REG Review
Barbaro Corporation's retained earnings at January 1, 2017, was $600,000. During 2017, Barbaro paid cash dividends of $150,000 and received a federal income tax refund of $26,000 as a result of an IRS audit of Barbaro's 2014 tax return. Barbaro's net income per books for the year ended December 31, 2017, was $274,900 after deducting federal income tax of $183,300. How much should be shown in the reconciliation Schedule M-2, of Form 1120, as Barbaro's retained earnings at December 31, 2017?
"$750,900. Beginning with the balance at January 1, 2017, the end-of-year balance would be computed as follows: Balance, 1/1/17: $600,000 Net income for year: + 274,900 Federal income tax refund: + 26,000 Cash Dividends: - 150,000 Balance, 12/31/17: 750,900
Green sold 200 shares of Y Corp. stock at $14 per share. Green received the 200 shares as a gift from his brother, three years ago, at the time that the shares had a fair market value of $10 per share. Green's brother purchased the stock for $16 per share. What is the gain or loss on this transaction?
$0. Since the Y Corp stock was received as a gift, Green has a gain basis and a loss basis in the stock. The gain basis is his brother's adjusted basis of $16; the loss basis is the lower of the brother's basis ($16) or the fair market value on the date of gift ($10), which is $10. When Green sells the stock a loss is recognized only to the extent that the stock is sold for less than the loss basis of $10; a gain is recognized only to the extent that the stock is sold for more than the gain basis of $16. If it is sold for an amount between the gain and loss basis (e.g., $14), no gain or loss is recognized.
Ed and Ann Ross were divorced in January of the current year. In accordance with the divorce decree, Ed transferred the title in their home to Ann. The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had twenty more years to run. Monthly mortgage payments amount to $1,000. Under the terms of settlement, Ed is obligated to make the mortgage payments on the home for the full remaining 20-year term of the indebtedness, regardless of how long Ann lives. Ed made 12 mortgage payments during the current-year. What amount is taxable as alimony in Ann's current-year return?
$0.00 In order to be treated as alimony, a payment must be made in cash and be received by or on behalf of the payee spouse. Furthermore, cash payments must be required to terminate upon the death of the payee spouse to be treated as alimony. In this case, the transfer of title in the home to Ann is not a cash payment and cannot be treated as alimony. Although the mortgage payments are cash payments made on behalf of Ann, the payments are not treated as alimony because they will be made throughout the full 20-year mortgage period and will not terminate in the event of Ann's death.
On June 30, 2017, James Roe sold his interest in the calendar-year partnership of Roe & Doe for $30,000. Roe's adjusted basis in Roe & Doe at June 30, 2017, was $7,500 before apportionment of any 2017 partnership income. Roe's distributive share of partnership income up to June 30, 2017, was $22,500. Roe acquired his interest in the partnership in 2012. How much long-term capital gain should Roe report in 2017 on the sale of his partnership interest?
$0.00. Roe's basis for his partnership interest of $7,500 must first be increased by his $22,500 distributive share of partnership income, to $30,000. Since the selling price also was $30,000, Roe will report no gain or loss on the sale of his partnership interest.
For 2017, Val and Pat White (both age 40) filed a joint return. Val earned $55,000 in wages and was covered by his employer's qualified pension plan. Pat was unemployed and received $4,000 in alimony payments for the first four months of the year before remarrying. The couple had no other income. Each contributed $5,500 to an IRA account. The allowable IRA deduction on their 2017 joint tax return is
$11,000. For married taxpayers filing a joint return for 2017, up to $5,500 can be deducted for contributions to the IRA of each spouse (even if one spouse is not working), provided that the combined earned income of both spouses is at least equal to the amounts contributed to the IRAs. Even though Val is covered by his employer's qualified pension plan, the Whites are eligible for the maximum deduction because their gross income of $55,000 + $4,000 = $59,000 does not exceed the base amount ($99,000) at which the maximum $5,500 deduction would be reduced. Also note that Pat's $4,000 of taxable alimony payments is treated as compensation for purposes of qualifying for an IRA deduction. Since they each contributed $5,500 to an IRA account, the allowable deduction on their joint return is $11,000.
Flagg and Miles are each 50% partners in Decor Partnership. Each partner had a $200,000 tax basis in the partnership on January 1, 2017. Decor's 2017 net business income before guaranteed payments was $45,000. During 2017, Decor made a $7,500 guaranteed payment to Miles for deductible services rendered. What total amount from Decor is includible in Flagg's 2017 tax return?
$18,750. Decor's net business income of $45,000 would be reduced by the guaranteed payment of $7,500, resulting in $37,500 of ordinary income that would pass through to be reported on partners' returns. Here, Flagg's share of the includible income would be $37,500 × 50% = $18,750.
Cara Fabricating Co. and Taso Corp. agreed orally that Taso would custom manufacture a compressor for Cara at a price of $120,000. After Taso completed the work at a cost of $90,000, Cara notified Taso that the compressor was no longer needed. Taso is holding the compressor and has requested payment from Cara. Taso has been unable to resell the compressor for any price. Taso incurred storage fees of $2,000. If Cara refuses to pay Taso and Taso sues Cara, the most Taso will be entitled to recover is
$122,000. Even though this is a sale of goods for $500 or more, it does not have to be in writing under the Statute of Frauds. This is because there is an exception to the Statute of Frauds here -- the goods at issue in this contract are special ordered goods. Any custom-made goods are specialty goods if the goods could not ordinarily be resold in the seller's ordinary course of business, and oral contracts for them are fully enforceable. The entire price of the contract ($120,000) must first be paid, because the goods cannot be resold. In a breach of contract situation, the law gives the wronged party the benefit of the bargain. If the goods cannot be resold, that means the full contract price is recoverable as direct damages. Also, the $2,000 storage costs must be paid as incidental damages. Costs that are associated out of a broken contract must be paid as well.
Charlene and Gene Blair, age 51, are married and filed a joint return for 2017. Their medical-related expenditures for 2017 included the following: Medical insurance premiums $1,550 Medicines prescribed by doctors 450 Aspirin and over-the-counter cold capsules 80 Unreimbursed doctor fees 1,000 Transportation to and from doctors 150 Emergency room fee 500 The emergency room fee related to an injury incurred by the Blairs' adult son, Eric, during a visit to their home. The Blairs graciously paid the bill; however, they provided no other support for Eric during the year. For 2017, Eric earned $18,000 as a self-employed house painter. Assuming the Blairs' adjusted gross income was $30,000, what amount of medical expenses can the Blairs deduct as an itemized deduction for 2017?
$150. A taxpayer can deduct the amounts paid for the medical care of himself, spouse, or dependents. The Blairs' qualifying medical expenses include the $1,550 of medical insurance premiums, $450 of prescribed medicines, $1,000 of unreimbursed doctor's fees, and $150 of transportation related to medical care. These expenses, which total $3,150, are deductible to the extent they exceed 10% of adjusted gross income, and result in a deduction of $150. Note that nonprescription medicines, including aspirin and over-the-counter cold capsules, are not deductible. Additionally, the Blairs cannot deduct the emergency room fee they paid for their son because they did not provide more than half of his support and he therefore does not qualify as their dependent.
Under a written agreement between Mrs. Norma Lowe and an approved religious exempt organization, a 10-year-old girl from Vietnam came to live in Mrs. Lowe's home on August 1, 2017, in order to be able to start school in the U.S. on September 3, 2017. Mrs. Lowe actually spent $500 for food, clothing, and school supplies for the student during 2017, without receiving any compensation or reimbursement of costs. What portion of the $500 may Mrs. Lowe deduct on her 2017 income tax return as a charitable contribution?
$200. A taxpayer may deduct as a charitable contribution up to $50 per school month of unreimbursed expenses incurred to maintain a student (in the 12th or lower grade) in the taxpayer's home pursuant to a written agreement with a qualified organization. Since the student started school in September, the amount deductible as a charitable contribution is $50 × 4 = $200.
Ryan, age 57, is single with no dependents. In 2017, Ryan's principal residence was sold for the net amount of $400,000 after all selling expenses. Ryan bought the house in 2000 and occupied it until it was sold. On the date of sale, the house had a basis of $180,000. Ryan does not intend to buy another residence. What is the maximum exclusion of gain on sale of the residence that may be claimed on Ryan's 2017 income tax return?
$220,000. The realized gain is $220,000 ($400,000 − $180,000). Taxpayers may exclude up to $250,000 ($500,000 for married filing jointly if both qualify) from the sale of his/her principal residence. To qualify for the exclusion, the taxpayer must own and use the residence as his/her principal residence for two of the 5 years preceding the sale of the residence. Once a taxpayer has made this election, he/she is not eligible to make the election again for two years. The entire $220,000 gain is excluded.
Nancy, who is single, formed a corporation during 2011 using a tax-free asset transfer that qualified under Sec. 351. She transferred property having an adjusted basis of $80,000 and a fair market value of $60,000, and in exchange received Sec. 1244 small business corporation stock. During February 2017, Nancy sold all of her stock for $35,000. What is the amount and character of Nancy's recognized loss resulting from the sale of the stock in 2017? - $0 ordinary loss; $45,000 capital loss. - $25,000 ordinary loss; $10,000 capital loss. - $25,000 ordinary loss; $20,000 capital loss. - $45,000 ordinary loss; $0 capital loss."
$25,000 ordinary loss; $20,000 capital loss. Sec. 1244 permits a single individual to annually deduct up to $50,000 of ordinary loss from the sale or exchange of small business corporation stock. Since Nancy acquired her stock in a tax-free asset transfer under Sec. 351, her stock's basis is $80,000 and the sale of the stock for $35,000 results in a loss of $45,000. However, because the property that Nancy transferred in exchange for the stock had an adjusted basis ($80,000) in excess of its fair market value ($60,000), the stock's basis must be reduced by the excess ($20,000) for purposes of determining the amount that can be treated as an ordinary loss. Thus, the amount of ordinary loss is limited to $60,000 − $35,000 = $25,000, with the remaining loss ($45,000 − $25,000 = $20,000) treated as a capital loss.
On August 22, 2017 Martha purchases a computer to use in her childcare business. She sells the computer on December 28, 2017 for $2,000 when the machine has an adjusted tax basis of $1,700. What is the amount and character of the gain on the sale?
$300 ordinary income. The computer is not a capital asset, because it is used in a trade or business operation.
Julie received a parcel of land as a gift from her Aunt Agnes. At the time of the gift, the land had a fair market value of $84,000 and an adjusted basis of $24,000. This was the only gift that Julie received from Agnes during 2017. If Agnes paid a gift tax of $14,000 on the transfer of the gift to Julie, what tax basis will Julie have for the land?
$36,000. A donee's basis for gift property is generally the same as the donor's basis, increased by any gift tax paid that is attributable to the property's net appreciation in value. That is, the amount of gift tax that can be added is limited to the amount that bears the same ratio as the property's net appreciation bears to the amount of taxable gift. For this purpose, the amount of gift is reduced by any portion of the $14,000 annual exclusion that is allowable with respect to the gift. Thus, Julie's basis is $24,000 + [$14,000 ($84,000 − 24,000) / ($84,000 − $14,000)] = $36,000.
The following information pertains to Raubolt Corporation's operations for the current year: Worldwide taxable income $300,000 U.S. source taxable income 180,000 U.S. income tax before foreign tax credit 96,000 Foreign General Category Income 90,000 Foreign income tax paid on general inc. 32,000 Foreign passive category income 30,000 Foreign inc tax paid on passive inc. 7,500 What amount of foreign tax credit may Raubolt Corporation claim for the current year?
$36,300. Since U.S. taxpayers are subject to U.S. income tax on their worldwide income, they are allowed a credit for the income taxes paid to foreign countries. However, the amount of credit that can be currently used cannot exceed the amount of U.S. tax that is attributable to the foreign income. This foreign tax credit limitation can be expressed as follows: Foreign TI/Worldwide TI x U.S. Tax = Foreign tax credit limitation One limitation must be computed for foreign passive category income (e.g., interest, dividends, royalties, rents, annuities), with a separate limitation computed for foreign general category income. In this case, the foreign income taxes paid on passive category income of $7,500 is fully usable as a credit because it is less than the applicable limitation amount of ($30,000 ÷ $300,000) × $96,000 = $9,600 (i.e., the amount of U.S. tax attributable to the income). On the other hand, the credit for the $32,000 of foreign income taxes paid on general category income is limited to the amount of U.S. tax attributable to the foreign general category income of ($90,000/$300,000) × $96,000 = $28,800. Thus, Raubolt's foreign tax credit for the current year totals $28,800 + $7,500 = $36,300.
Thompson's basis in Starlight Partnership was $60,000 at the beginning of the year. Thompson materially participates in the partnership's business. Thompson received $20,000 in cash distributions during the year. Thompson's share of Starlight's current operations was a $65,000 ordinary loss and a $15,000 net long-term capital gain. What is the amount of Thompson's deductible loss for the period?
$55,000. A partner's distributive share of partnership losses is generally deductible to the extent of the tax basis for the partner's partnership interest at the end of the year. All positive basis adjustments and all reductions for distributions must be taken into account before determining the amount of deductible loss. Here, Thompson's basis of $60,000 at the beginning of the year would be increased by the $15,000 of net long-term capital gain, reduced by the $20,000 cash distribution, to $55,000. As a result, Thompson's deduction of the ordinary loss for the current year is limited to $55,000 which reduces the basis for his partnership interest to zero. He cannot deduct the remaining $10,000 of ordinary loss currently, but will carry it forward and deduct it when he has sufficient basis for his partnership interest.
A distribution to an estate's sole beneficiary for the 2017 calendar year equaled $15,000, the amount currently required to be distributed by the will. The estate's 2017 records were as follows: Estate income: $40,000 Taxable interest Estate disbursements: $34,000 Expenses attributable to taxable interest What amount of the distribution was taxable to the beneficiary?
$6,000. The maximum amount that is taxable to the beneficiary is limited to the estate's distributable net income (DNI). An estate's DNI is generally its taxable income before the income distribution deduction, increased by its exemption, a net capital loss deduction, and tax-exempt interest (reduced by related nondeductible expenses), and decreased by any net capital gains allocable to corpus. Here, the estate's DNI is its taxable interest of $40,000, reduced by the $34,000 of expenses attributable to taxable interest, or $6,000.
Lee, an attorney, uses the cash receipts and disbursements method of reporting. In 2017, a client gave Lee 500 shares of a listed corporation's stock in full satisfaction of a $10,000 legal fee the client owed to Lee. This stock had a fair market value of $8,000 on the date it was given to Lee. The client's basis for this stock was $6,000. Lee sold the stock for cash in January 2018. In Lee's 2017 income tax return, what amount of income should be reported in connection with the receipt of the stock?
$8,000. Compensation for services rendered that is received by a cash method taxpayer must be included in income at its fair market value on the date of receipt.
Green sold 1,225 shares of ABC Corp. stock at $9 per share. Green purchased 600 shares several years ago at $30 per share. Three years ago, when the stock price was $21, there was a 2-for-1 stock split and two years ago, when the stock price was $25, there was a 3-for-2 stock split. No other shares were sold by Green prior to year 2. What is the gain or loss on this transaction?
($1,225). The stock splits are not taxable but the basis per share changes due to a stock split. The basis in the stock is 600 shares x $30 = $18,000. After the 2-1 stock split there are 1,200 shares and the total basis is still $18,000. After the 3-2 for stock split there are $1,800 shares (1,200 shares x 3/2) with a total basis of $18,000. Thus, the basis per share is $10 ($18,000/1,800). The amount realized is $11,025 (1,225 x $9) and the adjusted basis is $12,250 (1,225 x $10). Therefore, the loss on this sale is $1,225 (11,025-12,250=1,225)
List the order of distribution of a bankruptcy estate after the gap creditors have been paid.
1. Employee/commission claims up to $12,850 2. Employee pension contributions to $12,850 (less amount taken in the above level) 3. Farms/fishers 4. Consumer deposits 5. Taxes 6. Driving under the influence damages 7. General creditors
List the top four categories in the order of distribution in a bankruptcy hearing.
1. Secured parties 2. Child support 3. Bankruptcy administration costs (trustee, accountant, lawyer, appraisal fees, etc.) 4. Gap creditors
Finbury Corporation's taxable income for the year ended December 31, 2016, was $2,000,000, on which its tax liability was $680,000. In order for Finbury to escape the estimated tax underpayment penalty for the year ending December 31, 2017, Finbury's 2017 estimated tax payments must equal at least
100% of the 2017 tax liability. Since Finbury is a large corporation (i.e., a corporation with taxable income of $1,000,000 or more in any of its three preceding tax years), its estimated tax payments must be at least equal to 100% of its 2017 tax liability.
Richard Baker filed his 2015 individual income tax return on April 15, 2016. On December 31, 2016, he learned that 100 shares of stock that he owned had become worthless in 2015. Since he did not deduct this loss on his 2015 return, Baker intends to file a claim for refund. This refund claim must be filed not later than April 15,
2023. The normal three-year statute of limitations is extended to seven years for refund claims resulting from bad debts or worthless securities. Since the securities became worthless during 2015, and Baker's 2015 return was filed on April 15, 2016, Baker's refund claim must be filed no later than April 15, 2023.
Jim Planter, who reached age sixty-five on January 1, 2017, filed a joint return for 2017 with his wife Rita, age fifty. Mary, their twenty-one-year-old daughter, was a full-time student at a college until her graduation on June 2, 2017. The daughter had $6,500 of income and provided 25% of her own support during 2017. In addition, during 2017 the Planters were the sole support for Rita's niece, age 27, who had no income. How many exemptions should the Planters claim on their 2017 tax return?
4. There is one exemption for Mr. Planter, and one exemption for his spouse. In addition there is one dependency exemption for their daughter who is a qualifying child (i.e., she did not provide more than half of her own support, and she is a full-time student under age twenty-four). There is also one dependency exemption for their niece who is a qualifying relative (i.e., they provided more than half of her support, and her gross income was less than $4,050).
In 2017, Nam Corp., which is not a dealer in securities, realized taxable income of $160,000 from its business operations. Also, in 2017, Nam sustained a long-term capital loss of $24,000 from the sale of marketable securities. Nam did not realize any other capital gains or losses since it began operations. In Nam's income tax returns, what is the proper treatment for the $24,000 long-term capital loss?
A corporation's capital losses can only be used to offset capital gains. If a corporation has a net capital loss, the net capital loss cannot be currently deducted, but must be carried back three years and forward five years as a STCL to offset capital gains in those years. Since Nam had not realized any capital gains since it began operations, the $24,000 LTCL can only be carried forward for five years as a STCL.
What is the personal exemption and standard deduction amounts for a dependent claimed on another's tax return?
A dependent on another return does not receive a personal exemption on her own return. Mini standard deduction is the higher of $1,050 (2017) or earned income + $350
Which of the following types of claims would be paid first in the distribution of a bankruptcy estate under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, if the petition were filed July 15, 20x8? - A secured debt properly perfected on March 20, 20x8 - Inventory purchased and delivered August 1, 20x8 - Employee wages due April 30, 20x8 - Federal tax lien filled June 30, 20x8
A secured debt properly perfected on March 20, 20x8. The perfected secured creditors will take first. Chapter 7 bankruptcy proceedings set out an order of preference for unsecured creditors of various kinds to take a share of the bankruptcy estate. Secured creditors whose interest is properly perfected are generally entitled to repossess for the value of their collateral before any unsecured creditor gets anything. Even here, wages and the tax lien have priority over purchase debt.
In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?
A taxpayer can deduct up to $2,500 of student loan interest as a deduction for AGI. Therefore, the taxpayer can deduct the entire $1,000 this year.
What depreciation is subject to recapture under Section 1245?
All depreciation that is claimed. The gain attributed to depreciation is recaptured as ordinary income.
Define "Section 1245 property."
All property other than land and buildings
Define "capital assets" and list the two most common categories of capital assets.
Assets other than inventory, accounts receivable, notes receivable, assets used in a trade or business, and creative works (in the hands of the creator). Two common categories are assets used in one's personal life and investments.
Irving Aster, Dennis Brill, and Robert Clark were partners who shared profits and losses equally. On February 28, 2017, Aster sold his interest to Phil Dexter. On March 31, 2017, Brill died, and his estate held his interest for the remainder of the year. The partnership continued to operate and for the fiscal year ending June 30, 2017, it had a profit of $45,000. Assuming that partnership income was earned on a pro rata monthly basis and that all partners were calendar-year taxpayers, the distributive shares to be included in 2017 gross income should be
Aster $10,000, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $5,000. Clark was a partner for the entire year and is taxed on his distributive 1/3 share ($45,000 × 1/3 = $15,000). Since Aster sold his entire partnership interest to Dexter, the partnership tax year closes with respect to Aster on February 28. As a result, Aster's distributive share is $45,000 × 1/3 × 8/12 = $10,000. Dexter's distributive share is $45,000 × 1/3 / 4/12 = $5,000. Additionally, a partnership tax year closes with respect to a deceased partner as of date of death. Since Brill died on March 31, the distributive share to be included in Brill's 2017 Form 1040 would be $45,000 × 1/3 × 9/12 = $11,250. Since Brill's estate held his partnership interest for the remainder of the year, the estate's distributive share of income is $45,000 × 1/3 × 3/12 = $3,750.
Aviary Corp., a sole proprietorship, sold a building for $600,000. Aviary received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method?
Aviary's basis in the building is $420,000 ($500,000 cost - $80,000 depreciation). Aviary's gain on the sale of the building is $180,000 ($600,000 amount realized - $420,000 basis). On the installment basis the $180,000 gain is reported pro-rata as payments are received. In the year of sale 20% ($120,000/$600,000) of the total payments of $600,000 are received. Thus, 20% of the gain is recognized, or $36,000 ($180,000 x 20%).
Jane Dunston is a general agent for JAX Industries, Inc. Jane is directed by JAX's CEO to purchase land in Idaho for the construction of a luggage factory. The announcement of JAX's move into Idaho would have a substantial impact on the economy generally and would result in price increases for real estate. JAX's CEO instructs Jane to not reveal that she is acting on behalf of JAX. Jane purchases a factory site for $1.2 million, signing her name on the contract. The seller of the factory site: - Does not have a valid contract - Has a defense of misrepresentation to set aside the contract because Jane did not disclose the material information about JAX's entrance into Idaho - Can enforce the contract against JAX - Cannot enforce the contract because there was no apparent authority to create a valid contract."
Can enforce the contract against JAX. Jane had actual authority from her principal to enter into the contract and the third party seller can enforce the contract against Jane (who can force JAX to perform) or JAX (because JAX is the principal). The third party can also discover who the principal is and proceed directly against the principal because there is a valid contract.
What is the useful life of computers under the MACRS rules?
Computers are classified as 5-year property under the MACRS rules
What depreciation is subject to recapture under Section 1250?
Excess depreciation (depreciation claimed over straight line) on buildings
What is the period of time that lookback rules apply to Section 1231 gains?
Five years
Dana Corp. owns stock in Seco Corp. For Dana and Seco to qualify for the filing of consolidated returns, at least what percentage of Seco's total voting power and total value of stock must be directly owned by Dana?
For Dana and Seco to qualify for filing a consolidated tax return, Dana must directly own stock possessing at least 80% of the total voting power, and at least 80% of the total value of Seco stock.
Kappes Corp. distributed marketable securities in a pro rata redemption of its stock in a complete liquidation. These securities, which had been purchased six years ago for $150,000, had a fair market value of $100,000 when distributed. What loss does Kappes recognize as a result of the distribution?
Generally, a corporation will recognize gain or loss on the distribution of its property in complete liquidation just as if the property were sold to the distributee for its fair market value. Since the marketable securities were a capital asset and held for more than one year, the distribution results in a long-term capital loss of $150,000 − $100,000 = $50,000.
Do health insurance premiums qualify as a medical deduction?
Health insurance premiums qualify as a medical expense and are deductible as an itemized deduction on Schedule A subject to a 10% of AGI threshold. If the self-employed taxpayer has access to health care through an employer (also is an employee) then the deduction for AGI is not allowed.
The donation of a long-term capital asset is valued for charitable contribution purposes at fair value (FV). Assume a taxpayer contributes inventory or a short-term capital asset to a charitable organization. What amount can be deducted?
If inventory or a short-term capital asset is conveyed to a charitable organization, the charitable deduction is FV on the contribution date reduced by any ordinary income or short-term capital gain that would be recognized if the asset was sold.
A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. When would a tax return preparer penalty not be applicable?
If it is reasonable to believe that the position would more likely that not be upheld. For tax shelters, the IRS has adopted a "more likely than not" test for tax shelters.
A civil fraud penalty can be imposed on a corporation that underpays tax by maintaining false records and reporting fictitious transactions to minimize corporate tax liability. What is the fraud penalty percentage?
If part of a tax underpayment is the result of fraud, a fraud penalty equal to 75% of the portion of the underpayment attributable to fraud will be assessed. Fraud differs from simple, honest mistakes and negligence. Fraud involves a taxpayer's actual, deliberate, or intentional wrongdoing with the specific purpose to evade a tax believed to be owing. Examples of conduct from which fraud may be inferred include keeping a double set of books; making false entries or alterations, false invoices or documents; destroying books or records; and, concealing assets or covering up sources of income.
The selection of an accounting method for tax purposes by a newly incorporated C corporation
Is made on the initial tax return by using the chosen method.
Lazur Corp. agreed to purchase 100 radios from Wizard Suppliers, Inc. Wizard is a wholesaler of small home appliances and Lazur is an appliance retailer. The contract required Wizard to ship the radios to Lazur by common carrier, "F.O.B. Wizard Suppliers, Inc. Loading Dock." Risk of loss for the radios during shipment to Lazur would be on
Lazur, because the risk of loss passes when the radios are delivered to the carrier. This is a shipment contract, because it is F.O.B, seller's loading dock. In a shipment contact, the risk of loss passes as soon as the seller places the goods with a common carrier. Any damage that then happens during shipment falls on the buyer. Although title passed to Lazur at the same time risk of loss is not dependent here on who has title.
In determining whether the consideration requirement to form a contract has been satisfied, the consideration exchanged by the parties to the contract must be
Legally sufficient. Consideration must be sufficient. However, the rule is that any obligation of legal value and bargained-for is sufficient consideration. It need not be of reasonably equal or even nearly equal value going both ways.
On October 1, 2017, Lois Rice learned that she was bequeathed 1,000 shares of Elin Corp. common stock under the will of her uncle, Pat Prevor. Pat had paid $5,000 for the Elin stock in 2012. Fair market value of the Elin stock on October 1, 2017, the date of Pat's death, was $8,000 and had increased to $11,000 six months later. The executor of Pat's estate elected the alternative valuation for estate tax purposes. Lois sold the Elin stock for $9,000 on December 1, 2017, the date that the executor distributed the stock to her. Lois should treat the 1,000 shares of Elin stock as a
Long-term capital asset. The stock should be treated as a capital asset held long-term since (1) property acquired from a decedent is considered to be held for more than twelve months regardless of its actual holding period, and (2) the stock is an investment asset in Lois' hands. The stock is not a Sec. 1231 asset because it was not held for use in Lois' trade or business.
An investor purchased shares of stock in a stock offering under the Securities Act of 1933. The financial statements included in the registration statement contained material misstatements. As a result, the investor incurred a significant loss on the securities. What must the investor prove to possibly recover losses from the CPA firm that audited the financial statements contained in the registration statement?
Losses and the financial statements were materially misstated. The plaintiff need not prove negligence by the CPA.
Maynard comes to you for tax advice. Please tell him which of the following statements is true? - Because money is important, the IRS imposes higher penalties for late payment than for late filing. - Maynard owes $100,000 in income taxes, but filed a tax return indicating that he owed only $70,000. He is guilty of a "substantial understatement" of his income tax. - Maynard is a shareholder in a Subchapter C corporation, Adlist Corporation, that owed $200,000 in income taxes but filed a tax return indicating that it owed only $185,000. Adlist is guilty of a "substantial understatement" of its income tax. - Maynard's income tax return contained two huge errors. One was a substantial understatement of an item of active income by $250,000. One was a substantial understatement of an item of passive income by $150,000. The federal government charged Mortar with fraud and sought to impose a 75% penalty on $400,000. Even if Mortar can prove that the passive error was an innocent (though large) one, the federal government will prevail."
Maynard owes $100,000 in income taxes, but filed a tax return indicating that he owed only $70,000. He is guilty of a "substantial understatement" of his income tax. A substantial understatement is one that exceeds the greater of (a) 10% of the tax ($10,000) or (b) $5,000. Because his understatement of $30,000 is greater than either of these standards, it is substantial.
Can you depreciate land?
No
Sharp & Co., CPAs, was engaged by Radar Corp. to audit its financial statements. Sharp issued an unqualified opinion on Radar's financial statements. Radar has been accused of making negligent misrepresentations in the financial statements which Wisk relied upon when purchasing Radar stock. Sharp was not aware of the misrepresentations nor was it negligent in performing the audit. If Wisk sues Sharp for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Sharp will
Prevail, since some element of scienter must be proved. This answer is correct because in an action brought under the Securities Exchange Act of 1934, Section 10(b) and Rule 10b-5 the plaintiff (Wisk) must prove that damages were incurred as a result of the act, that there was a material misstatement or omission, that s/he relied upon the financial information, and that scienter exists. Scienter is generally defined as the knowledge of or the intent to deceive, defraud, or manipulate. Thus, Sharp will prevail if Wisk is unable to prove that Sharp had knowledge of the misrepresentations or that Sharp had intended to deceive or defraud (scienter).
On May 2, Handy Hardware sent Ram Industries a signed purchase order that stated, in part, as follows: "Ship for May 8 delivery 300 Model A-X socket sets at current dealer price. Terms 2/10/net 30." Ram received Handy's purchase order on May 4. On May 5, Ram discovered that it had only 200 Model A-X socket sets and 100 Model W-Z socket sets in stock. Ram shipped the Model A-X and Model W-Z sets to Handy without any explanation concerning the shipment. The socket sets were received by Handy on May 8. What is the result of Ram's shipment?
Ram's shipment is an acceptance of Handy's offer. Under the UCC when a buyer orders (offers to buy) goods to be shipped by a seller, a seller can accept that offer by (1) shipment of conforming goods, (2) by a prompt promise to ship conforming goods, or (3) by the shipment of nonconforming goods without notice of accommodation. Here Ram, in response to Handy's offer, shipped nonconforming goods without notice ("explanation") of accommodation resulting in Ram's acceptance (and breach of contract).
Define "Section 1231 assets."
Realty and depreciable property used in a trade or business owned more than one year
For a CPA to be liable for damages under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, a plaintiff must prove all of the following except that - The plaintiff relied on the financial statements audited by the CPA. - The CPA violated generally accepted auditing standards. - There was a material misrepresentation of fact in the financial statements audited by the CPA. - The CPA acted with scienter.
The CPA violated generally accepted auditing standards. In an action brought under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, a plaintiff must prove the following: (1) that plaintiff suffered damages, (2) there was a material misstatement or omission in the financial information audited by the CPA, (3) that the plaintiff relied on financial information, and (4) existence of scienter. There is no requirement that the plaintiff specifically prove that the CPA violated generally accepted auditing standards.
Explain the Section 179 deduction.
The Section 179 deduction is $500,000 for 2017, with a 50% bonus depreciation
Tally Corporation sold machinery that had been used in its business for a loss of $22,000 during 2017. The machinery had been purchased and placed in service sixteen months earlier. For 2017, the $22,000 loss will be treated as a
Sec. 1231 loss. Property held for use in a trade or business is specifically excluded from the definition of capital assets, and if held for more than one year is considered Sec. 1231 property.
What types of assets are eligible for Section 179 expensing?
Tangible personalty used in a trade or business; can be new or used
Are tax return preparation fees deductible?
Tax return preparation fees are deductible as an itemized deduction on Schedule A subject to a 2% of AGI threshold.
The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount?
The Uniform Capitalization Rules do not apply to small personal property dealers. Small personal property dealers are defined as those with $10 million or less in gross receipts during the preceding three years.
Green sold 500 shares of XYZ Corp. stock at $20 per share. Green purchased these shares two years prior at $22 per share. Three weeks subsequent to the sale, Green purchased 100 shares of XYZ stock at $18 per share. What is the gain or loss on this transaction?
The amount realized is $10,000 (500 x $20), the adjusted basis is $11,000 (500 x $22), and the realized loss is ($1,000). However, this is a wash sale because the identical shares were purchased within 30 days of the sale. If 500 identical shares were purchased none of the loss would be recognized. Since only 100 shares were purchased, 20% (100/500) of the loss is disallowed, or $200. The recognized loss is $800 ($1,000 - $200).
For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household? - Insurance on the home - Rental value of the home
The cost of maintaining a household includes such costs as rent, mortgage interest, taxes, insurance on the home, repairs, utilities, and food eaten in the home. The cost of maintaining a household does not include the cost of clothing, education, medical treatment, vacations, life insurance, transportation, the rental value of a home an individual owns, or the value of an individual's services or those of any member of the household.
Smith contracted to perform for $500 certain services for Jones. Jones claimed that the services had been performed poorly. Because of this, Jones sent Smith a check for only $425. Marked clearly on the check was "payment in full." Smith crossed out the words "payment in full" and cashed the check. Assuming that there was a bona fide dispute as to whether Smith had in fact performed the services poorly, the majority of courts would hold that
The debt is unliquidated and the cashing of the check by Smith completely discharged the debt. At the time the contract was made, the debt was liquidated since the amount was certain ($500). However, the bona fide dispute changed the debt to an unliquidated debt. Payment of a lesser sum to discharge an unliquidated debt will be effective if accepted as payment in full since each party gives consideration in the form of forfeiting a claim to dispute the amount of the debt. Smith's cashing of the check was acceptance of a settlement for the full amount of the debt.
Petty Corp. made a public offering subject to the Securities Act of 1933. In connection with the offering, Ward & Co., CPAs, rendered an unqualified opinion on Petty's financial statements included in the SEC registration statement. Huff purchased 500 of the offered shares. Huff has brought an action against Ward under Section 11 of the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement.
The misstatements were material. Under the Securities Act of 1933, a CPA is liable to any third-party purchaser of registered securities for losses resulting from misstatements in the financial statements included in the registration statement. The plaintiff (purchaser) must establish that damages were incurred, and that the misstatements were material misstatements of facts.
On January 2, 2013, Bates Corp. purchases and places into service seven-year MACRS tangible property costing $100,000. On December 31, 2017, Bates sells the property for $102,000, after having taken $47,525 in MACRS depreciation deductions. What amount of the gain should Bates recapture as ordinary income?
The property sold by Bates Corp. is Section 1245 property and, as such, is subject to 1245 recapture. Section 1245 property includes all depreciable personal property (for example, equipment and machinery). Under Section 1245 recapture, gains are treated as ordinary income to the extent of depreciation or amortization taken on the property. The basis of Bates Corp.'s property at the time of the sale is $52,475 − $100,000 purchase price, less $47,525 in depreciation. Hence, the corporation had a gain of $49,525. However, owing to Section 1245 recapture, the amount of depreciation allowed, $47,525, will be considered ordinary income and only $2,000 will be considered a gain.
On March 10, 2017, James Rogers sold 300 shares of Red Company common stock for $4,200. Rogers acquired the stock in 2013 at a cost of $5,000. On April 4, 2017, he repurchased 300 shares of Red Company common stock for $3,600 and held them until July 18, 2017, when he sold them for $6,000. How should Rogers report the above transactions for 2017?
The purchase of substantially identical stock within 30 days of the sale of stock at a loss is known as a wash sale. The $800 loss incurred in the wash sale ($5,000 basis less $4,200 amount realized) is disallowed. The basis of the replacement (substantially identical) stock is its cost ($3,600) plus the disallowed wash sale loss ($800). The holding period of the replacement stock includes the holding period of the wash sale stock. The amount realized ($6,000) less the basis ($4,400) results in a long-term gain of $1,600.
Sam has been engaged in an illegal business this year related to electronically stealing funds from individuals' bank accounts. What items are deductible on his business tax return for the year?
The salaries, rent expense, and interest expense are all deductible. The ordinary, necessary, and reasonable expenses of operating illegal businesses (other than illegal drug activity) are permitted (as long as the expense itself is not against public policy). Therefore, all of these expenses are deductible against the revenue earned from the activities.
With regard to the passive loss rules involving rental real estate activities, which one of the following statements is correct? - The term ""passive activity"" includes any rental activity without regard as to whether or not the taxpayer materially participates in the activity. - Gross investment income from interest and dividends not derived in the ordinary course of a trade or business is treated as passive activity income that can be offset by passive rental activity losses when the ""active participation"" requirement is not met. - Passive rental activity losses may be deducted only against passive income, but passive rental activity credits may be used against tax attributable to non passive activities. - The passive activity rules do not apply to taxpayers whose adjusted gross income is $300,000 or less.
The term "passive activity" includes any rental activity without regard as to whether or not the taxpayer materially participates in the activity.
Nolan agreed orally with Train to sell Train a house for $100,000. Train sent Nolan a signed agreement and a down payment of $10,000. Nolan did not sign the agreement but allowed Train to move into the house. Before closing, Nolan refused to go through with the sale. Train sued Nolan to compel specific performance. Under the provisions of the Statute of Frauds,
Train will win because Train made a down payment, took possession, and made improvements. The Statute of Frauds applies to real property transactions like this one and generally requires that they be in writing to be enforceable. However, there is an exception to this part of the Statute if the buyer, by taking possession of the property, making improvements, and making a down payment and improvements cannot be returned to the status quo. In such a case, the oral agreement is perfectly valid and enforceable.
An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individual wants to file a claim for refund of federal income taxes that were paid at that time. The individual must file the claim for refund within which of the following time periods after those taxes were paid?
Two years. The deadline for filing a claim for refund (on form 1040X) is the later of: 1. Two years from the payment of tax, or 2. Three years from the date the return was filed (or April 15 if filed before the original due date).
Miramar Corp. has total business income of $1 million, and in State XY has a sales factor of 60%, a payroll factor of 50%, and a property factor of 49%. What is Miramar's State XY UDITPA appointment factor and State XY business income?
UDITPA recommends an apportionment formula that equally weighs sales, payroll, and property. Business income is then apportioned to a state by adding the three factors and then dividing by 3 to average the factors. Here the apportionment factor would be (60% + 50% + 49%) /3 = 53%, and would result in the apportionment of $530,000 of business income to State XY.
Dunne and Cook signed a contract requiring Cook to rebind 500 of Dunne's books at $3.00 per book. Later, Dunne requested, in good faith, that the price be reduced to $2.70 per book. Cook agreed orally to reduce the price to $2.70. Under the circumstances, the oral agreement is
Unenforceable, because Dunne failed to give consideration, but proof of it is otherwise admissible into evidence. There are two issues here. The first is the enforceability of the modification. This modification is invalid, because it is a contract for services, and it is not supported by new consideration. Dunne has not agreed to do anything new, and, therefore, since he had a preexisting duty to pay $3.00 per book, the modification cannot be enforced. The second issue is whether evidence of the agreement can be introduced for other reasons. The answer here is yes. The parole evidence rule prohibits testimony about agreements that existed before a contract was signed, because contracts are generally presumed to be the final word on an agreement. However, evidence about things taking place after a contact was signed (subsequent modification) is admissible.
Cable Corp. orally engaged Drake & Co., CPAs, to audit its financial statements. Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not:
Violate generally accepted auditing standards in performing the audit. In a negligence case, the plaintiff must show that the CPA did not use reasonable care or did not act as a reasonable CPA in the circumstances. If Drake can show that he followed GAAS in preparing the report, it is strong evidence that he acted reasonably. It is not an absolute defense, but it tends to show that he did what other accountants would have done in the same situation.
Matt is Sally's supervisor in an accounting firm that does only tax work. If Sally makes a serious mistake, will Matt be in trouble with the IRS under Circular 230?
Yes, if he did not use reasonable care in supervising, training, and evaluating Sally.
Pierce owed Duke $3,000. Pierce contracted with Lodge to paint Lodge's house and Lodge agreed to pay Duke $3,000 to satisfy Pierce's debt. Pierce painted Lodge's house, but Lodge did not pay Duke the $3,000. In a lawsuit by Duke against Pierce and Lodge, who will be liable to Duke?
You have third-party rights set up by the contract between Pierce and Lodge. Whether the relationship is an assignment of benefits or Duke is a third-party creditor beneficiary, Duke has contractual recovery rights. By involving Lodge, Pierce gives Duke rights in the contract.
The Smiths are remodeling their kitchen and want to purchase new appliances: a large refrigerator-freezer, microwave oven, dishwasher, garbage disposal, and stove-oven. Z Bank has advertised a special consumer loan rate, and AP Appliances has great discount rates on appliances. The Smiths can only pay AP Appliances 20% of the purchase price. AP Appliances' credit rates are higher than Z Bank's consumer loan rates. The Smiths sign a security agreement putting up the to-be-purchased listed appliances as security, and Z Bank issues a check for the balance payable to AP Appliances and the Smiths. Which of the following statements is correct?
Z Bank has a purchase money security interest in the appliances and is a perfected secured party without a filing. A purchase money security interest can be created by a secured party who advances value to enable the debtor to purchase the collateral, and because the appliances are consumer goods, perfection is automatic without a filing.
Zack Limited Partnership intends to sell $6m of its limited partnership interests. Zack conducts all of its business activities in the state in which it was organized. All the property it owns is located in the same state. Zack intends to use the offering proceeds to build anew warehouse in the same state. What is the result of the Rule 147 offering and registration exemption that is available to Zack under the Securities Act of 1933?
Zack will lose the Rule 147 exemption if the limited partnership, while doing all its business and owning all its property in this state, was organized in a different state. Under Rule 147, an offeror cannot make even one offer to a nonresident. Sale to a single nonresident would obviously ruin the exemption as well. And resident purchasers must hold onto shares for at least six months before reselling to nonresidents. Under Rule 147, the issuer must be both organized in the state and doing most of its business there in order to use the intrastate offering exemption.