...Solutions to Chapter 7 Problem Assignments Check Your Understanding 3. Realized vs. Recognized Gain Explain the difference between a realized gain and a recognized gain. Solution: A realized gain is the excess of the amount realized on a sale or exchange over the adjusted basis of the property sold or exchanged. The recognized gain is the amount of this realized gain that will be treated as income and subject to tax on the seller’s income tax return. 4. Asset Classification What type of assets are Section 1231 assets? What type of assets are capital assets? What type of assets are ordinary income assets? Give several examples of each type of asset. Solution: The most common Section 1231 assets are depreciable realty and personalty used in a trade or business and nondepreciable trade or business realty that have been held for more than one year. Long-term capital gain property held for the production of income that is involuntarily converted is also Section 1231 property. To qualify, all of these assets must have been held for more than one year. Section 1231 assets include machinery and equipment, office furniture and fixtures, rental real estate, factory buildings and land held for future expansion of a business. Capital assets include most investment properties and personal-use assets. They exclude inventory, real and depreciable property used in a trade or business, and accounts and notes receivable from the sale of inventory in the ordinary...
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...Tax Return Problem 1 (TRP 1) Corporate Tax Return Information The Snap-It-Open Corporation incorporated and began operations on January 15, 2002. Its address is 3701 Commerce Drive, Baltimore, MD 23239. Its employer identification number is 69-7414447. It elects to file its initial tax return for 2002 as a calendar-year corporation and uses the accrual method of accounting. It elects the LIFO method of inventory valuation. Jason Sprull (SSN 333-33-3333) and Martin Winsock (SSN 555-55-5555) formed the business. They each contributed $250,000 cash for 50 percent of the 100,000 shares of $1 par value stock issued and outstanding. The company was formed to assemble and market a unique, compact, snap-open umbrella and its business activity code is 339900. These umbrellas are sold to a variety of organizations as premiums. The company purchases the umbrella frames and several types of waterproof fabric for the umbrella material and covers from various manufacturers. It prints the organizations’ advertising logos or other designs on the umbrella material and covers and then assembles these on the umbrella frames for delivery to the customer. On January 16, the company began using two machines for printing and cutting the fabric for the umbrellas that they had purchased for $250,000 each and two used umbrella assembly machines purchased for $200,000 each. The company obtained a bank loan of $750,000 secured by the machines. Jason and Martin were required to personally...
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...To: Tax File Date: 10/30/12 Facts: Walter Hodges wants to begin a business involving real estate. In spring of 2010, Walter began marketing his business. In October, Walter paid $25,000 for training classes. In November 2010, he obtained a loan of $145,000. Also, in November he obtained an employer ID number from the IRS. In December 2010, Walter opened necessary banking accounts for his business. Walter was able to acquire his first property on December 30 2010. He listed the property and began renting it successfully in March of 2011. Walter prepared a schedule C and listed a business loss of $29,000, which includes the cost of the training classes, automobile expenses, meals and entertainment, computer and software expenses, and supplies. The IRS has disallowed the deduction of $ 29,000. Issue: Is Walter allowed to deduct the business loss of $29,000 in 2010? Conclusion: The $29,000 loss is not considered as business expense; therefore, no deduction is allowed. Analysis: The loss of $29,000 is not deductible, because Walter was not “engaged in the active conduct of trade or business” in 2010. Under 26 U.S.C.S. § 162, it generally allows deduction for all the ordinary and necessary expense incurred during the taxable year. However, the taxpayer in Woody v. Comm’r, T.C. Memo 2009-93, attempted to deduct his business expense incurred during the taxable year, which he was preparing for starting business. Court considered that “A taxpayer is not carrying on...
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...Income Tax Problems and Solution Illustration : House Property Mr. Ryan is an owner of a four-storied building at Mohakhali. Mr Ryan resides with his family in the 2nd floor and all other floors (in each floor there are two flats) are let out at a monthly rent of Tk. 9,000/- per flat. Expected rent of the house is Tk. 9,00,000/. The following expenses were incurred in the income year 2011-2012 for that house ; 1. Repair expenses Tk. 50,000; 2. City Corporation Tax Tk. 22,000; 3. Insurance premium Tk. 16,000; 4. Caretaker and Night guard salary Tk. 24,000; 5. Land revenue paid Tk. 2,000; 6. Interest paid to HBFC Tk. 60,000 on Principal amount of Tk 60,00,000/. 7. Alteration cost for ground floor Tk. 30,000; During the year one of the tenants in the ground floor leave the house without paying rent for one month and another one flat was vacant for one month. Compute income from house property for the income year ended 30th June 2012. Solution : Mr. Ryan Income year : 2011-2012 Assessment year : 2012-2013 Calculation of Total Income | |Tk. |Tk. | |Income from House property (Section-24): | | | | | | | |Actual rental value (9...
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...The purpose of this tax research problem is to solve the following scenario presented by Rupert, Pope, & Anderson: “Mark Hancock is a self-employed attorney who operates his law practice as an unincorporated sole proprietorship. In 2012, the IRS disallowed several business deductions he took in 2010 and 2011. In addition to paying the deficiency and assessed penalties, he also pays $18,000 in interest on the tax owed. Can he deduct that interest in the current year?” (p. 7-45). This is a highly controversial subject that has been contested many times over the years. “Prior to the Tax Reform Act of 1986, the tax court in several cases had deemed an income tax deficiency to be an ordinary and necessary business expense for purposes of determining a taxpayer's adjusted gross income, net operating loss carryover, and net operating carryback, so long as that deficiency was attributable to the ordinary operation of the taxpayer's business” (Rovner, 2015, para. 6). Therefore, businesses could deduct the interest they paid for IRS penalties from previous years as a business expense before 1986. The decision of whether or not a business could deduct interest incurred as a result of IRS imposed penalties was brought to the spotlight in the 1990’s. “On their income tax returns for 1992 and 1994, Nick and Helen Kikalos deducted as a business expense the interest they paid on tax deficiencies that had been assessed for prior years. The Internal Revenue Service disallowed the deduction...
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...In this tax research problem, we have a couple – Mr. and Mrs. Hattan, who have lived in their home for 20 years. They have purchased the home for $100,000 as joint tenants with right of survivorship. Mr. Hattan died in May of the current year when the house’s FMV was $800,000. Mrs. Hattan wants to sell the house. The purpose of this research is to determine the tax effect of selling the house this year for $825,000 or next year for $830,000. This research is based on Internal Revenue Code sections 121 and 1014. We will determine what the most favorable choice is for Mrs. Hattan, as far as the property is concerned. It will be in her best interest to choose the option which will give her higher after-tax earnings from the sale. Legal fees and sales commission will not be considered for this problem. Section 121 from the Internal Revenue Code explains the exclusions of gain from sale of principal residence. Based on the IRC § 121, Mrs. Hattan will be qualified for an exclusion of up to $500,000 as long as she sells the property no later than two years after the death of her spouse. This means that she can claim the exclusion no matter if she sells the house this or next year. Section 1041 from the Internal Revenue Code states the rules for calculating the basis of the property acquired by a decedent. To determine the extent to which the gain from the sale of the property is taxable, we need to determine the basis of the property. According to IRC § 1041, the basis of the property...
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...Mark Hancock, a self-employed attorney owns his own law practice as an unincorporated sole proprietorship. Hancock is having to pay $18,000 in interested on tax that he owes because in 2012 the IRS disallowed several business deductions that he used in 2010 and 2011. He is now having to pay the deficiency, assessed penalties, and $18,000 in interest on the tax he owed. Mark Hancock is wondering if he can deduct the interest he owes in the current year. Sec 162 states “Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 262, however, provides that no deduction is allowed for personal, living, or family expenses.” Sec. 163 states “There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness”. The case Kikalos v Comm., in 1997 Nick and Helen Kikalos underreported their income and they owed more than tax then they had paid. They petitioned with the court to deduct their interest payments from the previous years that was filed incorrectly. They owed more than $300,000 from penalties. The court denied their request because it is a personal expense not a business expense because underpayment does not constitute as a business expense. Even though Mark Hancock’s interest of $18,000 is in relation to his business, it is considered non-deductible personal interest because it was an underpayment that was owed due to filing his...
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...act on the problem, but a professor from Lynchburg College, Virginia called Dr. Thomas R. Nicely discovered the problem around June 1994 he was the one that noticed it in two sets of numbers and did some tests on 486 and Pentium-based computers, Dr. Nicely was certain that the error is caused by the Pentium Processor. Dr. Nicely then contacts Intel Technical Support on October 24, 1994 Intel technical support then duplicates the problem and confirms it, but it was not reported before. Later the Intel person he had contacted admitted that Intel had been aware of the problem since May 1994, when the flaw was discovered by Tom Kraljevic. When Intel first knew about the problem they decided not to tell anyone, thinking that the flaw would hardly affect anyone and that it was just a commonplace for a complex microprocessor to have a few bugs. Then, when it was forced to acknowledge the problem, Intel pushed it away again and dismissed the chances of it causing problems for the average user. In my opinion, Intel was acting very unprofessional when they knew about the problems and did nothing to fix the problem. I think that Intel was just trying to save money with them thinking “maybe if we don’t fix it and just let it hurt a couple of people, the consumer will have to try to fix it themselves and keep buying parts from us”. But instead it was the other way around the people found out about the problem with the help of Dr. Nicely and him telling the people about the problem so they could...
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...CHAPTER 2 TAX ADMINISTRATION Problem 2 – 1 TRUE OR FALSE 1. True 2. False – not the BIR, but the Department of Finance 3. False – the BIR is responsible to collect national taxes only. 4. False – The review shall be made by the Court of Justice. 5. True 6. True 7. False – The Secretary of Justice and the Courts also interprets the provisions of the Tax Code. 8. False – the fact that taxes are self-assessing the BIR assessment is necessary to ensure the reliability of the ITR. 9. False – the BIR or the Government is not allowed by law to appeal to the CTA. (Acting Collector of customs vs. Court of Appeals, Oct. 31, 1957) 10. True 11. False – Appeal to the SC shall be made within 15 days from the receipt of the decision of the CTA. 12. False – the CIR can conduct a jeopardy assessment when there are no accounting records. 13. True 14. False – the taxpayer needs to waive first his right on the secrecy of bank deposits before BIR can inquire into his bank deposits. 15. True Problem 2 – 2 TRUE OR FALSE 1. False – there must be a Letter of Authority. 2. False – the supporting documents must be submitted to the BIR within 60 days from the date a protest is filed. 3. True 4. True 5. False – destraint as a tax collection method is applicable only to personal property. 6. False – criminal violations already filed in court are not subject to compromise. 7. True 8. False, collection must be within 5 years 9. True 10...
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...x Chapter 1 Summary of End-of-Chapter Problem Revisions |2012 Edition |2011 Edition | | |Problem Number |Problem Number |2012 Edition Modifications | |1 |1 | | |2 |2 | | |3 |3 | | |4 |4 | | |5 |5 | | |6 |6 | | |7 |7 | | |8 |8 | | |9 |9 | ...
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...sufficient to defray its budgetary requirements. 7. True 8. True 9. False. Basically, taxes imposed are based on the ability of the taxpayer to pay. 10. False. It is the primary obligation of the state to protect all the constituents regardless of whether they pay or not their tax liabilities. True or False 1-2 1. True 2. True 3. True 4. True 5. True 6. False. The President cannot delegate the power of taxation, since taxation is not vested in the President. Taxation is vested in the legislative body. 7. False. Taxation cannot be separated from the state. The moment a state exists, taxation also exists. 8. False. The making of tax law is undertaken ahead of the collection of taxes. 9. False. Levying refers to the making of tax laws. 10. False. Only the legislative body, the Congress, can grant tax exemptions. True or False 1-3 1. False. It is the legislative branch of the government that is vested with the power of taxation. 2. False. The power of taxation is restricted by inherent and constitutional limitations. 3. False. Tax assessment is the valuation and determination of the amount of tax. The passage of taxation is called levying or imposition of tax. 4. False. The three inherent powers can be and have been delegated by the Legislative to the Executive Branch. 5. True 6. True 7. False....
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...amount or percentage of property tax revenue that comes from owners of Habitat for Humanity houses in a particular municipality. Discuss complexity of this activity. In order to properly asses the percentage of property tax revenue that comes from owners of Habitat for Humanity houses you must look at them as if they came from a “normal” house within that area. To calculate the property tax percentage, the city/county responsible for receiving the payments will take the assessed value of the property and multiply it by the mill rate. Afterwards they will divide it by 1,000 (Mikesell, 2010). The mileage rate (also known as the mill rate) is the amount of tax per thousand dollars of the property value. Based on the municipality of Northern Virginia, property owners in this area are assessed at a high rate. This in turn causes the owners to pay a higher property tax than homeowners in other parts of the state regardless of the financial stability or ability to pay the higher cost. In this activity the high property tax is not necessarily the problem, but the owners of homes bought through Habitat for Humanity, and their lack of financial resources to pay the property tax. In this area (Alexandria, VA), the local government does not distinguish between income of the individuals within a household, but the value of house. So Kesha James, who averages around $28,00 a year is barley able to make the monthly payments on her house whose property tax continues to rise. Two arguments...
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...ECONOMICS FOR MANAGERS T3.2013 Assignment Due date: Nature: Assignment Overview: Monday, January 13, 2014. Individual assignment. This assignment is partly based on the attached article published in The Australian on April 26, 2012 entitled “Poor bear brunt of ‘nanny taxes’” by Adam Creighton and a paper written by Sam Oldfield on August 7, 2013, “Cigarette Tax Hike Defies Economic Logic.” Please read the articles carefully before attempting the questions. You will be required to demonstrate your understanding of economic concepts taught in the unit and relate them to the cases in the articles. This assignment is designed to encourage you to think about the applications of economic concepts learned in this unit to real world scenarios. Based on the attached Rubric, your assignment will be graded on your use of appropriate economic theory and concepts, clarity of exposition and overall quality of your answers. Your answers should follow “Guide to assignment writing and referencing”, available at this link: http://www.deakin.edu.au/currentstudents/assets/resources/study-support/study-skills/assignref.pdf. Answer all questions. Limit the total word count of your assignment to less than 3,000 words. Depth is encouraged over breadth: that is, it is more important that you demonstrate you understand a concept fully, rather than talk about 3 related concepts only cursorily. You are encouraged to use diagrams/examples in your answers when appropriate. 40 marks. Allocation as indicated...
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...“TAX EVASION & AVOIDANCE - A REAL PROBLEM FOR BANGLADESH” INTRODUCTION: Tax evasion and avoidance are both phenomena that are probably as old as taxation itself. Wherever and whenever authorities decide to levy taxes, individuals and firms try to avoid paying them. Though this problem has always been present, it becomes more pressing in the course of globalization as this process extends the range of opportunities to dodge taxation while simultaneously reducing the risk of being detected. Developing and emerging countries like Bangladesh are particularly vulnerable to tax evasion and avoidance activities of individual taxpayers and corporations. While tax revenues in OECD-countries are almost 35 per cent of GDP ,in case of Bangladesh it is only around 10%.This can be considered one of the primary reasons for large differences in the ability to mobilize own resources between developed and developing countries. Tax evasion and tax avoidance is a great problem in our country. In Bangladesh there are many individual taxpayers and corporations who are evading or avoiding tax. As a result government’s developments activities are hampered. So, we should know about the tax evasion and tax avoidance and thereby its preventives measures. For development of a country government needs to create infrastructure and invest in various sectors. For this activities government needs founds and tax revenue is the main source for the purpose. But due to tax evasion and tax avoidance government’s...
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