1. (TCOs 2, 3, and 5) We learned this semester that not only do we have to determine the amount of income that a taxpayer must recognize for tax purposes, but we also need to determine the type or character of income that is recognized. As we know, this may depend on the type of transaction that generated the income at issue. Explain the general types or categories of income that exist under the Code (e.g., ordinary), and how the amount of each type of income is calculated and taxed under the Code, including what rates may apply. (Points : 25)
Question 2. 2. (TCOs 2, 4, and 5) This semester, we learned that Congress designed the Code to include deductions that can be taken for losses that a taxpayer may experience. Two such deductions are (1) the bad debt deduction and (2) the deduction for casualty losses and theft. How does the IRS generally interpret deductions (i.e., broadly or narrowly)? How do we determine whether a taxpayer is entitled to each of these two deductions? What is the purpose of each of these two deductions? Are there any limits on the deduction at issue? Finally, what generally governs when a taxpayer may take each of these two deductions? (Points : 25)
Question 3. 3. (TCOs 2, 5, 6, and 7) As a tax practitioner, you often get people asking questions concerning the tax effect of property transactions. This year is no exception. You’ve had individual clients ask you the following questions this year:
I. I inherited property from my grandfather, and I received a gift of property from another family member. How do I determine the basis in each piece of property?
II. I bought a piece of property that is used in a trade or business. Are there any tax deductions associated with this purchase of property? If so, how do I determine the amount of those deductions?
Answer each of these questions, explaining the applicable rules and possibilities of each. (Points : 50)
Question 4. 4. (TCOs 2, 3, and 4) One of your corporate clients has approached you about whether or not its employees are required to include certain benefits provided by the corporation in their income. In particular, the corporation has inquired whether the following benefits provided by the corporation to employees would be included in an employee’s taxable income:I. The employer would like to provide a holiday present to each employee at the end of December. It envisions providing gift cards, including a gift card for dinner at a local restaurant and a gift card for an electronics store. It also plans on providing each employee a $150.00 holiday bonus in a separate check.
II. The employer, which is in the business of providing commercial repair services (such as plumbing, painting, and remodeling), would like to give each employee a $500.00 “credit” each year that the employee can use toward any services or goods provided by the employer. For example, they could use the credit to have interior walls painted, plumbing work completed, or to purchase a new window and have it installed.
Explain to your client the general rules surrounding whether an employee must include benefits provided by the employer in income. Then, for the two proposed benefits mentioned above, explain whether the employee would have to include the amount in income or what provision or exception might apply to make the proposed benefit nontaxable. If the employer would have to make changes to the proposed benefit to render it nontaxable, explain what changes(s) would have to be made. Finally, explain what the resulting benefit would be to the employee and how much, if any, of the benefit the employee could exclude from income. Make sure to detail any significant exceptions or rules that apply to the benefit exception at issue. (Points : 50)
Question 5. 5. (TCOs 1, 2, 8, 9, and 10) One of your best individual clients is thinking about starting up a new business, and he is seeking your advice on which business form he should select. In particular, he’s trying to decide whether to operate the business as a sole proprietorship or a C corporation. Explain to him the significant tax and nontax issues that will arise from choosing each of these entities as compared to the other, including how income will be treated by the entity, the overall tax burden, and the effect of distributions of property or earnings from the entity to your client. (Note: Do not spend time addressing other types of business entities. Credit will only be given for discussion of the two business entities at issue.) (Points : 50)
Question 6. 6. (TCO 2, 3, 6, 8, 9, and 10) You are chief counsel to the chairman of the Joint Committee on Taxation, the body primarily responsible for identifying taxation issues and their consequences as Congress seeks to implement a comprehensive and coherent tax policy. Currently, the United States is in a bit of an economic slump. Corporate earnings reports are relatively weak; the stock market is about 25% off of its five-year highs, and tax revenues are down. Largely as a result of the last issue, the government finds itself operating under an annual deficit, and the national debt hovers around $7,000,000,000. Interest rates, however, remain at historic lows. The president has suggested a multiple-pronged attack to revitalize the economy. He has proposed permanently abolishing all capital gains taxes. He has also proposed eliminating the double taxation of dividends by excluding them from shareholders’ income. To partially offset these reductions, however, he has proposed eliminating the deduction that self-employed individuals receive for medical insurance copayments as well as the home mortgage interest deduction.
The chairman has asked you for your analysis of these provisions. Please prepare a memorandum outlining your thoughts on each, including, but not necessarily limited to
(I) the effect of each recommendation on revenues and deficits, both in the short and long run;(II) the effect of each recommendation on the economy;(III) the relative effects of each recommendation on different socioeconomic groups of taxpayers;(IV) the relative “fairness” of each recommended change; and(V) your conclusion regarding whether any or all should be adopted. (Points : 50)
Question 7. 7. (TCO 1, 2, 3, 4, 8, and 10) As a newly minted CPA, you obtain your first significant position as a tax professional: senior tax accountant for one of the offices of a regional accounting firm. Of course, the firm runs a notice of your hiring in the local newspaper. A few days later, the editor of the newspaper calls you and asks if you might be interested in writing a monthly column for the newspaper on tax issues. Figuring that it would be a good way to get your name out in the community as an expert in the field (and a little free advertising to boot!), you tell him that you would be more than happy to do so. “Great! ” he says. “By the way, I have already blocked out space for this column in the next edition of the paper. Is there any way that you can get me your article by the end of the day today?” After you commit to doing so, he also proceeds to tell you that you will not be paid for these articles. “I figure that it is just a sort of public service that you could offer to the community. I am sure you understand.” (And so it begins…. Get used to a lot of this.) You spend the next 10 minutes thinking about what you could discuss in your first article. You would like to shake people up a little bit, and perhaps challenge their opinions about some issues of tax law. That way, you could perhaps build up some interest in your column, which, as you know, will be difficult to achieve under the best of circumstances! (After all, who wants to read newspaper articles about taxes?)
Finally, you decide on a topic: You will argue to the readers that the federal income tax should be abolished and replaced with a national property tax that is levied on both personal property and real estate.
Required: Write an article arguing this position. You may or may not agree with this proposition. However, based on the materials covered in this course and the discussions that have occurred in the Discussion areas, you should be able to articulate a cogent, persuasive argument in support of this proposition. In particular, reference theories, concepts, justifications, and anticipated economic, social, and/or other benefits that would result from such a system. To the extent that you think strong contrary arguments could be made, consider raising those contrary arguments and then persuasively arguing against them. Your answer to this question will be evaluated based on the thoroughness, professionalism, substance, and persuasiveness of your argument. (Points : 50)