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Related Party Transactions. During the current year, CVI
Corporation sells a tract of land for $75,000. The sale is made to Sandi, CVI
Corporation’s sole shareholder. CVI Corporation originally purchased the land
five years earlier for $98,000.
a. What is the amount of gain or loss that CVI Corporation
will recognize on the sale during the current year?
b. Assume that in the following year, Sandi sells the land
for $85,000. What is the amount of gain or loss Sandi will recognize? What are
the tax consequences to CVI Corporation upon the subsequent sale by Sandi?
c. Assume that in the following year, Sandi sells the land
for $70,000. What is the amount of gain or loss Sandi will recognize?
d. Assume that in the following year, Sandi sells the land
for $105,000. What is the amount of gain or loss Sandi will recognize?

Hobby Loss Presumptive Rule. Emily is an interior decorator
who does consu lting work for several furniture stores. Additionally, she has
been designing and creating rubber stamps for the past several years. She sells
the stamps to local stationary and novelty shops. Emily has reported the
following net income or loss from the rubber stamp activity:
Emily is audited for the year 2019, and the agent disallows
the $800 loss. Can Emily make an election for 2019 ro keep the year open in
anticipation of meeting the presump – tive rule for the year? Why or why nor?

Hobby Losses. Chuck, a dentist, raises prize rabbits for
breeding and showing purposes. Assume that the activity is determined to be a
hobby. During 2019, the activity generates the following items of income and
expense:
a. What is the total amount of income and deductions Chuck
shou ld report for 2019 with respect to the rabbit raising activities?
b. Identify which expenses may be deducted and indicate
whether the y are deductions for or from AGL c. By what amount is the cost
basis of the rabbit hutches to be reduced for the year?

Rental of Vacation Home. During 2019, Kim incurs the
following expenses with respect to her beachfronr condominium in Hawaii:
During 2019, Kim used the condominium 20 days for vacation.
She rented it out for a total of 60 days, generating a total gross income of
$9,100.
a. What are the total amounts of deductions for and from AGI
that Kim may take during 2019 with respect to the condominium using the IRS
allocation method?
b. What is the effect on the basis of the condominium?

Bryce, a bank official, is 40 years old, unmarried and has
no dependents. During 2019 he engages in the following activities and
transactions:
a. Being an avid fisherman, Bryce develops an expertise in
tying flies. Ar rimes during the year, he is asked to conduct fly-eying
demonstrations, for which he is paid a small fee. He also periodically sells
flies char he makes. Income generated from these activities during the year is
$2,500. The expenses for the year associated with Bryce’s fly-eying activity
include $125 personal property taxes on a small trailer that he uses
exclusively for chis purpose, $2,900 in supplies, $270 in repairs on the
trailer, and $200 in gasoline for traveling to the demonstrations.
b. Bryce sells a small building lot to his brother for
$40,000. Bryce purchased the lot four years ago for $47,000, hoping to make a
profit.
c. Bryce enters into the following stock transactions: (None
of the stock qualifies as small business stock.)
d. Bryce’s salary for the year is $100,000. In addition to
the items above, he makes $5,000 charitable contributions and pays $4,800 of
state income tax. Determine the following:
1. Bryce’s taxable income for 2019.
2. Bryce’s basis in the Silver stock he continues to own.

Using the following facts, determine Jaron ‘s 2019 taxable
income.
1. In November 2017, when his wife died, Jaron left the CPA
firm he was working for and starred his own practice so he could have more time
to spend ,vith his four children (ages 14, 16, 19, and 24 years old). The three
younger children live at home with their father. Danny, Jaron’s 19-year-old
son, graduated from high school a year ago and is currently working at a local
golf course. Danny earned $17,000 in the current year. Jaron’s oldest daughter,
Laura, is married and lives in town with her husband, Chad. Laura graduated
from college two years ago and now works for a local advertising agency.
2. Jaron rents a small office downtown where he meets with
clients and conduces business. He keeps all his client files and business
records in chis office. In the evening, he uses a converted bedroom in his home
as his office. The following expenses are allocated to his home office (by
square feet):
3.Jaron owns a condominium downtown. He rented it out 270
days during the year. He also allowed Laura and her husband to stay in the home
rent-free for 24 days while they were looking for a home. Fortunatel y, the
condominium was not rented during the rime they needed it. The following items
of annual income and expense relate to the
4.On April 6, Jaron sold a parcel of land he had held for
investment to a real estate development firm for $75,000. He purchased the land
three years earlier from his brother for $70,000. His brother had originally
purchased the land for $74,000.
5. On May 1,Jaron purchased 1,000 shares in Genomics Ltd.
for $10 per share. In December he was forced to sell all 1,000 shares at $8 per
share ro avoid a conflict of interest.

Danielle Anderson, your client and a cash method taxpayer,
works full-time at a music store located in a mall. She assists the manager in
buying decisions, serves customers on the sales floor, and plays music to draw
in customers. On the weekends, she plays in various orchestras, working as an
independent contractor. She does not work under a business name, maintain an
office, or maintain a separate bank account for her performing activities. She
always pays her bills as soon as possible, well before the bill due date. In
prior years, she has taken every allowable deduction related to the performing
activities. Prior year returns show the following on her Schedule C:
Danielle has come to you on December 12, 2019. She
understands that the IRS can deny losses generated by her performing business
if it determines the business is actually a hobb y. Because of the uncertainty
of the entertainment industry, she will likely continue to generate profits in
some years and losses in others. Still, she continues the activities with the
intent to earn a profit. Danielle routinely sends bills to orchestra clients at
the end of the month for work she performed during the month. Most of her
clients, including the Springville Orchestra, send payment within ten days of
when they receive her bill.
The following is a summary of the financial position of the
business as of December 12, 2019:
What will you recommend to your client? What issues must you
address? What actions will you take to ensure the most favorable tax outcome
possible? What advice, if any, will you give your client for the future?

Dave Stevens, age 34, is a self-employed physical therapist.
His wife Sarah, age 31, teaches English as a Second Language at a local
language school. Dave’s Social Security number is 111-11-1111. Sarah’s Social
Security nwnber is 222 -22-2222. Sarah and Dave have three children- Andrew,
age 8; Isaac, age 6; and Mira, age 3. The children’s Social Security munhers
are, respectively, 333-33 -3333, 444 -44-4444, and 555 -55-5555. They live at
12637 Pheasant Run, West Bend, Oregon 74658. They paid $8,900 in qualified
residence interest and $2,400 in property taxes on their home. They had cash
charitable contributions of $14,000. They also paid $180 co a CPA for preparing
their federal and state income tax returns for the prior year, $100 of which
was for the preparation of Dave’s Schedule C. Sarah and Dave earned interest on
CDs of $3,200. Sarah’s salary for the year is $32,000, from which $9,600 in
federal income tax and $1,400 in state income tax were withheld. Dave’s office
is located at Suire 402, 942 Woodview Drive, Portland, Oregon 74624, and his
employer ID number is 11-1111111. Dave has been practicing for four years, and
he uses the cash method of accounting. During 2018, Dave recorded the following
items of income:
The following expenses were recorded for the office:
Dave pays $50 annually for use of a safety deposit box co
score certain confidential documents related co his business. In addition co
his medical practice, Dave spends 15 hours every week managing his real estate
investments. To make sure he is aware of all current investment strategies and
best practices, he subscribes co the following journals:
Dave also prepaid $33,000 in estimated federal income taxes.
Prepare Dave and Sarah’s 2018 tax return (Form 1040, Schedules 1, A, B, C, and
SE). Disregard any tax credits for which they may be eligible.

Lyle and Kaye James are married, have two minor children,
Jessica, age 8 and Jerron, age 4, and are filing a joint tax return in the
current year. They are both employed. Lyle and Kaye, ages 38 and 37,
respectively, have combined salaries of $240,000, from which $48,000 of federal
income tax and $10,000 of scare income tax are withheld. Lyle and Kaye own cwo
homes. Their primary residence is located at 11620 N. Mount Ave., New Haven,
Connecticut 22222, and their vacation home is on the beach in Fore Lauderdale,
Florida. They often rent their vacation home co supplement their income. The
following items are related co the James’ ownership of the two homes:
The James family used their Fore Lauderdale home 20 days
during the year. They rented the vacation home 60 days during the year. Lyle
and Kaye jointly purchase stock in various corporations and make the following
transactions in the current year. (None of the stock qualifies as small
business stock.)

Scarlet furniture Corporation, an accrual-method taxpayer,
retails custom office furniture. On January 1 of the current year, Peter Marlin
and John Tanner incorporated Scarlet furniture Corporation. Peter transferred
$350,000 cash for 70% of Scarlet’s outstanding stock, and John transferred
$150,000 cash for 30% of the outstanding stock. Scarlet generated the following
financial statements at the end of its first year of operations: Scarlet
Corporation’s Balance Sheet
Scarlet Corporation’s Income Statement
•Depreciation expense for tax purposes was $120,441 because
Scarlet made a Sec. 179 election to expense $105,000 of the cost of the
equipment purchased this year. ••Miscellaneous expense relates 10 a $600
penalty fee as a result of a breached customer contract and a $10,000 fine
assessed by OSHA for hazardous conditions in its storage facility. •••wages and
salary expense includes Peter’s salary of $40,000 and the accrual of $15,000 of
bonuses payable to Peter which Scarlet actually paid on February 10 of the
following yeac ••••The acruaJ expenditure paid for warranty repairs during the
year is $2,000 .
Scarier does nor make any sales or purchases on account.
Scarlet’s employer identification number is 12-3456789. Its address is 789
Presidential Way, Seattle, Washington 54789. Peter Marlin’s Social Security
number is 555-66-8888. During the current year, the Corporation made federal
estimated income tax payments of $50,000. Prepare a Form 1120 for the initial
return for Scarier