FEDERAL TAXATION 307__________________________________ Week 2 – Chapter 4 Homework: student’s name #20. Brenda loaned her son Bart $250,000 to purchase a new home. Brenda did not charge interest on the loan. Brenda was required to recognize imputed interest income and Bart had imputed home mortgage interest expense that he deducted as an itemized deduction. Would Brenda’s and Bart’s combined total income taxes likely increase or decrease as a result of the imputed interest? #23. On July 1, 1998, when Betty was 65 years old, she purchased an annuity contract for $108,000.
The annuity was to pay Betty $9,000 on June 30 each year for the remainder of her life. Betty died on March 31, 2011. What are the effects of the annuity on Betty’s gross income and taxable income for 2011? #31. Al is a medical doctor who conducts his practice as a sole proprietor. During 2011, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2010. At the end of 2011, Al had accounts receivable of $60,000, all for services rendered in 2011.
In addition, at the end of the year, Al received $12,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2012. Compute Al’s gross income for 2011” a)Using the cash basis of accounting. b)Using the accrual basis of accounting. c)Advise Al on which method of accounting he should use. #34. Color Paint Shop, Inc. (459 Ellis Avenue, Harrisburg, PA 17111), is an accrual basis taxpayer that paints automobiles. During the year, the company painted Samuel’s car and was to receive a $1,000 payment from his insurance company.
Samuel was not satisfied with the work, however, and the insurance company refused to pay. In December 2011, Color and Samuel 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 lesser amount. In May 2012, the insurance company reviewed the claim and paid the $800 to Color. An IRS agent thinks that Color, as an accrual basis taxpayer, should report $1,000 of income in 2011, when the work was done, and then deduct a $200 loss in 2012.
Prepare a memo to Susan Apple, a tax partner for whom you are working, with the recommended treatment for the disputed income. #36. Marlene, a cash basis taxpayer, invests in Series EE U. S. Government savings bonds and bank certificates of deposit (CDs). Determine the tax consequences of the following on her 2011 gross income. a)On July 1, 2011, she purchased a CD for $10,000. The CD matures on June 30, 2013, and will pay $10. 816, thus yielding a 4% annual return. b)On December 31, 2011, she cashed in a CD and received $11,025. She purchased the CD on January 1, 2010 and the yield to maturity was 5%. )On September 30, 2011, she cashed in Series EE bonds for $10,000. She purchased the bonds in 2011 for $7,025. The yield to maturity on the bonds was 4. 5%. #38. Freda is a cash basis taxpayer. In 2011, she negotiated her salary for 2012. Her employer offered to pay her a total of $250,000 for the year. Freda countered that she would accept $10,000 each month for the 12 months in 2012, and the remaining $130,000 in January 2013. The employer accepted Freda’s terms for 2012 and 2013. a)Did Freda actually or constructively receive $250,000 in 2012? b)What could explain Freda’s willingness to spread her salary over a longer period of time? 42. Fran, Gary, and Heidi each have a one-third interest in the capital and profits of the FGH Partnership. Each partner had a capital account of $50,000 at the beginning of the tax year. The partnership profits for the tax year were $240,000. Changes in their capital accounts during the tax year were as follows: Fran Gary Heidi Total Beginning balance$50,000$50,000$50,000$150,000 Withdrawals(25,000)(35,000)(10,000)( 70,000) Additional contributions -0- -0- 5,000 5,000 Allocation of profits 80,000 80,000 80,000 240,000 Ending balance $105,000 $95,000 $125,000$325,000
In arriving at the $240,000 of partnership profits, the partnership deducted $1,800 ($600 for each partner) in premiums paid for group term life insurance on the partners. Fran and Gary are 39 years old, and Heidi is 35 years old. Other employees are also eligible for group term life insurance equal to their annual salary. These premiums of $10,000 have been deducted in calculating the partnership profits of $240,000. Computer each partner’s gross income from the partnership for last year. #49. On June 30, 2011, Ridge borrowed $62,000 from his employer. On July 1, 2011, Ridge used the money as follows:
Interest-free loan to Ridge’s controlled corporation (operated by Ridge on a part-time basis)$31,000 Interest-free loan to Tab (Ridge’s son) 11,000 National Bank of Grundy 5% CD ($14,700 due at maturity, June 30, 2012) 14,000 National Bank of Grundy 5. 5% CD ($6,678 due at maturity, June 30, 2012) 6,000 $62,000 Ridge’s employer did not charge him interest. The applicable Federal rate was 5% throughout the relevant period. Tab had investment income of $800 for the year, and he used the loan proceeds to pay medical school tuition. There were no other outstanding loans between Ridge and Tab.
What are the effects of the preceding transactions on Ridge’s taxable income for 2011? #51. Vito is the sole shareholder of Vito, Inc. He is also employed by the corporation. On June 30, 2011, Vito borrowed $8,000 from Vito, Inc. , and on July 1, 2012, he borrowed an additional $4,000. Both loans were due on demand. No interest was charged on the loans, and the Federal rate was 8% for all relevant dates. Vito used the money to purchase a boat, and he had $1,100 of investment income. Determine the tax consequences to Vito and Vito, Inc. in each of the following situations: )The loans are considered employer-employee loans. b)The loans are considered corporation-shareholder loans #52. Tess retires after 30 years of service with her employer. She is 66 years old and has contributed $37,800 to her employer’s qualified pension fund. She elects to receive her retirement benefits as an annuity of $3,000 per month for the remainder of her life. a)Assume that Tess retires in June 2011 and collects six annuity payments this year. What is her gross income from the annuity payments in the first year? b)Assume that Tess lives 30 years after retiring.
What is her gross income from the annuity payments in the twenty-ninth year? c)Assume that Tess dies after collecting 180 payments. She collected six payments in the year of her death. What are Tess’s gross income and deductions from the annuity contract in the year of her death? FEDERAL TAXATION 307__________________________________ – Chapter 5 Homework: #7. Lime Finance Company requires its customers to purchase a credit life insurance policy associated with the loans it makes. Lime is the beneficiary of the policy to the extent of the remaining balance on the loan at the time of the customer’s death.
In 2010, Lime wrote off as uncollectible a $5,000 account receivable from Wally, which included $1,500 of accrued interest. When Wally died in 2011, the life insurance policy was still in force, and Lime received $3,500. Is the $3,500 of life insurance proceeds received by Lime included in its gross income? #13. Melba’s employer provides a flexible spending plan for medical and dental expenses not covered by insurance. Melba contributed $1,500 during 2011, but by the end of December 2011, she still had $300 remaining in the account.
Melba intended to get new eyeglasses, but was too busy during the holiday season. Is Melba required to forfeit the balance in her flexible spending account? #23. In 2011, Montgomery County experienced a budget surplus. The County is considering using a portion of the surplus to rebate part of the real estate taxes paid by county real estate owners. What would be the income tax consequences to the real estate owners of receiving the rebate in 2012? #25. Molly is a cash basis taxpayer. In 2011, she earned only $6,500, which was less than the standard deduction and personal exemption.
In January 2012, Molly’s employer determined that he had miscalculated her December 2011 bonus and that she should have received an additional $1,000 of compensation in 2011. The employer paid Molly the $1,000 in 2012. If Molly had received the $1,000 in 2011, it would not have resulted in any tax liability because her gross income would still have been less than her standard deduction and personal exemption. In 2012, Molly had over $30,000 in taxable income. Does the tax benefit rule apply to Molly’s situation? Explain. #28. Ed, an employee of the Natural Color Company, suffered from a rare disease that was very expensive to treat.
The local media ran several stories about Ed’s problems, and the family received more than $10,000 in gifts from individuals to help pay the medical bills. Ed’s employer provided hospital and medical insurance for its employees, but the policy did not cover Ed’s illness. When it became apparent that Ed could not pay all of his medical expenses, the hospital canceled the $25,000 Ed owed at the time of his death. After Ed’s death, his former employer paid Ed’s widow $12,000 in “her time of need. ” Ed’s widow also collected $50,000 on a group term life insurance policy paid for by Ed’s employer. What are Ed’s and his wife’s gross income? 31. What is the taxpayer’s gross income in each of the following situations? a)Darrin received a salary of $50,000 in 2011 from his employer, Green Construction Associates, Inc. In July 2011, Green gave each employee $2,500 as a bonus for exceeding the monthly sales goals. b)Megan received $10,000 from her employer to help her pay the college expenses of her daughter. c)Blake received $15,000 from his deceased wife’s employer in “recognition of her 30 years of faithful service to the company. ” d)Clint collected $50,000 as the beneficiary of a group term life insurance policy for which his deceased wife’s employer had paid the premiums. 33. Ray and Carin are partners in an accounting firm. The partners have entered into an arm’s length agreement requiring Ray to purchase Carin’s partnership interest from Carin’s estate if she dies before Ray. The price is set at 120% of the book value of Carin’s partnership interest at the time of her death. Ray purchased an insurance policy on Carin’s life to fund this agreement. After Ray had paid $45,000 in premiums, Carin was killed in an automobile accident, and Ray collected $800,000 of life insurance proceeds. Ray used the life insurance proceeds to purchase Carin’s partnership interest. )What amount should Ray include in his gross income from receiving the life insurance proceeds? b)The insurance company paid Ray $16,000 interest on the life insurance proceeds during the period Carin’s estate was in administration. During this period, Ray had left the insurance proceeds with the insurance company. Is this interest taxable? c)When Ray paid $800,000 for Carin’s partnership interest, priced as specified in the agreement, the fair market value of Carin’s interest was $1 million. How much should Ray include in his gross income from this bargain purchase? #36.
Leigh sued an overzealous bill collector and received the following settlement: Damage to her automobile the collector attempted to repossess$ 3,300 Physical damage to her arm caused by the collector 15,000 Loss of income while her arm was healing 6,000 Punitive damages 80,000 a)What effect does the settlement have on Leigh’s gross income? b)Assume Leigh also collected $25,000 of damages for slander to her personal reputation caused by the bill collector misrepresenting the facts to Leigh’s employer and other creditors. Is this $25,000 included in Leigh’s gross income? #39.
The UVW Union and HON Corporation are negotiating contract terms. Assume the union members are in the 28% marginal tax bracket and all benefits are provided on a nondiscriminatory basis. Write a letter to the UVW Union members explaining the tax consequences of the options discussed below. The union’s address is 905 Spruce Street, Washington, DC 20227. a)The company would impose a $100 deductible on medical insurance benefits. Most employees incur more than $100 each year in medical expenses. b)Employees would get an additional paid holiday with the same annual income (the same pay but less work). )An employee who did not need health insurance (because the employer’s spouse works and receives family coverage) would be allowed to receive the cash value of the coverage. #52. Tonya, who lives in Virginia, inherited a $10,000 State of Virginia bond in 2011. Her marginal Federal tax rate is 35%, and her marginal state tax rate is 5%. The Virginia bond pays 4% interest, which is not subject to Virginia income tax. She can purchase a corporate bond of comparable risk that will yield 6% or a U. S. government bond that pays 5. 6% interest.
Tonya does not itemize her deductions. Which investment will provide the greatest after-tax yield? Chapter 6 Homework #7 Nanette is a third-grade teacher. Potential deductions are charitable contributions of $520, personal property taxes on her car of $225, and various supplies purchased for use in her classroom of $225 (none reimbursed by her school). How will these items affect Nanette’s income tax return? #11 Mary Kate owns a building that she leases to an individual who operates a grocery store. Rent income is $10,000 and rental expenses are $6,000.
On what Form 1040 schedule or schedules are the income and expenses reported? #20 Gordon anticipates that being positively perceived by the individual who is elected mayor will be beneficial for his business. Therefore, he contributes to the campaigns of both the Democratic and the Republican candidates. The Republican candidate is elected mayor. Can Gordon deduct any of the political contributions he made? #25 Are there any circumstances under which taxpayers can rent their personal residence and not be required to report the rent income received?
Does this have an effect on the deductions allowed? #37 This has not been a good year for Betsy. During the year, she had losses from the following sales: Personal use sailboat$ 6,000 Personal residence$30,000 Rental house$12,000 Orange, Inc. stock$ 4,000 City of James bonds$ 2,000 a)What is the amount of Betsy’s deductible losses b) Classify the deductible losses as deductions for or from AGI #45 Vermillion, Inc. , a publicly held corporation (not a TARP recipient), pays the following salaries to its executives: Retirement Plan SalaryBonus Contribution
CEO$2,000,000$100,000 $80,000 Executive vice president 1,800,000 90,000 72,000 Treasurer 1,600,000 -0- 64,000 Marketing vice president 1,500,000 75,000 60,000 Operations vice president 1,400,000 70,000 56,000 Distribution vice president 1,200,000 60,000 48,000 Research vice president 1,100,000 -0- 44,000 Controller 800,000 -0- 32,000 Vermillion normally does not pay bonuses, but after reviewing the results of operations for the year, the board of directors decided to pay a 5% bonus to selected executives.
What is the amount of these payments hat =Vermillion may deduct? #47 Terry traveled to a neighboring state to investigate the purchase of two hardware stores. His expenses included travel, legal, accounting, and miscellaneous expenses. The total was $52,000. He incurred the expenses in June and July 2011. Under the following circumstances, what can Terry deduct in 2011? a)Terry was in the hardware store business and did not acquire the two hardware stores. b)Terry was in the hardware store business and acquired the two hardware stores and began operating them on October 1, 2011. )Terry did not acquire the two hardware stores and was not in the hardware store business. d)Terry acquired the two hardware stores, but was not in the hardware store business when he acquired them. Operations began on October 1, 2011. #58 The Robin Corporation is owned as follows: Isabelle26% Peter, Isabelle’s husband19% Sonya, Isabelle’s mother15% Reggie, Isabelle’s father25% Quinn, an unrelated party15% Robin is on the accrual basis, and Isabelle and Peter are on the cash basis. Isabelle and Peter each loaned the Robin Corporation $40,000 out of their separate funds.
On December 31, 2011, Robin accrued interest at 7% on both loans. The interest was paid on February 4, 2012. What is the tax treatment of this interest expense/income to Isabelle, Peter, and Robin? #59 For each of the following independent transactions, calculate the recognized gain or loss to the seller and the adjusted basis to the buyer. a)Bonnie sells Parchment, Inc. stock (adjusted basis $17,000) to Phillip, her brother, for its fair market value of $12,000 b)Amos sells land (adjusted basis $85,000) to his nephew, Boyd, for its fair market value of $70,000. c)Susan sells a tax-exempt bond (adjusted basis $20,000) to her holly owned corporation for its fair market value of $19,000 d)Ron sells a business truck (adjusted basis $20,000) that he uses in his sole proprietorship to his cousin, Agnes, for its fair market value of $18,500. e)Martha sells her partnership interest (adjusted basis $175,000) in Pearl Partnership to her adult daughter, Kim, for $220,000. #61 Lee incurred the following expenses in the current tax year. Indicate, in the spaces provided, whether each expenditure is deductible for AGI, from AGI, or not deductible. DeductibleNot Expenses Item For AGI From AGI Deductible a) Lee’s personal medical expenses. ______ ______________ b) Lee’s dependent daughter’s medical expenses _______ ______________ c) Real estate taxes on Lee’s rental property _______ ______________ d) Real estate taxes on Lee’s personal residence _______ ______________ e) Real estate taxes on daughter’s personal residence _______ ______________ f) Lee’s state income taxes _______ ______________ g) Interest on Lee’s rental property mortgage _______ ______________ h) Interest on Lee’s personal residence mortgage _______ ______________ i) Interest on daughter’s personal residence mortgage _______ ______________ j) Interest on Lee’s business loans. _______ ______________ k) Lee’s charitable contributions. ______ ______________ l) Depreciation on Lee’s rental property _______ ______________ m) Depreciation on auto used in Lee’s business _______ ______________ n) Depreciation on Lee’s personal use auto _______ ______________ o) Depreciation on daughter’s personal use auto _______ ______________ Chapter 7 Homework: student’s name #7Many years ago, Jack purchased 400 shares of Canary stock. During the current year, the stock became worthless. It was determined that the company “went under” because several corporate officers embezzled a large amount of company funds. Identify the relevant tax issues for Jack. #22Green Corporation made extensive modifications to a portion of a building so that it could be used to conduct product research. Discuss whether the modification costs would qualify as research and experimental expenditures. #29Monty loaned his friend Ned $20,000 three years ago.
Ned signed a note and made payments on the loan. Last year, when the remaining balance was $11,000, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $11,000 as a nonbusiness bad debt. Last year Monty had no capital gains and taxable income of $12,000. During the current year, Ned paid Monty $5,000 in satisfaction of the debt. Determine Monty’s tax treatment for the $5,000 received in the current year. #32Mary, a single taxpayer, purchased 10,000 shares of §1244 stock several years ago at a cost of $20 per share. In November of the current year, Mary received an offer to sell the stock for $12 per share.
She has the option of either selling all of the stock now or selling half of the stock now and half of the stock in January of next year. Mary will receive a salary of $80,000 for the current year and $90,000 next year. Mary will have long-term capital gains of $8,000 for the current year and $10,000 next year. If Mary’s goal is to minimize her AGI for the two years, determine whether she should sell all of her stock this year or half of her stock this year and half next year. #35Heather owns a two-story building. The building is used 60% for business use and 40% for personal use. During 2011, a fire caused major damage to the building and its contents. Heather purchased the building for $800,000 and has taken depreciation of $150,000 on the business portion.
At the time of the fire, the building had a fair market value of $900,000. Immediately after the fire, the fair market value was $200,000. The insurance recovery on the building was $600,000. The contents of the building were insured for any loss at fair market value. The business assets had an adjusted basis of $220,000 and a fair market value of $175,000. These assets were totally destroyed. The personal use assets had an adjusted basis of $50,000 and a fair market value of $65,000. These assets were also totally destroyed. If Heather’s AGI is $100,000 before considering the effects of the fire, determine her itemized deduction as a result of the fire. Also determine Heather’s AGI.