1. (TCOs 1 and 2) The tax law contains various provisions that encourage home ownership. What are some of these provisions? On what basis can this objective be justified? Are there any negative considerations? Explain
2. (TCOs 1, 2, 3, and 5) Determine the proper tax year for gross income inclusion in each of the following cases:
I. An automobile dealer has several new cars in inventory, but often does not have the right combination of body style, color, and accessories. In some cases the dealer makes an offer to sell a car at a certain price, accepts a deposit, and then orders the car from the manufacturer. When the car is received from the manufacturer, the sale is closed, and the dealer receives the balance of the sales price. At the end of the current year, the dealer has deposits totaling $8,200 for cars that have not been received from the manufacturer. When is the $8,200 subject to tax? Explain.
II. Purple Corporation, an exterminating company, is a calendar year taxpayer. It contracts to provide service to homeowners once a month under a one-, two-, or three-year contract. On April 1 of the current year, the company sold a customer a one-year contract for $120. How much of the $120 is taxable in the current year if the company is an accrual basis taxpayer? If the $120 is payment on a two-year contract, how much is taxed in the year the contract is sold and in the following year? If the $120 is payment on a three-year contract, how much is taxed in the year the contract is sold and in the following year? Explain
3. (TCOs 4 and 5) Gladys owns a retail hardware store in Tangipahoa. She is considering opening a business in Hammond, a community located 25 miles away. She incurs expenses of $60,000 in 2011 in investigating the feasibility and desirability of doing so. What amount can Gladys deduct in 2011 if the business is
I. another retail hardware store which she opens in December 2011?
II. another retail hardware store which she decides against opening?
III. a video rental store which she opens in December 2011?
IV. video rental store which she decides against opening?
4. (TCOs 4 and 5) In 2011, Jean earns a salary of $150,000 and invests $20,000 for a 20% interest in a partnership not subject to the passive loss rules. Through the use of $400,000 of nonrecourse financing, the partnership acquires assets worth $500,000. The activity produces a loss of $75,000, of which Jean's share is $15,000. In 2011, Jean's share of the loss from the partnership is $7,500. How much of the loss from the partnership can Jean deduct?
5. (TCO 7) Audra acquires the following new five-year class property in 2011:
Asset Acquisition Date Cost
A January 10 $106,000
B July 5 $70,000
C November 15 $250,000
Audra elects § 179 for Asset C. Audra's taxable income from her business would not create a limitation for purposes of the § 179 deduction. If Congress reenacts additional first-year depreciation for 2010, Audra elects not to take additional first-year depreciation. Determine her total cost recovery deduction (including the § 179 deduction) for the year.
6. (TCOs 6 and 7) Ollie owns a personal use car for which he originally paid $42,000. He trades the car in on a sports utility vehicle (SUV), paying the automobile dealer cash of $24,000. If the negotiated price of the SUV is $45,000, what is Ollie's recognized gain or loss and his adjusted basis for the SUV?
7. (TCOs 3, 4, and 6) Homer (age 68) and his wife Jean (age 70) file a joint return. They furnish all of the support of Luther (Homer's 90-year-old father), who lives with them. For 2011, they received $6,000 of interest income on city of Chicago bonds and interest income on corporate bonds of $48,000. Compute Homer’s and Jean's taxable income for 2011.
8. (TCOs 3, 4, and 6) Evan is employed as an assistant manager in the furniture division of a national chain of department stores. He is a recent college graduate with a degree in marketing. During 2011, he enrolls in the evening MBA program of a local university and incurs the following expenses: tuition, $4,300; books and computer supplies, $900; transportation expense to and from the university, $350; and meals while on campus, $300. Evan is single and his annual AGI is less than $65,000. Regarding these expenses, what are Evan's:
I. Deductions for AGI?
II. Deductions from AGI?