Discussion Questions
1. LO.1 In the following independent
situations, is the tax position of the taxpayer likely to change? Explain why
or why not.
a. John used to make casual purchases and
sales of real estate as an investor. Currently, he does so on a regular basis
and has obtained a license as a dealer.
b. Theresa quit her job as a staff
accountant and has established her own practice as a CPA.
c. After saving enough for a down payment,
Paul has purchased a personal residence.
2. LO.1 Marvin is the executor and sole
heir of his aunt’s estate. The estate includes her furnished home, which Marvin
is considering converting to rental property to generate additional cash flow.
What are some of the tax problems Marvin may confront?
3. LO.2 The Sixteenth Amendment to the U.S.
Constitution was passed to overturn a
Supreme Court decision that had invalidated
the Federal income tax. Do you agree? Why or why not?
4. LO.2 World War II converted the Federal
income tax into a mass tax. Explain.
5. LO.2 How does the pay-as-you-go
procedure apply to wage earners? To persons who have income from sources other
than wages?
6. LO.3 Using Adam Smith’s canon on
economy, evaluate the Federal income tax.
7. LO.3 Distinguish between taxes that are
proportional and those that are progressive.
8. LO.4 Several years ago Ethan purchased
the former parsonage of St. James Church to use as a personal residence. To
date, Ethan has not received any ad valorem property tax bills from either the
city or the county tax authorities.
a. What is a reasonable explanation for
this oversight?
b. What should Ethan do?
9. LO.4 The Adams Independent School
District wants to sell a parcel of unimproved land that it does not need. Its
three best offers are as follows: from the state’s
Department of Public Safety (DPS), $2.3
million; from the Second Baptist Church, $2.2 million; and from Baker Motors,
$2.1 million. DPS would use the property for a new state highway patrol
barracks, Second Baptist would start a church school, and
Baker would open a car dealership. If you
are the financial adviser for the school district, which offer would you
prefer? Why?
10. LO.4 The commissioners for Walker
County are actively negotiating with Falcon
Industries regarding the location of a new
manufacturing plant in the area. As
Falcon is considering several other sites,
a “generous tax holiday” may be needed to influence the final choice. The local
school district is opposed to any “generous tax holiday.”
a. What would probably be involved in a
generous tax holiday?
b. Why would the school district be
opposed?
11. LO.4 Sophia lives several blocks from
her parents in the same residential subdivision.
Sophia is surprised to learn that her ad
valorem property taxes for the year were raised, while those of her parents
were lowered. What is a possible explanation for the difference?
12. LO.4 The Morgan family lives in
Massachusetts. They moor their sailboat in Rhode
Island. What might be a plausible reason
for the possible inconvenience?
13. LO.4 Is the breadth and number of
Federal excise taxes increasing or decreasing?
Explain.
14. LO.4 After his first business trip to a
major city, Herman is alarmed when he reviews his credit card receipts. Both
the hotel bill and the car rental charge are in excess of the price he was
quoted. Was Herman overcharged, or is there an explanation for the excess amounts?
15. LO.4 What is the difference between an
excise tax and a general sales tax?
a. Do all states impose a general sales
tax?
b. Does the Federal government impose a
general sales tax?
16. LO.4 The Grays live in Clay County,
which is adjacent to Jackson County. Although the retail stores in both
counties are comparable, the Grays usually drive a few extra miles to shop in
Jackson County. As to why the Grays might do this, consider the following:
a. Clay County is in a different state than
Jackson County.
b. Clay County and Jackson County are in
the same state.
17. LO.4 During a social event, Muriel and
Earl are discussing the home computer each recently purchased. Although the
computers are identical makes and models,
Muriel is surprised to learn that she paid
a sales tax, while Earl did not. Comment as to why this could happen.
18. LO.4 Distinguish between an estate tax
and an inheritance tax.
a. Do some states impose both? Neither?
b. Which, if either, does the Federal
government impose?
19. LO.4 Jake (age 72) and Jessica (age 28)
were recently married. To avoid any transfer taxes, Jake has promised to leave
Jessica all of his wealth when he dies. Is
Jake under some misconception about the
operation of the Federal gift and estate taxes? Explain.
20. LO.4 Address the following issues:
a. What is the purpose of the unified
transfer tax credit?
b. Is the same amount available for both
the Federal gift tax and the estate tax?
Explain.
c. Does the use of the credit for a gift
affect the amount of credit available for the estate tax? Explain.
21. LO.4 Elijah and Anastasia are husband
and wife who have five married children and nine minor grandchildren. For 2016,
what is the maximum amount they can give to their family (including the sons-
and daughters-in-law) without using any of their unified transfer tax credit?
22. LO.4 What is the difference between the
Federal income tax on individuals and that imposed on corporations?
23. LO.4 As to those states that impose an
income tax, comment on the following:
a. “Piggyback” approach and possible
“decoupling” from this approach.
b. Deductibility of Federal income taxes.
c. Credit for taxes paid to other states.
24. LO.4 In May 2016, Hernando, a resident
of California, has his 2014 Federal income tax return audited by the IRS. An
assessment of additional tax is made because he had inadvertently omitted some
rental income. In October 2016, California audits his state return for the same
year. Explain the coincidence.
25. LO.4 Mike Barr was an outstanding
football player in college and expects to be drafted by the NFL in the first
few rounds. Mike has let it be known that he would prefer to sign with a club
located in Florida, Texas, or Washington. Mike sees no reason why he should
have to pay state income tax on his player’s salary. Is Mike under any
delusions? Explain.
26. LO.4, 5 A question on a state income
tax return asks the taxpayer if he or she made any out-of-state Internet or
mail-order catalog purchases during the year.
The question requires a yes or no answer,
and if the taxpayer answers yes, the amount of such purchases is to be listed.
a. Does such an inquiry have any relevance
to the state income tax? If not, why is it being asked?
b. Your client, Harriet, wants to leave the
question unanswered. As the preparer of her return, how do you respond?
27. LO.4 Many state income tax returns
contain checkoff boxes that allow taxpayers to make donations to a multitude of
local charitable causes. On what grounds has this procedure been criticized?
28. LO.4 Many states have occasionally
adopted amnesty programs that allow taxpayers to pay back taxes with reduced
penalties.
a. Besides the revenue generated, how are
these programs advantageous?
b. Could an amnesty program be used by a
state that does not levy an income tax?
c. Does the IRS utilize this approach?
29. LO.4 Contrast FICA and FUTA as to the
following:
a. Purpose of the tax.
b. Upon whom imposed.
c. Governmental administration of the tax.
d. Reduction of tax based on a merit rating
system.
30. LO.4 In connection with the Medicare
component of FICA, comment on the following:
a. Any dollar limitation imposed.
b. The applicability of the .9% increase in
the 1.45% regular tax rate.
31. LO.4 One of the tax advantages of
hiring family members to work in your business is that FICA taxes are avoided.
Do you agree with this statement? Explain.
32. LO.4 Describe the nature and purpose of
the following taxes:
a. Severance taxes.
b. Franchise taxes.
c. Occupational fees.
d. Customs duties.
e. Export duties.
33. LO.4 Regarding the value added tax
(VAT), comment on the following:
a. Popularity of this type of tax.
b. Nature of the tax.
c. Effect on government spending.
34. LO.4 Both a value added tax (VAT) and a
national sales tax have been criticized as being regressive in their effect.
a. Explain.
b. How could this shortcoming be remedied
in the case of a national sales tax?
35. LO.4, 5 Serena operates a lawn
maintenance service in Southern California. As most of her employees are
itinerant, they are paid on a day-to-day basis.
Because of cash-flow problems, Serena
requires her customers to pay cash for the services she provides.
a. What are some of the tax problems Serena
might have?
b. Assess Serena’s chances of audit by the
IRS.
36. LO.5 With regard to the IRS audit
process, comment on the following:
a. The audit is resolved by mail.
b. The audit is conducted at the office of
the IRS.
c. A “no change” RAR results.
d. A special agent joins the audit team.
37. LO.5 Aldo has just been audited by the
IRS. He does not agree with the agent’s findings but believes that he has only
two choices: pay the proposed deficiency or resort to the courts. Do you agree
with Aldo’s conclusion? Why or why not?
38. LO.5 What purpose is served by a
statute of limitations? How is it relevant in the case of tax controversies?
39. LO.5 Regarding the statute of
limitations on additional assessments of tax by the
IRS, determine the applicable period in
each of the following situations.
Assume a calendar year individual with no
fraud or substantial omission involved.
a. The income tax return for 2015 was filed
on February 19, 2016.
b. The income tax return for 2015 was filed
on June 25, 2016.
c. The income tax return for 2015 was
prepared on April 4, 2016, but was never filed. Through some misunderstanding
between the preparer and the taxpayer, each expected the other to file the
return.
d. The income tax return for 2015 was never
filed because the taxpayer thought no additional tax was due.
40. LO.5 Brianna, a calendar year taxpayer,
files her income tax return for 2015 on February
3, 2016. Although she makes repeated
inquiries, she does not receive her refund from the IRS until May 28, 2016. Is
Brianna entitled to interest on the refund? Explain.
41. LO.5, 6 On a Federal income tax return
filed five years ago, Andy inadvertently omitted a large amount of gross
income.
a. Andy seeks your advice as to whether the
IRS is barred from assessing additional income tax in the event he is audited.
What is your advice?
b. Would your advice differ if you were the
person who prepared the return in question? Explain.
c. Suppose Andy asks you to prepare his
current year’s return. Would you do so?
Explain.
42. LO.5 Isabella files her income tax
return 35 days after the due date of the return without obtaining an extension
from the IRS. Along with the return, she remits a check for $40,000, which is
the balance of the tax she owes. Disregarding the interest element, what are
Isabella’s penalties for failure to file and for failure to pay?
43. LO.5 For tax year 2013, the IRS
assesses a deficiency against David for $500,000.
Disregarding the interest component, what
is David’s penalty if the deficiency is attributable to:
a. Negligence?
b. Fraud?
44. LO.5, 6 In March 2016, Jim asks you to
prepare his Federal income tax returns for tax years 2013, 2014, and 2015. In
discussing this matter with him, you discover that he also has not filed for
tax year 2012. When you mention this fact, Jim tells you that the statute of
limitations precludes the IRS from taking any action as to this year.
a. Is Jim correct about the application of
the statute of limitations? Why or why not?
b. If Jim refuses to file for 2012, should
you prepare returns for 2013 through
2015? Explain.
45. LO.5, 6 The Benson CPA firm is
considering utilizing an offshore service provider to prepare many of its tax
returns. In this regard, what ethical considerations must be taken into
account?
46. LO.7 In terms of tax policy, what do
the following mean?
a. Revenue neutrality.
b. Pay-as-you-go, or “paygo.”
c. Sunset provision.
d. Indexation.
47. LO.7 Some tax rules can be justified on
multiple grounds (e.g., economic and social). In this connection, comment on
the possible justification for the rules governing the following:
a. Pension plans.
b. Education.
c. Home ownership.
48. LO.7, 8 Discuss the probable
justification for each of the following aspects of the tax law:
a. A tax credit is allowed for amounts
spent to furnish care for minor children while the parent works.
b. Deductions for interest on home mortgage
and property taxes on a personal residence.
c. The income-splitting benefits of filing
a joint return.
d. Gambling losses in excess of gambling
gains.
e. Net operating losses of a current year
can be carried back to profitable years.
f. A taxpayer who sells property on an
installment basis can recognize gain on the sale over the period the payments
are received.
g. The exclusion from Federal tax of
certain interest income from state and local bonds.
h. Prepaid income is taxed to the recipient
in the year received and not in the year earned.
49. LO.7 Mia owns a warehouse that has a
cost basis to her of $80,000. The city condemns the warehouse to make room for
a new fire station. It pays Mia $400,000 for the property, its agreed-to fair
market value. Shortly after the condemnation,
Mia purchases another warehouse as a
replacement. What is her recognized gain if the new property cost:
a. $280,000?
b. $444,000?
c. $80,000?
d. What, if any, is the justification for
deferring the recognition of gain on the involuntary conversion?
50. LO.8 A mother sells a valuable
collection of antiques to her daughter for $1,000.
What judicial concept might the IRS invoke
to question this transaction?