Question 1

(a)  List AND explain at least four (4) reasons for provisions of the federal income tax law other than raising revenue for the federal government.  

1.

2.

3.

4.

(b)  Some of these provisions result in taxpayers with the same income paying different rates and amounts of federal income tax.  For example, taxpayers whose income consists of qualified dividends and net capital gains pay less tax than someone who earns the same income as salary.  What is the reason for the lower tax rate on qualified dividends and net capital gains?  

(c)  Define horizontal equity.  Remember to use your own words. Is the reason for the lower tax rate on qualified dividends and net capital gains more important than the violation of the principle of horizontal equity that results?  Explain in detail. 

Question 2

Define each of the following AND explain the relative weight of authority of each one: 

(a) section of the Internal Revenue Code

(b) Final Treasury Regulation

(c) Revenue Ruling

(d) Private Letter Ruling (also known as Letter Ruling or IRS Letter Ruling)

Question 3

What is the present value of $10,000 to be received one time in two years if the annual discount rate is 8 percent?  Show all calculations. 

Question 4

Brian Barton is in the 35-percent marginal tax bracket.  He can invest in a project that will generate ordinary income.  The project’s before-tax return is 20 percent.  What is the project’s after-tax percentage return?  Show all calculations. 

Question 5

Bill is one of three shareholders in a C corporation called Super Duper, Inc.  He is also an employee of Super Duper, Inc.  Describe the tax effects to Bill AND to Super Duper for each of the following: 

(a) Super Duper paying him a reasonable bonus for work done exceptionally well 

(b) Super Duper paying him a dividend as a shareholder

Question 6

Connie F. Drysdale is 39 years old and divorced and files as a head of household. She has one dependent son named John G. Drysdale who is 11 years old.  For tax year 2015, her income consisted of the following: 

Salary  $64,000

Interest from bank accounts $2,000

Child support received from her ex-husband Tim Drysdale $6,000

She has the following possible deductions:

Medical expenses (not covered by insurance or otherwise) $3,600

Penalty on early withdrawal of a certificate of deposit $400

Home mortgage interest $10,600

Real estate taxes $1,500

State income taxes $2,900

Charitable contributions (cash) $1,400  

Required:

(a) calculate her adjusted gross income as defined in Section 62. Show and label all calculations.

(b) calculate her taxable income as defined in Section 63.  Show and label all calculations.

Question 7

Bob Adams is 42 years old. He deducted medical expenses on his U. S. individual income tax return for 2014.  For tax year 2014, his total medical expenses exceeded the 10-percent floor based on adjusted gross income by $4,750.  His total itemized deductions for tax year 2014 exceeded the standard deduction he otherwise could have claimed by $8,624.  

In 2015, he received an unexpected reimbursement from his health insurance company of $8,890 for medical expenses he paid in 2014 and deducted on his U. S. individual income tax return for 2014.  How much of this $8,890 reimbursement must he include in his gross income for 2015? Explain. Show all calculations. 

Question 8

Sam sold land to Brenda.  The sales price was $200,000.  Sam paid a commission to a real estate broker of $12,000 and paid other selling expenses of $2,425.  Sam’s basis in the land was $116,750.  What was Sam’s gain realized on the sale of the land? Show all calculations. 

Question 9

Carl suffered two different casualty losses during 2015.  

His storage building, which he used for personal, nonbusiness purposes, was destroyed by a tornado on March 18, 2015.    It was not insured.  His adjusted basis in the storage building was $4,268, but it had a fair market value of $5,200 at the time of the tornado.

His car was destroyed by a flood on November 8, 2015.  His adjusted basis in the car, which he used solely for personal purposes, was $18,295, but it had a fair market value of $12,300 at the time of the flood.  It was not insured.  His adjusted gross income for 2015 was $40,450.  

What is his total itemized deduction for the casualty losses he incurred in 2015? Show all calculations.

Question 10

Mary Washington is self-employed.  She did not work as an employee at any time during 2015.  Therefore, she did not have any wages in 2015.  She did not have any other income in 2015. Her net business income as shown on Schedule C of her Form 1040 was $74,286.  

(a)  What is her self-employment tax liability for 2015? Show all calculations. 

(b)  How much, if any, of her self-employment tax liability for 2015 may she deduct in calculating her adjusted gross income for 2015? Show all calculations.