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FEDERAL TAXATION 307__________________________________
Week 2 – Chapter 4 Homework: student’s name

#20. Brenda loaned her son Bart $250,000 to purchase a new home. Brenda did not charge interest on the loan. Brenda was required to recognize imputed interest income and Bart had imputed home mortgage interest expense that he deducted as an itemized deduction. Would Brenda’s and Bart’s combined total income taxes likely increase or decrease as a result of the imputed interest?

#23. On July 1, 1998, when Betty was 65 years old, she purchased an annuity contract for $108,000. The annuity was to pay Betty $9,000 on June 30 each year for the remainder of her life. Betty died on March 31, 2011. What are the effects of the annuity on Betty’s gross income and taxable income for 2011?

#31. Al is a medical doctor who conducts his practice as a sole proprietor. During 2011, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2010. At the end of 2011, Al had accounts receivable of $60,000, all for services rendered in 2011. In addition, at the end of the year, Al received $12,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2012. Compute Al’s gross income for 2011”

a)Using the cash basis of accounting.
b)Using the accrual basis of accounting.
c)Advise Al on which method of accounting he should use.

#34. Color Paint Shop, Inc. (459 Ellis Avenue, Harrisburg, PA 17111), is an accrual basis taxpayer that paints automobiles. During the year, the company painted Samuel’s car and was to receive a $1,000 payment from his insurance company. Samuel was not satisfied with the work, however, and the insurance company refused to pay. In December 2011, Color and Samuel agreed that Color would receive $800 for the work, subject to final approval by the insurance company. In the past, Color had come to terms with customers only to have the insurance company negotiate an even lesser amount. In May 2012, the insurance company reviewed the claim and paid the $800 to Color. An IRS agent thinks that Color, as an accrual basis taxpayer, should report $1,000 of income in 2011, when the work was done, and then deduct a $200 loss in 2012. Prepare a memo to Susan Apple, a tax partner for whom you are working, with the recommended treatment for the disputed income.

#36. Marlene, a cash basis taxpayer, invests in Series EE U.S. Government savings bonds and bank certificates of deposit (CDs). Determine the tax consequences of the following on her 2011 gross income.

a)On July 1, 2011, she purchased a CD for $10,000. The CD matures on June 30, 2013, and will pay $10.816, thus yielding a 4% annual return. b)On December 31, 2011, she cashed in a CD and received $11,025. She purchased the CD on January 1, 2010 and the yield to maturity was 5%. c)On September 30, 2011, she cashed in Series EE bonds for $10,000. She purchased the bonds in 2011 for $7,025. The yield to maturity on the bonds was 4.5%. #38. Freda is a cash basis taxpayer. In 2011, she negotiated her salary for 2012. Her employer offered to pay her a total of $250,000 for the year. Freda countered that she would accept $10,000 each month for the 12 months in 2012, and the remaining $130,000 in January 2013. The employer accepted Freda’s terms for 2012 and 2013.

a)Did Freda actually or constructively receive $250,000 in 2012? b)What could explain Freda’s willingness to spread her salary over a longer period of time?

#42. Fran, Gary, and Heidi each have a one-third interest in the capital and profits of the FGH Partnership. Each partner had a capital account of $50,000 at the beginning of the tax year. The partnership profits for the tax year were $240,000. Changes in their capital accounts during the tax year were as follows:

Fran Gary Heidi Total
Beginning balance$50,000$50,000$50,000$150,000
Withdrawals...
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