Exam 2: Income Tax Concepts

On June 1, Don receives a rental house from his Uncle Sidney as a graduation present. The monthly rental on the house is $1,000. On June 25, the tenant pays Uncle Sidney the $1,000 rent payment for June by mistake. Which of the following concepts, constructs, or doctrines is the most relevant in determining the tax treatment of the $1,000 rental payment?

John sells his uncle Bob land held for investment for $10,000 that he had purchased 3 years ago for $12,000. John is precluded from taking the $2,000 loss under the arm's-length transaction concept since this is a related party transaction.

In which of the following situations does the taxpayer have a claim of right to the payment received? I.Ellen is on the Carlyle city council. She accepts $5,000 from a contractor who is seeking rezoning of his land before the commission on the condition that Ellen supports the rezoning. The payment is illegal under state law and Ellen will have to repay the $5,000 if the arrangement with the contractor is discovered. II.Alan's automobile is damaged in an automobile accident. Because he uses the automobile in his job, his employer gives him $4,000 to have the car repaired. The employer will withhold $100 per paycheck until the $4,000 is repaid. ​

Some discontented taxpayers have suggested that complexity be removed from the income tax structure by applying a flat tax rate to the gross income of all taxpayers. This approach violates which concept?

Bethany bought a new suit to wear to work. She will not be able to deduct the cost of the suit even though she wears it to work.

An individual can legally assign income to another individual, and the assignment relieves the owner of the income from paying tax on the income.

James purchased land costing $22,000 in 2017. He paid $2,000 in legal fees and other expenses to complete the purchase. In 2018, James spends $24,000 subdividing the land and running utilities to the property. Interest paid on the loan used to finance the purchase and subdividing total $1,750 in 2017 and $3,200 in 2018. James paid $350 of property taxes in 2017 and $750 of property taxes in 2018. What is James's basis in the land at the end of 2018?

Monica's Lawn Service, Inc., purchases a heavy-duty tri-cut lawn mower on March 17, 2018, for $4,500. The depreciation on the lawn mower in 2018 was $500. In July, a tire on the lawn mower is repaired at a cost of $650. Maintenance costs on the lawn mower for 2018 total $175. What is Monica's basis in the lawn mower at the end of 2018?

Match each term with the correct statement below. -Conduit entity

Match each statement with the correct term below. -Legislative Grace Concept

Sanchez Company allows its employees to make personal copies without charge on the company copy machines. What concept, construct, or doctrine helps explain why the benefit received is not taxable to Sanchez employees?

A corporation is allowed to deduct all of its ordinary and necessary business expenses. Which of the following Concepts is least helpful in determining this treatment?

In June, Catherine receives stock worth $12,000 as a graduation present from her Grandfather. The following November she receives an $800 cash dividend on the stock. Catherine must include the $800 dividend in her gross income, but excludes the $12,000 value of the stock received. The income tax concept(s) that require this treatment include: I.Ability-to-Pay Concept. II.All-inclusive Income Concept. III.Constructive Receipt Doctrine. IV.Legislative Grace Concept. ​

For each tax treatment described below, explain the income tax concept(s), which is (are) responsible for the treatment. a.Amelia owns a 1/4 royalty interest in a uranium mine. Amelia has the owner of the mine pay 1/3 of her royalties to her son, Joel. During the current year, Amelia receives $18,000 and Joel receives $9,000 in royalty payments. Amelia has $27,000 of gross income from the royalty payments. Joel has no income. b.Mark owns a weekend barbecue business. During the year, he purchases $900 of wood that he uses in his barbecue operation and in his personal fireplace. Mark can only deduct $550 of the wood cost as an expense of his barbecue business. c.Andre is the sole owner of Woods Corporation. Woods sells Andre a parcel of land that it owned for $30,000. Woods had paid $45,000 for the land. Woods Corporation cannot deduct the $15,000 loss on the sale. d.On February 20, 2017, Constance purchases 100 shares of Paris stock for $4,500. At December 31, 2017, the stock is worth $5,200. On November 8, 2018, Constance sells the stock for $5,800. Constance has no income from the stock in 2017 and a capital gain of $1,300 in 2018. e.Barney is a consultant and is a cash basis taxpayer. On December 31, 2018, a client calls and offers to drop off a check for $1,000 in payment of his account on his way to lunch. Barney tells the client not to bother delivering it in person and instructs him to mail the check. Barney must include the $1,000 in his 2018 gross income.?

Belinda purchases a computer system costing $6,000. During the current year, 70% of the use of the computer is for keeping the books and records of her Plasticware business, 20% of the use is for tracking her investments, and 10% of the use is personal. Explain the treatment of the computer according to the income tax concepts.

Robin owns an appliance store. Robin gives Tim a stereo unit to paint the front of her store building. The stereo unit, included in Robin's inventory at a cost of $400, normally retails for $700. If Tim had billed Robin for his work like he charged other customers, he would have sent Robin a bill for $600. Does Tim have income from the receipt of the stereo unit? If so, what amount should Tim report as gross income? Explain in terms of the Income Tax Concepts.

Fran Holloway is an active dealer in used automobiles. While preparing her income tax return, you notice that she purchased one automobile for $7,000 and sold it one month later for $5,800 to Brian Holloway Enterprises. Explain, in terms of the income tax concepts, why the $1,200 loss on the sale of the automobile may not be deductible.

Match each statement with the correct term below. -Investment Expense

Match each statement with the correct term below. -Capital Recovery Concept

The allowance of deductions in calculating taxable income and the use of a progressive tax rate structure are a direct application of the