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business
federal taxation

Questions and Answers of Federal Taxation

Does the exemption from the gift tax for direct payment of tuition encompass payments of non-relatives’ tuition? Explain.
Determine whether the following statement is true or false: Every donor who makes a taxable gift incurs a gift tax liability. Explain your answer.
What was the Congressional purpose for enacting the gift-splitting provisions?
Consider three taxpayers who are in the following tax
Terry’s marginal tax rate is 30%. He can invest in a taxable bond yielding 7.5% before taxes. What is the implicit tax rate on a tax-exempt bond of equivalent risk that yields 6%?a. Which bond
Sandy will earn a $100,000 bonus that can be split between current and deferred compensation in any of the following ways:Current (BT$)*
Consider the following facts:a. Complete the following table for each case:b. Suppose in Case 2 from Part a that the employer and employee negotiate a Dn of 1.62. Compute CSI, DCI, CSE, and DCE with
Consider Marsha and Todd from Example I:18-28 in the text. Suppose these employees worked for Learned University, a tax-exempt organization, instead of a taxable corporation. The university’s BTROR
Consider the following facts:Rf= Rc= 18%tc= 34%tp= 40% for ordinary income= 20% for capital gainsn = 5, 25, or 50 yearsOther information:€¢ The corporation is formed with a $10,000
Suppose a bond is taxable for both federal and state purposes. Let Rb = the BTROR on the bond, tfed = the federal tax rate, and tst = the state tax rate. Determine the ATROR (i.e., after federal and
Assume the corporation in Problem I:18-29 had been an S corporation for its first 12 years, during which it distributed just enough cash for the shareholder to pay taxes on the flow-through income.
Twelve years ago, your client formed a C corporation with a $100,000 investment (contribution). The corporation’s BTROR (Rc) has been and will continue to be 10%. The corporate tax rate (tc) has
Myron has $10,000 to invest in a business. He can either (1) operate as a sole proprietor or (2) form a regular C corporation by contributing the $10,000 in exchange for corporate stock. In either
Given the following facts and assumptions, determine what investment strategy Karen should follow to maximize accumulations and how much she will have accumulated at the beginning of Year 10
Beth wants to contribute to either a traditional deductible IRA or a Roth IRA. However, she can afford to contribute only $4,800 aftertax dollars to a Roth IRA even though the maximum contribution is
What characteristics of a C corporation cause the shareholder’s stock investment to conform to the Deferred Model?
Under what conditions are the Exempt Model and Pension Model equivalent? Under what conditions would one model perform better than the other? How does the $5,500 limitation on deductible and Roth IRA
How does the length of the investment horizon affect the annualized ATROR of an investment conforming to the Deferred Model?
Suppose a taxpayer is trying to decide between saving outside an IRA or saving through a traditional IRA. If the taxpayer needs the savings before reaching age 59 ½, should he or she necessarily
Why might an investment in a capital asset be preferable to an investment that is fully taxed currently even though the capital asset’s BTROR is less than that of the fully-taxable investment?
What is an annualized ATROR, and why is it useful?
Why would a flat-rate tax system eliminate clientele effects?
Harry wants to contribute either $5,500 (BT$) to a traditional deductible IRA or $5,500 (AT$) to a Roth IRA. His current tax rate is 30% for ordinary income and 15% for capital gains. He expects his
Martha, who is in the 35% tax bracket, has $40,000 of before-tax income with which she wants to make a one-time investment. She wants to put $20,000 of this income in a deductible H.R. 10 plan, and
Brenda has $5,500 of before-tax dollars available for a one-time investment. She is in the 25% bracket and expects to remain in this bracket indefinitely. She can invest directly in a taxable bond
Mark is considering investing in either a tax-exempt municipal bond that yields 7% or a nondeductible IRA that contains investments that yield 10% before taxes. (Mark is ineligible to contribute to a
David can make a single investment in one of three alternatives. The first investment conforms to the Current Model, the second investment conforms to the Deferred Model, and the third investment
Laura, who is in the 35% tax bracket, notices that tax-exempt municipal bonds are yielding a 7% return. What before-tax rate of return on a fully-taxable bond must Laura obtain to make her prefer the
We have discussed implicit taxes using tax-exempt bonds as an example, and we have mentioned capital gains assets as another case where implicit taxes might occur. Give one or two other specific tax
Why might the BTROR on a tax-favored investment be higher than the BTROR on a fully-taxable investment even though implicit tax theory says that it should be lower?
An article that appeared in a financial publication several years ago made a statement similar to the following:At the highest federal tax rates, interest from private sector investments are taxed at
What is a clientele effect, and what conditions are necessary for it to occur?
What forces cause ATRORs of various investments to be equal for marginal investors?
What is an implicit tax, and how does it arise?
Why might an investment conforming to the Exempt Model have a lower BTROR than would an equivalent-risk investment conforming to the Current Model?
Why might the employee and/or employer prefer salary over deferred compensation even in cases where deferred compensation provides the better tax results?
What is the variable, Dn, and why is it important to the current salary versus deferred compensation decision?
How does the tax treatment of deferred compensation differ from the tax treatment of current salary?
What is the primary distinguishing feature that causes the Current Model, Deferred Model, and Pension Model to differ?
In January 2015, Joey contributed investment land he had held two years with a FMV of $6,000 and an adjusted basis of $10,000, and Rachel contributed $6,000 cash to form the Green Partnership as
Chuck, Cindy, and Clay are equal shareholders of Able Corporation common stock. Able was incorporated in the current year. Able elects to be treated as an S corporation starting in its initial year.
Sandra is an employee of the Beach Group, an organization active in the Florida real estate industry. Sandra finds real estate property on Miami Beach and subsequently organizes partnerships to
Dan is the partial owner of an S corporation that currently has 100 shareholders. In March of the current year, Dan sold some of his S corporation stock to each of his two adult children. In August,
Peggy, Phil, and Ralph each have unincorporated accounting practices, and they wish to pool their resources and operate as a single business entity. Peggy owns a building that has appreciated in
Steve and Erin started a general partnership to do landscaping and sell gardening supplies. Both will work in the business full time and need to withdraw approximately $40,000 a year each to live on.
Peter, Paul, and Mary plan to create a new business that buys, restores, and sells classic cars. The three individuals have been involved in a number of business deals dating back to the 1990s. Each
Joann and Bob, both single taxpayers in their mid-40s, own an employment business. The firm finds temporary employment for students in the college town of Gainesville, Florida. They have operated the
Charles is a 60% partner in CD Partnership, a calendar year partnership. For 2016, Charles received a Schedule K-1 that reported his share of partnership items as follows:Partnership ordinary
Delta Corporation made an S election on January 1 of the current year. Delta had been a C corporation since its inception in 2001. The corporation has the following operating results during the
Copper Corporation formed two years ago and immediately elected S corporation status. In the current year, the corporation pays the following insurance premiums for its employees:Group term life
Compact Corporation, an S corporation, distributes land used in its business to Clay, its sole shareholder. The land has a $75,000 adjusted basis and a $125,000 FMV. Clay assumes a $20,000 mortgage
Omega Company has two equal owners, William and Mary. Prior to a property distribution, each owner has a $200,000 basis in his or her ownership interest. In the current year, Omega distributes
Control Corporation distributes $11,000 cash to shareholder Craig whose stock basis is $8,000 before this year’s income or the distribution. Craig’s share of ordinary income for the current year
Because of earlier losses, Cindy has a zero basis in her S corporation stock and a zero basis in her $10,000 loan to the corporation. During the current year, Cindy acquires additional shares of the
Chris owns one-third of Coastal Corporation’s stock, and he materially participates in the business. Coastal, an S corporation, uses the calendar year as its tax year. On January 1 of the current
Cathy is a 40% shareholder of City Corporation. City is a calendar year S corporation. Cathy acquired her stock on January 1 of the current year for $80,000. In the current year, City reports the
The income statement for Central Corporation, an S corporation, reports the following:Sales........................................................................$260,000Cost of goods
Which of the following events will cause termination or revocation of the S election for a calendar year corporation? When is the termination or revocation effective? (Assume all other requirements
JLK Partnership is an electing large partnership with 100 partners. The partnership reports the following operating results from the current year:Ordinary
Rita, a calendar year taxpayer, is an employee of the RST Partnership, which has a June 30 year-end. The partnership pays Rita a salary of $2,500 per month for the period January 1 through June 30,
The balance sheet of the ABC Partnership at December 31 of the current year is as follows:All partners have an equal interest in the partnership. Allen sells his partnership interest to an outsider
Lynn’s basis in her partnership interest is $9,000 when she receives a nonliquidating distribution of $5,000 cash and land having a $6,000 adjusted basis and a $12,000 FMV.a. What gain or loss does
Laura and Mark are equal partners in the LM Partnership. Laura receives a $35,000 guaranteed payment in the current year and also withdraws $15,000 of her partnership capital in cash. Partnership
Kevin has a 30% interest in the KLM Partnership. Louis (Kevin’s son) also has a 30% interest. An individual unrelated to either Kevin or Louis holds the remaining 40% interest. Kevin sells the
Keith has a one-half interest in the KL Partnership. His basis in the partnership interest at the end of the current year (before deducting his share of partnership losses) is $40,000. His share of
Anita has a one-half interest in the AB Partnership. Anita’s basis in her interest at the beginning of the current year is $75,000. During the year, the following events occur:• Partnership
Alice and Bruce are equal partners in the calendar year AB Partnership. On November 1 of the current year, Carl joined the partnership by making a $100,000 cash contribution in exchange for a
Ed contributes land (a capital asset) having a $60,000 adjusted basis and a $100,000 FMV, and Gail contributes $100,000 cash to the EG Partnership. Ed and Gail each receive 50% interests in the
Dan, who is active in the management of the partnership, contributes $10,000 in cash to the newly formed DEF Partnership for a 10% interest in the partnership. The partners transfer no liabilities to
Paula transfers two assets to a partnership in separate transactions:a. Land with a $60,000 adjusted basis and a $100,000 FMV in exchange for a 20% interest in the partnership.b. A machine with a
Penny and Rick, equal partners in a partnership, recently attended a business-planning seminar held in their town. While at the seminar they learned about limiting their personal liability by using
Vincent anticipates that his actual tax liability for the tax year 2016 will be $12,000 and that federal income taxes withheld from his salary will be $9,000. Thus, when he files his 2016 income tax
Damien and Donna are equal partners in the DD Partnership. The passive activity loss and the at-risk rules are not applicable to the partners. The partnership reports the following items on its
The ABC Partnership, a calendar year entity, is formed and begins business on July 1 of the current year. ABC incurs the following expenditures on the date the partnership is formed:Legal fees
In the current year, Dana transfers to the DE Partnership land and a building having a total $25,000 adjusted basis and an $80,000 FMV. In addition, the property is subject to a $70,000 mortgage. The
Bonnie, Carlos, and Dale form the BCD Partnership as equal partners. Bonnie contributes land and a building having a $50,000 adjusted basis and a $200,000 FMV that is subject to a $100,000 mortgage
Andrea, Robert, and Agatha form the ARA Partnership as equal general partners. Andrea contributes land with a $20,000 basis and a $40,000 FMV along with cash of $60,000. Andrea has held the land for
Coastal Corporation has been a C corporation for several years and has substantial earnings and profits. Its tangible business assets are highly appreciated, and the corporation has paid no dividends
Helen and Helga are equal partners in the HH Partnership. However, Helen devotes most of her time managing the business and believes that she should be given additional compensation in the form of a
Bert and José plan to combine their unincorporated businesses by forming a partnership. Bert has substantially appreciated business assets. Moreover, if he transfers all the business’ liabilities
Explain the circumstances in which an S corporation is subject to taxation at the corporate level.
Assume the same facts as in Problem I:17-33 except Barry and Bart instead are considering the treatment of fringe benefits. Barry and Bart want to provide group term life insurance and accident and
Barry and Bart are considering whether to start a new manufacturing business. Alternative forms of business organization being considered include operating as a partnership, a limited liability
Allied Corporation, an S corporation, is considering making a distribution of land to its sole shareholder. Allied acquired the land three years ago and used it in its business activities. The land
Anne has a $10,000 basis in her S corporation stock on January 1 of the current year. On March 1 of the current year, Anne lends the corporation $8,000. Her share of the S corporation’s ordinary
Explain why the basis of S corporation stock is increased by the stockholder’s share of ordinary income and separately stated gain and income items and reduced by the stockholder’s share of an
Indicate whether the following items are reported on the tax return of an S corporation as part of ordinary income (or loss) or as separately stated items:a. Repairsb. Long-term capital gainsc.
Under what conditions will an S corporation involuntarily lose its special tax status and revert to being a C corporation? What remedies are available if the S corporation termination is deemed to be
An S corporation’s shareholder wants the corporation to voluntarily revoke the S election. What percentage of the stock interests must agree to the revocation? When is the revocation effective?
Andrew sells his Ajax Corporation stock to Angela on March 1. On March 15, Ajax elects S corporation status for the current year. Ajax is a calendar year taxpayer. Which shareholder(s) must consent
An S corporation issues straight debt obligations to its shareholders. Is it possible for the debt to be treated as a second class of stock, which would terminate the S election? Explain.
What are the tax consequences to an S corporation and its shareholders if one of the requirements for a small business corporation is not met at some time in a tax year?
What are the primary advantages of using an S corporation instead of a C corporation?
What are the major differences between the reporting of business profits and losses earned by an electing large partnership having 200 partners and a regular partnership having two partners?
What requirements must a partnership meet to make an election to use the simplified reporting rules available to electing large partnerships?
What are the tax consequences to a partner who sells his or her partnership interest if the partnership has Sec. 751 assets (i.e., unrealized receivables or inventory items)? What is the reason for
Explain why a partner who sells his or her interest in the partnership for cash must include his or her share of the partnership liabilities in the amount realized from the sale.
Explain the circumstances that cause a partner to recognize gain or loss if the partnership distributes money or other property in a nonliquidating partnership distribution.
The SJ Partnership, in which Sandy and Jack are equal partners, reported the following income and losses in the current year:Interest from municipal bonds............................................$
Ursula is a 30% partner in the UV Partnership. The partnership agreement states that she shall receive 30% of partnership profits computed before considering guaranteed payments. However, she is not

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