Category: Writing

Richard Penn lives in Harrisburg, Pennsylvania. Richard is
the president of an architectural firm. Richard has become known throughout the
community for excellent work and honesty in his business dealings. Richard
believes his reputation is an integral part of the success of the firm. Oil was
found recently in the area around Harrisburg and some geologists believed the
reserves were large. A few well-respected businesspeople organized Oil Company
to develop a few wells. Although some oil was being extracted, the oil
corporation lacked capital to develop the oil fields to their expected
potential. After reading the geologists’ report, Richard felt that Oil Company
was a good investment; therefore, he acquired 25% of the company. A short rime
after Richard ‘s acquisition, the price of foreign oil decreased sharply. The
drop in foreign oil prices caused Oil Company to be unprofitable due to its high
production costs. Three months later Oil Company filed bankruptc y. The
bankruptcy proceedings were reported in the local newspaper. Many of Oil
Company’s creditors were real estate developers chat engaged Richard ‘s
architectural firm

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?

John and Kathy Brown have just been audited and the IRS
agent disallowed the business loss they claimed in 2016. The agent asserted
that the activity was a hobby, nor a business. John and Kathy live in
Rochester, New York, near Lake Ontario. Kathy is a CPA, and John was formerly
employed by an insurance firm. John ‘s firm moved in 2011 and John resolved not
to move ro the firm’s new location. Instead of seeking ocher employment, John
felt he could supplement his income by using his fishing expertise. He had been
an avid fisherman for 15 years, and he owned a large Chris-Craft fly-bridge
that he chartered to paying parties. In 2012, Kathy and John developed a
business plan, established a bank account for the charter activities, developed
a bookkeeping system, and acquired insurance to cover the boat and the
passengers. John fulfilled all the requirements to receive a U.S. Coast Guard
operating license, a New York sport trolling license, and a seller’s permit.
These licenses and permits were necessary to legally operate a charter boat.
The first year of their activity was 2012. John advertised in local papers and
regional sport fishing magazines. He usually had three or four half-day paying
parties each week. John spent at least one day per week maintaining and
repairing his boat. Kathy usually accompanied John on charters three or four
times each year. John’s charter activity was unprofitable the first two years.
In 2014, John and Kathy restructured the activity to improve profitability. The
restructuring included increasing advertising, participating in outdoor shows,
and negotiating small contracts with local businesses. After the restructuring,
the activity provided a small profit in 2014 and 2015. In 2016, John started
working with another insurance company in the area on a fulltime basis. Even
though he returned ro the insurance business, John normally took two paying
parties and one nonpaying, promotional party each week throughout the fishing
season. John ‘s costs unexpectedly increased and he lost $8,000 in the activity
during 2016. John and Kathy deducted the entire loss on Schedule C of their
2016 tax return. Required: Prepare a memo to the Browns recommending what
position they should take and why. Show the logic used in arriving at your
recommendation.

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?

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

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?

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.)

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.

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?

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.