Homework Chapter 4
3. Allen visits Reno, Nevada, once a year to gamble. This year his gambling loss was $25,000. He commented to you, “At least I didn’t have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $3,000. “What are the relevant tax issues for Allen? Allen received something of value from the casino. Under the broad concept of income, the airfare and hotel accommodations would be considered income. However, Allen could argue that the income should be matched with his $25,000 in gambling losses on the trip, and when the income and losses are combined, the net effect is an economic loss
7. Why does the constructive receipt doctrine apply to cash basis taxpayers but not to accrual basis taxpayers? The cash method taxpayer is subject to the constructive receipt doctrine. Generally, the cash basis taxpayer does not recognize income until it is collected. Under the constructive receipt concept, when the taxpayer has earned the income and the customer has offered to pay, the taxpayer cannot defer its recognition by postponing the date when the income is collected. The constructive receipt doctrine is not relevant to accrual basis taxpayers, who must recognize income when the taxpayer has a right to receive it even though the income has not been collected
12. Wade paid $7,000 for an automobile that needed substantial repairs. He worked nights and weekends to restore the car and spent $2,400 on parts for it. He knows he can sell the car for $13,000. His daughter’s college tuition is due in a few days. Would it matter, after taxes, whether Wade sells the car and pays the tuition or whether he gives the car to his daughter and she sells it for $13,000 and pays her tuitions? If Wade sells the car, he must pay the tax on the gain of $3,600 ($13,000 $9,400). If Wade gives the automobile to his daughter and she sells it, she will be taxed on the gain of $3,600. Thus, the increase in value that is economically attributable to Wade will become his daughter’s income. If Wade is in a higher marginal tax bracket (probably the case), the family unit will generate tax savings by Wades daughter selling the car. Thus, gifts of appreciated property can be a useful tax planning concept
16. What are the tax consequences if the alimony recapture rules apply to a cash payment to a former spouse? The recapture amount is computed in the third year by a formula provided in the Code. The person who took the deductions in the first two years must include in his or her gross income the recapture amount in the third year. The purpose of the rule is to prevent what are in fact nondeductible property settlements from being deducted as alimony.
20. Brenda loaned her son Bart $250,000 to purchase a new home. Brenda did not change 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? Explain The combined income tax will differ as a result of the imputed interest if Brenda and Bart are in different marginal tax brackets. Also, if Bart would have taken the standard deduction in the absence of the interest deduction, the increased itemized deductions for Bart will not exceed the standard deduction by the amount of the interest paid. Thus, the increase in Brenda’s taxable income will exceed the decrease in Bart’s taxable income.
39. The Bluejay Apartments is a new development and is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company’s actually more concerned about damage that about tenants not paying their rent. a. Discuss the tax effects of the following alternatives.