Questions and Answers of Taxation

On December 10, 2016, the representative of a national charitable organization contacted the CEO of Wilkie Inc., a calendar year accrual basis corporation, to solicit a $100,000 donation. The CEO
In 2016, Elspeth Corporation paid both regular tax ($2,714,000) and AMT ($129,300). The director of tax forecasts that Elspeth will be in an AMT position for 2017 and 2018. However, its tentative
Describe the FICA payroll tax implications when the IRS classifies a portion of a salary payment to a shareholder/employee as a constructive dividend?
Why are publicly held corporations such as General Motors generally immune from the accumulated earnings tax?
Mr. and Mrs. Barnes own a fast-food restaurant that generates $160,000 average annual income. The couple wants to shift some of this income to their two children, ages 19 and 22. Can Mr. and Mrs.
Mega Corporation generates taxable income of $550,000 per year. Mini Corporation generates taxable income of $50,000 per year. a. Calculate regular income tax liability for Mega and Mini and total
Delta Partnership has four equal partners. At the beginning of the year, Drew was one of the Delta partners, but on October 1, he sold his partnership interest to Cody. If Delta's ordinary income for
Mr. and Mrs. Keck are in the highest marginal tax bracket. Their son, a first-year college student, earns minimal income from his summer job, and his marginal tax rate is 10 percent. Mr. and Mrs.
WQ Corporation, a closely held family business, has not paid a dividend for the last seven years. Each year, the minutes of the board of directors' December meeting state that WQ must accumulate
Mr. Jackson owns a 40 percent interest in newly formed JKL Partnership. The partners organized their business as a pass through entity so that the start-up loss would generate an immediate tax
Mr. and Mrs. Braun own 100 percent of the stock of BB Inc., which operates a temporary employment business. Late last year, Mr. Braun was short of cash in his personal checking account. Consequently,
REW Inc. is closely held by six members of the REW family. The corporation owns two vans that employees use for various business transportation purposes. However, for at least eight weeks during each
Eight years ago, Mr. and Mrs. Lauffer created a family partnership with their son, the son's wife, their daughter, and the daughter's husband. Each of these six individuals owns an equal interest in
LSN, a calendar year S corporation, has 13 shareholders. Since its incorporation, LSN has retained more than $800,000 income to reinvest in its business. Because LSN is a pass through entity, the
Taha is closely held by eight family members. Taha purchased investment land 12 years ago for $100,000. The land was recently appraised at a FMV of $3 million. A buyer has offered to pay cash for the
Mr. and Mrs. Crandall own 100 percent of the stock in CR Inc., which recently hired the couple's nephew at a $30,000 annual salary. The nephew, age 20, has been in several scrapes with the law and
Borden Inc. conducts a business that spans four states. Its total income for the year was $32 million. However, the total of the taxable incomes reported on Borden's four state income tax returns was
In what situation would a multistate business deliberately create nexus with a state so that the state has jurisdiction to tax a portion of the business income?
Distinguish between a home country and a host country in the international tax context?
Watch Corporation has U.S. source income for the current year of $2 million, foreign source income from Country X of $3 million, and foreign source income from Country Y of $1 million, for total
For the current year, Harbor Corporation earned before-tax income of $776,000. Harbor operates in a single state with a 10 percent state income tax rate.a. Compute Harbor's state income tax
Jumper Inc., which has a 34 percent marginal tax rate, owns 40 percent of the stock of a CFC. At the beginning of 2016, Jumper's basis in its stock was $660,000. The CFC's 2016 income was $1 million,
Refer to the facts in the preceding problem. In 2017, the CFC's income was $600,000, none of which was subpart F income, and it distributed a $300,000 dividend to its shareholders ($120,000 to
Bianco Inc. is headquartered in Pennsylvania. Bianco produces custom stationary for sale to customers in stores located in Pennsylvania and New Jersey. It also sells its products online and ships to
Lido Inc. does business in two states, X and Y. State X uses an equal-weighted three factor apportionment formula and has a 4 percent state tax rate. State Y bases its apportionment only on the sales
Turbo is a U.S. corporation. This year, it earned $5 million before-tax income and paid $175,000 income tax to jurisdictions other than the United States. Compute Turbo's U.S. federal income tax
Williams Inc. is a U.S. corporation that manufacturers toys in a factory located near Milwaukee, Wisconsin. Williams sells the toys to its foreign subsidiary, which is incorporated in Carnema, a
Durbin Corporation is incorporated and has its commercial domicile in State N. This year, Durbin sold its manufactured products to customers in State N (61 percent of sales), State O (28 percent of
Benton is a consulting firm with its headquarters in New York City. This year, it entered into a consulting contract with a multinational corporation. Mrs. Kalle, an employee, spent 33 days working
Funk Corporation conducts business in a foreign jurisdiction that imposes a 1 percent tax on gross receipts from sales within the jurisdiction. This year, Funk paid $750,000 gross receipts tax to the
Lincoln manufactures paper products in the United States and sells the products internationally. Because most of its foreign sales are in high-tax jurisdictions, Lincoln has excess foreign credits
Discuss possible tax policy reasons why individuals who are age 65 or older receive an additional standard deduction.
Individuals who are legally blind receive an additional standard deduction, while individuals with other disabilities, such as deafness or paralysis, aren't entitled to an additional deduction. Is
Describe the restrictions on tax benefits available to an individual taxpayer who is claimed as a dependent on another taxpayer's Form 1040.
Determine Ms. A's filing status in each of the following independent cases: a. Ms. A and Mr. Z have been living together since 2015. They were married on December 13, 2017. b. Ms. A married Mr. P in
Mr. P is an unmarried individual with no dependent children. He reports the following information:Wages.......................................................$65,000Schedule C net
Mr. and Mrs. H are married with two dependent children living with them. Their AGI is $360,000.a. Using the worksheets in Appendixes 14-A and 14-B, compute the exemptions and the below-the-line
Mr. and Mrs. L are married with no dependent children. Mr. L worked for Smart Tech Corporation January through March and for Computer Associates the remainder of the year. Mrs. L finished her degree
Jaclyn Biggs, who files as a head of household, never paid AMT before 2017. In 2017, her $197,900 taxable income included $178,000 ordinary income and a $19,900 capital gain taxed at 15 percent. Her
In January, Ms. NW projects that her employer will withhold $25,000 from her 2018 salary. However, she has income from several other sources and must make quarterly estimated tax payments. Compute
Mr. and Mrs. Brown report taxable income of $120,000 in 2017. In addition, they report the following:Excess Social Security Withholding Credit..................$ 2,200Estimate tax
Ms. NM, a single taxpayer, projects that she will incur about $8,000 of expenses qualifying as itemized deductions in both 2017 and 2018. Assuming that her standard deduction is $6,350 in both years,
Mr. and Mrs. O file a joint income tax return. Determine if each of the following unmarried individuals is either a qualifying child or a qualifying relative for whom the couple can claim an
Mr. LR died on April 16. Mr. and Mrs. LR had been married for 11 years and had always filed a joint return. Mrs. LR remarried on December 21. Identify the tax issue or issues suggested by the above
During the first eight months of the year, Ms. V was self-employed and earned $63,200 net income. In September, she accepted a job with MW Company and earned $75,000 salary through the end of the
Mr. and Mrs. P own a sole proprietorship that generates approximately $60,000 annual net profit. This business is the couple's only source of income. In April, June, and September, they paid their
In November, Mr. K discovered that his combined income tax withholding and estimated tax payments would be less than his prior year tax and, therefore, would not be a safe-harbor estimate. He
Mr. and Mrs. JC were married in 1997. This year they traveled to Reno, Nevada, immediately after Christmas and obtained a divorce on December 29. They spent two weeks vacationing in California,
Mr. and Mrs. CD engage a CPA to prepare their Form 1040. For the last two years, their itemized deductions totaled $11,014 and $12,300. The CPA estimates that $750 of his fee relates to the
Mr. and Mrs. TB have an 11-year-old child. The couple is divorced, and Mrs. TB has sole custody of the child. However, Mr. TB pays his former wife $1,200 child support each month. Identify the tax
Bill Young, a single taxpayer, reported the following information on his 2017 Form 1040:Salary from part-time job.....................................$ 16,600Interest on savings
Mr. and Mrs. Wilson are married with one dependent child. They report the following information for 2017:Schedule C net profit.....................................................$66,650Interest
In 2012, BT granted a nonqualified stock option to Ms. P to buy 500 shares of BT stock at $20 per share for five years. At date of grant, BT stock was trading on Nasdaq for $18.62 per share. In 2017,
In 2008, BB granted an incentive stock option (ISO) to Mr. Y to buy 8,000 shares of BB stock at $7 per share for 10 years. At date of grant, BB stock was trading on the AMEX for $6.23 per share. In
Two years ago, Mrs. EL was granted a stock option from her corporate employer. At date of grant, the stock was selling at $14 per share, and the strike price was $18 per share. This year, Mrs. EL
In 2010 (year 0), Mrs. L exercised a stock option by paying $100 per share for 225 shares of ABC stock. The market price at date of exercise was $312 per share. In 2017, she sold the 225 shares for
Mr. and Mrs. JN moved from Lincoln, Nebraska, to Kansas City, Missouri, so that Mr. JN could take a job with the HM Company. As part of his employment agreement, Mr. JN received a $7,500 moving
Mr. Evon, who has participated in his employer's qualified defined-benefit plan for 38 years, retired in June. What is his maximum annual pension benefit assuming that: a. His average compensation
This year, Mrs. Bard, who is head of Lyton Industries's accounting and tax department, received a compensation package of $360,000. The package consisted of a $300,000 current salary and $60,000
Refer to the facts in the preceding problem. Assume Mrs. Bard retires in 2023 and receives her first $20,000 payment from Lyton Industries. a. How much compensation income does Mrs. Bard recognize in
Mrs. Shin retired in 2016 at age 63 and made her first withdrawal of $20,000 from her traditional IRA. At year-end, the IRA balance was $89,200. In 2017, she withdrew $22,000 from the IRA. At
Mr. Ballard retired in 2017 at age 69 and made his first withdrawal of $35,000 from his traditional IRA. At year-end, the IRA balance was $441,000. In 2018, he withdrew $60,000 from the IRA. At
Mr. T and Mr. V founded TV Corporation six years ago and have devoted every waking hour to the corporate business. During the first four years, neither shareholder received a salary. During the last
Mr. S was fired from his job because of unprofessional conduct. He believed that his reputation in the local business community was damaged and that he should make a new start in a different state.
Early this year, Mrs. C's employer reassigned her from its Chicago office to its Memphis office. In May, she spent $1,100 on a house-hunting trip to Memphis. She located a new home and moved her
This year, TT Corporation agreed to defer $100,000 compensation owed to Ms. B, the director of research. TT funded its obligation by transferring $100,000 cash to a trust administered by a local
Corporation J sponsors a qualified profit-sharing plan for its employees. Three years ago, Ms. PQ, a participant in the plan for more than 12 years, quit her job and left town without leaving a
Mr. X, age 53, owns a traditional IRA with a $215,000 current balance. Mr. X recently divorced his wife and transferred this IRA to her as part of the property settlement.Identify the tax issue or
Mr. DW has the full-time use of an automobile owned and maintained by his employer. This year, Mr. DW drove this company car 48,000 miles on business and 12,000 for personal reasons. He is not
Mr. G is employed by a closely held corporation that gave him a year-end bonus of 50 shares of stock worth $200 per share. However, Mr. G's ownership of the stock is restricted. If he resigns from
GHK recently granted a stock option to employee O to purchase 20,000 shares of stock for $11 per share. On the date of grant, GHK stock was selling for $12 on the NYSE.Identify the tax issue or
Six years ago, Ms. PL paid $20 per share for 1,000 shares of her employer's stock. This stock is now worth $58 per share. Ms. PL wants to exercise a stock option to buy 1,000 more shares at a strike
Mr. and Mrs. SK are CPAs. Mr. SK is an employee of a national accounting firm, while Mrs. SK operates her own professional practice. Each year, the couple pays approximately $1,300 to subscribe to
Ms. Q sadly concluded that a $7,500 debt owed to her by Mr. and Mrs. L is uncollectible. Compare the tax consequences to Ms. Q if the debt arose because she extended credit to Mr. and Mrs. L in a
In 2015, Mrs. Ulm paid $80,000 for a corporate bond with a $100,000 stated redemption value. Based on the bond's yield to maturity, amortization of the $20,000 discount was $1,512 in 2015, $1,480 in
Ira Munro owns a life insurance policy that will pay $750,000 to his granddaughter Ginnie upon Ira's death. To date, Ira has paid $69,200 total premiums on the policy, which has a current cash
In 2015, Mr. Dale paid $47,600 for 3,400 shares of GKL Mutual Fund and elected to reinvest his year-end dividends in additional shares. In 2015 and 2016, he received Form 1099s reporting the
This year, Linda Moore earned a $112,000 salary and $2,200 interest income from a jumbo certificate of deposit. She recognized a $15,300 capital loss on the sale of undeveloped land. Compute Linda's
Mr. Scott sold rental real estate that had a $186,200 adjusted basis ($200,000 million cost - $13,800 straight-line accumulated depreciation). The sales price was $210,000. This was his only property
Diane Stacy, who has a 33 percent marginal income tax rate and a 3.8 percent Medicare contribution tax rate on investment income, owns 13,800 shares in Tobler Mutual Fund. This year, she received an
Mr. Dunn, who is in a 35 percent marginal tax bracket, recognized a $15,000 capital loss in 2017. Compute the tax savings from this loss assuming that:a. He also recognized an $18,000 short-term
In 2000, Ms. Ennis, a head of household, contributed $50,000 in exchange for 500 shares of Seta stock. Seta is a qualified small business. This year, Ms. Ennis sold all 500 shares for $117,400. Her
Mrs. Turner died this year at age 83. On the date of death, the FMV of Mrs. Turner's property was $6.3 million, and she owed $91,000 to various creditors. The executor of her estate paid $7,800
Mr. OG, a 66-year-old divorced individual, has two children with his former wife. He recently married a 45-year-old woman with no property of her own. Therefore, Mr. OG plans to change his will to
Mr. D died on March 8. His taxable estate includes a traditional IRA with a $140,000 balance. Mr. D's contributions to this IRA were fully deductible. His son is the beneficiary of the IRA.Identify
Mrs. AS died on June 1. She and her surviving husband were co-owners of real property with a $200,000 adjusted basis and a $1.6 million FMV. Mr. AS inherited his wife's half of the property.Identify
At the beginning of the year, Ms. A owned 2,900 shares of SBS stock with a basis of $32 per share. SBS paid a 50 percent stock dividend, and Ms. A received 1,450 additional SBS shares. Before this
In 1993, Mr. L paid $18,000 for a newly issued BN bond with a $30,000 stated redemption value. He has recognized $6,000 of the original issue discount (OID) as ordinary interest income. This year, BN
Mr. and Mrs. G paid $53,000 for a corporate bond with a $50,000 stated redemption value. They paid the $3,000 premium because the bond's annual interest rate is higher than the market interest
Two years ago, Ms. X loaned $3,500 to her 20-year-old daughter, who used the loan proceeds to buy a used car. This year, the daughter informed her mother that she could not repay the debt.Identify
Mr. O was a 25 percent partner in MNOP Partnership, which operated a gift and souvenir shop. He materially participated in the partnership business. Several years ago, Mr. O loaned $10,000 to MNOP in
This year, Ms. T had a $29,000 capital loss carry-forward and a $8,200 suspended passive activity loss carry-forward. He died on September 12 and didn't recognize any capital gain or passive activity
Rachel Sanchez is a limited partner in HN Partnership, which operates a souvenir shop, and a member in Jams-n-Jellies LLC, which makes specialty food items and sells them at retail. Rachel has no
Ms. K, who is in the 35 percent marginal income tax bracket, acquired the following blocks of stock in KDS, a closely held corporation: July 12, 2003 ..................... 1,400 shares at $41 per
Ms. Barstow purchased a limited interest in Quinnel Partnership in 2017. Her share of the partnership's 2017 business loss was $5,000. Unfortunately, Ms. Barstow couldn't deduct this loss because she
Discuss the similarities and differences in the structure of the hobby loss rule and the vacation home rule?
Mr. and Mrs. Compton, ages 61 and 60, paid $9,280 of medical expenses that were not reimbursed by their private insurance provider. Compute the after-tax cost of these expenses assuming that: a. The
Mr. and Mrs. Moss, ages 28 and 26, have major medical and dental insurance provided by Mrs. Moss's employer. This year, they incurred the following unreimbursed expenses:Routine office visits to
Mr. Curtis paid the following taxes: Federal income tax ...................................... $50,789 Federal gift tax ............................................... 285 Federal employer payroll
Mrs. Stuart paid the following taxes: Local property tax on: 20 acres of land held for investment .............................. $ 2,500 Condominium used as principal residence

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