Source: http://questionsoffederaltaxation.blogspot.com/2013/04/south-western-federal-taxation-2013_8.html
Timestamp: 2013-12-07 17:46:03
Document Index: 441431915

Matched Legal Cases: ['§ 1244', '§ 1244', '§ 1244', '§ 1244', 'art 1', 'art 2', '§ 1244']

Sample Chapter 7 DISCUSSION
QUESTIONS 1. LO.1 Explain how an account receivable can give rise to a bad debt
deduction. 2. LO.1 Ron sells his business accounts receivable of $100,000 to Mike for
$70,000 (70% of the actual accounts receivable). Mike later determines that he
will be able to collect only $6,000 of a $10,000 receivable. Discuss the amount
and classification of Mike’s bad debt deduction. 3. LO.1 Discuss when a bad debt deduction can be taken for a nonbusiness debt. 4. LO.1 During the past tax year, Jane identified $50,000 as a nonbusiness bad
debt. In that tax year, Jane had $100,000 of taxable income, of which $2,000
consisted of shortterm capital gains. During the current tax year, Jane
collected $10,000 of the amount she had previously identified as a bad debt.
Discuss Jane’s tax treatment of the $10,000 received in the current tax year. 5. LO.1 Bob owns a collection agency. He purchases uncollected accounts receivable
from other businesses at 60% of their face value and then attempts to collect
these accounts. Discuss the treatment of any account Bob is unable to collect. 6. LO.1 Discuss the treatment of a business bad debt when the business also has
longterm capital gains. 7. LO.1 Many years ago, Jack purchased 400 shares of Canary stock. During the
current year, the stock became worthless. It was determined that the company
“went under” because several corporate officers embezzled a large amount of
company funds. Identify the relevant tax issues for Jack. 8. LO.2 Sean is in the business of buying and selling stocks and bonds. He has
a bond of Green Corporation for which he paid $200,000. The bond is currently
worth only $50,000. Discuss whether Sean can take a $150,000 loss for a
business bad debt or for a worthless security. 9. LO.2 Discuss the tax treatment of the sale of § 1244 stock at a gain. 10. LO.3, 4 Jim discovers that his residence has extensive termite damage.
Discuss whether he may take a deduction for the damage to his residence. 11. LO.3, 4 The value of Mary’s personal residence has declined significantly
because of a recent forest fire in the area where she lives. Mary’s house
suffered no actual damage during the fire, but because much of the surrounding
area was destroyed, the value of all of the homes in the area declined
substantially. Discuss whether Mary can take a casualty loss for the decline in
value of her residence caused by the fire. 12. LO.4 Discuss at what point in time a casualty loss generally is recognized.
13. LO.4 Mary’s diamond ring was stolen in 2011. She originally paid $8,000 for
the ring, but it was worth considerably more at the time of the theft. Mary
filed an insurance claim for the stolen ring, but the claim was denied. Because
the insurance claim was denied, Mary took a casualty loss for the stolen ring
on her 2011 tax return. In 2011, Mary had AGI of $40,000. In 2012, the
insurance company had a “change of heart” and sent Mary a check for $5,000 for
the stolen ring. Discuss the proper tax treatment of the $5,000 Mary received
from the insurance company in 2012. 14. LO.4 Discuss the measurement rule for the theft of property used in a
transaction entered into for profit. 15. LO.4 Discuss the tax consequences of not making an insurance claim when
insured personal use property is subject to a loss. 16. LO.4 Discuss the circumstances under which the cost of repairs to the
damaged property can be used to measure the amount of a casualty loss. 17. LO.4 Discuss the treatment of a loss on rental property under the following
facts: Basis $650,000 FMV before the loss 500,000 FMV after the loss –0– 18. LO.4 Hazel sustained a loss on the theft of a painting. She had paid
$50,000 for the painting, but it was worth $40,000 at the time of the theft.
Evaluate the tax consequences of treating the painting as investment property
or as personal use property. 19. LO.4 Discuss the tax treatment when personal casualty gains exceed personal
casualty losses. 20. LO.4 Kelly decided to invest in Lime, Inc. common stock after reviewing
Lime’s public disclosures, including recent financial statements and a number
of press releases issued by Lime. On August 7, 2010, Kelly purchased 60,000
shares of Lime for $210,000. In May 2011, Lime entered into a joint venture
with Cherry, Inc. In November 2011, the joint venture failed, and Lime’s stock
began to decline in value. In December 2011, Cherry filed a lawsuit against
Lime for theft of corporate opportunity and breach of fiduciary responsibility.
In February 2012, Lime filed a countersuit against Cherry for fraud and
misappropriation of funds. At the end of December 2012, Kelly’s stock in Lime
was worth $15,000. Identify the relevant tax issues for Kelly. 21. LO.3, 4 In 2009, John opened an investment account with Randy Hansen, who
held himself out to the public as an investment adviser and securities broker.
John contributed $200,000 to the account in 2009. John provided Randy with a
power of attorney to use the $200,000 to purchase and sell securities on John’s
behalf. John instructed Randy to reinvest any gains and income earned. In 2009,
2010, and 2011, John received statements of the amount of income earned by his
account and included these amounts in his gross income for these years. In
2012, it was discovered that Randy’s purported investment advisory and
brokerage activity was in fact a fraudulent investment arrangement known as a
Ponzi scheme. In reality, John’s account balance was zero, the money having
been used by Randy in his scheme. Identify the relevant tax issues for John. 22. LO.5 Green Corporation made extensive modifications to a portion of a
building so that it could be used to conduct product research. Discuss whether
the modification costs would qualify as research and experimental expenditures.
23. LO.5 Discuss under what circumstances a company would elect to amortize
research and experimental expenditures rather than use the expense method. 24. LO.6 Amos began a business, Silver, Inc., on July 1, 2009. The business
extracts and processes silver ore. During 2012, Amos becomes aware of the
domestic production activities deduction (DPAD) and would like to take
advantage of this deduction. Identify the relevant tax issues for Silver, Inc. 25. LO.6 The DPAD is unlike other deductions and is designed to provide a tax
benefit in a somewhat unique manner. Explain this statement. 26. LO.6 Discuss the impact of an NOL on the DPAD. 27. LO.7 Discuss whether deductions for AGI can be treated as nonbusiness
deductions in computing an individual’s NOL. P R O B L E M S 28. LO.1 Several years ago, John Johnson, who is not in the lending business,
loaned Sara $30,000 to purchase an automobile to be used for personal purposes.
In August of the current year, Sara filed for bankruptcy, and John was notified
that he could not expect to receive more than $4,000. As of the end of the
current year, John has received $1,000. John has contacted you about the
possibility of taking a bad debt deduction for the current year. Write a letter
to John that contains your advice as to whether he can claim a bad debt
deduction for the current year. Also prepare a memo for the tax files. John’s
address is 100 Tyler Lane, Erie, PA 16563. 29. LO.1 Monty loaned his friend Ned $20,000 three years ago. Ned signed a note
and made payments on the loan. Last year, when the remaining balance was
$11,000, Ned filed for bankruptcy and notified Monty that he would be unable to
pay the balance on the loan. Monty treated the $11,000 as a nonbusiness bad debt.
Last year, Monty had capital gains of $4,000 and taxable income of $20,000.
During the current year, Ned paid Monty $10,000 in satisfaction of the debt.
Determine Monty’s tax treatment for the $10,000 received in the current year. 30. LO.1 Sally is in the business of purchasing accounts receivable. Last year,
Sally purchased an account receivable with a face value of $80,000 for $60,000.
During the current year, Sally settled the account, receiving $55,000.
Determine the maximum amount of the bad debt deduction for Sally for the
current year. 31. LO.1, 2 Mable and Jack file a joint return. For the current year, they had
the following items: Salaries $120,000 Loss on sale of § 1244 stock acquired
two years ago 105,000 Gain on sale of § 1244 stock acquired six months ago
20,000 Nonbusiness bad debt 19,000 Determine their AGI for the current year. 32. LO.2, 8 Mary, a single taxpayer, purchased 10,000 shares of § 1244 stock
several years ago at a cost of $20 per share. In November of the current year,
Mary received an offer to sell the stock for $12 per share. She has the option
of either selling all of the stock now or selling half of the stock now and
half of the stock in January of next year. Mary will receive a salary of
$80,000 for the current year and $90,000 next year. Mary will have long-term
capital gains of $8,000 for the current year and $10,000 next year. If Mary’s
goal is to minimize her AGI for the two years, determine whether she should
sell all of her stock this year or half of her stock this year and half next
year. 33. LO.4 During 2012, someone broke into Jacob’s personal residence and took
the following items: Asset Adjusted Basis FMV before FMV after Insurance
Recovery Business computer $12,000 $10,000 $–0– $ 7,000 Bearer bonds 30,000
25,000 –0– –0– Silverware 7,000 20,000 –0– 18,000 Cash 8,000 8,000 –0– –0–
Jacob is an employee and used the computer 100% of the time in his employment.
Although his homeowner’s insurance policy paid Jacob $7,000 for the stolen
computer, Jacob’s employer did not reimburse Jacob for any of the remainder of
his loss. Jacob’s AGI for the year, before considering any of the above items,
is $50,000. Determine the total deduction for the stolen items on Jacob’s 2012
tax return. 34. LO.3, 4, 8 Olaf owns a 500-acre farm in Minnesota. A tornado hit the area
and destroyed a farm building and some farm equipment and damaged a barn.
Fortunately for Olaf, the tornado occurred after he had harvested his corn
crop. Applicable information is as follows: Item Adjusted Basis FMV before FMV
after Insurance Proceeds Building $90,000 $ 70,000 $ –0– $70,000 Equipment
40,000 50,000 –0– 25,000 Barn 90,000 120,000 70,000 25,000 Because of the
extensive damage caused by the tornado, the President designated the area as a
disaster area. Olaf, who files a joint return with his wife, Anna, had $174,000 of taxable
from the tornado, is $250,000. Determine the amount of Olaf and Anna’s loss and
the year in which they should take the loss. 35. LO.3, 4 Heather owns a two-story building. The building is used 40% for
business use and 60% for personal use. During 2012, a fire caused major damage
to the building and its contents. Heather purchased the building for $800,000
and has taken depreciation of $100,000 on the business portion. At the time of
the fire, the building had a fair market value of $900,000. Immediately after
the fire, the fair market value was $200,000. The insurance recovery on the
building was $600,000. The contents of the building were insured for any loss
at fair market value. The business assets had an adjusted basis of $220,000 and
a fair market value of $175,000. These assets were totally destroyed. The
personal use assets had an adjusted basis of $50,000 and a fair market value of
$65,000. These assets were also totally destroyed. If Heather’s AGI is $100,000
before considering the effects of the fire, determine her itemized deduction as
a result of the fire. Also determine Heather’s AGI. 36. LO.3, 4 On July 24 of the current year, Sam Smith was involved in an
accident with his business use automobile. Sam had purchased the car for
$30,000. The automobile had a fair market value of $20,000 before the accident
and $8,000 immediately after the accident. Sam has taken $20,000 of
depreciation on the car. The car is insured for the fair market value of any
loss. Because of Sam’s history, he is afraid that if he submits a claim, his
policy will be canceled. Therefore, he is considering not filing a claim. Sam
believes that the tax loss deduction will help mitigate the loss of the
insurance reimbursement. Sam’s current marginal tax rate is 35%. Write a letter
to Sam that contains your advice with respect to the tax and cash-flow
consequences of filing versus not filing a claim for the insurance
reimbursement for the damage to his car. Also prepare a memo for the tax files.
Sam’s address is 450 Colonel’s Way, Warrensburg, MO 64093. 37. LO.5 Blue Corporation, a manufacturing company, decided to develop a new
line of merchandise. The project began in 2012. Blue had the following expenses
in connection with the project: 2012 2013 Salaries $500,000 $600,000 Materials
90,000 70,000 Insurance 8,000 11,000 Utilities 6,000 8,000 Cost of inspection
of materials for quality control 7,000 6,000 Promotion expenses 11,000 18,000
Advertising –0– 20,000 Equipment depreciation 15,000 14,000 Cost of market
survey 8,000 –0– The new product will be introduced for sale beginning in July
2014. Determine the amount of the deduction for research and experimental
expenditures for 2012, 2013, and 2014 if: a. Blue Corporation elects to expense
the research and experimental expenditures. b. Blue Corporation elects to
amortize the research and experimental expenditures over 60 months. 38. LO.6 Sarah Ham, operating as a sole proprietor, manufactures printers in
the United States. For 2012, the proprietorship has QPAI of $400,000. Sarah’s
modified AGI was $350,000. The W–2 wages paid by the proprietorship to
employees engaged in the qualified domestic production activity were $60,000.
Calculate Sarah’s DPAD for 2012. 39. LO.6 Barbara, a calendar year taxpayer, owns and operates a company that
manufactures toys. For 2012, she has modified AGI of $600,000 and QPAI of
$550,000. Ignoring the W–2 wage limitation, calculate Barbara’s DPAD. 40. LO.6 Red Corporation manufactures hand tools in the United States. For the
current year, the QPAI derived from the manufacture of hand tools was $1
million. Red’s taxable income for the current year was $2.0 million. Last year,
Red had an NOL of $800,000, which Red elected to carry forward. Calculate Red’s
DPAD for the current year. 41. LO.6 Green Corporation manufactures skirts and blouses in the United
States. The DPGR derived from the manufacture of one skirt is $12, and the DPGR
from one blouse is $10. The cost of goods sold is $5 for one skirt and $6 for
one blouse. Other allocated costs are $1 for one skirt and $5 for one blouse.
What amount of QPAI is available to Green for calculating the DPAD? 42. LO.6 In 2012, Rose, Inc., has QPAI of $4 million and taxable income of $3
million. Rose pays independent contractors $500,000. Rose’s W–2 wages are
$600,000, but only $400,000 of the wages are paid to employees engaged in
qualified domestic production activities. a. Calculate the DPAD for Rose, Inc.,
for 2012. b. What suggestions could you make to enable Rose to increase its
DPAD? 43. LO.1, 3 Nell, single and age 38, had the following income and expense items
in 2012: Nonbusiness bad debt $ 6,000 Business bad debt 2,000 Nonbusiness
long-term capital gain 4,000 Nonbusiness short-term capital loss 3,000 Salary
50,000 Interest income 3,000 Determine Nell’s AGI for 2012. 44. LO.1, 4 Assume that in addition to the information in Problem 43, Nell had
the following items in 2012: Personal casualty gain on an asset held for four
months $10,000 Personal casualty loss on an asset held for two years 1,000
Determine Nell’s AGI for 2012. C U M U L A T I V E P R O B L E M S 45. Jane Smith, age 40, is single and has no dependents. She is employed as a
Jane lives at 2020 Oakcrest Road, Boca Raton, FL 33431. Jane’s Social Security
number is 123–45–6789. Jane indicates that she wants to designate $3 to the
Presidential Election Campaign Fund. During 2011, Jane had the following income
and expense items: a. $100,000 salary from Legal Services, Inc. b. $20,000 gross receipts from her typing services business. c. $700 interest income from Acme National Bank. d. $1,000 Christmas bonus from Legal Services, Inc. e. $60,000 life insurance proceeds on the death of her sister. f. $5,000 check given to her by her wealthy aunt.
g. $100 won in a bingo game. h. Expenses connected with the typing service: Office rent $7,000 Supplies
4,400 Utilities and telephone 4,680 Wages to part-time typists 5,000 Payroll
taxes 500 Equipment rentals 3,000 i. $9,500 interest expense on a home mortgage (paid to San Jose Savings and
$5,448 {Social Security tax of $4,050 [($101,000 − $4,580) × 4.2%] + Medicare
tax of $1,398 [($101,000 − $4,580) × 1.45%]}. m. Alimony of $10,000 received from her former husband, Ted Smith. n. Interest income of $800 on City of Boca Raton bonds. o. Jane made estimated Federal tax payments of $1,000. p. Sales taxes from the sales tax table of $964. q. Charitable contributions of $2,500.
Part 1—Tax Computation Compute Jane Smith’s 2011 Federal income tax payable (or
refund due). If you use tax forms for your computations, you will need Forms
1040 and 4684 and Schedules A, C, and D. Suggested software: H&R BLOCK At
Home. Part 2—Tax Planning In 2012, Jane plans to continue her job with Legal
Services, Inc. Therefore, items a, d, and l will recur in 2012. Jane plans to
continue her typing services business (refer to item b) and expects gross
receipts of $26,000. She projects that all business expenses (refer to item h)
will increase by 10%, except for office rent, which, under the terms of her
lease, will remain the same as in 2011. Items e, f, g, j, and k will not recur
in 2012. Items c, i, m, n, p, and q will be approximately the same as in 2011.
Jane would like you to compute the minimum amount of estimated tax she will
have to pay for 2012 so that she will not have to pay any additional tax upon
filing her 2012 Federal income tax return. Write a letter to Jane that contains
your advice and prepare a memo for the tax files. 46. Mason Phillips, age 45, and his wife, Ruth, live at 230 Wood Lane, Salt
Lake City, UT 84101. Mason’s Social Security number is 111–11–1111. Ruth’s
Social Security number is 123–45–6789. Mason and Ruth are cash basis taxpayers
and had the following items for 2012: • Salary of $140,000. • Bad debt of $30,000 from uncollected rent. • Collection of unpaid rent from a prior year of $6,000. • Sale of § 1244 stock resulting in a loss of $105,000. The stock was acquired
eight months ago. • Rental income of $60,000. • Rental expenses of $33,000. • Casualty loss on rental property of $10,000. • Personal casualty loss (from one event) of $20,000. • Theft loss of $5,000 on a computer used 100% associated with their jobs. • Theft loss of $8,000 on a painting held for investment. • Other itemized deductions of $18,000. • Federal income tax withheld of $3,000. Compute Mason and Ruth’s 2012 Federal
income tax payable (or refund due). RESEARCH PROBLEMS Research Problem 1. During 2012, John was the chief executive officer and a
National Bank. This loan was secured by John’s personal residence. Although
Maze was listed as a co-borrower, John repaid the loan in full in 2012. On
Maze’s Form 1120 tax returns, no loans from shareholders were reported. Discuss
whether John is entitled to a bad debt deduction for the amount of the payment
on the loan. Partial list of research aids: U.S. v. Generes, 405 U.S. 93
(1972). Dale H. Sundby, T.C.Memo. 2003–204. James M. Arrigoni, 73 T.C. 792
(1980). Estate of Herbert M. Rapoport, T.C.Memo. 1982–584. Clifford L. Brody
and Barbara J. DeClerk, T.C. Summary Opinion, 2004–149. Research Problem 2. Mavis Marble was involved in an automobile accident in
which she hit a pedestrian with her car. The pedestrian later died as a result
of the accident. The pedestrian’s estate filed a claim against Mavis for
wrongful death. Mavis’s insurance company concluded that the proximate cause of
the accident rested with Mavis; therefore, it paid the policy limit of $200,000
to the pedestrian’s estate. To fully settle the claim by the estate, Mavis paid
the estate an additional $300,000 from her personal funds. Discuss whether
Mavis is entitled to a casualty loss deduction for the $300,000 she paid the
estate from her own funds. Research Problem 3. Scan several publications that are read by owners of small