- As we know, Congress devised a very broad definition of income and codified this definition in Section 61 of the Internal Revenue Code. Explain the Code’s definition of income and how it is generally applied to taxpayers. In particular, explain how the Code’s definition of income is different than other potential definitions of income, such as the economic concept of income, and use an example to illustrate the difference between the two systems. Explain how the Code approaches whether or not particular items should be included in income and how a taxpayer’s taxable income is generally determined under the Code.
- This semester, we learned that Congress designed the Code to include deductions that can be taken for losses that a taxpayer may experience. Two such deductions are (1) the bad debt deduction and (2) the deduction for casualty losses and theft. How does the IRS generally interpret deductions (i.e., broadly or narrowly)? How do we determine whether a taxpayer is entitled to each of these two deductions? What is the purpose of each of these two deductions? Are there any limits on the deduction at issue? Finally, what generally governs when a taxpayer may take each of these two deductions?
- As a tax practitioner, you often get people asking questions concerning the tax effect of property transactions. This year is no exception. You’ve had individual clients ask you the following questions: I had some business property that was destroyed by a fire. I received payment on the property by the insurance company equal to the full fair market value of the property, which was higher than its adjusted basis. I took the insurance proceeds and purchased a new piece of property, but the property purchased cost less than the amount of the payment from the insurance company.
My corporation sold some depreciable property (a machine) this year. The amount realized on the transaction was higher than the adjusted basis of the property after taking depreciation into account. How will the corporation account for this gain? Would it have been any different if the property were sold by me as an individual instead of the corporation?
Answer each of these questions, explaining the rules that apply to each property transaction and the possible tax consequences of each.
- One of your corporate clients has approached you about whether or not its employees are required to include certain benefits provided by the corporation in their income. In particular, the corporation has inquired whether the following benefits provided by the corporation to employees would be included in an employee’s taxable income:
The employer would like to provide a holiday present to each employee at the end of December. It envisions providing gift cards, including a gift card for dinner at a local restaurant and a gift card for an electronics store. It also plans on providing each employee a $150.00 holiday bonus in a separate check.
II. The employer, which is in the business of providing commercial repair services (such as plumbing, painting, and remodeling), would like to give each employee a $500.00 credit each year that the employee can use toward any services or goods provided by the employer. For example, they could use the credit to have interior walls painted, plumbing work completed, or to purchase a new window and have it installed.
Explain to your client the general rules surrounding whether an employee must include benefits provided by the employer in income. Then, for the two proposed benefits mentioned above, explain whether the employee would have to include the amount in income or what provision or exception might apply to make the proposed benefit nontaxable. If the employer would have to make changes to the proposed benefit to render it nontaxable, explain what changes(s) would have to be made. Finally, explain what the resulting benefit would be to the employee and how much, if any, of the benefit the employee could exclude from income. Make sure to detail any significant exceptions or rules that apply to the benefit exception at issue.
The material covered in this particular essay question has been covered in the course readings, problems assigned, and/or the Discussion topics in the course. There are a few key concepts that should be addressed in any complete answer, including the following:
I. A general discussion of how employee benefits are generally included in income unless some specific exception excludes them from income, including that the taxpayer must show that all of the requirements for exclusion are satisfied before he or she is entitled to exclude the item from income;
II. A discussion of the rules concerning employee exclusions that may apply to the fact pattern given, including the requirements to be entitled to the exclusion. In this case, it would include a discussion of:
• With respect to the first fact pattern, a discussion/evaluation of the de minimis exclusion and the nature of compensation income
• With respect to the second fact pattern, a discussion/evaluation of the qualified employee discount (and, possibly, the no additional cost service exclusion to argue that it does not apply)
In grading this question, however, instructors should give due credit to discussions of concepts that are relevant to the answer, while ignoring those that are irrelevant or off topic. This means that some students may identify issues that are relevant but perhaps different than those raised by other students. Credit should be given accordingly for these answers, because students are being presented with the opportunity to show their comprehensive understanding of the material and their ability to apply it to a given set of circumstances.
- One of your best individual clients is thinking about starting up a new business, and he is seeking your advice on which business form he should select. In particular, he’s trying to decide whether to operate the business as a partnership or a C corporation. Explain to him the significant tax and nontax issues that will arise from choosing each of these entities compared to the other, including how income will be treated by the entity, the overall tax burden, and the effect of distributions of property or earnings from the entity to your client. (Note: Do not spend time addressing other types of business entities. Credit will only be given for discussion of the two business entities at issue.)
- You are chief counsel to the chairman of the Joint Committee on Taxation, the body primarily responsible for identifying taxation issues and their consequences as Congress seeks to implement a comprehensive and coherent tax policy. Currently, the United States is in a bit of an economic slump. Corporate earnings reports are relatively weak; the stock market is about 25% off of its 5-year highs, and tax revenues are down. Largely as a result of the last issue, the government finds itself operating under an annual deficit, and the national debt hovers around $7,000,000,000. Interest rates, however, remain at historic lows. The president has suggested a multiple-pronged attack to revitalize the economy. First, he has proposed going to a flat tax rather than the current progressive tax system. (No recommendation regarding what that flat tax rate should be has been made, although the president has indicated that he would not be likely to accept any figure above 15%.) As part of this plan, however, the president has proposed eliminating many of the current individual income tax deductions, including (I) the home mortgage interest deduction and (II) the property tax deduction. He has also proposed eliminating the deduction for dependents. Furthermore, he has proposed eliminating the child care and earned income credits to help make up for any potential shortfalls in revenue.
The chairman has asked you for your analysis of these provisions. Please prepare a memorandum outlining your thoughts on each, including, but not necessarily limited to
(I) the effect of each recommendation on revenues and deficits, both in the short and long run;
(II) the effect of each recommendation on the economy;
(III) the relative effects of each recommendation on different socioeconomic groups of taxpayers;
(IV) the relative fairness of each recommended change; and
(V) your conclusion regarding whether any or all should be adopted.
- As a newly minted CPA, you obtain your first significant position as a tax professional: senior tax accountant for one of the offices of a regional accounting firm. Of course, the firm runs a notice of your hiring in the local newspaper. A few days later, the editor of the newspaper calls you and asks if you might be interested in writing a monthly column for the newspaper on tax issues. Figuring that it would be a good way to get your name out in the community as an expert in the field (and a little free advertising to boot!), you tell him that you would be more than happy to do so. “Great!” he says. “By the way, I have already blocked out space for this column in the next edition of the paper. Is there any way that you can get me your article by the end of the day today?” After you commit to doing so, he also proceeds to tell you that you will not be paid for these articles. “I figure that it is just a sort of public service that you could offer to the community. I am sure you understand.” (And so it begins…get used to a lot of this.) You spend the next 10 minutes thinking about what you could discuss in your first article. You would like to shake people up a little bit, and perhaps challenge their opinions about some issues of tax law. That way, you could perhaps build up some interest in your column, which, as you know, will be difficult to achieve under the best of circumstances! (After all, who wants to read newspaper articles about taxes?)
Finally, you decide on a topic: You will argue to the readers that the federal income tax should be abolished and replaced with a national property tax that is levied on both personal property and real estate.
Required: Write an article arguing this position. You may or may not agree with this proposition. However, based on the materials covered in this course and the discussions that have occurred in the Discussion areas, you should be able to articulate a cogent, persuasive argument in support of this proposition. In particular, you should focus on reference theories, concepts, justifications, and anticipated economic, social, and/or other benefits that would result from such a system. To the extent that you think strong contrary arguments could be made, consider raising those contrary arguments and then persuasively arguing against them. Your answer to this question will be evaluated based on the thoroughness, professionalism, substance, and persuasiveness of your argument.
- Mary Green is a full-time undergraduate student at Clayton State University. Mary is an honor student and received a $9,000-per-year scholarship. The scholarship award pays for Mary’s tuition ($6,000), books ($1,000), equipment ($1,200), and incidental expenses ($800).
a: Explain how each of the amounts shown above would be treated for tax purposes.
b: Calculate the total amounts that should be shown in Mary’s gross income.
- Joan Smart’s personal residence is condemned as part of the urbanization enlightened project. Her adjusted basis of the residence is $490,000. She receives condemnation proceeds of $470,000 and invests the proceeds in stocks and bonds.
(a): Calculate Joan’s realized and recognized gain or loss.
(b): If the condemnation proceeds are $515,000, what is Joan’s realized and recognized gain or loss?
(c): What is Joan’s realized and recognized gain or loss in (a) above if the house was a rental property?
- Everest Corporation, a calendar year C corporation, was formed on March 7, 2017 and opened for business on July 1, 2017. After its formation but before opening for business, Everest Corporation incurred the following expenses:
What is the maximum amount of these expenditures that Everest Corporation will be allowed to deduct in 2017?