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Tax questions - Linda, Quail, Jake, Drew, Joanne, Sue, Mable

Q1- Linda operates a drug-running operation. Which of the following expenses she incurs can reduce taxable income?
a. Bribes paid to border guards.
b. Salaries to employees.
c. Price paid for drugs purchased for resale.
d. Kickbacks to police.
e. Rent on an office.
f. Depreciation on office furniture and equipment.
g. Tenant's casualty insurance.

Q2- Quail Corporation anticipates that being positively perceived by the individual who is elected mayor will be beneficial for business. Therefore, Quail contributes to the campaigns of both the Democratic and the Republican candidates. The Republican candidate is elected mayor. Can Quail deduct any of the political contributions it made?

Q3- Jake owns City of Charleston bonds with an adjusted basis of $100,000. During the year, he receives interest payments of $4,000. Jake partially financed the purchase of the bonds by borrowing $70,000 at 6% interest. Jake's interest payments on the loan this year are $4,100, and his principal payments are $1,000.
a. Should Jake report any interest income this year?
b. Can Jake deduct any interest expense this year?

Q4- Drew and his wife Cassie own all of the stock of Thrush, Inc. Cassie is the president and Drew is the vice president. Cassie and Drew are paid salaries of $400,000 and $300,000, respectively, each year. They consider the salaries to be reasonable based on a comparison with salaries paid for comparable positions in comparable companies. They project Thrush's taxable income for next year, before their salaries, to be $800,000. They decide to place their four teenage children on the payroll and to pay them total salaries of $100,000. The children will each work about five hours per week for Thrush.
a. What are Drew and Cassie trying to achieve by hiring the children?
b. Calculate the tax consequences of hiring the children on Thrush, Inc., and on Drew and Cassie's family.

Q5- Joanne, the owner of a very successful restaurant chain, is exploring the possibility of expanding the chain in to a city in the neighboring state. She incurs $28,000 of expenses associated with this investigation. Based on the regulatory environment for restaurants in the city, she decides not to expand. During the year, she also investigates opening a hotel that will be part of a national hotel chain. Her expenses for this are $53,000. The hotel beings operations on October 1. Determine the amount that Joanne can deduct in the current year for investigation these two businesses.

Q7- Sue loaned her sister Janice $10,000 three year ago. Janice has never made any payments to Sue, and Sue has never tried to collect from Janice. This year, Janice filed for bankruptcy and told Sue that she would not be able to repay any of the $10,000 loans. Determine Sue's tax treatment for the loan for current year.

Q8-Mable and Jack file a joint return. For the current year, they had the following items:
Salaries $180,000
Loss on sale of section 1244 stock acquired two years ago 95,000
Gain on sale of section 1244 sock acquired six months ago 12,000
Non business bad 16,000
Determine the impact of the above items on Mable and Jack's income for the current year.

Q9- Hazel has investments in two non rental passive activities: Activity A, acquired seven years ago and profitable until the current year, and Activity B, acquired this year. Currently, Hazel's shares of the activities' losses are $10,000 from Activity A and $6,000 from Activity B. What is the total of Hazel's suspended losses from these activities?

Q10- Compute the taxable income for 2007 for Marjory on the basis of the following information Marjory is married but has not seen or heard from her husband since 2005.
Salary $60,000
Interest on bonds issued by the city of independence (MO) 2,000
Interest on CD issued by Hibernia National Bank 1,800
Cash dividend received on GE common stock 2,300
Life insurance proceeds paid on death of aunt (Marjory was the designated
Beneficiary of the policy) 50,000
Inheritance received on death of aunt 110,000
Carlton (a cousin) repaid a loan Marjory made to him in 2004 (no interest
Was provided for) 5,000
Itemized deduction (state income tax, property taxes on residence, interest On home mortgage, charitable contributions) 7,200
Number of dependents (children, ages 13 and 15) 2
Age 40

Q11- Which of the following taxpayers must file a Federal income tax return for 2007?
a. Ben, age 19, is a full-time college student. He is claimed as a dependent by his parents. He earned $5,400 in wages during the year.
b. Anita, age 12, is claimed as a dependent by her parents. She earned interest income of $1,200 during the year.
c. Earl, age 16, is claimed as a dependent by his parents. He earned wages of $2,700 and interest of $1,100 during the year.
d. Karen, age 16 and blind, is claimed as a dependent by her parents. She earned wages of $2600 and interest of $1,200 during the year.
e. Pat, age 17, is claimed as a dependent by her parents. She earned interest of $300 during the year. In addition, she earned $550 during the summer operating her own business at the beach, where she painted caricatures of her customers.

Q12- Each year, the Hundleys normally have itemized deductions of $9500, including a $3600 pledge payment to their church. Upon the advice of a friend, they do the following: in early January 2007, they pay their pledge for 2006; during 2007, they pay the pledge for 2007; and in late December 2007, they prepay their pledge for 2008.
a. Explain what the Hundleys are trying to accomplish.
b. What will be the tax saving if their marginal tax bracket is 25% for all three years? (Assume the standard deduction amounts for 2007 and 2008 are the same).

Solution Preview

Q1- Linda operates a drug-running operation. Which of the following expenses she incurs can reduce taxable income?
a. Bribes paid to border guards.
b. Salaries to employees.
c. Price paid for drugs purchased for resale.
d. Kickbacks to police.
e. Rent on an office.
f. Depreciation on office furniture and equipment.
g. Tenant's casualty insurance.

Bribes, kickbacks, fines and penalties are not deductible business expenses regardless of whether the business is illegal or not. Also note that the business should be reported. Remember that Al Capon was convicted of tax evasion, not any of the other crimes he committed.

Q2- Quail Corporation anticipates that being positively perceived by the individual who is elected mayor will be beneficial for business. Therefore, Quail contributes to the campaigns of both the Democratic and the Republican candidates. The Republican candidate is elected mayor. Can Quail deduct any of the political contributions it made?

Political contributions are never deductible. Even though called contributions, the organizations are not charitable in nature.

Q3- Jake owns City of Charleston bonds with an adjusted basis of $100,000. During the year, he receives interest payments of $4,000. Jake partially financed the purchase of the bonds by borrowing $70,000 at 6% interest. Jake's interest payments on the loan this year are $4,100, and his principal payments are $1,000.
a. Should Jake report any interest income this year?
b. Can Jake deduct any interest expense this year?

a. The bond income should be classified as tax exempt and even though the $4000 is reportable, it should not be taxable.
b. The interest on the loan for funds to purchase the bonds is not deductible because the use of the funds earned tax-exempt income.

Q4- Drew and his wife Cassie own all of the stock of Thrush, Inc. Cassie is the president and Drew is the vice president. Cassie and Drew are paid salaries of $400,000 and $300,000, respectively, each year. They consider the salaries to be reasonable based on a comparison with salaries paid for comparable positions in comparable companies. They project Thrush's taxable income for next year, before their salaries, to be $800,000. They decide to place their four teenage children on the payroll and to pay them total salaries of $100,000. The children will each work about five hours per week for Thrush.
a. What are Drew and Cassie trying to achieve by hiring the children?
b. Calculate the tax consequences of hiring the children on Thrush, Inc., and on Drew and Cassie's family.

a. Drew and Cassie are attempting to lower the tax rate on corporate income by assigning it to their kids. The corporation would take the deductions for wages and the kids would report it but in ...

Solution Summary

The cited solution contains a comprehensive explanation for each of the independent tax questions. Subjects include drug-running expenses, political donations, interest deductions, hiring the children, start up expenses, uncollectible loan to a sister, Sec 1244 stock, passive limitations, bunching up deductions and dependency exemptions.

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