother several years before. She used the proceeds to buy an apartment building in a neighboring community. She realized a $15,000 capital loss on the sale. She carries over $12,000 of the capital loss to the current year. During the current year, a fire destroys the apartment building when its adjusted basis is $100,000. Mavis receives an insurance check for $110,000 and immediately invests it in another apartment building. Advise Mavis how she should deal with these situations for the current tax year. A fire destroys David's business building that cost $200,000 in 2005 and had an adjusted basis of $160,000. David's insurance company reimburses him $250,000 for his loss. David promptly reconstructs the building for $230,000. a. What is the amount and the character of David's minimum recognized gain (loss)? b. What is the basis of David's new building? Discuss the type of property that is qualified replacement property for involuntary conversion provisions for gain deferrals. In each of the following cases, determine the amount of realized gain or loss and the recognized gain or loss: a. Silvia sells her house for $100,000 and she pays $8,000 in commissions on the sale. She paid b. c. $110,000 for the house 2 years earlier. In July 2014, Carmen, who is single, is transferred to Dallas. She had purchased a new home in June 2015 for $130,000. Carmen sells the house for $165,000 and pays a commission of $10,000 on the sale. Conrad is single and sells his principal residence for $350,000. He pays selling expenses of $20,000. Conrad purchased the house for $65,000 in 1986. Drake and Cynthia sell their home for $475,000, incurring selling expenses of $20,000. They had purchased the residence in 1998 for $105,000 and made capital improvements totaling $25,000. They buy a new residence for $210,000. What is their realized gain and recognized gain on the sale? What is their basis in the new house? ANSWER: Drake and Cynthia have a realized gain of $325,000. Assuming they both meet the ownership and use test they can exclude the entire amount of the gain ($500,000 maximum for a married taxpayer). The ownership test requires that either of them own the house for at least two of the five years preceding the sale. The use test requires that the house was the principal residence for both of them in two of the preceding five years. Because they meet both of these tests, they can exclude the $325,000 gain. Amount realized ($475,000 - $20,000) $455,000 Adjusted basis ($105,000 + $25,000) (130,000) Realized gain $325,000 Exclusion amount (325,000) Recognized gain $- 0 The basis in the their new house is the $210,000 purchase price. The exclusion has no impact on the basis of the new home. Dominic and Lois sell their home for $775,000, incurring selling expenses of $40,000. They had purchased the residence in 1990 for $185,000 and made capital improvements totaling $45,000. They buy a new residence for $310,000. What is their realized gain and recognized gain on the sale? What is their basis in the new house? Iris' personal residence, located in a plush suburban area, is condemned to facilitate the construction of a new freeway artery. Iris receives a condemnation award of $1,000,000. She uses the award to purchase a new residence for $1,150,000. The adjusted basis of the former residence was $1,100,000 at the date of the condemnation. Determine Iris's recognized gain or loss and the basis in the new residence. Discuss in terms of the concepts of taxation how you arrived at your answers. Louise is the marketing manager and a 30% owner of Walker Company. At the beginning of the current year, Louise's basis in Walker Company is $22,000. During the year, Walker borrows $50,000 to finance the construction of a new building. For the year, Walker suffers a $100,000 net operating loss and distributes $60,000 in cash to its owners. Determine Louise's deductible loss if Walker is organized as a. A partnership b. A corporation c. An S corporation Sandi and Jodie are partners who operate Household Humanities. Sandi owns 60% and Jodie owns 40% of Household. During the current year, Household has the following results: Revenues Operating expenses Sandi's salary Jodie's salary Municipal bond interest income Long-term capital loss Charitable contributions $165,000 45,000 50,000 45,000 3,000 30,000 10,000 a. How must Household report these results to Sandi and Jodie? Show calculations. b. Sandi is a head of household with two dependent children (ages 17 and 18). She has $19,000 of other income, which includes a $6,000 short-term capital gain. Sandi has $16,750 of other allowable itemized deductions. Calculate Sandi's taxable income and income tax liability. Marvin and Marshall own and operate MM Company, an electing S corporation. Marvin owns 75% and Marshall owns 25% of MM's stock. During the current year, MM has the following results: Revenues Operating expenses Marvin's salary Marshall's salary Municipal bond interest income Long-term capital loss Charitable contributions $350,000 185,000 40,000 85,000 12,000 30,000 20,000 a. How must MM report these results to Marvin and Marshall? Show calculations. b. Marvin is a single taxpayer with no dependents. He has total income from other sources of $68,000, which includes a $26,000 long-term capital gain. He has $11,400 of other allowable itemized deductions. Calculate Marvin's taxable income and his income tax liability. ANSWER: a. Because the income from an S corporation is taxed at the shareholder level, those items that receive special treatment must be reported separately to the owners. Owner/employee's can be employees of the corporation and the corporation can deduct the salaries paid to Marvin and Marshall, who must include the salary on their individual returns. MM has operating income of $40,000 ($350,000 - $185,000 - $40,000 - $85,000). The remaining items must be separately reported to each partner. Marvin Marshall Operating income $30,000 $10,000 Municipal bond interest income 9,000 3,000 Long-term capital loss 22,500 7,500 Charitable contributions 15,000 5,000 b. Marvin's taxable income is $85,100 and his tax liability is $16,719. He must combine the results from the S corporation with his other income and expenses in calculating his taxable income. The municipal bond interest is excluded from tax. The $22,500 long-term capital loss is combined with his $26,000 long-term capital gain, resulting in a $3,500 long-term capital gain. The capital gain is added to his income in calculating taxable income. However, the $3,500 net long-term capital gain is taxed at 15%. The charitable contributions increase his allowable itemized deductions to $26,400. Other income ($68,000 - $26,000) Salary from MM Net long-term capital gain ($26,000 $22,500) S corporation operating income Adjusted gross income Less: Deductions from adjusted gross income Itemized deductions ($11,400 + $15,000) Less: Personal exemption Taxable income $42,000 40,000 3,500 30,000 $115,500 (26,400) (4,000) $85,100 The $3,500 net long-term gain is taxed at 15%. Therefore, Marvin must separate the long-term capital gain from his other taxable income and calculate the tax on it at 15%. This leaves $81,600 taxed at regular rate and $3,500 taxed at the 15% long-term capital gain rate: Tax on $81,600 (Single) Tax on $3,500 capital gain Income tax liability - $5,156.25 + [25% ($81,600 $37,450)] - $3,500 15% $16,194 525 $16,719 90. Calvin Corporation, has the following items of income and expense for the current year. Calculate (a) Calvin's taxable income and (b) income tax liability. Sales revenue Cost of goods sold Gross profit $500,000 360,000 $140,000 Other revenue: Dividends (less than 2% ownership) Interest received from municipal bonds Expenses: Utilities Insurance Meals and entertainment Charitable contributions Net operating loss (from the previous year) $5,000 30,000 $25,000 15,000 60,000 10,000 $ 60,000 Dorothy operates a pet store as a sole proprietorship. During the year she sells the business to Florian for $200,000. The assets sold and the allocation of the purchase price are as follows: Adjusted Basis Purchase Price Inventory $20,000 $20,000 Building 60,000 105,000 Land 20,000 35,000 Equipment -030,000 Goodwill -010,000 Total Assets $100,000 $200,000 Dorothy acquired the building in 1997 for $100,000 of which $20,000 was allocated to the land. She paid $40,000 for the equipment in the same year. What are the tax consequences of the liquidation for Dorothy