South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by Hoffman Smith Solutions Manual Test Bank


 
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by Hoffman Smith Solutions Manual Test Bank -- price  $35


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Contents:

* Test Bank
* Complete Solutions Manual
* Solutions to Research Problems
* Solution Transparency Masters
* Practice Set Solutions
* Instructor's Guide
* Solutions to Appendix E

Contents of Appendix E
Problem 1 – Karl F. and Jeanne S. Wheat – Individual Income Tax Return
Problem 2 – Robert (Bob) S. and Sally D. Grove – Individual Income Tax Return
Problem 3 – Pet Kingdom – Form 1120 Corporate Tax Return
Problem 4 – By the Numbers – Form 1120 Corporate Tax Return
Problem 5 – Rock the Ages – Form 1065 tax return
Problem 6 – Chocolat, Inc – Form 1120S
Problem 7 – Daniel and Lisa Ward – Form 709 Tax Returns
Problem 8 – Pam Butler – Form 706 Tax Return
Problem 9 – Green – Form 1041 Tax Return



DISCUSSION QUESTIONS OF CHAPTER  7

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 unreimbursed employee business expenses can create an NOL for an individual taxpayer.

28. LO.7 Discuss whether deductions for AGI can be treated as nonbusiness deductions in computing an individual’s NOL.

29. LO.7 Discuss whether itemized deductions can create an NOL.

30. LO.7 Discuss the effect of an NOL carryback on a charitable contribution.

31. LO.7 Thomas believes that he has an NOL for the current year and wants to carry it back to a previous year and receive a tax refund. In determining his NOL, Thomas offset his business income by alimony payments he made to his ex-wife, contributions he made to his traditional Individual Retirement Account (IRA), and moving expenses he incurred. His reason for using these items in the NOL computation is that each item is a deduction for AGI. Identify the relevant tax issues for Thomas.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.

38. 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 income last year. Their taxable income for the current year, excluding the loss 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.

39. 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.

40. 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.

41. 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.

42. 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.

43. 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.

44. 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.

45. 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?

46. 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?

47. LO.7 Sam, age 45, is single. For 2012, he has the following items:

Business income $70,000

Business expenses 65,000

Alimony paid 12,000

Interest income 3,000

Itemized deductions 4,000

a. Determine Sam’s taxable income for 2012.

b. Determine Sam’s NOL for 2012.

48. LO.7 Mary, a single taxpayer with two dependent children, has the following items of income and expense during 2012:

Gross receipts from business $144,000

Business expenses 180,000

Alimony received 22,000

Interest income 3,000

Itemized deductions (no casualty or theft) 24,000

a. Determine Mary’s taxable income for 2012.

b. Determine Mary’s NOL for 2012.

49. LO.7 Gus, who is married and files a joint return, owns a grocery store. In 2012, his gross sales were $276,000, and operating expenses were $320,000. Other items on his 2012 return were as follows:

Nonbusiness capital gains (short term) $20,000

Nonbusiness capital losses (long term) 9,000

Itemized deductions (no casualty or theft) 18,000

Ordinary nonbusiness income 8,000

Salary from part-time job 10,000

During 2010, Gus had no taxable income. In 2011, Gus had taxable income of $21,700 computed as follows:

Net business income $ 60,000

Interest income 2,000

Adjusted gross income $ 62,000

Less: Itemized deductions

Charitable contributions of $40,000, limited to 50% of AGI $31,000

Medical expenses of $6,550, limited to the amount in excess of 7.5% of AGI ($6,550 − $4,650) 1,900

Total itemized deductions (32,900)

Exemptions (2 × $3,700) (7,400)

Taxable income $ 21,700

a. What is Gus’s 2012 NOL?

b. Determine Gus’s recomputed taxable income for 2011.

c. Determine the amount of Gus’s 2012 NOL to be carried forward to 2013.

50. LO.7 During 2012, Rick and his wife, Sara, had the following items of income and expense to report:

Gross receipts from farming business $400,000

Farming expenses 525,000

Interest income from bank savings accounts 8,000

Sara’s salary 50,000

Long-term capital gain on stock held as an investment 4,000

Itemized deductions (no casualty or theft) 15,000

a. Assuming that Rick and Sara file a joint return, what is their taxable income for 2012?

b. What is the amount of Rick and Sara’s farming loss for 2012?

c. What is the amount of Rick and Sara’s NOL for 2012?

d. To what years can Rick and Sara’s NOL be carried?

51. LO.7 Assume that in addition to the information in Problem 50, Rick and Sara had no taxable income for 2007, 2008, 2009, and 2010 and $4,300 of taxable income for 2011 computed as follows:

Salary $ 25,000

Capital loss (1,000)

Adjusted gross income $ 24,000

Less: Itemized deductions

Charitable contributions of $20,000, limited to 50% of AGI $12,000

Medical expenses of $2,100, limited to the amount in excess of 7.5% of AGI ($2,100 − $1,800) 300

Total itemized deductions (12,300)

Exemptions (2 × $3,700) (7,400)

Taxable income $ 4,300

a. Determine Rick and Sara’s recomputed taxable income for 2011.

b. Determine the amount of Rick and Sara’s 2012 NOL to be carried forward to 2013.

52. LO.7 During 2012, Ron and his wife, Sue, had the following items of income and expense to report:

Farming income $300,000

Farming expenses 350,000

Interest income 6,000

Medical expenses (after 7.5%-of-AGI reduction) 12,000

Casualty loss (after $100 reduction and 10%-of-AGI reduction) 20,000

a. Determine Ron and Sue’s taxable income for 2012.

b. Determine Ron and Sue’s NOL for 2012.

c. Determine Ron and Sue’s farming loss for 2012.

d. To what years can Ron and Sue’s NOL be carried?

53. LO.7 Robert and Susan Reid had an NOL of $30,000 in 2012. They had no taxable income for 2010 and $14,850 of taxable income for 2011 computed as follows: Salary $ 50,000 Capital loss (4,000) Adjusted gross income $ 46,000

Less: Itemized deductions

Charitable contributions of $24,000, limited to

50% of AGI $23,000

Medical expenses of $4,200, limited to the amount in excess of 7.5% of AGI

($4,200 − $3,450) 750

Total itemized deductions (23,750)

Exemptions (2 × $3,700) (7,400)

Taxable income $ 14,850

Write a letter to Robert and Susan informing them of the amount of the remaining NOL to be carried forward if the loss is applied against the 2011 taxable income. Also prepare a memo for the tax files. Their address is 201 Jerdone Avenue, Conway, SC 29526.

54. LO.7 Pete and Polly are married and file a joint return. They had the following income and deductions for 2012:

Salary $50,000

Interest from savings account 5,000

Itemized deductions (no casualty or theft) 8,000

2011 NOL carried to 2012 60,000

a. What is Pete and Polly’s taxable income for 2012?

b. What is Pete and Polly’s NOL for 2012?

c. What is Pete and Polly’s NOL to be carried to 2013?

55. LO.1, 2, 7 Soong, single and age 32, had the following items for the tax year 2012:

• Salary of $30,000.

• Interest income from U.S. government bonds of $2,000.

• Dividends from a foreign corporation of $500.

• Sale of small business § 1244 stock on October 20, 2012, for $20,000. The stock had been acquired two years earlier for $65,000.

• Business bad debt of $4,000.

• Nonbusiness bad debt of $5,000.

• Sale of small business § 1244 stock on November 12, 2012, for $4,000. The stock had been acquired on June 5, 2012, for $800.

• Sale of preferred stock on December 4, 2012, for $40,000. The stock was acquired four years ago for $18,000.

• Total itemized deductions of $25,000 (no casualty or theft).

a. Determine Soong’s NOL for 2012.

b. Assuming that Soong had taxable income for each of the last five years, determine the carryback year to which the 2012 NOL should be applied.

56. 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.

57. LO.1, 4 Assume that in addition to the information in Problem 56, 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.

58. LO.1, 4, 7 Assume that in addition to the information in Problems 56 and 57, Nell had the following items in 2012:

Personal casualty loss on an asset held for five years $60,000

Interest expense on home mortgage 15,000

Determine Nell’s taxable income and NOL for 2012.

59. LO.1, 2, 3, 4, 7 Jed, age 55, is married with no children. During 2012, Jed had the following income and expense items:

a. Three years ago, Jed loaned a friend $10,000 to help him purchase a new car. In June of the current year, Jed learned that his friend had been declared bankrupt and had left the country. There is no possibility that Jed will ever collect any of the $10,000.

b. In April of last year, Jed purchased some stock for $5,000. In March of the current year, the company was declared bankrupt, and Jed was notified that his shares of stock were worthless.

c. Several years ago, Jed purchased some § 1244 stock for $120,000. This year, he sold the stock for $30,000.

d. In July of this year, Jed sold some land that he had held for two years for $60,000. He had originally paid $42,000 for the land.

e. Jed received $40,000 of interest income from State of Minnesota bonds.

f. In September, Jed’s home was damaged by an earthquake. Jed’s basis in his home was $430,000. The value of the home immediately before the quake was $610,000. After the quake, the home was worth $540,000. Because earthquake damage was an exclusion on Jed’s homeowner’s insurance policy, he received no insurance recovery.

g. Jed received a salary of $80,000.

h. Jed paid home mortgage interest of $14,000.

If Jed files a joint return for 2012, determine his NOL for the year. C U M U L A T I V E P R O B L E M S

60. Jane Smith, age 40, is single and has no dependents. She is employed as a legal secretary by Legal Services, Inc. She owns and operates Typing Services located near the campus of Florida Atlantic University at 1986 Campus Drive. Jane is a material participant in the business. She is a cash basis taxpayer. 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 Loan).

j. $15,000 fair market value of silverware stolen from her home by a burglar on October 12, 2011. Jane had paid $14,000 for the silverware on July 1, 2002. She was reimbursed $1,500 by her insurance company.

k. Jane had loaned $2,100 to a friend, Joan Jensen, on June 3, 2008. Joan declared bankruptcy on August 14, 2011, and was unable to repay the loan. Assume that the loan is a bona fide debt.

l. Legal Services, Inc., withheld Federal income tax of $18,000 and FICA tax of $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.

61. 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). R E S E A R C H P R O B L E M S

Research Problem 1. During 2012, John was the chief executive officer and a shareholder of Maze, Inc. He owned 60% of the outstanding stock of Maze. In 2009, John and Maze, as co-borrowers, obtained a $100,000 loan from United 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. Arrigoni v. Comm., 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. Henry Hansen is a real estate developer. He was successful for many years. Three years ago, however, the real estate market crashed, and Henry reported losses for the two following tax years. The IRS disputed these losses and assessed tax deficiencies of $300,000 and $200,000 for the two years in question. In March of the current year, Henry offered to resolve all issues relating to those two years by paying the IRS $250,000, or $125,000 for each year. In April of the current year, the Commissioner accepted Henry’s offer without discussion or negotiation. Henry now finds that he has an NOL for last year. If he carries the NOL back to the two years for which he reached a settlement with the IRS, the stipulated tax deficiency will be eliminated. Discuss whether Henry will be allowed to carry his NOL back to the two prior years for which he reached a settlement.

Research Problem 3. Jeb Simmons operated an illegal gambling business out of his home. While executing a search warrant, the local sheriff seized gambling paraphernalia and $200,000 in cash. Subsequently, Jeb voluntarily consented to forfeit to the state the cash that had been seized in connection with the execution of the search warrant. Write a letter to Jeb advising him as to whether he can claim a loss under § 165 for the seized cash. Also prepare a memo for the tax files. Jeb’s address is 100 Honey Lane, Macon, GA 31208.

Research Problem 4. 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 5. In June of the current year, Bob attended a party at a friend’s house. Because of the amount of alcohol Bob consumed at the party, he asked a friend to drive him home. Several hours after arriving home, Bob decided to drive to his parents’ home. On the way there, he failed to negotiate a turn, and his car slid off the road and rolled. The car was extensively damaged from the rollover, but Bob was not severely injured. At the time of the accident, Bob’s blood-alcohol level was slightly over the state legal limit. Note: Solutions to Research Problems can be prepared by using the Checkpoint® Student Edition online research product, which is available to accompany this text. It is also possible to prepare solutions to the Research Problems by using tax research materials found in a standard tax library.

Hence, he was cited and arrested for driving under the influence of alcohol (DUI). Bob’s automobile insurance carrier denied his loss claim in accordance with the terms of his policy because of his DUI citation and arrest. As a result of the accident, Bob’s car suffered $35,000 of damages. Discuss whether Bob is entitled to a casualty loss deduction on his current year’s tax return.

Research Problem 6. Find a newspaper article that discusses tax planning for casualty losses when a disaster area designation is made. Does the article convey the pertinent tax rules correctly? Then list all of the locations identified by the President as Federal disaster areas in the last two years.

Research Problem 7. Scan several publications that are read by owners of small businesses. Some of the articles in these publications address tax-related issues such as how to structure a new business. Do these articles do an adequate job of conveying the benefits of issuing § 1244 small business stock? Prepare a short memo explaining the use of § 1244 stock and post it to a newsgroup that is frequented by inventors, engineers, and others involved in startup corporations.