10. LO.

4 The commissioners for Colby County are actively negotiating with Eagle Industries regarding the location of a new manufacturing facility in the county. As Eagle is considering several other sites, a generous tax holiday may be needed to influence its choice. The local school district is opposed to any generous tax holiday. a. In terms of a generous tax holiday, what might the proposal entail? b. Why should the school district be opposed? a. The proposal might entail a suspension of any taxes for Eagle or maybe all construction and building taxes in the city for a set amount of time. b. The school district should be opposed because it would result in less funding for education. LO.4 Franklin County is in dire financial straits and is considering a number of sources for additional revenue. Evaluate the following possibilities in terms of anticipated taxpayer compliance: a. A property tax on business inventories. b. A tax on intangibles (i.e., stocks and bonds) held as investments. c. A property tax on boats used for recreational purposes. a. Property tax on business inventories are the most difficult to hide so they would be the easiest to track and collect on. Taxpayer compliance and enforcement are also measurably better. b. These taxes generally can be difficult to push because the state may not have a way to verify ownership. c. Value declines rapidly so a license fee is usually better. 16. LO.4 Eileen, a resident of Wyoming, goes to Montana to purchase her new automobile. She does this because Wyoming imposes a sales tax while Montana does not. Has Eileen successfully avoided the Wyoming sales tax? Explain. No, use tax has stepped in so once she returns to Wyoming she will have higher payments which will ultimately make up for the taxes she didnt pay in Montana. She will probably also have to pay the tax when she registers the vehicle. 20. LO.4 Jake (age 72) and Jessica (age 28) were recently married. To avoid any transfer taxes, Jake has promised to leave Jessica all of his wealth when he dies. Is Jake under some misconception about the operation of the Federal gift and estate taxes? Explain.
1

This would be considered an estate tax and a federal gift tax. Depending on how much Jake has already used of his federal gift allowance this could still cost him a lot. He is only allowed an annual exclusion of $13,000 to Jessica depending on the state he lives in because they are married they could be completely exempt from any of these taxations. 25. LO.4 Mike Barr was an outstanding football player in college and expects to be drafted by the NFL in the first few rounds. Mike has let it be known that he would prefer to sign with a club located in Florida, Texas, or Washington. Mike sees no reason why he should have to pay state income tax on his players salary! Is Mike under any delusions? Explain. He is not really under any delusions. He will save toms of money by living in one of these states. The only thing he will have to do is pay his jock tax when he plays at an away game. 38. LO.5 Aldo has just been audited by the IRS. He does not agree with the agents findings but feels he has only two choices: pay the proposed deficiency or resort to the courts. Do you agree with Aldos conclusion? Why or why not? No, Aldo has the option to return the correspondence to the IRS. They can then research if they were right or if Aldo is correct. If this does not work he also has the right to negotiate a settlement with a higher level of the IRS. 42. LO.5, 6 On a Federal income tax return filed five years ago, Andy inadvertently omitted a large amount of gross income. a. Andy seeks your advice as to whether the IRS is barred from assessing additional income tax in the event he is audited. What is your advice? b. Would your advice differ if you are the person who prepared the return in question? Explain. c. Suppose Andy asks you to prepare his current years return. Would you do so? Explain. a. The IRS is barred as long as the amount omitted was less than 25% of the gross income reported on the return and the return is not viewed as fraudulent. I would advise to correct the mistake. b. My advice would remain the same to Andy but if I was the preparer and he did not correct it I would withdraw from the engagement.

c. There may be a carryover effect that could change the outcome of current taxes so I would not prepare his current years return unless this issue was already straightened out. 44. LO.5 For tax year 2008, the IRS assesses a deficiency against Rhett for $500,000. Disregarding the interest component, what is Rhetts penalty if the deficiency is attributable to: a. Negligence? b. Fraud? a. 20% = $100,000 b. Civil fraud 75% = $375,000 or criminal fraud could result in fines and a prison sentence. 48. LO.7 Some tax rules can be justified on multiple grounds (e.g., economic, social, etc.). In this connection, comment on the possible justification for the rules governing the following a. Energy conservation and pollution control. b. Pension plans. c. Education. d. Home ownership a. Can help improve the environment and save our natural resources. b. Allows people to save money that is not taxed until they use it and a cheaper rates the longer they have it. c. Helps encourage higher education. d. Encourages home ownership rather than renting. 53. LO.8 Edward leases real estate to Janet for a period of 20 years. Janet makes capital improvements to the property. When the lease expires, Edward reclaims the property, including the improvements made by Janet. a. Under current law, at what point does Edward recognize income as a result of Janets improvements? b. Has the law in part (a) always been the rule?

c. What is the justification, if any, for the current rule? a. The landlord does not recognize any income either when the improvements are made (unless made in lieu of rent) or when the lease terminates (Hoffman, 2012). b. No, this was per an amendment made to the tax law. c. It was not consistent with the wherewithal to pay concept before the amendment. 19. LO.4 Alberto, who is single, is a U.S. citizen and resident. He provides almost all of the support of his parents and two aunts, who are citizens and residents of Mexico. Albertos parents and aunts are seriously considering moving to and becoming residents of El Salvador. Would such a move have any impact on Alberto? Why or why not? Yes, Alberto would no longer be able to claim them if they do not live in the U.S., Canada, or Mexico. 29. LO.1, 8 Compute the taxable income for 2011 for Curtis on the basis of the following information. His filing status is single. Salary Interest income from bonds issued by City of San Diego Alimony payments made Contribution to traditional IRA Gift from grandparents Capital loss from stock investment $80,000 3,000 3,600 5,000 26,000 3,000

Amount lost in football office pool (sports gambling is illegal where Curtis lives) Number of potential dependents (two nephews, who live in another state) Age ? 39 1,500

Taxable income is $80,000. $13,100 needs to be excluded due to the interest, alimony, contributions, and football pool.

31. LO.2 Determine the amount of the standard deduction allowed for 2011 in the following independent situations. In each case, assume the taxpayer is claimed as another persons dependent. a. Edward, age 18, has income as follows: $600 interest from a certificate of deposit and $5,900 from repairing cars. b. Sarah, age 18, has income as follows: $400 cash dividends from a stock investment and $4,600 from handling a paper route. c. Colin, age 16, has income as follows: $900 interest on a bank savings account and $800 for painting a neighbors fence. d. Kara, age 15, has income as follows: $300 cash dividends from a stock investment and $600 from grooming pets. e. Kay, age 67 and a widow, has income as follows: $1,200 from a bank savings account and $3,100 from baby-sitting. a. 5,900 + 300 = 6,200 but he is limited to 5,800 standard b. 4,600 + 400 = 5,000 + 300 = 5,300 c. 800 + 300 = 1,100 d. 600 + 300 = 900 but she gets 950 as it is the standard e. 3,100 + 300 = 3,400 + 1,450 = 4,850 34. LO.3, 4 Determine the number of personal and dependency exemptions in each of the following independent situations. a. Reginald, a U.S. citizen and resident, contributes 100% of the support of his parents who are citizens of Canada and live there. b. Pablo, a U.S. citizen and resident, contributes 100% of the support of his parents who are citizens of Mexico. Pablos father is a resident of Mexico, and his mother is a legal resident of the United States. c. Marlena, a U.S. citizen and resident, contributes 100% of the support of her parents who are also U.S. citizens but are residents of Germany. d. Elena is a U.S. citizen and a resident of Italy. Her household includes Mario, a fouryear-old adopted son who is a citizen of Spain.

a. b. c. d.

1 personal exemption for self and 2 dependency exemptions for the parents 1 personal exemption for self and 2 dependency exemptions for the parents 1 personal exemption for self and 0 dependency exemptions 0 personal exemption for self and 0 dependency exemptions

35. LO.3, 4 Determine how many personal and dependency exemptions are available in each of the following independent situations. Specify whether any such exemptions would come under the qualifying child or the qualifying relative category. a. Andy maintains a household that includes a cousin (age 12), a niece (age 18), and a son (age 26). All are full-time students. Andy furnishes all of their support. b. Minerva provides all of the support of a family friends son (age 20) who lives with her. She also furnishes most of the support of her stepmother who does not live with her. c. Raul, a U.S. citizen, lives in Costa Rica. Rauls household includes an adopted daughter, Helena, who is age 9 and a citizen of Costa Rica. Raul provides all of Helenas support. d. Karen maintains a household that includes her ex-husband, her mother-in-law, and her brother-in-law (age 23 and not a full-time student). Karen provides more than half of all of their support. Karen is single and was divorced in the current year a. a. 1 personal exemption for self and 2 dependency exemptions for cousin and niece a. son is over age 24 b. cousin is qualifying relative c. niece is qualifying child b. 1 personal exemption for self and 1 dependency exemption for step mother a. friends son is over 19 and not in school b. step mother is a qualifying relative c. 0 personal exemptions for self and 0 dependency exemptions d. 2 personal exemptions for self and ex and 1 dependency exemption for mother in law a. ex husband is a personal exemption b. brother in law not in school c. mother in law is qualifying relative d. still married in previous year 37. LO.3, 4 Determine the number of personal and dependency exemptions for 2011 in each of the following independent situations.

a. Marcus (age 68) and Alice (age 65 and blind) file a joint return. They furnish more than 50% of the support of a cousin, Ida, who lives with them. Ida (age 20) is a full-time student and earns $5,000 during the year tutoring special needs children. b. Penny (age 45) is single and maintains a household in which she and her nephew, Clint, live. Clint (age 18) earns $4,900 from doing yard work, but receives more than 50% of his support from Penny. c. Trent (age 38) is single and lives alone. He provides more than 50% of the support of his parents (ages 69 and 70) who are in a nursing home. d. Jack and Carol were divorced in 2007, and Carol has custody of their three children (ages 5, 7, and 9). Jack does not furnish more than half of their support, and the divorce decree is silent as to the dependency exemptions. Carol signs a Form 8332. a. 2 personal exemptions for self and spouse and 1 dependency exemption b. 1 personal exemption for self and 1 dependency exemption c. 1 personal exemption for self and 2 dependency exemptions d. Carol has 1 personal exemption for self and 0 dependency exemptions Jack has 1 personal exemption for self and 3 dependency exemptions 38. LO.4, 9 Isaiah and Inez (ages 88 and 89) live in an assisted care facility and for years 2010 and 2011 received their support from the following sources. Percentage of Support Social Security benefits Daughter Nephew Cousin Sister Family friend (not related) 17% 21 30 11 10 11

a. Who is eligible to claim the Federal income tax dependency exemptions under a multiple support agreement? b. Must Isaiah and Inez be claimed by the same person(s) for both 2010 and 2011? c. Who, if anyone, can claim an itemized deduction for paying Isaiahs and Inezs medical expenses?

a. the daughter, nephew, and the cousin b. No, but the signed paperwork would need to be done for the other person claiming them in the different year. c. The daughter should claim for medical expenses as this usually falls on the dependents of the tax payer. 41. LO.3, 4, 5 Nadia died in 2010 and is survived by her husband, Jerold (age 44), her married son, Travis (age 22), and her daughter-in-law, Macy (age 18). Jerold is the executor of his wifes estate. He maintains the household where he, Travis, and Macy live, and Jerold furnished all of their support. During 2010 and 2011, Travis is a full-time student, while Macy earns $7,000 each year from a part-time job. Travis and Macy do not file jointly during either year. What is Jerolds Federal income tax filing status for 2010 and 2011 if all parties reside in: a. Idaho (a community property state)? b. Kansas (a common law state)? It would be the surviving spouse status in either state. 45. LO.5 Which of the following individuals are required to file a 2011 Federal income tax return? Should any of these individuals file a return even if filing is not required? Why? a. Patricia, age 19, is a self-employed single individual with gross income of $4,500 from an unincorporated business. Business expenses amounted to $4,300. b. Mike is single and is 67 years old. His gross income from wages was $10,800. c. Ronald is a dependent child under age 19 who received $5,100 in wages from a parttime job. d. Sam is married and files a joint return with his spouse, Lana. Both Sam and Lana are 67 years old. Their combined gross income was $21,400. a. needs to file self-employed with over 400 gross income b. no need to file he made less than 10,950 c. no need to file less than 5,800 for standard deduction d. needs to file over 21,300 gross income

50. LO.1, 3, 6, 7 Terri, age 16, is claimed as a dependent on her parents 2011 return. During the year, Terri earned $5,000 in interest income and $3,000 from part-time jobs. a. What is Terris taxable income? b. How much of Terris income is taxed at her own tax rate? At her parents rate? c. Can the parental election for the kiddie tax be made? Why or why not? a. 3,000 + 300 = 3,300 5,000 + 3,000 3,300 = 4,700 is taxable income b. 4,700 (5,000 1,900) = 1,600 at Terris rate 5,000 1,900 = 3,100 at parents rate c. No, because of her earned income.

Hoffman, W. H., Maloney, D., Raabe, W., & Young, J. (2012). South-western federal taxation 2012: Chapters 1-14: 2012 custom edition (35th ed.). Mason, OH: Cengage Learning.