Research Problems
Research Problem 1. Siva Nathaniel owns various plots of land in Fulton County,
Georgia. He acquired the land at various times during the last 20 years. About every fourth year, Siva subdivides into lots one of the properties he owns. He then has water, sewer, natural gas, and electricity hookups put in each lot and paves new streets. Siva has always treated his sales of such lots as sales of capital assets. His previous tax returns were prepared by an accountant whose practice you recently purchased.
Has the proper tax treatment been used on the prior tax returns? Explain.
Research Problem 2. Clyde had worked for many years as the chief executive of Red
Industries, Inc., and had been a major shareholder. Clyde and the company had a falling out, and Clyde was terminated. Clyde and Red executed a document under which
Clyde’s stock in Red would be redeemed and Clyde would agree not to compete against Red in its geographic service area. After extensive negotiations between the parties,
Clyde agreed to surrender his Red stock in exchange for $600,000. Clyde’s basis in his shares was $143,000, and he had held the shares for 17 years. The agreement made no explicit allocation of any of the $600,000 to Clyde’s agreement not to compete against Red. How should Clyde treat the $600,000 payment on his 2016 tax return?
Research Problem 3. Your client, Alternate Fuel, Inc. (a regular corporation), owns three sandwich shops in the Philadelphia area. In 2013, the year Alternate Fuel incorporated, it acquired land on the outskirts of Philadelphia with the hope of someday farming the land to cultivate humanely harvested meat and grow organic fruits and vegetables to use in its sandwich shops. In 2015, Alternate Fuel drew up plans for the farm and began consulting with agricultural experts about the best locations for crops and the number of animals that could be sustained on the acreage. After reviewing those plans, Alternate Fuel’s CEO decided that the plans are not currently financially feasible and would like to sell the land in 2016. The land has appreciated substantially in value, and the company could use the cash infusion. Given that the land has not been used in the business, will any gain realized be categorized as a § 1231 gain or as a long-term capital gain? Explain.
Research Problem 4. Perform a Google search to find information about capital gains tax rates worldwide (and across U.S. states). Try searching for “capital gains rate by country (state).” What jurisdiction has the highest capital gains tax rate? What U.S. states have high capital gains tax rates?
Research Problem 5. Search for the phrase “mortgage and real estate fraud” on the
IRS’s website (www.irs.gov). Read the articles you find, and explain why this type of fraud is often unearthed by the IRS.
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Roger CPA Review Questions
1. Identify which of the following is a capital asset:
I. A canvas painting of a portrait client, in the painter’s hands
II. Depreciable fixtures in a business parking lot
III. Office supplies held by a business
a. II only
b. II and III only
c. III only
d. None of the above
2. On January 15 of the current year, Kreutzer, an individual, received as an inheritance from Gladstone’s estate shares of stock worth $25,000. Gladstone had purchased the shares in June of the previous year for $20,000, and the shares were worth $25,000 at Gladstone’s date of death in November of the previous year. The executor of Gladstone’s estate did not elect to use the alternate valuation date. In
March of the current year, Kreutzer sold the shares for $27,000. As a result of the sale, what is the amount and type of gain reported by Kreutzer?
a. $7,000 long-term capital gain
b. $2,000 short-term capital gain
c. $7,000 short-term capital gain
d. $2,000 long-term capital gain
3. The following facts apply to Collins, an individual:
In February of the current year, Hodge, who had owed a $5,000 personal debt to
Collins for the past three years, declared bankruptcy.
Collins sold land held for investment for a $10,000 gain. The land had been purchased by Collins five years prior.
In July of the current year, Collins received shares of stock as a gift from Bellamy.
Bellamy had purchased the shares in January of the current year. In November,
Collins sold the stock for a gain of $3,000.
Considering only the above facts, what will Collins report on the current-year tax return?
a. $2,000 long-term capital gain
b. $8,000 long-term capital gain
c. $10,000 ordinary income and $2,000 short-term capital loss
d. $10,000 long-term capital gain and $3,000 short-term capital gain
4. In 2016, Colossus Corporation incurred a net capital loss in the amount of $25,000.
Colossus had the following net capital gains in the previous five years:
2015: $7,000
2014: $2,000
2013: $5,000
2012: $4,000
2011: $3,000
How much of the 2016 net capital loss may Colossus carry over to 2017?
a. $0
b. $25,000
c. $11,000
d. $4,000
5. The following facts apply to Eliot, an individual, in the current year:
April 2: Sold shares of stock, purchased on April 1 of the previous year, for a $2,000 gain
May 15: Sold equipment used in Eliot’s business, which had been purchased in July of the previous year, for a $2,000 gain
July 12: Sold shares of stock, purchased in February of the previous year, for a $7,000 gain
November 3: Sold equipment used in Eliot’s business, which had been purchased in
January of the current year, for a $1,000 loss
December 9: Sold shares of stock, purchased on February 22 of the current year, for a $3,000 loss
Considering only the above facts, what is Eliot’s net capital gain for the current year?
a. $7,000 long-term capital gain
b. $9,000 long-term capital gain
c. $5,000 long-term capital gain
d. $6,000 long-term capital gain
6. In year 1, Gardner used funds earmarked for use in Gardner’s business to make a personal loan to Carson. In year 3, Carson declared bankruptcy, having paid off only $500 of the loan at that time. In year 1, Gardner purchased equipment for use in Gardner’s business. In year 3, Gardner sold the equipment at a $5,000 loss. In
January of year 3, Gardner received shares of stock as a gift from Smith; the shares had been purchased by Smith in year 1. In November of year 3, Gardner sold the shares of stock for a $5,000 gain.
Which of the above transactions will Gardner report as long-term capital gains or losses for year 3?
I. The bad debt write-off
II. The sale of equipment
III. The sale of shares
a. II and III only
b. I only
c. III only
d. None of the above
7. On March 1 of the current year, Reiter, an individual, sold an office building for $300,000 that had an adjusted basis of $220,000, resulting in a gain of $80,000. Reiter had purchased the building for $260,000 on April 1 of the previous year, and $30,000 of the total depreciation taken took advantage of a special tax incentive program
Reiter qualified for. How should Reiter report this gain on the current-year tax return?
a. $80,000 ordinary gain
b. $30,000 ordinary gain and $50,000 long-term capital gain
c. $50,000 ordinary gain and $30,000 long-term capital gain
d. $40,000 ordinary gain and $40,000 short-term capital gain
8. In year 3, Daniels, an individual, sold depreciable equipment for $21,000 that had an adjusted basis of $12,000, resulting in a $9,000 gain. The property had cost Daniels $20,000 when purchased in year 1, and $8,000 of MACRS depreciation had been taken. How should Daniels report the gain on Daniels’s year 3 tax return?
a. As a long-term capital gain of $9,000
b. As an ordinary gain of $1,800 and a § 1231 gain of $7,200
c. As an ordinary gain of $8,000 and a § 1231 gain of $1,000
d. As an ordinary gain of $7,200 and a § 1231 of $1,800
9. Cowabunga Corp. had a highly profitable year 4, during which it purchased $1,000,000 in tangible personal property and elected to claim the highest depreciation expense allowed for tax purposes under § 179. In year 6, Cowabunga sells the tangible personal property, which now has an adjusted basis of $200,000 as a result of the heavy depreciation taken in years 4 and 5. Had only MACRS depreciation been taken on the property, its adjusted basis at the time of sale would have been $800,000. At a sales price of $930,000, how much of the $730,000 realized gain must be reported as ordinary gain for tax purposes?
a. $720,000
b. $600,000
c. $0
d. $730,000
Research Problem 1. Siva Nathaniel owns various plots of land in Fulton County,
Georgia. He acquired the land at various times during the last 20 years. About every fourth year, Siva subdivides into lots one of the properties he owns. He then has water, sewer, natural gas, and electricity hookups put in each lot and paves new streets. Siva has always treated his sales of such lots as sales of capital assets. His previous tax returns were prepared by an accountant whose practice you recently purchased.
Has the proper tax treatment been used on the prior tax returns? Explain.
Research Problem 2. Clyde had worked for many years as the chief executive of Red
Industries, Inc., and had been a major shareholder. Clyde and the company had a falling out, and Clyde was terminated. Clyde and Red executed a document under which
Clyde’s stock in Red would be redeemed and Clyde would agree not to compete against Red in its geographic service area. After extensive negotiations between the parties,
Clyde agreed to surrender his Red stock in exchange for $600,000. Clyde’s basis in his shares was $143,000, and he had held the shares for 17 years. The agreement made no explicit allocation of any of the $600,000 to Clyde’s agreement not to compete against Red. How should Clyde treat the $600,000 payment on his 2016 tax return?
Research Problem 3. Your client, Alternate Fuel, Inc. (a regular corporation), owns three sandwich shops in the Philadelphia area. In 2013, the year Alternate Fuel incorporated, it acquired land on the outskirts of Philadelphia with the hope of someday farming the land to cultivate humanely harvested meat and grow organic fruits and vegetables to use in its sandwich shops. In 2015, Alternate Fuel drew up plans for the farm and began consulting with agricultural experts about the best locations for crops and the number of animals that could be sustained on the acreage. After reviewing those plans, Alternate Fuel’s CEO decided that the plans are not currently financially feasible and would like to sell the land in 2016. The land has appreciated substantially in value, and the company could use the cash infusion. Given that the land has not been used in the business, will any gain realized be categorized as a § 1231 gain or as a long-term capital gain? Explain.
Research Problem 4. Perform a Google search to find information about capital gains tax rates worldwide (and across U.S. states). Try searching for “capital gains rate by country (state).” What jurisdiction has the highest capital gains tax rate? What U.S. states have high capital gains tax rates?
Research Problem 5. Search for the phrase “mortgage and real estate fraud” on the
IRS’s website (www.irs.gov). Read the articles you find, and explain why this type of fraud is often unearthed by the IRS.
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Roger CPA Review Questions
1. Identify which of the following is a capital asset:
I. A canvas painting of a portrait client, in the painter’s hands
II. Depreciable fixtures in a business parking lot
III. Office supplies held by a business
a. II only
b. II and III only
c. III only
d. None of the above
2. On January 15 of the current year, Kreutzer, an individual, received as an inheritance from Gladstone’s estate shares of stock worth $25,000. Gladstone had purchased the shares in June of the previous year for $20,000, and the shares were worth $25,000 at Gladstone’s date of death in November of the previous year. The executor of Gladstone’s estate did not elect to use the alternate valuation date. In
March of the current year, Kreutzer sold the shares for $27,000. As a result of the sale, what is the amount and type of gain reported by Kreutzer?
a. $7,000 long-term capital gain
b. $2,000 short-term capital gain
c. $7,000 short-term capital gain
d. $2,000 long-term capital gain
3. The following facts apply to Collins, an individual:
In February of the current year, Hodge, who had owed a $5,000 personal debt to
Collins for the past three years, declared bankruptcy.
Collins sold land held for investment for a $10,000 gain. The land had been purchased by Collins five years prior.
In July of the current year, Collins received shares of stock as a gift from Bellamy.
Bellamy had purchased the shares in January of the current year. In November,
Collins sold the stock for a gain of $3,000.
Considering only the above facts, what will Collins report on the current-year tax return?
a. $2,000 long-term capital gain
b. $8,000 long-term capital gain
c. $10,000 ordinary income and $2,000 short-term capital loss
d. $10,000 long-term capital gain and $3,000 short-term capital gain
4. In 2016, Colossus Corporation incurred a net capital loss in the amount of $25,000.
Colossus had the following net capital gains in the previous five years:
2015: $7,000
2014: $2,000
2013: $5,000
2012: $4,000
2011: $3,000
How much of the 2016 net capital loss may Colossus carry over to 2017?
a. $0
b. $25,000
c. $11,000
d. $4,000
5. The following facts apply to Eliot, an individual, in the current year:
April 2: Sold shares of stock, purchased on April 1 of the previous year, for a $2,000 gain
May 15: Sold equipment used in Eliot’s business, which had been purchased in July of the previous year, for a $2,000 gain
July 12: Sold shares of stock, purchased in February of the previous year, for a $7,000 gain
November 3: Sold equipment used in Eliot’s business, which had been purchased in
January of the current year, for a $1,000 loss
December 9: Sold shares of stock, purchased on February 22 of the current year, for a $3,000 loss
Considering only the above facts, what is Eliot’s net capital gain for the current year?
a. $7,000 long-term capital gain
b. $9,000 long-term capital gain
c. $5,000 long-term capital gain
d. $6,000 long-term capital gain
6. In year 1, Gardner used funds earmarked for use in Gardner’s business to make a personal loan to Carson. In year 3, Carson declared bankruptcy, having paid off only $500 of the loan at that time. In year 1, Gardner purchased equipment for use in Gardner’s business. In year 3, Gardner sold the equipment at a $5,000 loss. In
January of year 3, Gardner received shares of stock as a gift from Smith; the shares had been purchased by Smith in year 1. In November of year 3, Gardner sold the shares of stock for a $5,000 gain.
Which of the above transactions will Gardner report as long-term capital gains or losses for year 3?
I. The bad debt write-off
II. The sale of equipment
III. The sale of shares
a. II and III only
b. I only
c. III only
d. None of the above
7. On March 1 of the current year, Reiter, an individual, sold an office building for $300,000 that had an adjusted basis of $220,000, resulting in a gain of $80,000. Reiter had purchased the building for $260,000 on April 1 of the previous year, and $30,000 of the total depreciation taken took advantage of a special tax incentive program
Reiter qualified for. How should Reiter report this gain on the current-year tax return?
a. $80,000 ordinary gain
b. $30,000 ordinary gain and $50,000 long-term capital gain
c. $50,000 ordinary gain and $30,000 long-term capital gain
d. $40,000 ordinary gain and $40,000 short-term capital gain
8. In year 3, Daniels, an individual, sold depreciable equipment for $21,000 that had an adjusted basis of $12,000, resulting in a $9,000 gain. The property had cost Daniels $20,000 when purchased in year 1, and $8,000 of MACRS depreciation had been taken. How should Daniels report the gain on Daniels’s year 3 tax return?
a. As a long-term capital gain of $9,000
b. As an ordinary gain of $1,800 and a § 1231 gain of $7,200
c. As an ordinary gain of $8,000 and a § 1231 gain of $1,000
d. As an ordinary gain of $7,200 and a § 1231 of $1,800
9. Cowabunga Corp. had a highly profitable year 4, during which it purchased $1,000,000 in tangible personal property and elected to claim the highest depreciation expense allowed for tax purposes under § 179. In year 6, Cowabunga sells the tangible personal property, which now has an adjusted basis of $200,000 as a result of the heavy depreciation taken in years 4 and 5. Had only MACRS depreciation been taken on the property, its adjusted basis at the time of sale would have been $800,000. At a sales price of $930,000, how much of the $730,000 realized gain must be reported as ordinary gain for tax purposes?
a. $720,000
b. $600,000
c. $0
d. $730,000