3-38 Alimony. As a result of their divorce, Fred agrees to pay alimony to Tammy of $20,000
per year. The payments are to cease in the event of Fred's or Tammy's death or in the event
of Tammy's remarriage. In addition, Tammy is to receive their residence, which cost them
$100,000 but is worth $140,000.
a. Does the fact that Tammy receives the residence at the time of the divorce mean that
there is a reduction in alimony, which will lead to Fred having to recapture an amount
in the subsequent year?
b. How will the $20,000 payments be treated by Fred and Tammy?
c. Would recapture of the payments be necessary if payment ceased because of Tammy's
d. What is Tammy's basis in the residence?
3-58 During 2006, Gary earned $57,000 as an executive. Gary, who is single, supported his
half sister, who lives in a nursing home. Gary received the following interest: $400 on City
of Los Angeles bonds, $200 on a money market account, and $2,100 on a loan made to his brother.
Gary spent one week serving on a jury and received $50.
Gary received a refund of federal income taxes withheld during the prior year of
$1,200 and a state income tax refund of $140. Gary had itemized deductions last year of $8,000.
Gary received dividends on Ace Corporation of $1,000 and on Tray Corporation of $1,400.
Gary's itemized deductions equal $9,000, and withholding for federal income taxes is $9,000.
Compute Gary's tax due or refund due for 2006.
I3-59 Kamal is starting a new business in 2006 which will operate as an S corporation. This
means that income earned by the corporation will be reported by shareholders even if
they do not receive distributions. Kamal has $110,000 of income from other sources,
and itemized deductions totaling $15,000. He expects that the new business will produce
$30,000 of income each year. He is considering giving his son Rashid 20% of the
stock in the corporation. Rashid is age 16, and is Kamal's dependent. Rashid's only
other income is $2,000 of interest. Neither Kamal nor Rashid will be employed by the
corporation. Which alternative will produce a lower income tax liability?having all
stock owned by Kamal or having Kamal own 80% of the stock and Rashid own 20%?
Assume Kamal's filing status is head-of-household and Rashid is single. Ignore other taxes.
I8-40 Amount and Character of Loss Transactions. On September 30 of the current year Silver Fox Corporation files for bankruptcy. At the time, it estimates that the total FMV of its assets is $725,000, whereas the total amount of its outstanding debt amounts to $950,000. Silver Fox Corporation has been engaged in the resale of tax preparation and tax research-related books and software for several years.
a. At the time of the bankruptcy, Silver Fox is owned by Randall, who purchased the stock from an investor for $250,000 several years ago. Randall is single. What are the amount and character of the loss sustained by Randall upon Silver Fox's bankruptcy?
b. How would your answer to part a change if Randall originally organized Silver Fox Corporation, capitalizing it with $250,000 of cash and assuming Silver Fox qualifies as a small business corporation?
c. How would your answer to Part a change if Randall were a corporation instead of an individual?
d. How would your answer to Part b change if Randall were a corporation instead of an individual?
I10-52 Able Corporation is a manufacturer of electrical lighting fixtures. Able is currently negotiating with Ralph Johnson, the owner of an unincorporated business, to acquire his retail electrical lighting sales business. Johnson's assets that are to be acquired include the following:
Inventory of electrical fixtures $ 30,000 $ 50,000
Store buildings 80,000 100,000
Land 40,000 100,000
Equipment: 7-year recovery period 30,000 50,000
Equipment: 5-year recovery period 60,000 100,000
Total $240,000 $400,000
Mr. Johnson indicates that a total purchase price of $1,000,000 in cash is warranted for
the business because of its high profitability and strategic locations and Able has agreed
that the business is worth $1,000,000. Despite the fact that both parties attribute the
excess payment to be for goodwill, Able would prefer that the $600,000 excess amount
be designated as a 5-year covenant not to compete so that he can amortize the excess over
a 5-year period.
You are a tax consultant for Able who has been asked to make recommendations as to
the structuring of the purchase agreement and the amounts to be assigned to individual
assets. Prepare a client memo to reflect your recommendations.
I13-65 Russ has never recognized any Sec. 1231 gains or losses. In December 2006, Russ is considering
the sale of two Sec. 1231 assets. The sale of one asset will result in a $20,000 Sec.
1231 gain while the sale of the other asset will result in a $20,000 Sec. 1231 loss. Russ has
no other capital or Sec. 1231 gains and losses in 2006 and does not expect to have any
other capital or Sec. 1231 gains and losses in 2006. He is aware that it might be advantageous
to recognize the Sec. 1231 gain and the Sec. 1231 loss in different tax years.
However, he does not know whether he should recognize the Sec. 1231 gain in 2006 and
the Sec. 1231 loss in 2007 or vice versa. His marginal tax rate for each year is expected to
be 33%. Advise the taxpayer with respect to these two alternatives:
a. Recognize the $20,000 Sec. 1231 loss in 2006 and the $20,000 Sec. 1231 gain in 2007.
b. Recognize the $20,000 Sec. 1231 gain in 2006 and the $20,000 Sec. 1231 loss in 2007.
I6-23 Under the related party rules of Sec. 267, why has Congress imposed the concept of constructive
Alimony and property settlement are two separate elements of a divorce. Alimony is considered to be a shift in income from Fred to Tammy and has nothing to do with the segregation of accumulated assets. The second important fact is that property transfers incident to divorce are not taxable events to either spouse.
In this case, Fred will be able to deduct 100% of the alimony he pays, and Tammy will report 100% of it as income. Tammy will take the house at their original basis because the transfer event is not taxable and therefore the basis doesn't change.
Those are the rules but some taxpayers got creative by trying to make alimony include some features of property settlement. By shifting some property payments into alimony, Fred would be able to deduct them. In the absence of any other documentation, a reduction in alimony would have one believe it included property settlement amounts. There is a recapture feature for disguised property settlements. There are specific calculations but basically if alimony decreases in the third post-separation year, Fred might have to report recapture income for the excess paid in year 1 and year 2.
a. No reduction in alimony and therefore no recapture
b. $20,000 is taxable to Tammy and deductible to Fred
c. No recapture if Tammy remarries because that was part of the agreement
Gary's tax return will report:
Wages of $57,000
Tax-exempt interest is not taxable
Money market interest of $200
Interest on loan to brother of $2,100 (provided it is supported by a note)
Jury Duty of $50 (provided it was for work, not for auto expense reimbursement)
Federal refunds are not taxable
State refund are of $140 is taxable because it was deducted in 2006
Dividends of $1000 and $1400 are taxable
Itemized deductions of ($9,000)
Personal exemptions of $3,300 x 2 = ($6,600)
Taxable income = $46,290
Note: Gary is able to file as head of household under a special provision allowable only for parents of taxpayers who qualify as dependents even if they ...
For these comprehensive tax problems, the explanations are thorough and the calculations detailed. These are very readable and understandable explanations in narrative form rather than code section copies.