1. Describe the trial courts that hear tax cases. What are the advantages or disadvantages of litigating a tax issue in each of these courts?
2. Part 1:Bill gifted land worth $20,000 (adjusted basis of $10,000) to his father on January 1, 2012. On June 1, 2012 Bill’s father died and left the land to Bill. The land was worth $22,000 on June 1, 2012. On August 1, 2012 Bill sold the land for $24,000. Discuss the tax treatment for the sale of the land.
Part 2:In 2012, Father gave his son, John, 100 shares of IBM stock, which at that time were worth $30,000. John’s father paid a gift tax on the transfer of $5,000.
Assuming that John’s father had purchased the stock in 2008 for $40,000, what are the tax consequences to John if he sells the stock for the following amounts?
a. $25,000
b. $37,000
c. $45,000
3.Given the facts below, indicate whether the taxpayer may use the cash method for 2012 in the following situations.
- Sweatshirt Corporation, a publicly traded corporation: annual gross receipts for 2009 and previous years were $1 million annually; gross receipts for 2010 were $3 million; and for 2011, $8 million.
- Dewey, Cheatham, and Howe, a law firm, operates as a partnership. Annual gross receipts for the past five years have exceeded $50 million.
- McSwane, McMillan, and McClain, Inc., an architectural firm, operates as a regular C corporation. Annual gross receipts for the past two years have exceeded $7 million. McSwane, McMillan, and McClain own all of the stock and perform services for the firm.
- Buttons and Bows, Inc., an S corporation.
- Plantation Office Park, a publicly traded limited partnership: annual gross receipts have never exceeded $2 million. The partnership is a tax shelter.
4.Part 1: On April 13, 2002, Jane and John purchased 20 acres of real estate for $180,000, taking in joint tenancy with rights of survivorship. John died on November 1, 2012 when the fair market value of the property was $300,000.
- What is Jane’s basis in the property after the death of John?
- What is Jane’s gain if she sells the property for $325,000 on December 2, 2012?
Part 2: David inherited two acres of commercial real estate from his grandmother, who had a basis in the property of $52,000. The property had a fair market value of $75,000 on the date of his grandmother’s death. For estate tax purposes, the estate was valued as of the date of death.
a.How much gain or loss (and what character…long or short-term) will be realized by David if he sells the property for $77,000?
b.What would be your answer if the sale price were $66,000?
5. John and Sara, who file a joint tax return, bought a vacation property in 1985 for $100,000. During their years of ownership, they have used it solely as a vacation home. (In some years they rented it on a short-term basis, but never for a period long enough to require them to recognize the rental income or to require depreciation deductions.) On January 1, 2011, they move into the home and begin to use it as their principal residence. During their period of ownership, John and Sara have added $125,000 in improvements. The community where it is located has become a major resort, so they have enjoyed significant appreciation, as well.
In 2020, they sell the home for $1 million.
What is the amount of their taxable gain? Is any part of the gain excludible? Wouldyou recommend any strategy for minimizing their tax liability?
6. Charlene, whose tax filing status is single, bought a vacation property costing $400,000 on March 1, 2009. On March 1, 2012, she converts the property to her principal residence. On March 1, 2014, she sells the property for $700,000, realizing a gain of $300,000. Thus, she has owned the property for 5 years and used it as a principal residence for 2 years. Based on the above fact pattern, what are the tax implications of this sale? What would you advise to minimize the tax?
7. IndividualTax Computation. Richard Hartman, age 29, single with no dependents,received a salary of $32,270 in 2012. During the year, he received $1,300 interest income from a savings account and a $1,500 gift from his grandmother. At the advice ofhis father, Richard sold stock he had held as an investment for five years, for a $3,000 gain. He also sustained a loss of $1,000 from the sale of land held as an investment and owned for four months. Richard had itemized deductions of $8,250. For 2012 compute the following for Richard:
a. Gross income
b. Adjusted gross income
c. Taxable income
d. Income tax before credits and prepayments (use the appropriate 2012 tax rate schedule)
e. Income tax savings that would result if Richard made a deductible $5,000contribution to a qualified Individual Retirement Account
8.Determine the effect on AGI for the husband (H) and wife (W) in each of the following continuous situations with regard to both child support and alimony. H and W are divorced and do not live in a community property state. They have three children.
- H paysW$400 per month as alimony and support of the three children.
- W discovers her attorney did not word the agreement correctly. H and W sign astatement that the original agreement is retroactively amended to hold that H pays$100 per month as alimony to W and $300 per month as support of the threechildren. All other language remains unchanged. What is the effect of this changeon future and past payments?
- Assume the original agreement contained the wording in (b) above. In the first year,H makes only 10 of the 12 payments for a total of $4,000. In the second year, Hpays the $800 balance due for the prior year and makes all 12 payments of $400each on time.
- Upon their divorce, W was awarded an automobile. H is required to pay the loanoutstanding on the car, $94 per month for 20 months. During the year, H pays$94 for 12 months. This includes $130 interest and $998 loan principal.
- H owns the home in which W and the children live free of charge. H’smortgage payments are $360 per month for the next 20 years. During the year,his expenses on the home are $2,900 interest, $800 property taxes, $340insurance, $280 loan principal, and $218 repairs. The rental value of the home is$425 per month.
- In addition to the monthly alimony and support payments above, H is to pay W$30,000 over a period of 11 years. H pays $2,500 of this amount the first yearand $3,600 the second year.
- H inherits considerable property. As a result, he voluntarily increases the alimony to$150 and child support to $450 per month. He makes 12 payments of $600 eachduring the year.
9. Alternative Minimum Tax—Computation. B is single and reports the following items of income and deductions for the current year (before limitations):
Salary ...... $ 50,000
Net short-term capital gain on sale
of investment property ...... 200,000
Medical expenses ...... 17,500
Casualty loss ...... 4,500
State and local income taxes ...... 15,000
Real estate taxes...... 20,000
Charitable contributions (all cash) ...... 15,000
Interest on home mortgage ...... 12,000
Investment interest expense……………………………………………………...10,000
The only additional transaction during the year was the exercise of an incentive stockoption of her employer’s stock at an option price of $12,000 when the stock was worth $100,000.
Compute B’s regular tax liability and AMT, if applicable for 2012.
10. Indy Smith, single, is an anthropologyprofessor at State University. The tax records that he brought to you for preparation ofhis return revealed the following items.
Income
Salary from State University...... …...... $67,850
Part-time consulting ...... ……………...... 5,000
Dividend income...... ……………...... 1,250
Reimbursement of travel to Denver by State University...... ………………... 200
Expenses
Interest on personal residence ...... ……...... $ 9,800
Travel expenses related to consulting ...... ……...... 1,000
Tax return preparation fee. ………...... 500
Safe deposit box to hold bonds. . . . ………...... 50
Travel and lodging to present academic paper in Denver related to
his teaching position...... …………………450
In addition, Indy claims a dependency exemption for his father for whom he provides
60 percent support (including 60 percent of housing costs).
Ignore self-employment taxes.
Compute Indy’s final tax liability for calendar year 2012.