Question 1. Dr. Phil, a cash basis individual, provides psychiatric services to three clients (Mr. A, Mr. B, and Mr. C) during 2021, sending a $10,000 bill for those services to each on October of 2021. All three clients are cash basis taxpayers, who each had the following facts:

A is a very wealthy real estate developer, but has short term cash flow problems. In November of 2021, A gives Dr. Phil an unsecured, assignable promissory note with a FMV of $10,000, due in 2022. In 2022, A pays $10,000 to Dr. Phil in full satisfaction of the note.

B is a struggling musician and cannot currently afford the bill. In November of 2021, B gives Dr. Phil an unassignable promissory note with a face of $10,000, due in 2022. B secures the note with musical equipment. However, the FMV of the note is only $4,000. In 2022, B pays $10,000 to Dr. Phil in full satisfaction of the note.

C is a successful actor. In December of 2021, C gives Dr. Phil an unsecured, unassignable promissory note with a face of $10,000. This note is payable upon demand, meaning Dr. Phil can demand payment anytime he wants beginning on Dec. 1, 2021. Dr. Phil does not demand payment though until 2022, when C pays the $10,000 to Dr. Phil in full satisfaction of the note.

a) In which year(s) does Dr. Phil Inc. have income and how much from each of his 3 clients?

b) Assuming the psychiatric services were deductible business expenses, in which year(s) does each client get a deduction and how much?

Question 2. In 2021, cash method taxpayer Chili's paid a lawyer $25,000 to prepare documents for the purchase of a restaurant building. Just before the purchase, Chili's received a large reduction in the purchase price because it was discovered that the building had dry rot in its wood. Right after the purchase, Chili's paid $70,000 to repair and replace dry rotted wood.

Later that same year, Chili's paid $40,000 on 100 "Tablets" which are electronic devices built into each table so customers can submit the order directly to the kitchen.

In the drop down menus below, state whether each expenditure should be capitalized or deducted in the year paid. Also provide the authority. Assume Chili's does NOT have Applicable Financial Statements (AFS), but will adopt and document any book accounting method that is necessary.

Question 3. Tax consequences of $25,000 lawyer fee in year paid? (Deduct/Capitalize)

Question 4. Tax consequences of $70,000 expenditure in year paid?(Deduct/Capitalize)

Question 5. Tax consequences of $40,000 expenditure on tablets in year paid? (Deduct/Capitalize)

Question 6. Confused Corp. wants to change its accounting method from cash to the accrual method for its 2021 calendar year. Assume this change is eligible for the automatic procedures under the most recent Rev Proc.

Assume the Section 481 adj. as of January 1, 2021 would be a positive $800,000.

Assume the Section 481 adj. as of December 31, 2021 would be a positive $1,000,000

Question 7. Are there any fees associated with filing of the Form 3115 to make this method change?

a) Assume Confused Corp. files its 2021 return on March 1, 2022, even though statutory deadline is April 15, 2022.When is the deadline to make the method change effective for the 2021 tax return?

b) Assume Confused Corp made a proactive method change.

If Confused Corp changes its method effective for the 2021 return, how much income is includible in 2021for the applicable Sec. 481 adj.? Income? WHat years is the applicable Sec 481. adjustment included?

Question 8. Bob and Alice are two unrelated accrual method taxpayers. On July 1, 2021, they signed a $240, 12 month service contract for Alice to provide on-call repair services in case Bob's computer has problems. The contract is NOT the type that would recur every year. Assume services are performed ratably over the periods involved.

Bob mails a $240 payment at the middle of the service contract on Dec. 31, 2021, which Alice receives on Jan. 4, 2022.

Neither Alice nor Bob has applicable financial statements.

Question 9. Same as PART A except that the contract is for 2 years (for a total of $480) and begins on April 1, 2021 with the payment of $480 made at the beginning, on April 1, 2021.

Question 10. Bob, an accrual method taxpayer, signed a $240 lease beginning on August 1, 2021 and ending July 31, 2022 to rent office space for his business. Bob makes the $240 cash payment at the end on July 31, 2022. The lease is NOT material. The contract is the type that would recur every year. Bob filed an extension and then a timely tax return on Aug. 15 each year.

Question 11. Bob, an accrual method taxpayer, signed a $240 contract for insurance beginning on August 1, 2021 and ending July 31, 2022. Bob makes the $240 cash payment at the end on July 31, 2022. The contract is material and is the type that would recur every year. Bob filed an extension and then a timely tax return on Aug. 15 each year.

Question 12. Bob, an accrual method taxpayer, signed a $240 warranty (not a service) contract beginning on August 1, 2021 and ending July 31, 2022. Bob makes the $240 cash payment at the end on July 31, 2022. The contract is material and is the type that would recur every year. Bob filed an extension and then a timely tax return on Aug. 15 each year.

Question 13. Paint Corp provides painting services to the three unrelated clients (A, B, and C) during 2021 year, sending a $10,000 bill for those services to each on December of 2021. All three clients are accrual basis taxpayers, who each had the following facts:

A was very happy with the services, but had a cash shortage. On December 15, 2021, A paid $3,000 and issued a $7,000 unsecured note. A paid off the $7,000 unsecured note in full on January 15, 2022.

B did not think the $10,000 fee was fair, sending a letter back (with no money) in December of 2021 stating, "That bill is way too high. I will agree to $4,000, but not a penny more." In February of 2022, after consulting a lawyer, B paid the $10,000 with a note stating he was no longer contesting the bill.

C is a new startup company. Paint Corp puts it in his contract that C would not have to pay the invoice until the year 2038. In 2021, C fully expects to pay the $10,000 invoice in full in 2038. C does pay the $10,000 in 2038.

Question 14. Trump Tower houses four business tenants, for $1,000 rent per month. All are cash basis taxpayers and begin their rental with a prepayment, covering the period in parenthesis below

On Jan. 31, 2021, Tenant #1 prepays $15,000 for 15 months rent (Feb 2021 thru April 2022)

On Feb. 28, 2021, Tenant #2 prepays $12,000 for 12 months rent (Mar 2021 thru Feb 2022)

On June 30, 2021, Tenant #3 prepays $24,000 for 24 months rent (July 2021 thru June 2023)

On Dec. 31, 2021, Tenant #4 prepays $8,000 for 8 months rent (July 2022 thru Feb 2023)

In which year(s) does each tenant get a deduction and how much?

Answer rating: 100% (QA)

Dr Phil Inc has income in 2021 from all three clients Mr A Dr Phil has income of 10000 in 2021 when ... View the full answer