Ch04 DISCUSSION QUESTIONS1. LO.1 According to the Supreme Court, would it be good tax policy to use income as computed by financial accounting principles as the correct measure of income for Federal income tax purposes? Explain.2. LO.1 Compare and contrast the economist’s concept used to recognize income with the concept employed in measuring taxable income.3. LO.1 Allen visits Reno, Nevada, once a year to gamble. This year his gambling loss was $25,000. He commented to you, “At least I didn’t have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $3,000.” What are the relevant tax issues for Allen?4. LO.1 Ben lost his job when his employer moved its plant. During the year, he collected unemployment benefits for three months, a total of $1,800. While he was waiting to hear from prospective employers, he painted his house. If Ben had paid someone else to paint his house, the cost would have been $3,000. The cost of the paint Ben used was $800. What is Ben’s gross income for tax purposes from the above events?5. LO.1 Howard buys wrecked cars and stores them on his property. Recently, he purchased a 1990 Ford Taurus for $400. If he can sell all of the usable parts, his total proceeds from the Taurus will be over $2,500. As of the end of the year, he has sold only the radio for $75 and he does not know how many, if any, of the remaining parts will ever be sold. What are Howard’s income recognition issues?6. LO.2, 3 On December 29, 2013, an employee received a $5,000 check from her employer’s client. The check was payable to the employer. The employee did not remit the funds to the employer until December 30, 2013. The employer deposited the check on December31, 2013, but the bank did not credit the employer’s bank account until January 2, 2014. When is the cash basis employer required to include the $5,000 in gross income?7. LO.2 What is the purpose of the constructive receipt doctrine?8. LO.2 How does the hybrid method of accounting differ from the cash method and the accrual method?9. LO.2 Sandra, a cash basis taxpayer, purchased a certificate of deposit for $970 on July 1, 2013, that matures on June 30, 2014, with the maturity value being $1,000. Also on July 1, 2013, she purchased a certificate of deposit for $940 that matures on June 30, 2015, with the maturity value being $1,000. Is Sandra required to recognize any income from the certificates in 2013, 2014, or 2015? Explain.10. LO.2 A Series EE U.S. government savings bond accrues 3.5% interest each year. The bond matures in three years, at which time the principal and interest will be paid. The bank will pay the taxpayer at a 3.5% interest rate each year if he agrees to leave money on deposit for three years. What tax advantage does the Series EE bond offer that is not available with the bank deposit?11. LO.2 The taxpayer performs services with payment due from the customer within 30 days. All customers pay within the time limit. What would be the benefit to the taxpayer using the cash method of accounting rather than the accrual method?12. LO.3, 5 Wade paid $7,000 for an automobile that needed substantial repairs. He worked nights and weekends to restore the car and spent $2,400 on parts for it. He knows he can sell the car for $13,000. His daughter’s college tuition is due in a few days. Would it matter, after taxes, whether Wade sells the car and pays the tuition or whether he gives the car to his daughter and she sells it for $13,000 and pays her tuition? Explain.13. LO.3 Anita, a cash basis taxpayer, sued her former employer for wage discrimination.Her attorney agreed to pursue the case on a contingent fee basis—the attorney would receive one-third of any settlement or court award. The parties reached a settlement, and the attorney for Anita’s former employer wrote a check payable to Anita for $320,000 and a check payable to her attorney for $160,000. Anita reasons that she and the attorney were partners in the lawsuit who shared profits two-thirds and one-third, respectively. Therefore, she includes $320,000 in her gross income. Is Anita’s analysis correct? Explain.14. LO.3 Rex became a partner with a 30% interest in the partnership profits when he invested $200,000. In 2013, the partnership generated $400,000 of taxable income, andRex withdrew $100,000. In 2014, the partnership had $600,000 of taxable income, and Rex withdrew $200,000. What is Rex’s gross income from the partnership in 2013 and 2014?15. LO.3, 5 Mark and Del were residents of Texas. In 2013, Del left Mark, and he has been unable to find her even though he hired a private investigator to do so. Mark and Del are still married at year-end. Both Del and Mark were employed. Mark is aware of the fact that Del inherited dividend-paying stocks in early 2013. They did not have any children.How will Del’s absence complicate Mark’s 2013 income tax return?16. LO.4 What are the tax consequences if the alimony recapture rules apply to a cash payment to a former spouse?17. LO.4 Evaluate the following statement: “In dividing up assets when a couple divorces, the basis of the assets is not relevant because the property division is nontaxable.”18. LO.4, 5 Williamand Abigail, who live in San Francisco, have been experiencing problems with their marriage. They have a 3-year-old daughter, April, who stays withWilliam’s parents during the day because both William and Abigail are employed. Abigail worked to supportWilliam while he attended medical school, and now she has been accepted by a medical school in Mexico. Abigail has decided to divorce William and attend medical school. April will stay in San Francisco because of her strong attachment to her grandparents and because they can provide her with excellent day care. Abigail knows that William will expect her to contribute to the cost of raising April. Abigail also believes that to finance her education, she must receive cash for her share of the property they accumulated during their marriage. In addition, she believes that she should receive some reimbursement for her contribution to William’s support while he was in medical school. She expects the divorce proceedings to take several months. Identify the relevant tax issues for Abigail.19. LO.4, 5 Patrick and Eva are planning to divorce. Patrick has offered to pay Eva $12,000 each year until their 11-year-old daughter reaches age 21. Alternatively, Patrick will transfer to Eva common stock that he owns with a fair market value of $100,000.What factors should Eva and Patrick consider in deciding between these two options?20. LO.4, 5 Brenda loaned her son Bart $250,000 to purchase a new home. Brenda did not charge interest on the loan. Brenda was required to recognize imputed interest income, and Bart had imputed home mortgage interest expense that he deducted as an itemized deduction. Would Brenda’s and Bart’s combined total income taxes likely increase or decrease as a result of the imputed interest? Explain.21. LO.4 In 2013, the Rose Corporation made a $400,000 interest-free loan to John Rose, the corporation’s controlling shareholder. Mr. Rose is also the corporation’s chief executive officer and receives a salary of $300,000 a year. What are the tax consequences of classifying the loan as a compensation-related loan rather than as a corporationshareholder loan?22. LO.2, 4 Brad is the president of the Yellow Corporation. He and other members of his family control the corporation. Brad has a temporary need for $50,000, and the corporation has excess cash. He could borrow the money from a bank at 9%, and Yellow is earning 6% on its temporary investments. Yellow has made loans to other employees on several occasions. Therefore, Brad is considering borrowing $50,000 from the corporation.He will repay the loan principal in two years plus interest at 5%. Identify the relevant tax issues for Brad and the Yellow Corporation.23. LO.4 On July 1, 2000, when Betty was 65 years old, she purchased an annuity contract for $108,000.
The annuity was to pay Betty $9,000 on June 30 each year for the remainder of her life. Betty died on August 31, 2013. What are the effects of the annuity on Betty’s gross income and taxable income for 2013?24. LO.4 An employer provides all of his employees with life insurance protection equal to twice the employee’s annual salary. Melba, age 42, has an annual salary of $70,000. Is Melba required to recognize income even though she is still alive at the end of the year and thus nothing has been collected on the life insurance policy? Explain.25. LO.4 Eve is 67 and unmarried. She receives $12,000 a year in Social Security benefits and $20,000 from a taxable pension. She is in the 15% marginal tax bracket on her Federal income tax return. She claims the standard deduction. She is considering selling stock she has held for more than one year. Her cost of the stock is $6,000, and its fair market value is $13,000. She has no other gains or losses for the year. She has asked you to estimate the tax consequences of selling the stock.PROBLEMS26. LO.1 Determine the taxpayer’s current-year (1) economic income and (2) gross income for tax purposes from the following events:a. Sam’s employment contract as chief executive of a large corporation was terminated, and he was paid $500,000 not to work for a competitor of the corporation for five years.b. Elliot, a 6-year-old child, was paid $5,000 for appearing in a television commercial.His parents put the funds in a savings account for the child’s education.c. Valery found a suitcase that contained $100,000. She could not determine who the owner was.d. Winn purchased a lottery ticket for $5 and won $750,000.e. Larry spent $1,000 to raise vegetables that he and his family consumed. The cost of the vegetables in a store would have been $2,400.f. Dawn purchased an automobile for $1,500 that was worth $3,500. The seller was in desperate need of cash.27. LO.1, 5 Andy recently completed medical school and is beginning his medical practice.Most of his patients are covered by health insurance with a co-pay requirement (e.g., the patient pays $10, and the insurance company is billed for the remainder). It takes approximately two months to collect from the health insurance plan. What advice can you provide Andy regarding the selection of a tax accounting method?28. LO.1, 2, 5 A taxpayer is considering three alternative investments of $10,000. Assume that the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are:• A taxable corporate bond yielding 5% before tax, and the interest can be reinvested at 5% before tax.• A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return).• Land that will increase in value.The gain on the land will be classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds?Given: Compound amount of $1 and compound value of annuity payments at the end of five years:Interest Rate $1 Compounded for 5 Years $1 Annuity Compounded for 5 Years5% $1.28 $5.534% 1.22 5.423.6% 1.19 5.3729. LO.1 Determine the taxpayer’s gross income for tax purposes in each of the following situations:a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for corporate stock with a fair market value of $12,000 at the time of the exchange.Deb’s cost of the bond was $10,000. The value of the stock had decreased to $11,000 by the end of the year.b. Deb needed $10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the $10,000. Deb’s cost of the stock was $3,000.Based on her broker’s advice, instead of selling the stock, she borrowed the $10,000 using the stock as collateral for the debt.c. Deb’s boss gave her two tickets to the Rabid Rabbits rock concert because she met her sales quota. At the time she received the tickets, each ticket had a face price of $200 and was selling on eBay for $300. On the date of the concert, the tickets were selling for $250 each. Deb and her son attended the concert.30. LO.1, 2 Determine Amos Watkins’s gross income in each of the following cases:a. In the current year, Amos purchased an automobile for $25,000. As part of the transaction,Amos received a $1,500 rebate from the manufacturer.b. Amos sold his business. In addition to the selling price of the stock, he received $50,000 for a covenant not to compete—an agreement that he will not compete with his former business for five years.c. Amos owned some land he held as an investment. As a result of a change in the zoning rules, the property increased in value by $20,000.31. LO.2, 5 Al is a medical doctor who conducts his practice as a sole proprietor. During 2013, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2012. At the end of 2013, Al had accounts receivable of $60,000, all for services rendered in 2013. In addition, at the end of the year, Al received $12,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2014. Compute Al’s gross income for 2013:a. Using the cash basis of accounting.b. Using the accrual basis of accounting.c. Advise Al on which method of accounting he should use.32. LO.2 Selma operates a contractor’s supply store. She maintains her books using the cash method. At the end of the year, her accountant computes her accrual basis income that is used on her tax return. For 2013, Selma had cash receipts of $1.4 million, which included $200,000 collected on accounts receivable from 2012 sales. It also included the proceeds of a $100,000 bank loan. At the end of 2013, she had $250,000 in accounts receivable from customers, all from 2013 sales.a. Compute Selma’s accrual basis gross receipts for 2013.b. Selma paid cash for all of the purchases. The total amount paid for merchandise in 2013 was $1.3 million. At the end of 2012, she had merchandise on hand with a cost of $150,000. At the end of 2013, the cost of merchandise on hand was $300,000.Compute Selma’s gross income from merchandise sales for 2013.33. LO.2, 3, 5 Your client is a new partnership, ARP Associates, which is an engineering consulting firm. Generally, ARP bills clients for services at the end of each month. Client billings are about $50,000 each month. On average, it takes 45 days to collect the receivables.ARP’s expenses are primarily for salary and rent. Salaries are paid on the last day of each month, and rent is paid on the first day of each month. The partnership has a line of credit with a bank, which requires monthly financial statements. These must be prepared using the accrual method. ARP’s managing partner, Amanda Sims, has suggested that the firm also use the accrual method for tax purposes and thus reduce accounting fees by $600. Assume that the partners are in the 35% (combined Federal and state) marginal tax bracket. Write a letter to your client explaining why you believe it would be worthwhile for ARP to file its tax return on the cash basis even though its financial statements are prepared on the accrual basis. ARP’s address is 100 James Tower,Denver, CO 80208.34. LO.2 Trip Garage, Inc. (459 Ellis Avenue, Harrisburg, PA 17111), is an accrual basis taxpayer that repairs automobiles. In late December 2013, the company repairedSamuel Mosley’s car and charged him $1,000. Samuel did not think the problem had been fixed and refused to pay; thus, Trip refused to release the automobile. In early January 2014, Trip made a few adjustments and convinced Samuel that the automobile was working properly. At that time, Samuel agreed to pay only $900 because he did not have the use of the car for a week. Trip said “fine,” accepted the $900, and released the automobile to Samuel. An IRS agent thinks Trip, as an accrual basis
taxpayer, should report $1,000 of income in 2013, when the work was done, and then deduct a $100 loss in 2014. Prepare a memo to Susan Apple, the treasurer of Trip, with the recommended treatment for the disputed income.35. LO.2 Determine the effects of the following on a cash basis taxpayer’s gross income for 2013 and 2014.a. On the morning of December 31, 2013, the taxpayer received a $1,500 check from a customer. The taxpayer did not cash the check until January 3, 2014.b. The same as part (a), except the customer asked the taxpayer not to cash the check until January 3, 2014, after the customer’s salary check could be deposited.c. The same as part (a), except the check was not received until after the bank had closed on December 31, 2013.36. LO.2 Marlene, a cash basis taxpayer, invests in Series EE U.S. government savings bonds and bank certificates of deposit (CDs). Determine the tax consequences of the following on her 2013 gross income:a. On September 30, 2013, she cashed in Series EE bonds for $10,000. She purchased the bonds in 2003 for $7,090. The yield to maturity on the bonds was 3.5%.b. On July 1, 2012, she purchased a CD for $10,000. The CD matures on June 30, 2014, and will pay $10,816, thus yielding a 4% annual return.c. On July 1, 2013, she purchased a CD for $10,000. The maturity date on the CD wasJune 30, 2014, when Marlene would receive $10,300.37. LO.2 Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effect of each of the following transactions on the company’s2013 gross income assuming that the company uses any available options to defer its taxes.a. In December 2012, the company received a $1,200 advance payment from a customer for an appliance that Drake special ordered from the manufacturer. The appliance did not arrive from the manufacturer until January 2013, and Drake immediately delivered it to the customer. The sale was reported in 2013 for financial accounting purposes.b. In October 2013, the company sold a 6-month service contract for $240. The company also sold a 36-month service contract for $1,260 in July 2013.c. On December 31, 2013, the company sold an appliance for $1,200. The company received $500 cash and a note from the customer for $700 and $260 interest, to be paid at the rate of $40 a month for 24 months. Because of the customer’s poor credit record, the fair market value of the note was only $600. The cost of the appliance was $750.38. LO.2, 5 Freda is a cash basis taxpayer. In 2013, she negotiated her salary for 2014. Her employer offered to pay her $21,000 per month in 2014 for a total of $252,000. Freda countered that she would accept $10,000 each month for the 12 months in 2014 and the remaining $132,000 in January 2015. The employer accepted Freda’s terms for 2014 and 2015.a. Did Freda actually or constructively receive $252,000 in 2014?b. What could explain Freda’s willingness to spread her salary over a longer period of time?c. In December 2014, after Freda had earned the right to collect the $132,000 in 2015, the employer offered $133,000 to Freda at that time, rather than $132,000 in January 2015. The employer wanted to make the early payment so as to deduct the expense in 2014. Freda rejected the employer’s offer. Was Freda in constructive receipt of the income in 2014? Explain.39. LO.2, 5 The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company is actually more concerned about damage than about tenants not paying their rent.a. Discuss the tax effects of the following alternatives:• $1,000 damage deposit with no rent prepayment.• $500 damage deposit and $500 rent for the final month of the lease.• $1,000 rent for the final two months of the lease and no damage deposit.b. Which option do you recommend? Why?40. LO.3 Rusty has been experiencing serious financial problems. His annual salary was $100,000, but a creditor garnished his salary for $20,000; so the employer paid the creditor (rather than Rusty) the $20,000. To prevent creditors from attaching his investments,Rusty gave his investments to his 21-year-old daughter, Rebecca. Rebecca received $5,000 in dividends and interest from the investments during the year. Rusty transferred some cash to a Swiss bank account that paid him $6,000 interest during the year. Rusty did not withdraw the interest from the Swiss bank account. Rusty also hid some of his assets in his wholly owned corporation that received $150,000 rent income but had $160,000 in related expenses, including a $20,000 salary paid to Rusty. Rusty reasons that his gross income should be computed as follows:Salary received $ 80,000Loss from rental property ($150,000 ? $160,000) (10,000)Gross income $ 70,000Compute Rusty’s correct gross income for the year, and explain any differences between your calculation and Rusty’s.41. LO.2, 3 Troy, a cash basis taxpayer, is employed by Eagle Corporation, also a cash basis taxpayer. Troy is a full-time employee of the corporation and receives a salary of $60,000 per year. He also receives a bonus equal to 10% of all collections from clients he serviced during the year. Determine the tax consequences of the following events to the corporation and to Troy:a. On December 31, 2013, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corporation for appraisal services Troy performed during 2013. Troy did not deliver the check to the corporation until January 2014.b. The facts are the same as in (a), except that the corporation is an accrual basis taxpayer and Troy deposited the check on December 31, but the bank did not add the deposit to the corporation’s account until January 2014.c. The facts are the same as in (a), except that the customer told Troy to hold the check until January 2014 when the customer could make a bank deposit that would cover the check.42. LO.3, 4 Faye, Gary, and Heidi each have a one-third interest in the capital and profits of the FGH Partnership. Each partner had a capital account of $50,000 at the beginning of the tax year. The partnership profits for the tax year were $270,000. Changes in their capital accounts during the tax year were as follows:Faye Gary Heidi TotalBeginning balance $ 50,000 $ 50,000 $ 50,000 $150,000Withdrawals (20,000) (35,000) (10,000) (65,000)Additional contributions –0– –0– 5,000 5,000Allocation of profits 90,000 90,000 90,000 270,000Ending balance $120,000 $105,000 $135,000 $360,000In arriving at the $270,000 of partnership profits, the partnership deducted $2,400 ($800 for each partner) in premiums paid for group term life insurance on the partners.Faye and Gary are 39 years old, and Heidi is 35 years old. Other employees are also eligible for group term life insurance equal to their annual salary. These premiums of $10,000 have been deducted in calculating the partnership profits of $270,000. Compute each partner’s gross income from the partnership for the tax year.43. LO.3, 5 In 2013, Alva received dividends on her stocks as follows:Amur Corporation (a French corporation whose stock is traded on an established U.S. securities market) $60,000Blaze, Inc., a Delaware corporation 40,000Grape, Inc., a Virginia corporation 22,000a. Alva purchased the Grape stock three years ago, and she purchased the Amur stock two years ago. She purchased the Blaze stock 18 days before it went ex-dividend and sold it 20 days later at a $5,000 loss. Alva had no other capital gains and losses for the year. She is in the 35% marginal tax bracket. Compute Alva’s tax on her dividend income for 2013.b. Alva’s daughter, who is 25 and not Alva’s dependent, had taxable income of $6,000, which included $1,000 of dividends on Grape, Inc. stock. The daughter had purchased the stock two years ago. Compute the daughter’s tax liability on the dividends.c. Alva can earn 5% before-tax interest on a corporate bond or a 4% dividend on a preferred stock
. Assuming that the appreciation in value is the same, which investment produces the greater after-tax income?d. The same as part (c), except that Alva’s daughter is to make the investment.44. LO.3 Liz and Doug were divorced on December 31 of the current year after 10 years of marriage. Their current year’s income received before the divorce was as follows:Doug’s salary $41,000Liz’s salary 55,000Rent on apartments purchased by Liz 15 years ago 8,000Dividends on stock Doug inherited from his mother 4 years ago 1,900Interest on a savings account in Liz’s name funded with her salary 2,400Allocate the income to Liz and Doug assuming that they live in:a. California.b. Texas.45. LO.4 Nell and Kirby are in the process of negotiating their divorce agreement. What should be the tax consequences to Nell and Kirby if the following, considered individually, became part of the agreement?a. In consideration for her one-half interest in their personal residence, Kirby will transfer to Nell stock with a value of $200,000 and $50,000 of cash. Kirby’s cost of the stock was $150,000, and the value of the personal residence is $500,000. They purchased the residence three years ago for $300,000.b. Nell will receive $1,000 per month for 120 months. If she dies before receiving all120 payments, the remaining payments will be made to her estate.c. Nell is to have custody of their 12-year-old son, Bobby. She is to receive $1,200 per month until Bobby (1) dies or (2) attains age 21 (whichever occurs first). After either of these events occurs, Nell will receive only $300 per month for the remainder of her life.46. LO.4 Samantha and Harold are in the process of negotiating a divorce. They have tentatively agreed on all of the terms, and Samantha is to pay Harold $240,000 over a threeyear period. Furthermore, the payments are to be spread over the three years in amounts that will qualify as alimony and minimize alimony recapture. Harold wants to receive as much of the $240,000 as soon as possible because if he dies or remarries within the three years, the payments will cease. Which of the following two patterns of payments will result in the least alimony recapture in year 3?YearOption 1:Amount PaidOption 2:Amount Paid1 $120,000 $100,0002 60,000 80,0003 60,000 60,000Total $240,000 $240,00047. LO.4 Alicia and Rafel are in the process of negotiating a divorce agreement. They both worked during the marriage and contributed an equal amount to the marital assets.They own a home with a fair market value of $400,000 (cost of $300,000) that is subject to a mortgage for $250,000. They have lived in the home for 12 years. They also have investment assets with a cost of $160,000 and a fair market value of $410,000. Thus, the net worth of the couple is $560,000 ($400,000 ? $250,000 + $410,000). The holding period for the investments is longer than one year. Alicia would like to continue to live in the house. Therefore, she has proposed that she receive the residence subject to the mortgage, a net value of $150,000. In addition, she would receive $17,600 each year for the next 10 years, which has a present value (at 6% interest) of $130,000. Rafel would receive the investment assets. If Rafel accepts this plan, he must sell one-half of the investments so that he can purchase a home. Assume that you are counseling Alicia.Explain to Alicia whether the proposed agreement would be “fair” on an after-tax basis.48. LO.4, 5 Roy decides to buy a personal residence and goes to the bank for a $150,000 loan. The bank tells him that he can borrow the funds at 4% if his father will guarantee the debt. Roy’s father, Hal, owns a $150,000 CD currently yielding 3.5%. The Federal rate is 3%. Hal agrees to either of the following:• Roy borrows from the bank with Hal’s guarantee to the bank.• Cash in the CD (with no penalty) and lend Roy the funds at 2% interest.Hal is in the 33% marginal tax bracket. Roy, whose only source of income is his salary, is in the 15% marginal tax bracket. The interest Roy pays on the mortgage will be deductible by him. Which option will maximize the family’s after-tax wealth?49. LO.2, 4 Ridge is a generous individual. During the year, he made interest-free loans to various family members when the Federal rate was 3%. What are the tax consequences of the following loans by Ridge:a. On June 30, 2013, Ridge loaned $12,000 to his cousin, Jim, to buy a used truck. Jim’s only source of income was his wages on various construction jobs during the year.b. On August 1, 2013, Ridge loaned $8,000 to his niece, Sonja. The loan was to enable her to pay her college tuition. Sonja had $1,200 interest income from CDs her parents had given her.c. On September 1, 2013, Ridge loaned $25,000 to his brother, Al, to start a business. Al had $220 of dividends and interest for the year.d. On September 30, 2013, Ridge loaned $150,000 to his mother so that she could enter a nursing home. His mother’s only income was $9,000 of Social Security benefits and $500 of interest income.50. LO.4 Indicate whether the imputed interest rules should apply in the following situations.Assume that all of the loans were made at the beginning of the tax year unless otherwise indicated.a. Mike loaned his sister $90,000 to buy a new home. Mike did not charge interest on the loan. The Federal rate was 5%. Mike’s sisterhad $900 of investment income for the year.b. Sam’s employer maintains an emergency loan fund for its employees. During the year, Sam’s wife was very ill, and he incurred unusually large medical expenses. He borrowed $8,500 from his employer’s emergency loan fund for six months. The Federal rate was 5.5%. Sam and his wife had no investment income for the year.c. Jody borrowed $25,000 from her controlled corporation for six months. She used the funds to pay her daughter’s college tuition. The corporation charged Jody 4% interest.The Federal rate was 5%. Jody had $3,500 of investment income for the year.d. Kait loaned her son, Jake, $60,000 for six months. Jake used the $60,000 to pay off college loans. The Federal rate was 5%, and Kait did not charge Jake any interest.Jake had dividend and interest income of $2,100 for the tax year.51. LO.4 Vito is the sole shareholder of Vito, Inc. He is also employed by the corporation.On June 30, 2013, Vito borrowed $8,000 from Vito, Inc., and on July 1, 2014, he borrowed an additional $10,000. Both loans were due on demand. No interest was charged on the loans, and the Federal rate was 4% for all relevant dates. Vito used the money to purchase a boat, and he had $2,500 of investment income. Determine the tax consequences to Vito and Vito, Inc., in each of the following situations:a. The loans are considered employer-employee loans.b. The loans are considered corporation-shareholder loans.52. LO.4 Pam retires after 28 years of service with her employer. She is 66 years old and has contributed $42,000 to her employer’s qualified pension fund. She elects to receive her retirement benefits as an annuity of $3,000 per month for the remainder of her life.a. Assume that Pam retires in June 2013 and collects six annuity payments this year.What is her gross income from the annuity payments in the first year?b. Assume that Pam lives 25 years after retiring. What is her gross income from the annuity payments in the twenty-fourth year?c. Assume that Pam dies after collecting 160 payments. She collected eight payments in the year of her death. What are Pam’s gross income and deductions from the annuity contract in the year of her death?53. LO.4 For each of the following, determine the amount that should be included in gross income:a. Peyton was selected the most valuable player in the Super Bowl. In recognition of this, he was awarded an automobile with a value of $60,000. Peyton did not need the automobile, so he asked that the title be put in his parents’ names.b. Jacob was awarded the Nobel Peace Prize. When he was presented the check for $1.4 million, Jacob said, “I do not need the money. Give it to the United Nations to use toward the goal of world peac
e.”c. Linda won th
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