Posted: October 20th, 2022

tax problems with solutions

1. LO.1 Ivan invests in land, and Grace invests in taxable bonds. The land appreciates by $8,000 each year, and the bonds earn interest of $8,000 each year. After holding the land and bonds for five years, Ivan and Grace sell them. There is a $40,000 realized gain on the sale of the land and no realized gain or loss on the sale of the bonds. Are the tax consequences to Ivan and Grace the same for each of the five years? Explain.2. LO.1 Carol and Dave each purchase 100 shares of stock of Burgundy, Inc., a publicly owned corporation, in July for $10,000 each. Carol sells her stock on December 31 for $8,000. Because Burgundy’s stock is listed on a national exchange, Dave is able to ascertain that his shares are worth $8,000 on December 31. Does the tax law treat the decline in value of the stock differently for Carol and Dave? Explain.3. LO.1 If a taxpayer sells property for cash, the amount realized consists of the net proceeds from the sale. For each of the following, indicate the effect on the amount realized:a. The property is sold on credit.b. A mortgage on the property is assumed by the buyer.c. A mortgage on the property is assumed by the seller.d. The buyer acquires the property subject to a mortgage of the seller.e. Stock that has a basis to the purchaser of $6,000 and a fair market value of $10,000 is received by the seller as part of the consideration.4. LO.1 Sally owns real property for which the annual property taxes are $8,000. She sells the property to Shelley on February 28, 2013, for $550,000. Shelley pays the real property taxes for the entire year on October 1.a. How much of the property taxes can be deducted by Sally and how much by Shelley?b. What effect does the property tax apportionment have on Shelley’s adjusted basis in the property?c. What effect does the apportionment have on Sally’s amount realized from the sale?d. How would the answers in (b) and (c) differ if the taxes were paid by Sally?5. LO.1 Taylor is negotiating to buy some land. Under the first option, Taylor will giveElla $150,000 and assume her mortgage on the land for $100,000. Under the second option, Taylor will give Ella $250,000, and she will immediately pay off the mortgage.Taylor wants his basis for the land to be as high as possible. Given this objective, which option should Taylor select?6. LO.1 Melba purchases land from Adrian. Melba gives Adrian $225,000 in cash and agrees to pay Adrian an additional $400,000 one year later plus interest at 5%.a. What is Melba’s adjusted basis for the land at the acquisition date?b. What is Melba’s adjusted basis for the land one year later?7. LO.1 Marge owns land and a building (held for investment) with an adjusted basis of $75,000 and a fair market value of $250,000. The property is subject to a mortgage of $400,000. Because Marge is in arrears on the mortgage payments, the creditor is willing to accept the property in return for canceling the amount of the mortgage.a. How can the adjusted basis of the property be less than the amount of the mortgage?b. If the creditor’s offer is accepted, what are the effects on the amount realized, the adjusted basis, and the realized gain or loss for Marge?c. Does it matter in (b) if the mortgage is recourse or nonrecourse? Explain.8. LO.1 Distinguish between the terms allowed depreciation and allowable depreciation. What effect does the difference have on adjusted basis?9. LO.4 On July 16, 2013, Taylor acquires land and a building for $500,000 to use in his sole proprietorship. Of the purchase price, $400,000 is allocated to the building, and $100,000 is allocated to the land. Cost recovery of $5,820 is deducted in 2013 for the building.a. What is the adjusted basis for the land and the building at the acquisition date?b. What is the adjusted basis for the land and the building at the end of 2013?10. LO.1 Auralia owns stock in Orange Corporation and Blue Corporation. She receives a $10,000 distribution from both corporations. The instructions from Orange state that the $10,000 is a dividend. The instructions from Blue state that the $10,000 is not a dividend.What could cause the instructions to differ as to the tax consequences?11. LO.1 On July 1, 2013, Katrina purchased tax-exempt bonds (face value of $75,000) for $82,000. The bonds mature in five years, and the annual interest rate is 6%. The market rate of interest is 2%.a. How much interest income and/or interest expense must Katrina report in 2013?b. What is Katrina’s adjusted basis for the bonds on January 1, 2014?12. LO.2 Wanda is considering selling two personal use assets that she owns. One has appreciated in value by $20,000, and the other has declined in value by $17,000. Wanda believes that she should sell both assets in the same tax year so that the loss of $17,000 can offset the gain of $20,000.a. Advise Wanda regarding the tax consequences of her plan.b. Could Wanda achieve better tax results by selling the assets in different tax years? Explain.13. LO.2 Ron sold his sailboat for a $5,000 loss in the current year because he was diagnosed with skin cancer. His spouse wants him to sell his Harley Davidson motorcycle because her brother broke his leg while riding his motorcycle. Because Ron no longer has anyone to ride with, he is seriously considering accepting his wife’s advice. Because the motorcycle is a classic, Ron has received two offers. Each offer would result in a $5,000 gain. Joe would like to purchase the motorcycle before Christmas, and Jeff would like to purchase it after New Year’s. Identify the relevant tax issues Ron faces in making his decision.14. LO.3 Monty owns a life insurance policy that will pay $500,000 to Pearlie, his spouse, upon his death. At the date of Monty’s death, he had paid total premiums of $115,000 on the policy. In accordance with § 101(a)(1), Pearlie excludes the $500,000 of insurance proceeds. Discuss the relationship, if any, between the § 101 exclusion and the recovery of capital doctrine.15. LO.4 How is cost allocated when a taxpayer acquires multiple assets in a lump-sum purchase?16. LO.4 Discuss how the tax treatment differs when stock rights are allocated a cost basis versus when no such allocation occurs. When must an allocation be made?17. LO.1, 2, 4, 11 Simon owns stock that has declined in value since acquired. He has decided either to give the stock to his nephew, Fred, or to sell it and give Fred the proceeds.If Fred receives the stock, he will sell it to obtain the proceeds. Simon is in the 15% tax bracket, while Fred’s bracket is 25%. In either case, the holding period for the stock will be short-term. Identify the tax issues relevant to Simon in deciding whether to give the stock or the sale proceeds to Fred.18. LO.4 Under what circumstances is it possible to recognize neither gain nor loss on the sale of an asset previously received as a gift?19. LO.4 Robin inherits 1,000 shares of Wal-Mart stock from her aunt in 2013. According to the information received from the executor of her aunt’s estate, Robin’s adjusted basis for the stock is $55,000. Albert, Robin’s fiancé, receives 1,000 shares of Wal-Mart stock from his uncle as a gift in 2013. His uncle tells Albert that his adjusted basis for the Wal-Mart stock is $7,000. What could cause the substantial difference in the adjusted basis for Robin’s and Albert’s respective 1,000 shares of Wal-Mart stock?20. LO.4 Gary makes a gift of an appreciated building to Carmen. She dies three months later, and Gary inherits the building from her. During the period Carmen held the building, she deducted depreciation and made a capital expenditure. What effect might these items have on Gary’s basis for the inherited building?21. LO.4 Address the following issues:a. In a community property state, what effect does the death of one spouse have on the adjusted basis of the surviving spouse’s one-half interest in the community property?b. Presuming that the property is jointly owned, would the result be different in a common law state?22. LO.5 Marilyn owns land that she acquired three years ago as an investment for $250,000. Because the land has not appreciated in value as she anticipated, she sells it to her brother, Amos, for its fair market value of $180,000. Amos sells the land two years later for $240,000.a. Explain why Marilyn’s realized loss of $70,000 ($180,000 amount realized ? $250,000 adjusted basis) is disallowed.b. Explain why Amos has neither a recognized gain nor a recognized loss on his sale of the land.c. Is the family unit treated fairly under the related-party disallowance rule under § 267? Explain.d. Which party wins, and which party loses?e. How could Marilyn have avoided the loss disallowance on her sale of the land?

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