Questions and Answers of Principles Taxation Business

Mr. Olaf earned an $89,000 salary, and Mrs. Olaf earned a $40,330 salary. The couple had no other income and can't itemize deductions.a. Compute their combined tax if they choose to file separate
Determine Mr. Jenkins's 2018 filing status in each of the following independent cases.a. Mr. Jenkins and Mrs. Jenkins were divorced on November 18. Mr. Jenkins has not remarried and has no dependent
Two years ago, Lodi Inc.'s shareholders voted to dissolve the corporation. Pursuant to the dissolution, Lodi sold all its assets, paid off its outstanding debts, and distributed $789,000 remaining
Ms. Barth is a professional tax return preparer. Three years ago, she prepared the Form 1120 for Denver Inc. Her fee for the preparation was $14,850. Upon audit of the return, the IRS disallowed a
Mr. Leon filed his 2016 Form 1040 on March 29, 2017. In 2019, the IRS issued a notice of deficiency to Mr. Leon, in which it assessed $7,700 of additional 2016 income tax. Compute the total amount
Mr. and Mrs. Lear filed their 2016 Form 1040 on April 1, 2017. In November 2018, they received a notice of deficiency in which the IRS assessed $19,044 of additional 2016 income tax. Compute the
During the audit of Mr. and Mrs. Jessel’s 2015 and 2016 tax returns, the revenue agent learned that they kept two sets of books for their sole proprietorship. A comparison of the two revealed that
Mrs. Fugate failed to include $28,000 lottery winnings on her 2017 Form 1040. The only gross income she reported was her $78,000 salary. She filed her return on January 19, 2018.a. What is the last
Mr. and Mrs. Wickham did not apply for an extension of time to file their 2017 Form 1040. Because they were vacationing outside the United States, they neglected to file their Form 1040 until July
Mr. and Mrs. Pratt failed to apply for an extension of time to file their 2017 Form 1040 and didn't mail the return to the IRS until May 29, 2018. Assuming the Pratts had no excuse for filing a
Collin Products received notice of a $21,000 income tax deficiency plus $4,300 interest. The deficiency related to an incorrect method of accounting for business inventory. Compute the after-tax cost
Mr. and Mrs. Boyd Knevel use a fiscal year ending July 31 as the taxable year for filing their joint Form 1040.a. What is the last date on which the Knevels can apply for an automatic extension of
During a field examination of GNT's income tax returns for 2015 and 2016, the revenue agent discovered that the treasurer had systematically omitted substantial income items and inflated deductions
Percy Wilson is a calendar year taxpayer. What is the un-extended filing date of Percy Wilson’s 2018 federal income tax return if:a. Percy Wilson Inc. is a corporation?b. Mr. Percy Wilson is an
Using an electronic tax library that contains IRS publications, determine the purpose of Publication 334, Publication 504, and Publication 907.
Mrs. Gomez, a widow, paid $148,000 for her home 20 years ago. She recently sold this home and moved in with her son on a permanent basis. Compute Mrs. Gomez’s recognized gain or loss on the sale
On January 12, 2016, Mr. and Mrs. Nixon moved out of their old residence (where they had lived for 22 years) and into a new residence purchased nine days earlier on January 3. They finally sold their
Mr. and Mrs. Kilo purchased their first home in 2003 for $240,000. They sold this home in 2007 for $210,000. They purchased their second home in 2008 for $435,000 and sold it this year for
Ms. Imo, who is single, purchased her first home in 1991 for $85,000 and sold it in May 2000 for $178,500. She purchased her second home in July 2000 for $385,000 and sold it this year for
Mr. and Mrs. Kim own a principal residence and a vacation home. Each residence is subject to a mortgage that qualifies as acquisition debt, and both mortgages were incurred before December 15, 2017.
Mr. and Mrs. Udall live in a home that Mrs. Udall inherited from her parents. This year, the Udalls took out a first mortgage secured by the home. Determine their itemized deduction for interest paid
Sandy Assam enjoys betting on horse and dog races. This year, she won $4,308 and lost $6,735 on her gambling activities. If Sandy’s marginal tax rate is 24 percent, compute the after-tax cost of
Mr. Monk is a self-employed computer consultant who earns more than $100,000 each year. He also is an enthusiastic artist. This year, he spent $4,900 on oil paints, canvasses, supplies, and lessons
Refer to the preceding problem. How would your answers change if the fire that damaged the Marcums’ roof was attributable to faulty electrical wiring in their attic?Assume the taxable year is
Mr. and Mrs. Marcum live in Southern California in an area devastated by wildfires that President Trump designated a federally declared disaster. Because of fire damage, the Marcums had to replace
Mrs. Carr made the following interest payments. Determine the extent to which she can deduct each payment on her Form 1040.a. $21,000 on a $280,000 mortgage incurred to construct (and secured by) her
Mr. Tolen made the following interest payments. Determine the extent to which he can deduct each payment on his Form 1040.a. $4,600 on credit card debt.b. $14,100 on a $210,000 mortgage secured by
Mr. and Mrs. Remy have the following allowable itemized deductions this year.Medical expenses ........................................... $2,310State and local taxes
Ms. Prince wants to create a scholarship in honor of her parents at the law school from which she received her degree. She could endow the scholarship with $500,000 cash or with $500,000 worth of
Diane Bauman, a professional artist with AGI in excess of $75,000, made the following donations. Determine to what extent each donation is deductible on her Schedule A.a. $2,000 cash to the First
Mary Vale contributed a bronze statuette to a local museum. Mary received the statuette as a gift from her grandmother 35 years ago, and her tax basis was only $200. However, the statue’s appraised
Perry Bell paid $6,438 of state and local property and income tax this year. Compute the after-tax cost of these payments assuming:a. Perry doesn’t itemize deductions on his Form 1040.b. Perry
Mrs. Stuart paid the following taxes. Local property tax on:20 acres of land held for investment .......................................... $ 1,500Condominium used as principal residence
Mr. Curtis paid the following taxes.Federal income tax ..................................................................... $50,789Federal gift tax
Mr. and Mrs. Moss have major medical and dental insurance provided by Mrs. Moss’s employer. This year, they incurred the following un-reimbursed expenses.Routine office visits to doctors and
Mr. and Mrs. Compton 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 Comptons itemize
Ms. Lincoln paid $14,340 of medical expenses this year that were not reimbursed by her insurance provider. Compute the after-tax cost of these expenses assuming that:a. Ms. Lincoln doesn’t itemize
Conrad Smith, a business executive, is an avid collector of vintage comic books. In February, he sold a 1938 Superman comic for $3,700 that he had purchased six years ago for $625. In December,
Milt Payner purchased an automobile several years ago for $40,000 and has held it as a personal asset ever since. This year he sold the automobile. Compute Milt’s recognized gain or loss on the
Mrs. Small had the following items of financial support this year.Social Security benefits ................................................ $13,670Pension from her former employer
Mr. Tahoma, who is a member of the Navajo tribe of Native Americans, developed severe arthritis this year. He paid $1,100 to a tribal medicine man who performed a series of traditional Navajo healing
Mr. and Mrs. Nester had the following items of financial support this year.Social Security benefits .......................................................... $26,890Dividends and interest
Assume that Congress amended the tax law to limit the itemized deduction for cash contributions to charity to 5 percent (rather than 60 percent) of AGI. Discuss the incidence of the tax increase
Mr. Lynch had the following items of financial support this year.Unemployment compensation ...................................................................... $ 9,279State welfare payments
Will and Sandra Emmet were divorced this year. As part of the property settlement, Sandra transferred marketable securities to Will. Her basis in the securities was $89,800, and their FMV was
Ann Moore receives a $1,000 monthly payment from her former husband Bill. How much of the $12,000 annual receipt is included in Ann’s AGI under each of the following assumptions?a. The monthly
Four years ago, Lyle Mercer was injured in a railroad accident and sued the railroad for damages. The jury required the railroad to pay $600,000 compensation for his physical injuries, $150,000 for
Buddy Bushey is a student at a local community college. This year, he received a $20,000 living allowance from his parents and an $11,500 academic scholarship from a civic club. This scholarship paid
Mr. Massey, who is in the 32 percent marginal tax bracket and itemizes deductions, recently inherited $30,000. He is considering three alternative uses for this windfall:He could buy shares in a
Ms. Queen, age 21, is a full-time college student with an athletic scholarship that provides the following annual benefits.Tuition payment ........................ $12,800Fees and books
Mrs. Cora Yank (age 42) is divorced and has full custody of her 10 year-old son, William. From the following information, compute Mrs. Yank's 2018 federal income tax (including any AMT) and the
Mr. Clark Besson is undergoing extensive chemotherapy treatment for cancer. His oncologist recommended that he ingest marijuana to relieve the painful side effects. However, possession or use of
Marcy Tucker received the following items this year. Determine to what extent each item is included in her AGI.a. A $25,000 cash gift from her parents.b. A $500 cash award from the local Chamber of
Blake and Valerie Meyer (both age 30) are married with one dependent child (age 5). On the basis of the following information, compute the Meyers' 2018 federal income tax (including any AMT) on their
Ms. French is a successful attorney in the 37 percent marginal tax bracket. During the past several years, she provided legal services to her great-uncle, who is 78 years old and in failing health.
Mrs. Wolter, an unmarried individual, owns investment land with a $138,000 basis, a nine year holding period, and a $200,000 FMV. Compute the after-tax (income tax and Medicare contribution tax) sale
Mrs. Turner died this year at age 83. On the date of death, the FMV of Mrs. Turner’s property was $46.3 million, and she owed $2.491 million to various creditors. The executor of her estate paid
Mr. Jackson died on June 19 when the total FMV of his property was $23 million and his debts totaled $2.789 million. His executor paid $23,000 funeral expenses and $172,000 accounting and legal fees
Mr. Ito, an unmarried individual, made a gift of real estate to his son. Compute the amount subject to federal gift tax in each of the following situations:a. The FMV of the real estate was $4.75
Mr. Zeplin wants to make a cash gift to each of his five children, to each of their five spouses, and to each of his 13 grandchildren. How much total wealth can he transfer to his descendants without
Mr. Erwin’s marginal tax rate on ordinary income is 37 percent. His $958,000 AGI included a $24,900 net long-term capital gain and $37,600 business income from a passive activity.a. Compute Mr.
Boyd Salzer, an unmarried individual, has $212,950 AGI consisting of the following items.Salary ........................................................................ $188,000Interest income
Mr. Garza earned an $85,000 salary and recognized a $12,000 loss on a security sale and a $14,000 gain on the sale of a limited partnership interest. His share of the partnership’s business income
Ms. Adams owns an interest in ABCD Partnership, which is a passive activity. At the beginning of the year, she projects that her share of ABCD’s business loss will be $16,000 and that she will have
Ms. Turney owns a one-half interest in an apartment complex, which is her only passive activity. The complex operated at a $53,000 loss this year. In addition to her share of this loss, Ms. Turney
Mr. Kelly owns stock in VP and in BL, both of which are S corporations. This year, he had the following income and loss items.Salary ..........................................................
Mr. and Mrs. Morris own a grocery store as a sole proprietorship. Their net profit and other relevant items for the year are as follows.Grocery store net profit .....................................
Mr. and Mrs. Poe earned $115,900 compensation income and $963 interest this year and recognized a $600 short-term capital gain and a $7,200 long-term capital gain on the sale of securities. They
Ms. Reid borrowed $50,000 from a broker to purchase Lero Inc. common stock. This year, she paid $3,900 interest on the debt. Compute her itemized deduction for this interest in each of the following
In 2005, Mr. Earl, a single taxpayer, contributed $45,000 in exchange for 500 shares of DB stock. In 2008, he paid $40,000 to another shareholder to purchase 1,000 more DB shares. All DB’s stock
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
Mr. Dunn, who has a 32 percent marginal tax rate on ordinary income, recognized a $15,000 capital loss in 2018. Compute the tax savings from this loss assuming that:a. He also recognized an $18,000
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
Mr. and Mrs. Scoler sold commercial real estate for $685,000. Their adjusted basis at date of sale was $544,700 ($596,600 cost − $51,900 straight-line accumulated depreciation). Compute the
Mrs. Cox, a head of household, earned a $313,000 salary and recognized a $29,300 net long-term capital gain this year. Compute the income tax on the gain if:a. None of the gain is collectibles gain
Mr. Fox, a single taxpayer, recognized a $64,000 long-term capital gain, a $14,300 short-term capital gain, and a $12,900 long-term capital loss. Compute Mr. Fox’s income tax and Medicare
Refer to the preceding problem. Determine which of the four cases results in a capital loss carryforward for Mr. and Mrs. Revel. What is the amount and character of each carryforward?Assume the
Mr. and Mrs. Revel had $206,200 AGI before considering capital gains and losses. For each of the following cases, compute their AGI:a. On May 8, they recognized a $8,900 short-term capital gain. On
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
Mr. Alm earned a $61,850 salary and recognized a $5,600 capital loss on the sale of corporate stock this year. Compute Mr. Alm’s AGI and any capital loss carryforward into future years in each of
Mrs. Beard recognized a $12,290 capital loss on the sale of corporate stock this year. How much loss can she deduct in each of the following cases?a. She had no other capital transactions this
Refer to the preceding problem. For each case, determine CVF’s tax basis in the security received in the exchange.Assume the taxable year is 2018.Data from Prob. 19CVF owned 2,000 shares of Jarvis
CVF owned 2,000 shares of Jarvis nonvoting common stock with a $225,000 basis. In each of the following cases, determine CVF’s recognized gain or loss on the disposition of this stock:a. CVF
Three years ago, Mrs. Gattis loaned $10,000 to Mr. Wren in return for his interest-bearing note. She made the loan to enable him to begin his own business. This year, Mr. Wren informed Mrs. Gattis
Ten years ago, Mr. Pott paid $8 per share for 1,800 shares of Drago stock. Mr. Pott learned that Drago is in bankruptcy and can pay only 30 percent of its debt. What are the tax consequences to Mr.
In 2016, 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 2016 and 2017, he received Form 1099s reporting the
Refer to the facts in the preceding problem. Assume that on January 1, 2025, Mr. Fairhold's unrecovered investment in the annuity is$1,875.a. How much of his total 2025 annuity payments ($15,600) are
Fifteen years ago, Mr. Fairhold paid $50,000 for a single-premium annuity contract. This year, he began receiving a $1,300 monthly payment that will continue for his life. On the basis of his age, he
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
Sixteen years ago, Ms. Cole purchased a $500,000 insurance policy on her own life and named her son as sole beneficiary. She has paid $31,280 total premiums to keep this policy in force.a. This year,
On February 13, Mr. Dega invested $75,000 in TIPS paying 3.5 percent yearly interest. During the year, Mr. Dega received two cash interest payments totaling $2,742. On December 31, the adjusted
Mr. and Mrs.Greer earn a combined annual salary of $150,000. What two basic economic choices do they have with respect to this income (i.e., what can they do with their money)? Now assume that Mr.
In 2016, 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 2016, $1,480 in
Mr. Jolly received the $100,000 face amount on the redemption of a matured corporate bond. How much interest income does he recognize on redemption if:a. He purchased the bond from a broker for
Ms. Pay, who has a 40.8 percent marginal tax rate on interest income (37 percent income tax + 3.8 percent Medicare contribution tax), owns HHL Inc. corporate bonds in her investment portfolio. She
Mrs. Yue, a resident of Virginia, paid $50,000 for a bond issued by Pennsylvania that paid $3,400 interest this year. Her marginal state income tax rate is 6 percent. Under Virginia law, interest on
Refer to the preceding problem and assume that Mrs. Nunn lives in New Jersey, which taxes the interest on bonds issued by state and local jurisdictions outside New Jersey. If Mrs. Nunn's state income
Mrs. Nunn, who has a 24 percent marginal tax rate on ordinary income, earned $2,690 interest on a debt instrument this year. Compute her federal income tax on this interest assuming that the debt
Ms. Barstow purchased a limited interest in Quinnel Partnership in 2018. Her share of the partnership’s 2018 business loss was $5,000. Unfortunately, Ms. Barstow couldn’t deduct this loss because
Three years ago, Mrs. Best purchased 1,000 shares of NN stock from an unrelated party for $12 per share. After her purchase, the value of the shares steadily declined. Two weeks ago, an page 16-43

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