Unit Two Assignments
Chapter Two Answers

Q.38

Answer: The IRS can assess additional taxes, interest, and penalties at any time although it must prove fraud. The deliberate omission of $40,000 of gross income will generally constitute fraud (tax evasion) and in those circumstances there is no statute of limitations.

If the IRS cannot prove fraud on Kevin’s part, then the statute of limitations would expire April 15, 2016.

Q.42 Answer:

The corporation will be able to pay interest on the debt s well as deduct the interest from its gross income. However if the corporation pays dividends on the stock, the dividends are not deductible by the corporation. Whether the payment is interest or dividends, the shareholder recognizes income for the amount received; however, dividend income is taxed at a lower rate. If the corporation retires a shareholder’s stock, it is possible that the amount received could also be treated as a dividend unless specific redemption requirements are met. Another consideration is that the corporation can repay the debt with no tax consequences at all to the shareholders.

Q.59

Answer:

According to section 1.183-2(c), Income Tax Regulations it is recognized that a taxpayer can be engaged in an activity for profit even when there is only the rare possibility of profit.

Q.69

Answer: The AICPA Tax Executive Committee believed that it is appropriate to issue the standards that would become part of the Professional Code of Conduct. The Statements on Standards for Tax Services (SSTS) are issued by the AICPA widely reflect the SRTPS.

Chapter Three Answers
Q.22
Answer:

a) How much income should Realty Corp. report in year 1 from the above-mentioned transactions for tax and financial accounting? In year 1 for tax purposes Realty Corp. will recognize $6,000 ($3,000 x 2 months’