26. LO.4, 5 A question on a state income tax return asks the taxpayer if he or she made any out-of-state Internet or mail-order catalog purchases during the year. The question requires a yes or no answer, and if the taxpayer answers yes, the amount of such purchases is to be listed.

a. Does such an inquiry have any relevance to the state income tax? If not, why is it being asked?

b. Your client, Harriet, wants to leave the question unanswered. As the preparer of her return, how do your respond?

36. LO.5 Assess the probability of an audit in each of the following independent situations:

a. As a result of a jury trial, Linda was awarded $3.5 million because of job discrimination. The award included $3 million for punitive damages.

b. Mel operates a combination check-cashing service and pawnshop.

c. Jayden, a self-employed trial lawyer, routinely files a Schedule C (Form 1040) that, due to large dedcti8ons, reports little (if any) profit from his practice.

d. Bernard is the head server at an upscale restaurant and recently paid $1.8 million for a residence in an exclusive gated community.

42. LO.5, 6 On a Federal income tax return filed five years ago, any 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 were the person who prepared the return in question? Explain.

c. Suppose Andy asks you to prepare his current year’s return. Would you do so? Explain.

50. LO.7, 8 Discuss the probable justification for each of the following aspects of the tax law:

a. A tax credit is allowed for amounts spent to furnish care for minor children while the parents work.

b. Deductions for interest on home mortgage and property taxes on personal residence.

c. The income splitting benefits of filing a joint return.

d. Gambling losses in excess of gambling gains.

e. Net operating losses of a current year can be carried back to profitable years.

f. A taxpayer who sells property on an installment basis can recognize gain on the sale over the period the payments are received.

g. The exclusion from federal tax of certain interest income from state and local bonds.

h. Prepaid income is taxed to the recipient in the year received and not in the year it is earned.

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 Janet’s improvements?

b. Has the law in part (a) always been the rule?

c. What is the justification, in any, for the current rule?

Chapter 3

2. LO.1, 5, 8, 9 During the year, Addison is involved in the following transactions. What are the possible Federal income tax effects of these transactions>

a. Lost money gambling on a trip to a casino.

b. Helped pay for her neighbor Howie’s dental bills. Howie is a good friend who is unemployed.

c. Received from the IRS a tax refund due to Addison’s overpayment of last year’s Federal income taxes.

d. Paid a traffic ticket received while double parking to attend a business meeting.

e. Contributed to the mayor’s reelection campaign. The mayor had promised Addison to rezone some of her land.

f. Borrowed money forma bank to make a down payment on an automobile.

g. Sold a houseboat and a camper on eBay. Both were personal use items, and the gain from one offset the loss from the other.

h. Her dependent Aunt Katherine died on June 3 of the year.

i. Paid for Katherine’s funeral expenses.

j. Paid premiums on her dependent son’s life insurance policy.

10. LO.2, 3, 5 David is age 78, is a widower, and is being claimed as a dependent by this son. How does this situation affect the follow?

a. David’s own individual filing requirement.

b. David’s personal exemption.

c. The standard deduction allowed to David.

d. The availability of any additional standard deduction.

21. LO.4, 5 Comment on the availability of head-of-household filing status in each of the following independent situations.

a. Al lives alone but maintains the household of his parents. In July, the parents use their savings to purchase a Lexus automobile for $62,000.

b. Bree maintains a home in which she and her father lives. The father then enters a nursing facility for treatment for a mental illness.

c. Chloe a single parent maintains a home in which she and Dean, Chloe’s unmarried son, live. Dean, age 18, earns $5,000 from a part-time job.

d. Assume the same facts as in (c), except that Dean is age 19, not 18.

e. Chee is married and maintains a household in which he and his dependent stepson live.

f. Evie lives alone but maintains the household where her dependent daughter Zoe lives.

g. Frank maintains a household that includes Georgia, an unrelated friend who qualifies as his dependent.

29. LO.1, 8 Compute Emily’s 2014 taxable income on the basis of the following information. Her filing status is single.

Salary $85,000

Interest income from bonds issued by Xerox 1,100

Alimony payments received 6,000

Contribution to traditional IRA 5,500

Gift from parents 25,000

Capital gain from stock investment, held for 7 months 2,000

Amount lost in football office pool (sports gambling is illegal where Emily lives) 500

Number of potential dependents (two cousins, who live in Canada) ?

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