AC507 Unit 2 Assignment
Chapter 2 Problems.
40. Thomas received $30,000 in a legal settlement in 2014. The tax treatment of the item is not certain. Thomas’s research results were ambiguous so he is not sure if the income is taxable. Because some doubt remained and because he did not think he would be audited, Thomas took the position that the income was not taxable and did not include it on his tax return filed on April 14, 2015. His gross income, excluding the $30,000 in question, was $50,000.
42. When Keith created a new corporation as the sole shareholder, he was advised by his accountant to treat 50 percent of the amount invested as a loan and 50 percent as a purchase of stock. What are the advantages and disadvantages of this structure as compared with treating the entire invest- ment as a purchase of stock?
59. Fred Fisher is a licensed scuba diver who lives in Key Largo. He is employed full-time as an engineer. Five years ago he had been employed as a professional diver for a salvage company. While working for the sal- vage company, he became interested in marine archaeology and treasure hunting. Until last year he gave diving lessons on weekends and trained individuals in the sport of treasure hunting under the name of “Fred’s Diving School.” Three of the diving students he taught subsequently found shipwrecks. Fred generally did not engage in recreational diving.
67. Go to www.irs.gov/irb/ (the IRS site containing Internal Revenue Bulletins). Locate and read IRS Notice 2008-14, 2008-4 IRB 310 and answer the following questions.
a. What is the penalty for filing a frivolous tax return?
b. What are the first three broad categories cited in this notice as examples of frivolous positions?
23. On December 1, year 1, Peak Advertising (a calendar-year, accrual-basis taxpayer) receives a $24,000 retainer fee for a two-year service contract. ‘
45. Giant Corporation (a U.S. corporation) forms Small Corporation in a foreign country. Giant owns 70% of Small Corporation’s stock and the remaining stock is owned by citizens of the country in which Small is located. This year Small Corporation earns $1,500,000 of taxable income from its manufacturing operations and pays $200,000 in taxes to the foreign country in which it is located. Small does not make any dividend distributions. How much of Small Corporation’s taxable income will be subject to U.S. income tax this year?
48. In year 1, Highrise Company contracts to manufacture a piece of customized equipment for a customer. The contract will take two years to complete. The contract price is $250,000 and the company estimates its total costs at $220,000. Actual costs incurred are as follows: