CH2 Sol - ANSWERS TO KEYSTONE PROBLEMS—CHAPTER 2...

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Unformatted text preview: ANSWERS TO KEYSTONE PROBLEMS—CHAPTER 2 (112161.) The leading case on the issue of the deductibility of home office expenses by teachers is David J. Weissman, 85-1 USTC 11 9106, 751 F.2d 512 (CA-3 1984), rev’g 47 TCM 520, Dec. 40,645(M), T.C. Memo. 1983-724. A college professor was required to do scholarly research and writing in addition to teaching. He spent the majority of his employment-related time doing research and writing at home because a quiet and safe place to perform this work was not available at the college. The court held that he was entitled to deduct his home office expenses because his home, not his college office, was his principal place of business. The home office was necessary to carry out an essential aspect of his job (i.e., his research) and was maintained for the convenience of the employer. The 7th Circuit in Thomas C. Cadwallader v. Commissioner, 90-2 USTC 1150,597, aff’ g 57 TCM 1030, denied a deduction for a home office maintained for the taxpayer’s own convenience where a university provided him with adequate office space. The US. Supreme Court, in another office-in-home case, Nadar E. Soliman, 93-1 USTC 1150,014, held that the office- in-home must be the principal place where the activities are performed to be deductible. Since Weissman’s principal income-earning activity could be held to be teaching, the deductibility of his office-in-home after the Soliman decision would be questionable. (112333.) In an office examination the taxpayer or a representative should take only information or support for items which are requested of the taxpayer by the IRS; otherwise the tax auditor might open up other areas for investigation. Situations may vary, but some practitioners believe that it is better for the taxpayer, assuming he or she has a representative such as a CPA or a lawyer, not to be present because the representative can keep better control over the interview and also approach the matter in a less emotional atmosphere. IRS personnel should be treated courteously and should be promptly furnished information and substantiation relating to applicable tax return items. Although the cooperation of the taxpayer (or representative) is important, the taxpayer should respond only to questions asked by the agent. Disclosing unnecessary information could cause problems to the taxpayer. When there is a disagreement after an office examination, if practicable, the taxpayer is given an opportunity for an interview with the tax auditor’s immediate supervisor or for a conference with an Appeals officer. If these actions are not feasible, the taxpayer will be sent a 30-day letter from the District Office indicating the proposed adjustments and the courses of action. If the taxpayer agrees with the adjustment, the agreement form can be signed. If the taxpayer disagrees, he or she may request an Appeals Office conference within 30 days, or ignore the 30-day letter and wait for the 90-day letter which allows the taxpayer to file a petition in the Tax Court. There are a number of factors a taxpayer should consider in trying to decide whether to pursue the matter. Going to the Appeals Office is less expensive than litigation, and yet the taxpayer leaves open the opportunity to file a petition in the Tax Court or to sue for refund in a District Court or the Court of Federal Claims. In addition, a taxpayer is often able to gather more information about the IRS position in the event the taxpayer needs to carry the case further and there may be a chance that the taxpayer may convince the Appeals Officer that the IRS was incorrect at the agent level. The Appeals Officer may be at some disadvantage in that the officer has not personally prepared the case and is relying on the information presented by the revenue agent, which could be an advantage to the taxpayer. On the other hand, there may be some disadvantages to having an Appeals Conference. New issues might be raised in an Appeals conference, although the IRS’s policy is not to raise an issue unless the grounds for such action are “substantial” and the potential effect upon tax liability is “material.” The 10 factors mentioned in the “Choice of Tax Forum” should also be considered. It is important for taxpayers to be aware of the characteristics of the courts so that an appropriate choice can be made if the taxpayer decides to go to court. A taxpayer, having made a decision to go to the District Court, for example, cannot later decide to go to the Tax Court. The taxpayer must think very seriously before taking the case to court. Not only may the economic costs be high, but the psychological and emotional costs may also be high. The taxpayer has to consider whether the tax savings will be worth the legal fees, time, and psychological costs. In deciding to which court to take the case, the taxpayer should not look simply at the statistics on taxpayer winnings in the various courts. Statistics like that only have some value if winnings by taxpayers on similar issues are being examined. Internal Revenue Code Structure 1. Yes, the Internal Revenue Code of 1986 includes all existing tax laws, regardless of the date when such provisions were enacted. Internal Revenue Code Organization 2. The majority of the income tax law is found in the Internal Revenue Code, Subtitle A, Chapter 1. Treasury Regulations: Judicial Precedent 3. Yes, Regulations are issued by the US. Treasury Department, and are authorized by Congress. In contrast, Revenue Rulings are issued by the Internal Revenue Service, which is a branch of the Treasury Department. Regulations v. Revenue Rulings 4. Yes, in dealing with the IRS, Regulations have the authority of law. Revenue Rulings are similar to Regulations in that they represent administrative interpretations of the law; however, they do not have the force and effect of Regulations, but they may be used as precedents. Administrative Sources of Tax Law 5. Treasury Regulations, Revenue Rulings, Revenue Procedures, Technical Information Releases and Announcements, Private Letter Rulings, Determination Letters, and Technical Advice Memoranda. Revenue Ruling and Revenue Procedure Citation 6. When a Revenue Ruling or a Revenue Procedure is first issued, the available citation is the reference to the Internal Revenue Bulletin. However, once the Cumulative Bulletinfor the period has been issued, all rulings and procedures reprinted in that Cumulative Bulletin should be cited according to their permanent CB page references—not according to the temporary IRB reference. Judicial Circuits 7. There are presently ll numbered judicial circuits plus the Federal Circuit. The District of Columbia is a separate Circuit. Trial Court System 8. The three trial courts that have jurisdiction over tax cases are the US. Tax Court, the US. District Court, and the US. Court of Federal Claims. Tax Court: Regular and Memorandum Decisions 9. Regular decisions require an interpretation of the law; memorandum decisions generally concern only well- established principles of law and require only a determination of facts. Tax Court: IRS Acquiescences 10. No, an acquiescence to a court decision can be retroactively withdrawn at any time by the IRS. Common Tax Law Abbreviations 11. CCH ............................................................................................................. .. CCH, a Wolters Kluwer business RIA .................................................................................................................... .. Research Institute of America BTA ................................................................................................................................ .. Board of Tax Appeals USTC ........................................................................................ ..United States Tax Cases (published by CCH) AFTR ......................................................... .. American Federal Tax Reports (RIA original series of tax cases) AFTRZd .............. .. American Federal Tax Reports, 2nd series (current years of tax cases, published by RIA) S.Ct. ....................... .. Supreme Court Reporter (Supreme Court decisions published by West Publishing Co.) CA-3 ................................................................................................................... .. Court of Appeals, 3rd Circuit TCM .......................................................................................................................... .. Tax Court Memorandum Tax Law Publication Services 12. Research Institute of America (RIA) Tax Law Publication Services 13. Merten’s, Law of Federal Income Taxation Tax Research Methodology: Case #1 14. 2011 = 0; 2012 = $1,900. See Reg. §l.165-1(d)(2)(ii). Tax Research: Computer-Based Research Systems 15. Computer-based research systems in which the text of tax treaties may be found include the publishers CCH, West, Lexis/Nexis, and RIA (Research Institute of America). Tax Research: Court Case Historical Record 16. The historical record of a court case can be found in a Citator. IRS Organization 17. See Exhibit 8 in the text for the organization of the Internal Revenue Service. The Internal Revenue Service consists of a National Office and an extensive field organization composed of over 100,000 revenue agents, revenue officers, and support personnel. The IRS is divided into four operating divisions, each responsible for serving a group of similar taxpayers. Practice Before the IRS 18. Attorneys or certified public accountants who are not under suspension or disbarment may practice before the IRS, as may any person enrolled as an agent. Enrolled agents, however, must demonstrate special competence in tax matters by written examination administered by the IRS. In certain situations, other persons may represent taxpayers: (1) An individual may represent another individual who is his or her full-time employer, may represent a partnership of which he or she is a member or a full-time employee, or may represent a member of his or her immediate family. (2) Corporations, associations, or organized groups may be represented by bona fide officers or full-time employees. (3) Trusts, receiverships, guardianships, or estates may be represented by their trustees, receivers, guardians, administrators, or executors or by full-time employees. (4) An individual who prepares the taxpayer’s return may represent the taxpayer before officers and employees of the Examination Division of the IRS. Rulings, Determination Letters, and Technical Advice Memoranda 19. Private Letter Rulings. A private ruling is a “written statement issued to a taxpayer by the National Office of the IRS that interprets and applies the tax laws to that taxpayer’s specific set of facts.” It is issued in response to a specific request by a taxpayer. The private ruling is applicable only for the taxpayer requesting the ruling, although it may provide to taxpayers in similar situations some indication of the IRS’s viewpoint. Determination Letters. A determination letter is a “written statement issued by a District Director in response to a written inquiry by a taxpayer which applies the principles and precedents previously announced by the National Office to a specific set of facts.” Determination letters are issued by District Directors whereas rulings are issued by the National Office. Most determination letters are issued as to matters involving pension plans and exempt organizations. Technical Advice Memoranda. Technical advice is “advice or guidance furnished by the National Office upon request of a District or an Appeals Office in response to any technical or procedural question” that develops during the examination or appeals process. Both the taxpayer and the District or Appeals Office may request technical advice. The taxpayer may request advice where there appears to be inconsistency in the application of law or where the issue is unusual or complex. Requests for technical advice memoranda sometimes become the basis for a Revenue Ruling. IRS Examination of Returns: Selection Programs 20. DIF. The Discriminant Function system used by the IRS involves computer scoring using mathematical formulae to select tax returns with the highest probability of errors. T CMP. Taxpayer Compliance Measurement Program is a program for measuring taxpayer compliance through specialized audits of individual tax returns. IRS Examination of Returns: Selection Criteria 21. The following events might cause an IRS examination: (1) Total positive income is above specified amounts. (2) Another IRS office or a non-IRS party might provide information (e.g., a tip from a bitter former spouse). (3) A claim for a refund may result in a closer examination of the return. (4) A return of a related party (family member, partner) might be examined to determine the correctness of the taxpayer’s return. Correspondence Examinations: Taxpayer Errors Resolved by Mail 22. Mathematical errors can be broadly defined to mean (1) an error in addition, subtraction, multiplication, or division shown on any return; (2) an incorrect use of any IRS table if such incorrect use is apparent from other information on the return; (3) inconsistent entries on the return; (4) an omission of information required to be supplied on the return to substantiate a return item; or (5) a deduction or credit disallowed by law that is either a specified monetary amount or a percentage, ratio, or fraction—if the items entering into the application of such limit appear on the return. District Office Examinations 23. Examples of types of issues which lend themselves to interview examinations are income items that are not subject to withholding, deductions for travel and entertainment, items such as casualty and theft losses that involve the use of fair market value, education expenses, deductions for business related expenses, and determination of basis of property. Also, if the taxpayer’s income is low in relation to financial responsibilities as indicated on the return through the number of dependents, or interest expense, or if the taxpayer’s occupation is of the type that required only a limited formal education, an office interview might be deemed appropriate. Certain business activities or occupations may also lend themselves to office interview examinations. Field Examinations 24. In addition to being less costly than settling at higher levels, negotiations with the revenue agent are generally more informal than higher levels and less demanding as to technical aspects. Also, if questionable issues exist but were not raised at the agent level, it may be wise to settle at that level in order to avoid the possibility of persons at higher levels raising those questionable issues. Notices of Deficiency 25. 30-day letter. If the taxpayer and the agent do not agree, the taxpayer will be sent a 30-day letter which explains the appellate procedures and urges the taxpayer to reply within 30 days either by signing the waiver or by requesting a conference. 90-day letter. If the taxpayer does not respond to the 30-day letter, a statutory notice of deficiency (90-day letter) will be sent which gives the taxpayer 90 days to file a petition with the Tax Court. Appeals Procedure: Administrative Process 26. If an appeal is made within the IRS, an appropriate request must be made if required. A taxpayer may go to the Appeals Office at two different times: (1) if the protest is filed within the 30-day period as stated in the 30- day letter, or (2) if the 30-day period passes and the taxpayer files a petition in the Tax Court within 90 days after receipt of a statutory notice of deficiency (the “90-day letter”). The taxpayer may represent himself or herself at an Appeals conference or the taxpayer may be represented by an attorney, CPA, or person enrolled to practice before the IRS. The Appeals Officer, who actually handles the appeals, reports to the Regional Director of Appeals, who reports to the Regional Commissioner. Proceedings before the Appeals Office are informal and are held in the District Office. The Appeals Officer may request that the taxpayer submit additional information, which could involve additional conferences. Appeals Procedure: Federal Court System 27. There is a small tax cases procedure in the Tax Court if the amount of the deficiency or claimed overpayment is not greater than $50,000. In addition, there are three other trial courts or courts of original jurisdiction: the US. Tax Court, a federal District Court, and the US. Court of Federal Claims. Appeals from the Tax Court and the District Court go to the Circuit Court of Appeals and appeals from the Court of Federal Claims go to the US. Court of Appeals for the Federal Circuit. Appeals from all Courts of Appeals go to the US. Supreme Court. Tax Forum Selection 28. The factors to be considered include the following: (1) Jurisdiction. (2) Payment of tax. (3) Jury trial. (4) Rules of evidence. (5) Expertise of judges. (6) Publicity. (7) Legal precedent. (8) Factual precedent. (9) Statute of limitations. (10) Discovery. See also the choice of tax forum section at 1l2311 in the textbook. Delinquency Penalties; Types 29. The two delinquency penalties are the penalty for failure to file a return and the penalty for failure to pay the tax. Delinquency Penalties: Reasonable Causes for Avoidance 30. The following are some “reasonable causes” for purposes of avoiding the delinquency penalties: (1) A return was mailed in time but returned for insufficient postage. (2) A return was filed within the legal period but in the wrong district. (3) Death or serious illness of the taxpayer or of someone in the immediate family. (4) Unavoidable absence of the taxpayer. (5) Destruction of the taxpayer’s business or business records by fire or other casualty. (6) Erroneous information was given the taxpayer by an IRS official. (7) The Taxpayer made an effort to obtain assistance or information necessary to complete the return by a personal appearance at an IRS office but was unsuccessful because the taxpayer, through no fault of his own, was unable to see an IRS representative. (8) The taxpayer is unable to obtain the records necessary to determine the amount of tax due for reasons beyond the taxpayer’s control. (9) The taxpayer contacts a competent tax adviser, furnishes the necessary information, and then is incorrectly advised that the filing of a return is not required. Negligence Penalty 3 1 . A 20 percent penalty, part of the accuracy-related penalty, is imposed for underpayment of tax due to negligence or intentional disregard of rules or regulations. Understatement of Tax Liability Penalty 32. (1) A taxpayer and (2) any person who aids in the preparation or presentation of any tax document in connection with matters arising under the internal revenue laws who knows that the document will result in the understatement of tax liability of another person. Valuation Overstatement Penalty 33. Any taxpayer having an underpayment of tax attributable to a valuation overstatement is subject to a penalty. The amount of the penalty is 20 percent and is part of the accuracy-related penalty. Underpayment of Tax Penalty 34. An individual taxpayer can avoid the penalty for underpayment if the payments of estimated tax are at least as large as any one of the following: (1) 90 percent of the tax shown on the return or 100 percent of the tax shown on the return of the individual for the preceding taxable year (assuming it showed a tax liability and covered a taxable year of 12 months); or (2) An amount equal to 90 percent of the tax for the taxable year computed by annualizing the taxable income received for the months in the taxable year ending before the month in which the installment is required to be paid. Delinquency Penalties: Computation of Penalty 35. Jim’s total penalties (disregarding interest) are $400, consisting of a failure to pay penalty of $40 (1/2 X 1% X $8,000) and a failure to file penalty of $360 or $400 (5% X $8,000) less the failure to pay penalty of $40. Negligence Penalty: Computation of Penalty 36. Rose’s total penalty is $4,000 (20% X $20,000). Appeals Procedure: Administrative Process 37. There are three options available to Olivia: (1) She may request a conference in the IRS Appeals Office. (2) She may ignore the 30-day letter. She would then receive a statutory notice of deficiency at which time she may file a petition in the Tax Court within the 90-day period. (3) She could wait for the 90-day period to expire, pay the assessment, and start a refund suit in the District Court or the Claims Court. Multiple Choice—Internal Revenue Code Organization 38. b. Partners and partnerships is the topic covered in Code Sec. 731 of the Internal Revenue Code. Multiple Choice—Treasury Regulations 39. (1. Treasury Regulations are published in the Federal Register. Multiple Choice—Revenue Rulings Publication 40. (c) and (d). Revenue Rulings are published when they are issued in the Federal Register. They are also published in the Internal Revenue Bulletin (issued weekly). Multiple Choice—Tax Court Memorandum Decisions Publication 41. d. Tax Court Memorandum Decisions (cited TCM), published by CCH, would be a publication in which to find memorandum decisions of the US. Tax Court. Practice Before the IRS 42. Attorneys or certified public accountants who are not under suspension or disbarment may practice before the IRS as may any person enrolled as an agent. Thus, if Matthew is an attorney or CPA, he may represent Timothy as well as if he has become an enrolled agent by taking a written examination administered by the IRS. If Matthew was related to Timothy, he could represent him without enrollment. Appeals Procedure: Refund Claims 43. Yes, Marvin should file a claim for refund by filing Form 1040X (Amended U.S. Individual Income Tax Return) and mail it to the IRS Center where he filed the original return. A claim for refund must be filed within three years from the date the return was filed or within two years from the date the tax was paid, whichever is later. Therefore, since he filed the return on August 15, 2010, and paid the tax on February 15, 2011, he must file the claim by August 15, 2013. IRS Letter Rulings: Areas Not Subject to Rulings 44. No, because the IRS will not issue rulings in a number of general areas, one of which applies to this situation. The IRS will not issue a ruling on the results of a transaction that lacks bona fide business purposes or has as its principal purpose the reduction of federal taxes. As Steve’s principal purpose for wanting to incorporate is the reduction of taxes and the transaction also lacks business purpose, he would not receive a ruling from the IRS. Delinquency Penalties: Reasonable Causes for Avoidance 45. No, because the penalty can be avoided if the taxpayer can show that failure to file and/or pay was due to reasonable cause and not to willful neglect. The Internal Revenue Manual states that if a return is mailed on time but returned for insufficient postage, the “reasonable cause” requirement for avoiding the penalty is met. Overstatement of Deposit of Tax Penalty 46. Any person who makes an overstated deposit claim is subject to a penalty of 10 percent of such claim. The term “overstated deposit claim” means the excess of the amount of tax claimed in a filed return to have been deposited in a government depository over the amount actually deposited in a depository on or before the date such return is filed. Thus, Douglas Corporation may be penalized $500 (($15,000 - $10,000) X 10%) as a result of this error. Tax Preparer Penalties 47. Joe is subject to a preparer penalty. Any preparer who endorses or otherwise negotiates a refund check issued to a taxpayer for a return or claim for refund prepared by the preparer is liable for a penalty of $500 with respect to such check. Thus, Joe is potentially liable for a penalty of $500 as a result of his depositing Karen’s refund check into his account in payment for his services. Statute of Limitations: Omissions of Income 48. Jim must omit more than $50,000 ($200,000 X 25%) for the six-year statute of limitations to apply. If the taxpayer omits income in excess of 25 percent of the gross income reported on his return, the IRS has six years in which to make any additional assessment of tax. In computing gross income, revenues from the sales of goods or services are not to be reduced by costs of goods sold. Tax Practice Ethics 49. Per “Statements on Standards for Tax Services,” Andrea should ask Rodney to disclose the error to the IRS. If Rodney does not comply with her request, Andrea may have a duty to withdraw from the engagement. Since the Statements indicate standards followed by members of the accounting profession, a violation of them might mean that “due care” has not been exercised. Thus, if Rodney does not comply with Andrea’s request and she does not withdraw from the engagement, she may be subject to charges of negligence. Tax Practice Ethics 50. No, per the AICPA “Statements on Standards for Tax Services.” In preparing a tax return, a CPA may take a position contrary to Treasury Department or IRS interpretations of the Code without disclosure if there is reasonable support for the position. Delinquency Penalties: Computation of Penalty 51. (1) Failure to pay penalty: 3% (.5% per month for the 6 months from April 16 through September 20, with the fractional month counted as a full month) of the $1,200 balance due $ 36 (2) Failure to file penalty: Penalty at 5% for maximum of five months, 25% of $1,200 300 Less: failure to pay penalty for 5 months ($6 X 5) i0 Failure to file penalty {Q Total delinquency penalties (l) and (2) $306 Valuation Misstatement Penalty: Computation of Penalty 52. The valuation claimed ($50,000) is 250% of the correct valuation ($20,000). The penalty, however, is 40% of the underpayment of tax since a charitable contribution is involved. Tommy’s underpayment of tax is $12,000, which means the penalty is $4,800. Statute of Limitations: Omissions of Income 53. 25% of gross income of $420,000 ($400,000 + $20,000) is $105,000. If Sandy omitted $100,000 income, which is less than $105,000, the statute of limitation would be three years. If she omitted $120,000 income, which is greater than $105,000, the statute of limitation would be increased to six years. Refunds: Timeliness of Claims 54. If Brent files the claim on March 14, 2012, he can recover $6,000 because the claim is filed within athree-year period from the due date of the return. (He filed the original return before the due date.) If he files the claim on May 15, 2012, his recovery is limited to the amount he actually paid during the last two years, that is, the $3,000 paid on June 10, 2010. Multiple Choice—Notices of Deficiencies 55. b. If the taxpayer omits from gross income an amount which is in excess of 25 percent of the amount of gross income stated on the return, the tax may be assessed at any time within six years after the return is filed, or the due date for filing, if later. However, there is no such rule for overstated deductions, and therefore the date is three years after the due date of the 2010 return (i.e., April 15, 2014). ‘ Multiple Choice—Statute of Limitations: Omissions of Income 56. d. For the six-year statute of limitations to apply, Maude would have had to omit in excess of 25 percent of gross income. In computing gross income, revenues from the sale of goods or services are not to be reduced by cost of goods sold. Also, gross income includes capital gains. Thus, 25 percent of $440,000 is $110,000. Multiple Choice—Statute of Limitations: Refund Claims 57. d. There is a special seven-year period of limitation on a claim for refund based on a debt that became wholly worthless or on a worthless security. Code Sec. 6511(d)(1). Multiple Choice—Tax Practice Ethics 58. a. Advise client. Multiple Choice—Tax Forum Selection 59. 0. Pay the additional tax, then file a claim for refund. Multiple Choice—Appeals Procedure 60. c. Submit a written protest within a specified time limit. Multiple Choice—Tax Preparer Penalties 61. c. The tax return preparer has the burden of proof. Research Problem—Revenue Rulings 62. Rev. Rul. 57-82 has been superseded by Rev. Rul. 76-74. Research Problem—Code References 63. Code Secs. 2053 and 2054. This is an exercise in locating a detailed Code section reference. However, please note that the reference in the regulation is unintelligible, unless you find out what Code Secs. 2053 and 2054 stand for. Research Problem—Revenue Rulings 64. Rev. Rul. 76—74 supersedes Rev. Ruls. 57-82; 56-445; 55-477. Research Problem—IRS Letter Rulings 65. The date of IRS Letter Ruling 8302032 is October 7, 1982. Research Problem—Regulations 66. Reg. §l.274-8 was adopted on June 24, 1963. Research Problem—Code Organization 67. Section 280A. Research Problem—Citator Case Citations 68. a. CA-2 reversed the district court. b. S.Ct. reversed CA-2. Research Problem—Code Organization 69. Standard Deduction: Code Sec. 63; Trade or Business Expenses: Code Sec. 162; Losses: Code Sec. 165; Medical Deductions: Code Sec. 213; Moving Expenses: Code Sec. 217. Research Problem—Code References 70. Code Secs. 902 and 936 are referred to in Code Sec. 56(f)(2)(F)(ii)(Il), which has been repealed. Research Problem—Citator Case Citations 71. Cert. denied, 296 US. 588; 56 S.Ct. 99. Research Problem—Regulations 72. Code Secs. 212 and 266 are referred to in Reg. § 212-1(n). Research Problem—Legal Terms: Definitions 73. ANNOTATED—To make or furnish critical or explanatory notes or comments. CERTIORARI—An appellate proceeding for reexamination of action of inferior tribunal or auxiliary process to enable appellate court to obtain further information in pending cause. REMANDED—To send back to the same (lower) court out of which a case came for purpose of having some action on it there. DICTUM—Statements and comments in an opinion concerning some rule of law or legal proposition not necessarily involved in or essential to determination of the case at hand are “obiter dicta” and lack the force of an adjudication. ACQUIESCED—When the IRS gives its express consent to a decision of the US. Tax Court. Research Problem—Code References 74. No, see Code Sec. 280F(d)(4). MACRS is not allowed for cellular telephones unless business use exceeds 50 percent. If such use is 50 percent or less, depreciation must be computed under the alternative depreciation system. Research Problem—Code References 75. July 10, 1989, is the effective date of Code Sec. 1031(f). Research Problem—Publishers' Loose—Leaf Services 76. a. In most foreclosures of real estate, the borrower will have a basis below the amount of the outstanding debt because of tax deductions for depreciation on the property. When the property is repossessed, gain is recognized to the extent that the amount realized exceeds the borrower’s basis. Code Sec. 1001(a); Reg. § 1.1001-2(a); and J. W Yarbro, 84-2 usrc 11 9691 (CA-5 1984), 737 F.2d 479, cert. denied 105 S.Ct. 959. Any excess of the outstanding debt over the fair market value of the property is ordinary income under the forgiveness of indebtedness rules of Code Sec. 61(a)(12). When a borrower is insolvent, however, this income can be excluded from income to the extent of the amount by which the taxpayer is insolvent. Code Sec. 108(a)(3); Rev. Rul. 90-16, 1990-1 CB 12. Result. Borrower realizes and recognizes a capital gain of $200,000, which is the excess of the FMV over basis ($1.2 million - $1 million). Borrower also has forgiveness of income of $300,000, which is the excess of the indebtedness over the FMV ($1.5 million - $1.2 million), but this gain is not taxed because Borrower is insolvent. If Borrower is not personally liable on the debt, then the forgiveness of indebtedness exception of Code Sec. 108(a) is not applicable and Borrower must treat the entire amount as being realized on a sale or exchange under Code Sec. 1001. Therefore, Borrower has a capital gain of $5 million. Research Problem—Electronic Data Base 77. No, Anthony may not deduct the cost of the bar review course. The courts have held that preparing for the bar exam of a second state is meeting the minimum requirements for practicing in that state and as such is not deductible as education expense. See: LR. Adamson, 32 TCM 486, Dec. 31,963(M), T.C. Memo. 1973-107; MD. Siewert, 80-2 USTC 1] 9613 (DC Tex 1980); SF Avery, 76-2 USTC 119694 (DC Iowa 1976); ME. Walker, 54 TCM 169, Dec. 44,128(M), T.C. Memo. 1987-409; RM Kohen, 44 TCM 1518, Dec. 39,451(M), T.C. Memo. 1982-625; J.A. Sharon, 78-2 usrc 79834, 591 F.2d 1273 (CA-9 1978), aff’ g per curiam 66 TC 515, Dec. 33,890. Research Problem—District Office Examinations: Nonappearance 78. Under Code Sec. 7210, any person who, being duly summoned to appear to testify or to appear and produce books, accounts, records, memoranda, or other papers, as required under Code Secs. 6420(e)(2), 6421(g) (2), 6427(j)(2), 7602, 7603, and 7604(b), neglects to appear or to produce such books, accounts, records, memoranda, or other papers, will, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than one year, or both, together with costs of prosecution. Research Problem—Business Expense 79. (a) and (b). According to Private Letter Ruling 9144042 (July 1, 1991), the issue is not whether a takeover is hostile or friendly. Rather, the proper inquiry to be made is whether the target corporation obtained a long- terrn benefit as a result of the expenditure. In order to obtain a deduction, the taxpayer must show it did not obtain a long-term benefit. Each case will turn on its own specific facts and circumstances. Research Problem—Exclusion from Gross Income 80. Damages for impairment of business income are taxable as gross income under Code Sec. 61 (Hort v. Comm., 313 US. 28 (1941); Freeman v. Comm, 33 TC 323 (1959), Letter Ruling 9348002). Punitive damages are also taxable under Code Sec. 61 (Comm. v. Glenshaw Glass, 348 US. 426 (1955)). ...
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This note was uploaded on 12/02/2011 for the course ACCOUNTING 4001 taught by Professor Nathanielbell during the Spring '11 term at FIU.

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CH2 Sol - ANSWERS TO KEYSTONE PROBLEMS—CHAPTER 2...

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