Question & Answer

] Marco, Jaclyn, and Carrie formed Daxing Partnership (a calendar-year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership and has an outside basis in their partnership interest of $104,000. On January 1 of the current year, Marco sells his partnership interest to Ryan for a cash payment of $137,000. The partnership has the following assets and no liabilities as of the sale date: Tax Basis Fair Market Value Cash $ 18,000 $ 18,000 Accounts receivable -0- 12,000 Inventory 69,000 81,000 Equipment 180,000 225,000 Stock investment 45,000 75,000    Totals $ 312,000 $ 411,000 The equipment was purchased for $240,000, and the partnership has taken $60,000 of depreciation. The stock was purchased seven years ago. a. What are the hot assets [§751(a)] for this sale? b. What is Marco’s gain or loss on the sale of his partnership interest? c. What is the character of Marco’s gain or loss? d. What are Ryan’s inside and outside bases in the partnership on the date of the sale?

Explain the use of call provisions on bonds. How can a call provision affect the price of a bond? (LO2)

Do all shareholders receive the same tax treatment in a complete liquidation of a corporation? Explain.

Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 $ 160,000 Purchases (gross) 640,000 Freight-in 30,000 Sales revenue 1,000,000 Sales returns 70,000 Purchase discounts 12,000 Instructions (a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales. (b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

Compare and contrast the IRS method and the Tax Court method for allocating expenses between personal use and rental use for vacation homes. Include the Tax Court’s justification for departing from the IRS method in your answer.

What is the difference between open and closed facts?  How is this distinction important in conducting tax research?

Compare and contrast the tax and financial accounting treatment of goodwill. Are taxpayers allowed to deduct amounts associated with self-created goodwill?

Compare the entity-level tax consequences for C corporations, S corporations, and business entities taxed as partnerships for both nonliquidating and liquidating distributions of noncash property. Do the tax rules tend to favor one entity type more than the others? Explain.

What are the requirements for a taxpayer to make a deductible contribution to a traditional IRA? Why do the tax laws impose these restrictions?

Diamond Mountain was originally thought to be one of the few places in North America to contain diamonds, so Diamond Mountain Inc. (DM) purchased the land for $1,000,000. Later, DM discovered that the only diamonds on the mountain had been planted there and the land was worthless for mining. DM engineers discovered a new survey technology and discovered a silver deposit estimated at 5,000 pounds on Diamond Mountain. DM immediately bought new drilling equipment and began mining the silver.  In years 1-3 following the opening of the mine, DM had net (gross) income of $200,000 ($700,000), $400,000 ($1,100,000), and $600,000 ($1,450,000), respectively. Mining amounts for each year were as follows: 750 pounds (year 1), 1,450 pounds (year 2), and 1,800 pounds (year 3). At the end of year 2, engineers used the new technology (which had been improving over time) and estimated there were still an estimated 6,000 pounds of silver deposits. DM also began a research and experimentation project with the hopes of gaining a patent for its new survey technology. Diamond Mountain Inc. chose to capitalize research and experimentation expenditures and to amortize the costs over 60 months or until it obtained a patent on its technology. In March of year 1, DM spent $95,000 on research and experimentation. DM spent another $75,000 in February of year 2 for research and experimentation. DM realizes benefits from the research and experimentation expenditures when the costs are incurred. In September of year 2, DM paid $20,000 of legal fees and was granted the patent in October of year 2 (the entire process of obtaining a patent was unusually fast). The patent's life is 20 years.

This year BPS billed clients for $86,700 and collected $61,000 in cash for golf lessons completed during the year. In addition, BPS collected an additional $14,500 in cash for lessons that will commence after year-end. Binu hopes to collect about half of the outstanding billings next year, but the rest will likely be written off.  Besides providing private golf lessons, BPS also contracted with the country club to staff the driving range. This year, BPS billed the country club $27,200 for the service. The club paid $17,000 of the amount but disputed the remainder. By year-end, the dispute had not been resolved, and while Binu believes BPS is entitled to the money, the remaining $10,200 has not been paid. BPS has accrued the following expenses (explained below): Advertising (in the clubhouse)$ 13,150 Pro golf teachers’ membership fees860 Supplies (golf tees, balls, etc.)4,720 Club rental6,800 Malpractice insurance2,400 Accounting fees8,820 The expenditures were all paid for this calendar year, with several exceptions. First, Binu initiated his golfer’s malpractice insurance on June 1 of this year. The $2,400 insurance bill covers the last six months of this calendar year and the first six months of next year. At year-end, Binu had only paid $600, but has assured the insurance agent the remaining $1,800 will be paid early next year. Second, the amount paid for club rental ($100 per week) represents rental charges for the last 6 weeks of the previous year, the 52 weeks in this calendar year, and the first 10 weeks of next year. Binu has also mentioned that BPS only pays for supplies that are used at the club. Although BPS could buy the supplies for half the cost elsewhere, Binu likes to “throw some business” to the golf pro shop because it is operated by his brother. Complete a draft of Parts I and II on the front page of a Schedule C for BPS.

When a C corporation reports a loss for the year, can shareholders use the loss to offset their personal income? Why or why not?

Describe the origination process for corporations that are about to issue new stock. (LO1)

What is a §481 adjustment, and what is the purpose of this adjustment?

Jasper and CrewellaDahvill were married in year 0.They filed joint tax returns in years 1 and 2.In year 3, their relationship was strained and Jasper insisted on filing a separate tax return.In year 4, the couple divorced.Both Jasper and Crewella filed single tax returns in year 4.In year 5, the IRS audited the couple’s joint year 2 tax return and each spouse’s separate year 3 tax returns.The IRS determined that the year 2 joint return and Crewella’s separate year 3 tax return understated Crewella’s self-employment income, causing the joint return year 2 tax liability to be understated by $4,000 and Crewella’s year 3 separate return tax liability to be understated by $6,000.The IRS also assessed penalties and interest on both of these tax returns.Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper. a.What amount of tax can the IRS require Jasper to pay for the Dahvill’s year 2 joint return?Explain.

Boodeesh is contemplating running a consulting business out of her home. She has a large garage apartment in her backyard that would be perfect for her business. Given that the garage apartment is separate from her house (about 30 feet behind her house), would the office be considered part of her home for purposes of the home office rules?

Agustina, Bobby, and Claudia are equal owners in Lafter, an S corporation that was a C corporation several years ago. While Agustina and Bobby actively participate in running the company, Claudia has a separate day job and is a passive owner. Consider the following information for 2024:    • As of January 1, 2024, Agustina, Bobby, and Claudia each have a basis in Lafter stock of $15,000 and a debt basis of $0.  On January 1, the stock basis is also the at-risk amount for each shareholder. • Bobby and Claudia also are passive owners in Aggressive LLC, which allocated business income of $14,000 to each of them in 2024. Neither has any other source of passive income (besides Lafter, for Claudia).  • On March 31, 2024, Agustina lends $5,000 of her own money to Lafter. • Anticipating the need for basis to deduct a loss, on April 4, 2024, Bobby takes out a $10,000 loan to make a $10,000 capital contribution to Lafter. Bobby uses his automobile ($12,000 fair market value) as the sole collateral for his loan (nonrecourse).  • Lafter has an accumulated adjustments account balance of $45,000 as of January 1, 2024. • Lafter has C corporation earnings and profits of $15,000 as of January 1, 2024. • During 2024, Lafter reports a business loss of $75,000, computed as follows: Sales revenue $90,000 Cost of goods sold (85,000) Salary to Agustina (40,000) Salary to Bobby (40,000) Business (loss)($75,000) • Lafter also reported $12,000 of tax-exempt interest income.     a. What amount of Lafter’s 2024 business loss of $75,000 are Agustina, Bobby, and Claudia allowed to deduct on their individual tax returns?  What are each owner’s stock basis and debt basis (if applicable) and each owner’s at-risk amount with respect to the investment in Lafter at the end of 2024?

Diderot Drilling Company has leased property on which oil has been discovered. Wells on this property produced 18,000 barrels of oil during the past year that sold at an average sales price of $55 per barrel. Total oil resources of this property are estimated to be 250,000 barrels. The lease provided for an outright payment of $500,000 to the lessor (owner) before drilling could be commenced and an annual rental of $31,500. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Diderot (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is $30,000. Instructions From the provisions of the lease agreement, you are to compute the cost per barrel for the past year, exclusive of operating costs, to Diderot Drilling Company.

Susmita purchased a car this year and uses it for both business and personal purposes. Susmita drove the car 11,000 miles on business trips and 9,000 miles for personal transportation. Describe how Susmita will determine the amount of deductible expenses associated with the auto.

If a person meets the qualifying relative tests for a taxpayer, is that person automatically considered to be a dependent of the taxpayer? Explain.

} Devon owns 1,000 shares of stock worth $10,000. This year he received 200 additional shares of this stock from a stock dividend. His 1,200 shares are now worth $12,500. Must Devon include the dividend paid in stock in income?

What is meant by the term aspect ratio for a metallic particle?

Distinguish between FASB Accounting Standards Updatesand FASB Statements of Financial Accounting Concepts.

Jack operates a large home repair business as a sole proprietorship. Besides providing services, Jack also sells home repair supplies to homeowners. However, these sales constitute a relatively small portion of Jack’s income. Describe the conditions under which Jack would need to account for sales and purchases of plumbing supplies using the accrual method. (Hint: Read §471(c) and Reg. §1.471-1.)

The grinding wheel in a centerless grinding operation has a diameter = 200 mm, and the regulating wheel diameter = 125 mm. The grinding wheel rotates at 3000 rev/min and the regulating wheel rotates at 200 rev/min. The inclination angle of the regulating wheel = 2.5°. Determine the throughfeed rate of cylindrical workparts that are 25.0 mm in diameter and 175 mm long.