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Illegal Payments. Indicate whether Glenda can deduct the
$5,000 payment in each of the following independent situations.
a. Glenda is a supplier of medical supplies. In order to
secure a large sales contract to the regional Veterans Affairs Hospital, Glenda
makes a gift of $5,000 co the hospital’s purchasing agent. The payment is
illegal under state law.
b. Assume the same facts as in Part a, except chat the
payment is made to the purchasing agent of a government -owned hospital in
Brazil.
c. Assume the same facts in Parr a, except that the payment
is made to the purchasing agent of a privately owned hospital in Idaho.

Bttsiness Investigation E.xpenditttres. During Januar y and
February of the current year, Big Bang LLC incurs $13,000 in travel,
feasibility studies, and legal expenses to investigate the feasibility of opening
a new entertainment gallery in one of the new suburban malls in town. Big Bang
already owns two other entertainment galleries in ocher malls in the area.
a. What is the proper tax treatment of these expenses if Big
Bang decides not to open the new gallery? b. What is the proper tax treatment
of these expenses if Big Bang decides to open the new gallery?

Bttsiness Investigation E.xpenditttres. Assume the same
facts as in Problem I:6-40, except that Big Bang LLC incurs $51,000 in
expenses, and it does not already own the ocher entertainment galleries and it
does not own anything similar.
a. What is the proper tax treatment of these expenses if Big
Bang does not open the new gallery?
b. What is the proper tax treatment of these expenses if Big
Bang decides co open the new gallery on May 1 of the current year and makes the
appropriate election under Sec. 195?

Timing of Expense Recognition . Solutions Corporation, a
computer vendor and consult – ing company, uses the accrual method of
accounting. Its tax year is the calendar year. The following are three of the
corporation’s transactions during the current year:
1.Solutions Corporation hired a contractor to remodel its
sales floor. The contractor completed the remodeling on November 30. On
December 15, Solutions received a $5,000 bill from the contractor. Solutions
immediately contacted the contractor to contest $1,000 of the total charges,
arguing that it exceeded the price that was agreed upon. Solutions made no
payment on the bill during its current tax year.
2. Solutions offers a 2-year warranty on all of its computer
systems. For sales of computers in the current year, it paid $11,500 to service
warranties during the current tax year, and it expects to pay $12,000 to
fulfill the remaining warranty obligations next year.
3. £very year, Solutions offers a series of six trade
seminars from November 1 through April 30. It receives all registration fees
from participants by October 1, before the seminars begin. As of December 31,
two of the six seminars are completed, and the next seminar is scheduled for
January 14-15. The expenses incurred in performing the seminars are routine
each year. On the first of each month from November through April, Solutions
pays the $625 monthly rent for the seminar location. On September 16, Solutions
signs a contract with the seminar teacher, a computers expert and excellent
public speaker. The contract requires Solutions to pay the teacher $900 after
each seminar, a total of $5,400. On October 3, Solutions signs a contract with
a local printing company, which will pro vide text materials for the seminars.
Solutions pays the printer $350 after each seminar’s materials are delivered
the day before the seminar.
Required:
a. How should Solutions Corpo ration treat these
transactions? What rules apply?
b. How would your answers change for each of the
transactions if Solutions Corpo ration were a cash-method taxpayer?

Prepaid Interest. During the current year, Richard and
Alisha, a married couple who use the cash method of accounting, purchased a
principal residence for $320,000. They paid $40,000 down and financed the
remaining $280,000 of the purchase price with a 30-year mortgage. At the
closing, they also paid $500 for an appraisa l, $500 for a title search, and
1.5 points representing additional interest over the term of the loan. At the
end of the year, Richard and Alisha received a statement from the mortgage
company indicating that $12,000 of their total monthly payments made during the
year represents interest and $1,000 is a reduction of the principal balance.
a. What is the total amount Richard and Alisha may deduct in
the current year arising from the purchase and ownership of their home?
b. What is the treatment of the ocher items chat are not
deductible?

Wash Sales. John Broward owns 1,500 shares of Silver Fox
Corporation common stock. John purchased the 1,500 shares on April 17, 2011,
for $21,000 . On December 8, 2018, John sells 750 shares for $5,000. On Januar
y 2, 2019, John buys 250 shares of Silver Fox Corporation common stock for
$1,750 and 50 shares of Silver Fox Corporation preferred stock for $1,000 . The
preferred stock is nonvoting, nonconvertible.
a. What is John ‘s realized and recognized loss on the
December 8 sale of stock?
b. What is his basis and the holding periods of the shares
purchased in 2011 and in 2018?

Wash Sales. Mr. Cougar owns 1,000 shares of Western
Corporation common stock, which it purchased on March 8, 2011, for $12,000 . On
October 3, 2019, Cougar purchases an additional 300 shares for $3,000. On
October 12, 2019, he sells the original 1,000 shares for $8,500. On November 1,
2019, he purchases an additional 500 shares for $4,000.
a. What is Mr. Cougar’s recognized gain or loss as a result
of the sale on October 12, 2019?
b. What are the basis and the holding period of the stock he
continues to hold?
c. How would your answers to Parts a and b change if the
stock Cougar purchases during 2019 is Western nonvoting, nonconvertible,
preferred stock instead of Western common stock?

Constructive Ownership. During the current year, Troy sells
land to Berry Corporation for $165,000. Troy purchased the land for investment
in 2002 for $170,000. Berry Corporation is owned as follows:
Troy and Jimmy are equal partners in a separate entity, TJ
Partnership.
a. What is Troy’s constructive ownership in Berry
Corporation?
b. What is the amount of loss Troy may recognize?
c. How would your answers to Parts a and b change if TJ
Partnership owned 25%, instead of Nicole?

Constructive Ownership . PIB Partnership is owned 20% by
Sara, 40 % by Steve, and 40% by Thann. Burnham, Inc. is owned 70% by PIB
Partnership, 10% by Ralph, 10% by Thann, and 10% by Sara. Ralph and Tham1 are
brothers. All other individuals are unre – lated. During the current year,
Ralph sold a piece of land to Burnham, Inc., for $90,000. Ralph originally
purchased the land as an investment a few years ago for $100,000.
a. How much of the loss may Ralph recognize?
b. Now assume all the same facts except that the sale
occurred benveen Thann and Burnham, Inc. How much of the loss may Thann
recognize?
c. Now assume the same facts as in b except that Burnham,
Inc., is owned 60% by Sara and 40% by Ralph. Thann sells the land to Burnham,
Inc. How much of the loss may Thann recognize?

Related Party Transactions. Sally is an attorney who
computes her taxable income using the cash method of accounting. Sage
Corporation, owned 40% by Sally’s brother, 40 % by her cousin, and 20% by her
grandmother, uses the accrual method of accounting. Sally is a calendar-year
taxpayer, whereas Sage Corporation’s fiscal year ends on January 31. During
2019, Sally does some consulting work for Sage Corporation for a fee of
$10,000. The work is completed on December 15 and Sage receives Sally’s invoice
on that date. For each of the following assumptions, answer the following
questions: During which tax year must Sally report the income? During which tax
year must Sage Corporation deduct the expense?
a. The payment to Sally is made on December 27, 2019.
b. The payment to Sally is made on January 12, 2020.
c. The payment to Sally is made on February 3, 2020.