A
Assume that 2021 is the relevant tax year for all problems.
Name _________________________________________
Instructions
- This assignment consists of 15 questions (with multiple parts).
- Please make sure to include your name on this form and submit it with your assignment
- You may provide your answers on these pages or attach additional sheets.
- Good Luck!
PROBLEM ONE (2 pts. for each part; 10 pts. total)
PART A
Jackson operates a construction company (as the sole owner). Since his company’s current projects are all housing contracts, he has the choice of utilizing either the completed contract method (recognizing all income when the project is completed) or the percentage of completion method (recognizing the income in proportion to the percentage of the project completed) for recognizing income. The completed contract method would allow Jackson to defer income recognition. Assuming that Jackson is projected to be in the top marginal tax bracket of 37% (before considering income from the construction company) for current and future years, which income recognition method would Jackson generally prefer? Why?
PART B
Further, assume that Jackson is an accrual-basis taxpayer and he also routinely pays a land clearing service before beginning major construction projects. Under the reoccurring item exception (which would allow him to immediately recognize expenses), he has the option of claiming the expenses either in the next or current year. Assuming that Jackson is projected to be far into the top marginal tax bracket of 37% in current and future years, which option would Jackson generally prefer? Why?
PART C
As a separate endeavor, Jackson has also invested in several undeveloped tracts of land. He hopes that the land will appreciate in value so that he can profit from the real estate when the property is sold. Assuming that the land has appreciated in value, would Jackson prefer to have these land tracts classified as ordinary or capital assets? Why? How would your answer change if the land has depreciated in value? Why?
PART D
Would your responses to Parts A and B be different if future marginal tax rates were expected to increase substantially due to recent tax law changes? Why?
PART E
Are a taxpayer’s general objectives when reporting taxable income consistent with his or her objectives when reporting financial (book) income? Why or why not?
PROBLEM TWO (9 pts. total)
PART A (3 pts.)
Marc, a single taxpayer, earns a $240,000 salary, $50,000 in interest from an investment in city of Birmingham Bonds, and $30,000 in employer provided educational assistance (which qualifies a working condition fringe benefit). He has no dependents. Assume that Marc also has no deductions for AGI and does not qualify for the QBI deduction. He has $9,000 in itemized deductions. What is Marc’s filing status? Compute Marc’s taxable income and his tax liability.
PART B (1 pt.)
Would Marc be required to use the Tax Table or the Tax Schedule method? Why would he be required to utilize that particular option?
PART C (3 pts.)
What is Marc’s marginal, average, and effective tax rate? When computing total income for the effective tax rate, ignore any deductions and consider only realized income. Which tax rate is most informative if you are considering the tax implications of a particular transaction? Why? Which tax rate is most informative if you are considering the overall taxpayer burden for a particular time period? Why?
PART D (2 pts.)
Assume that Marc has a qualifying relative dependent who does not live with him. How would this impact his filing status? What would you recommend to Marc if he was interested in obtaining a more advantageous filing status for tax purposes (assuming he is not interested in marrying anyone)?
PROBLEM THREE (10 pts. total)
PART A (4 pts.)
Steve died in 2019 and is survived by his wife, Marsha, and their 18-year-old daughter, Amanda (birthday of December 1, 2001). Marsha is the executix of Steve’s estate and maintains a household in which she and Amanda live. Marsha furnishes all of their support (for her and Amanda) and Amanda saves her earnings. Amanda’s earnings and student status are as follows:
| Year | Earnings | Student Status |
| 2019 | $4,500 | Full-time (for spring and summer semesters) |
| 2020 | $9,000 | Not enrolled in any educational institution for entire year |
| 2021 | $5,000 | Full-time (for summer and fall semesters) |
| 2022 | $3,500 | Not enrolled in any educational institution for the entire year |
Given the provided information, please indicate Marsha’s filing status for 2019, 2020, 2021, and 2022. Please also indicate why you selected the following filing statuses for Marsha in each year.
PART B (2 pts.)
Now assume that Marsha claims her cousin, Amber, as her dependent in 2023 (Amanda is no longer her dependent). Would Marsha be legally permitted to claim the dependency under any circumstance? Assuming Marsha could claim her as a dependent, how would this impact Marsha’s filing status for 2023?
PART C (2 pts.)
Now assume that Amber’s income in 2023 consists of $3,200 that she earns from a part-time job and $500 of interest from a savings account. She is also age 67 and blind. What is Amber’s standard deduction in 2023 when completing her tax return?
PART D (2 pts.)
Assume that Marsha’s brother Tom was abandoned by his wife in 2021. In 2022, Tom maintains a home that he and his 26-year-old daughter (who is his qualified relative dependent) live in for all of 2022. He is still legally married at the end of 2022. What is Tom’s filing status in 2022? Would your answer change if his daughter was 18 at year end and he provided more than half of her support?
PROBLEM FOUR (5 pts. total)
PART A (3 pts.)
Christie sued a former client for a back injury she suffered on the job in 2018. As a result of the injury, she was partially disabled. In 2019, she received $350,000 for her loss of future income, $190,000 in punitive damages because of the employer’s flagrant disregard for the employee’s safety, $130,000 due to emotional distress from the injury, and $17,000 for medical expenses. The medical expenses were deducted on her 2018 return, reducing her taxable income by $12,000. Compute Christie’s gross income from these transactions in 2019.
PART B (2 pts.)
How would your answer to Part A change if the lawsuit was related to slander and defamation (as opposed to a back injury)? You can ignore the $17,000 of medical expenses in Part B.
PROBLEM FIVE (5 pts. total)
PART A (3 pts.)
Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to purchase educational materials for his studies. What is Barney’s gross income from these transactions?
PART B (2 pts.)
Several years later, Barney is employed by a large corporation that provides him with $7,500 of annual employer provided educational assistance. Since Barney is the Chief Financial Officer (CFO) of the organization, the company also directly provides his son with an annual scholarship of $10,000 (this benefit is not available to lower ranking employees). What is Barney’s gross income from these transactions?
PROBLEM SIX (6 pts.)
Remnant Corporation provides the following fringe benefits to the company’s president (Melinda). Please indicate the financial amount of the benefits that are included in Melinda’s gross income.
The company owns a parking garage that is used by both employees and the general public. While a member of the general public would be required to pay $4,000 per year for the parking, Melinda was able to receive this benefit for free since she was the company president.
Since the board of directors voted to move the company’s headquarters from New York to Los Angeles, Melinda was required to move to California. The company reimbursed her for $9,000 of moving expenses.
The company provides home restoration services to the general public. Executives are allowed a 30% discount on these services while other employees only receive a 10% discount.
The company also offers a qualified retirement plan. The company pays the cost of employee attendance at a retirement planning seminar. Melinda attends the conference. The employees must be within 5 years of retirement and the cost of the seminar is $1,000 per attendee.
PROBLEM SEVEN (6 pts. total)
PART A (3 pts.)
Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $200,000. Albert had paid $35,000 of premiums on the policy. The insurance company has offered to pay him $90,000 to cancel the policy, although its cash surrender value was only $75,000. Albert accepted the $90,000. Albert used $19,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy, what amount of gross income does Albert have to report?
PART B (3 pts.)
How would your answer to Part A change if Albert been just chronically ill (instead of terminally ill)?
PROBLEM EIGHT (4 pts. total)
PART A (2 pts.)
Rachel has $90,000 of foreign earned income and $500,000 of U.S. based income. She is anticipating having similar income in future years. She is concerned about double taxation of her income and whether or not she should elect a particular tax benefit. Assuming you were her tax adviser, what would you recommend?
PART B (2 pts.)
Assume that Rachel has $700,000 of foreign earned income and $300,000 of U.S. based income. She is anticipating having similar income in future years. How would you adjust your suggestions from Part A?
PROBLEM NINE (9 pts. total) – Assume the following situations are independent.
PART A (3 pts.)
Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd’s only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Does either party (Sharon or Todd) have any imputed interest income or expense in this situation? If so, what is the amount?
PART B (3 pts.)
Sharon made a $110,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd’s only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Does either party (Sharon or Todd) have any imputed interest income or expense in this situation? If so, what is the amount?
PART C (3 pts.)
Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd’s only sources of income were $25,000 from the business and $1,050 of interest on his checking account. The relevant Federal interest rate was 5%. Does either party (Sharon or Todd) have any imputed interest income or expense in this situation? If so, what is the amount?
PROBLEM TEN
PART A (3 pts.)
Betty purchased an annuity for $75,000 in 2010. Under the contract, Betty will receive $500 each month for the rest of her life (beginning in January of 2019 when she turns 65). What are her total expected lifetime annuity payments (excluding the time value of money)? What is Betty’s gross income from the annuity in 2019?
PART B (2 pts.)
Assuming Betty is still receiving the full payments in 2049, what is her gross income from the annuity contract in that year?
PROBLEM ELEVEN (4 pts.)
In 2021, Iris collected $150,000 on her deceased husband’s life insurance policy. The policy was purchased by the husband’s employer under a group policy. Iris’s husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. Iris also received a separate inheritance from her husband of $70,000 and a gift of $30,000 from her brother. Iris, who is currently in perfect health, also sold a life insurance policy on herself to an insurance company for $130,000. She had paid premiums of $35,000 on the policy. What is Iris’ gross income from these transactions?
PROBLEM TWELVE (4 pts. total)
PART A (1 pt.)
Bill filed his 2019 tax return on March 15th, 2020. When will the statute of limitations for IRS assessment on Bill’s 2019 tax return end?
PART B (1 pt.)
Bill never files his 2019 tax return. When will the statute of limitations for IRS assessment on Bill’s 2019 tax return end?
PART C (1 pt.)
Bill filed his 2019 tax return on March 15th, 2020. He accidentally omitted 30% of his gross income on the return. When will the statute of limitations for IRS assessment on Bill’s 2019 tax return end?
PART D (1 pt.)
Bill filed his 2019 tax return on May 15th, 2020. However, Bill does not pay his actual tax liability and the associated penalties until June 3, 2021. When will the statute of limitations for Bill’s filing of a refund claim end?
PROBLEM THIRTEEN (9 pts. total)
What are the differences between deductions for AGI and deductions from AGI on Form 1040? If all other factors are considered equal, does a taxpayer generally prefer a deduction to be a deduction for AGI, a deduction from AGI, or would a taxpayer be ambivalent between the two? If a taxpayer would generally one type of deduction over another, why would that preference occur? (3 pts.)
What is the difference between a tax credit and a tax deduction? If all other factors are considered equal, would a taxpayer prefer a tax deduction of $100 or a tax credit of $100? Why? (3 pts.)
Define what is meant by the terms realized and recognized gains? Can a gain be realized but unrecognized? If so, please provide an example. How does the distinction between accounting and economic income relate to the definition of gross income. (3 pts.)
PROBLEM FOURTEEN (7 pts. total)
Paul has a lot of interest-bearing investments and is in the 37% marginal tax bracket (for ordinary income). In order to reduce his overall tax liability, he plans to gift the assets to his three children (who are his qualifying children, under age 18, for tax purposes) so that the interest will be partially shielded by their full standard deductions of $12,000 and then taxed at the children’s lower marginal tax rates. The children range in age from 5 to 9 years old and have no earned income. He also has an adult nephew (who is a non-dependent) in a lower tax bracket that he would like to loan $50,000 so that the nephew can use the investment income to pay for living expenses. He believes that loaning the money to his nephew will lower the marginal tax rate applied to the investment income (and the tax liability) while still providing him (Paul) with access to the principal (The loan is payable on demand). Further, Paul also runs a small business and believes that he can shift some of his income to other family members by employing them in his business (so that the income will be shifted to family members in a lower marginal tax bracket). Do you see any problems with Paul’s proposed tax strategies? Is there a way he can lower the marginal tax rates applied to the investment income while keeping the assets within the control of family members?
PROBLEM FIFTEEN (7 pts. total)
Describe the concept of income that is utilized for tax purposes? How and why is taxable income different from accounting or economic income? If a taxpayer sells property, are the gross receipts taxable?
When are cryptocurrency transactions taxable?
