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Chapter 7 Deductions And Losses: Certain Business Expenses And Losses
Discussion Questions
1. LO.1 Explain how an account receivable can give rise to a bad debt deduction.
2. LO.1 Ron, a cash basis taxpayer, sells his business accounts receivable of $100,000 to Mike for $70,000 (70% of the actual accounts receivable). Discuss the amount and classification of Ron’s bad debt deduction.
3. LO.1 Discuss when a bad debt deduction can be taken for a nonbusiness debt.
4. LO.1 Discuss the treatment of a business bad debt when the business also has long-term capital gains.
5. LO.1 Many years ago, Jack purchased 400 shares of Canary stock. During the current year, the stock became worthless. It was determined that the company “went under” because several corporate officers embezzled a large amount of company funds. Identify the relevant tax issues for Jack.
6. LO.2 Sean is in the business of buying and selling stocks and bonds. He has a bond of Green Corporation for which he paid $200,000. The bond is currently worth only $50,000. Discuss whether Sean can take a $150,000 loss for a business bad debt or for a worthless security.
7. LO.2 Discuss the tax treatment of the sale of § 1244 stock at a gain.
8. LO.3, 4 Jim discovers that his residence has extensive termite damage. Discuss whether he may take a deduction for the damage to his residence.
9. LO.3, 4 The value of Mary’s personal residence has declined significantly because of a recent forest fire in the area where she lives. Mary’s house suffered no actual damage during the fire, but because much of the surrounding area was destroyed, the value of all of the homes in the area declined substantially. Discuss whether Mary can take a casualty loss for the decline in value of her residence caused by the fire.
10. LO.4 Discuss at what point in time a theft loss generally is recognized.
11. LO.4 Discuss the circumstances under which the cost of repairs to the damaged property can be used to measure the amount of a casualty loss.
12. LO.4 Hazel sustained a loss on the theft of a painting. She had paid $20,000 for the painting, but it was worth $40,000 at the time of the theft. Evaluate the tax consequences of treating the painting as investment property or as personal use property.
13. LO.4 Kelly decided to invest in Lime, Inc. common stock after reviewing Lime’s public disclosures, including recent financial statements and a number of press releases issued by Lime. On August 7, 2014, Kelly purchased 60,000 shares of Lime for $210,000. In May 2015, Lime entered into a joint venture with Cherry, Inc. In
November 2015, the joint venture failed, and Lime’s stock began to decline in value.
In December 2015, Cherry filed a lawsuit against Lime for theft of corporate opportunity and breach of fiduciary responsibility. In February 2016, Lime filed a countersuit against Cherry for fraud and misappropriation of funds. At the end of December 2016,
Kelly’s stock in Lime was worth $15,000. Identify the relevant tax issues for Kelly.
14. LO.3, 4 In 2013, John opened an investment account with Randy Hansen, who held himself out to the public as an investment adviser and securities broker. John contributed $200,000 to the account in 2013. John provided Randy with a power of attorney to use the $200,000 to purchase and sell securities on John’s behalf. John instructed Randy to reinvest any gains and income earned. In 2013, 2014, and 2015, John received statements of the amount of income earned by his account and included these amounts in his gross income for these years. In 2016, it was discovered that Randy’s purported investment advisory and brokerage activity was in fact a fraudulent investment arrangement known as a Ponzi scheme. In reality,
John’s account balance was zero, the money having been used by Randy in his scheme. Identify the relevant tax issues for John.
15. LO.5 Discuss under what circumstances a company would elect to amortize research and experimental expenditures rather than use the expense method.
16. LO.6 Amos began a business, Silver, Inc., on July 1, 2013. The business extracts and processes silver ore. During 2016, Amos becomes aware of the domestic production activities deduction (DPAD) and would like to take advantage of this deduction. Identify the relevant tax issues for Silver, Inc.
17. LO.6 The DPAD is unlike other deductions and is designed to provide a tax benefit in a somewhat unique manner. Explain this statement.
18. LO.7 Discuss whether deductions for AGI can be treated as nonbusiness deductions in computing an individual’s NOL.