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ACC307_-_Week_1_Solutions[1] - Chapter 1 Solutions 9...

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Chapter 1 Solutions 9. Although the Baker Motors bid is the lowest, from a long-term financial standpoint, it is the best. The proposed use of the property by the state and the church probably will make it exempt from the School District’s ad valorem tax. This would hardly be the case with a car dealership. In fact, commercial properties (e.g., car dealerships) often are subject to higher tax rates. p. 1-7 11. Probably what has happened is that the appraised value of the residence has been raised. Unfortunately, there is often a time lag in the appraisal process, and the taxing authority has not yet taken into account any recent changes in value. See Tax in the News item on p. 1-8. 14. Eileen may have avoided the sales tax but she will be vulnerable to the Wyoming use tax. This tax will be imposed when Wyoming discovers she has not paid its sales tax—probably when she registers the car in Wyoming. See the discussion in connection with Example 4. p. 1-10 19. As to gifts, Alvin can give Holly $1,013,000 [$13,000 (annual exclusion) + $1,000,000 (the equivalent of the $345,800 unified credit)] the first year without incurring any transfer tax. Additional gifts of $13,000 per year also can be made free of tax. Alternatively, by death Alvin can pass Holly $3,500,000 (the equivalent of $1,455,800 unified credit) free of estate tax. A good approach would be to give her the $1,013,000 now and pass her the $2,500,000 balance at death. This approach reduces the unified tax credit available at death by $345,800—the amount used to cover the current gift. pp. 1-12 to 1-14 26. a. This type of question has no relevance to the state income tax, but is a less than subtle way of encouraging taxpayers to pay any use tax due on Internet and mail order purchases. See Tax in the News on p. 1-15. b. As the preparer of the state income tax return, you should not leave questions unanswered unless there is a good reason for doing so. It appears that Harriet has no justifiable reason. p. 1-24 36. a. The large amount involved means it received media coverage. IRS agents are instructed to take note of such items. Consequently, it would not be surprising if Linda’s return for the year involved is audited. Keep in mind that this is a ‘‘big ticket item’’ in terms of possible income tax deficiencies. b. Mel operates a cash business where the potential for omission of income is high. Also, his erratic personal life could make him subject to retribution (i.e., ‘‘informed on’’ to the IRS).
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c. Cindy could be a candidate for an audit for two reasons. First, her high gross income and AGI. Second, the large donation will exceed the norm for itemized charitable contributions for someone in her income category. d. As a headwaiter, Pierre will receive large tips. He will also share in the business of the valet service which invariably involves gratuities. With so much cash involved, the full reporting of income may not occur. The IRS is aware of this potential for omission.
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