Question;1. Your client, Morris Norris, was quite busy this year managing his various properties andinvestments. He has invested a significant amount of money with a broker who has fullcontrol over the trades within guidelines set by Morris upon the initial funding of thebrokerage account. There were over 1,000 total trades in the account and the form 1099B that was originally supplied to Morris showed only the sales price of each one. Yoursupervisor requested Morris to ask for the basis for each trade and being a little greedydecided to ask the broker to supply the gain or loss and type (short-term vs. long-term)for each trade. Luckily, Morris is a big client of this broker so the broker was willing tocomply with the request and provided the details. The attached sheet (see below for thesummary) summarizes the data provided for the brokerage account. Morris being Morris,he also had several transactions that were outside of the broker account. He sold somestock that he had acquired by inheritance from his grandfather 26 years ago. The salesprice of the stock was $257,000 for all of the 5,000 shares of IBM stock he had sold.Your supervisors research noted that the IBM stock had split several times during theyears, such that the 5,000 shares he sold were originally 1,250 shares. The discussionbetween your supervisor and Morris resulted in a conclusion that Morris had no idea ofhis grandfathers original cost basis or of the fair value of the stock at the time of the gift.The only piece of information you have is that grandpa bought the stock just before hedied on June 15, 1984. Morris also sold some stock he received from his brother as abirthday present in 2011. Morriss brother has not had a good track record at pickingstocks. Morris sold the stock in two separate transactions one in June 2012 and theother in December 2012. Each time, he sold half of the shares. At the date of the sale inDecember 2012, the gross sales price of half of the shares Morris received was $4,375.The June transaction resulted in gross sales price of $3,000. Having been through thisbefore, Morris remembered on his birthday in 2011 to ask his brother for the original costbasis of the 5,000 shares and the date of purchase. His brother was so offended by thisthat he has not spoken to Morris since then. Morris told your supervisor that the best hecould get out of his brother was that he (the brother) purchased the shares in thecompanys Initial Public Offering (IPO) and that he paid $1.50 per share (not much of anIPO). Further research indicates that the IPO was completed in August 2011. Knowingthat Morriss birthday is in November, your supervisor also tracked down the fair marketvalue of the stock on his birthday as $1.30 per share.MORRISNORRISBROKERSUMMARYSALES PRICEBROKERFEESBASISGAIN/(LOSS)SHORT TERMSUMMARY:GAINS276,5002,765177,50096,235(131,558LOSSES375,7503,758503,550GAINS424,5004,245209,750LOSSES327,5003,275495,800)LONG TERMSUMMARY210,505(171,575)Required: Calculate Morriss net gain or loss from all of these transactions and determinewhether the net amount is short term or long-term. Show your calculations and explain yourreasoning for each conclusion you make.2. In May 2002, Wanda purchased a house on the beach in San Diego with an original costof $2,000,000. The house was on the beach and was a perfect weekly rental. Wandawould occasionally stay in the house on short vacation trips when the place was not beingrented. The rental company statement provided the following information for 2009 and2010 (the information is provided toWanda for comparative purposes). Note that yoursupervisor made sure that the 2009 amounts appearing here also tied to the amounts usedon the 2009 return:Item20092010Days rented at market value315304Daily rental income$225$200Management fees$15,000$12,000Interest on mortgage$35,000$0 (*)Property taxes$25,000$26,000Cleaning costs$2,000$2,500Repairs$1,500$1,200Insurance$2,500$2,500New carpet$0$5,000Painting the exterior$3,000$0New kitchen countertops$0$10,000New appliances$0$4,000Alarm company$1,000$1,000(*) Wanda originally used a 7 year loan to purchase the property and it was fully paid off during2009.In November 2010, Wanda received an offer to purchase the San Diego house that she just couldnot refuse and sold the property for a purchase price of $2,250,000. The sale closed onDecember 30, 2010. As part of the closing process, the escrow agent was required to withhold3% of the sales price and remit the money to the state of California as income tax withholding(this is standard procedure when a non-resident sells California real property and thus there wasno way for Wanda to avoid the cost). For both 2009 and 2010, Wandas AGI exclusive of theimpact from the rental is over $200,000.Required: Calculate Wandas total net gain or loss on the sale of the property in 2010. Showyour work as to how you arrived at the amounts.3. Dano has decided to start his own enterprise growing wheat grass in 2012. The particularstrain of wheat grass he plans on growing is very susceptible to direct sunlight, so Danobuys a vacant home in Elk Grove. He proceeds to board up all the windows, except theones in his bedroom, and installs sophisticated hydroponic watering and growing lightsystems. Because Dano had previous experience working in a plant nursery that recentlyclosed down, he did not spend any money investigating this new venture but just startedright up. Dano brought in $25,000 selling his wheat grass at local craft shows on theweekends and to friends. He incurred the following expenditures during the year.ExpenditureAmountLighting systemHydroponic equipmentWheat grass seedsGas to the craft showsDanos time, based upon his prior jobswage rate of $12/hourDoritos and other snacksWindow coveringsElectricityWater billsPurchase of the houseProperty taxesMortgage interestContainersPlastic baggies for delivery$12,000$10,000$3,000$4,000$12,000$1,000$2,500$8,000$3,000$175,000$1,500$6,000$1,000$2,500Dano lived in the house full time to avoid having to move back in with his mother.Required: Calculate Danos gross income and net income for tax purposes. Show all ofyour calculations and explain your reasoning for each item.4. During the flood of 1997 in Sacramento, the first floor of Bernards house wascompletely covered with water. Because he had just purchased the home two monthsbefore the flood, he knew it was worth $250,000 because that is what he paid for it. Healso lost his car in the flood which originally cost him $10,000 in 1988 and was worth$1,000 in 1997. Once the water receded, Bernard obtained a contractor to begin fixinghis new home. Unfortunately for Bernard, he had decided against flood insurance duringthe purchase process of his new home, thus there was little likelihood of receiving anytype of insurance reimbursement for the repairs. Since he was already in the process ofrepairs, Bernard decided to have the contractor add a deck on the back of the house.Bernard and the contractor agreed upon an aggregate price for the repairs and the deck of$40,000. Bernards car was a total loss and he was reimbursed by his car insurancecompany for $1,000. Bernards AGI for 1997 was $275,000 (he is a doctor with asuccessful private practice). Assume the cost of the deck by itself is $10,000. Duringthis same flood, Bernards doctor office was also inundated with water. His medicalequipment which originally cost $400,000 in 1995 was waterlogged, but not completelydestroyed. Bernard made a claim against his business insurance and was reimbursed$200,000 for the damage. The medical equipment was eventually salvaged by a waterrepair company and Bernard placed it back in service in 1998. Bernard runs his medicalpractice as a sole proprietorship. Bernard used a 5 year life under MACRS for all of themedical equipment.Required: Calculate Bernards casualty gain or loss, if any, from the above transactions. Showyour work and explain your reasoning for each one.5. Tomas is thinking about starting or acquiring a new business. He is currently in the piemaking business where his company bakes special order pies for parties and for grocerystores. The grocery store pies are mass produced as opposed to the special order pies.Tomas thinks that his business expertise will lend itself to a catering business. He hasspent considerable time looking into the catering business, to determine whether heshould buy an existing business or start his own. He has incurred legal fees fromlawyers, and accountants fees for various advice with respect to the new venture. Thelegal and accounting fees to date have been $15,000. Tomas decides to start his owncatering business and begins to work on getting the business up and running starting onSeptember 1, 2012. He incurs the following costs during 2012. He loans some of hisown pie staff to the new business in order to get it going. Tomas gets his first catering jobon December 20, 2012. The catering salaries were incurred ratably throughout theperiod. Tomas hired his first staff in September.Legal/accounting (same as above)Incorporation costsLoaning his pie staff timePurchasing of catering equipmentAdvertisingSalaries of newly catering staff$15,000$4,000$10,000$50,000$8,000$12,000Truck purchase$25,000Required: Decide what to do with each of the expenditures mentioned above for income taxpurposes. Explain how much you think Tomas can deduct during 2012 and how much we willbe able to deduct, if any, in future years.6. Leonard has the following transactions. Leonard purchased 1,500 shares of stock onJanuary 15, 2008 at $10 per share. Leonard purchased an additional 500 shares of stockin the same company on June 15, 2008 at $15 per share. Leonard was given 250 sharesof stock in the same company by his grandmother on December 15, 2008. Hisgrandmother passed away on December 30, 2008, leaving all of her remaining assets toLeonard and his brother Sheldon. They each received 2,000 shares of stock in the samecompany. The value of the company stock on December 15 was $25 per share and thevalue on December 30 was $30 per share. Their grandmother was the founder of thecompany and paid $1 per share for all of her shares in the company. Leonard did notwant to run the company and so began selling his shares in January 2009. On January 22,2009, Leonard sold 2,000 shares for $35 per share. On December 15, 2009 Leonard soldan additional 2,000 shares for $5 per share (after Sheldon had run the business into theground).Required: Calculate the each gain or loss on the above transactions and determine the net totalincludible in Leonards taxable income for 2009. Also calculate how many shares, if anyLeonard has left and what is his basis in those shares as of the end of 2009.7. Willie is currently in the business of manufacturing wooden crates. He is interested inpurchasing some additional crate making equipment and is asking you, as his CPA, whatis the best answer for tax purposes with respect to generating the lowest possible taxableincome for the year of purchase. The total purchase amount is expected to be $1,750,000.Required: Using all potential depreciation related deductions, determine how muchdepreciation Willie can take for the year of the purchase under each of the followingsituations. Presume that the crate making equipment falls in the 7 year life for MACRS.Show each of your calculations and explain your conclusions.a. The equipment is purchased and placed in service during the first month of 2010.b. The equipment is purchased in June 2009.c.The equipment is purchased in October 2010.8. Willie (same Willie as question 7) has grown tired of the crate making business anddecides in 2011 to sell all of his equipment that he bought in 2009. He engages anequipment broker to sell the equipment for a commission of 3% of the sales price. After6 months of work, the broker has sold all of the equipment to a single buyer for a grosssales price of $1,200,000. Using your answers to parts a, b and c in question 7, determinehow much gain or loss, if any, Willie must recognize in 2011, explain whether the gain orloss is capital or ordinary and explain under what code section you made yourconclusions.a.b.c.9. Peter is in the business of selling medical marijuana in California where state lawcurrently allows this as a legal business. Federal law has not yet caught up to the wisdomof the California population. Peter recognizes a good opportunity when he sees one anddecides to expand his operation. The front of his shop continues to sell product only tothose with a legitimate medical marijuana doctors prescription. However, since he canobtain more supply than needed just for those people, he decides to use the back of thestore to sell to anyone. Being a former accountant, Peter recognizes the need for detailedaccounting records and makes sure to segregate all revenues between the front of thestore sales and the back of the store sales. Peter is not quite as detailed with the expensesof the store.FrontBackTotalRevenue $Ounces sold350,0003,500650,0008,667$1,000,00012,167Cost of goods sold175,000433,350608,350(product only)ElectricityGasWaterCosts to start upback roomPoliticaldonationsSalariesEmployeesRentSquare feet usedStamp tax onproduct purchasedTotal Expenditures4,0002,0001,00065,0001,00023500100120,000510,00060060,835872,185Required: Given the above information, determine what you believe to be Peters taxableincome from the store operations. Explain your choices for each expenditure.10. Sheila had a terrible year during 2012. Not only did her grandmother pass away in thefirst part of the year, but she lost her job in May. In March, she took some of the cash sheinherited from grandma and loaned it to one of her friends who had convinced her that hehad an idea for a new iPhone app that was sure to be a huge hit. She loaned Albert$25,000 in cash and made him sign a promissory note that did not charge him interest andrequired repayment only once Alberts app had sold 25,000 copies at the Apple App store.After she lost her job, she took some of the stock inherited from grandma and sold it tomake her mortgage payment for June. The sales price of the shares was $4,000 for 4,000shares. The stock price at the date of grandmas death on January 1 was $10 per share.Sheila was the executor of grandmas estate. Starting in July, Sheila tried to get in touchwith Albert but found out his cell phone had been turned off and he had moved away withno forwarding address. She continued to look for him until November when she finallygave up, however when she checked the App store, she found the exact app that Alberthad described to her. It was selling for $0.99 per copy. A little more investigation andshe found out that the App store had sold nearly 1 million copies of Alberts FlashingApp (dont ask what it does). In November, she found out that the company in whichgrandma had invested and left to her (she originally owned 100,000 shares) had gonebankrupt. She was very sad because she knew that grandma was one of the originalinvestors in this company and had worked hard before her death (perhaps the cause?) tomake the company be successful. The other investors had been her uncle and aunt whoeach had invested $250,000 along with grandmas $450,000. Then in December, herbank foreclosed on her house because she had not made any payments since June 1,2012. Her total mortgage at the time of the foreclosure was $150,000.Required: based on all of the above information, determine what transactions, if any, impactSheilas 2012 taxable income. Calculate the amounts for each transaction you feel has sometype of impact on her taxable income and describe the character of the income or loss (capitalvs. ordinary and short term vs. long-term).11. Ted provided you the following information about his business income and outflows forthe years 2010 through 2012. After a long discussion with Ted about his business, youalso determined that in 2010, Ted entered into a long-term contract to provide services toa large client of his. The contract terms called for an advance payment in 2010 of$200,000 and the length of the contract was to be 20 months. Ted signed the contract onJuly 2, 2010 and started work for this client the next day. The client paid him uponsigning of the contract and this amount is included in the cash receipts listed below for2010. After 16 months, the client decided to terminate Teds services and demanded theremainder of their money back. Ted returned the remainder of the money at thebeginning of 2012, but instituted a lawsuit for breach of contract to get the money back.The cost to Ted is included in the cash payments shown below for year 3. Ted also payshis employees and himself a monthly salary payable on the last day of the month, withthe exception of December when Ted tells the payroll accountant to move payday to thenext day for that month only. Ted runs the business as a corporation. The employeesmonthly salaries are $10,000 and Teds salary is $20,000 per month. These amounts arenot included in the below balances of accounts payable. Below is relevant informationon the cash ins and outs of Teds business.2010Beginning Accounts ReceivableEnding Accounts ReceivableCash ReceivedBeginning Accounts PayableEnding Accounts PayableCash Expenses200,000350,000600,000150,000250,000380,0002011350,000175,000700,000250,000275,000450,0002012175,000150,000800,000275,000300,000500,000Required: Calculate Teds business net taxable income based upon the accrual method. Thencalculate Teds business net taxable income on the cash method. Ignoring tax law that wouldhave required Ted to make a choice in the first year of his business and based solely on the threeyears of information you have available, recommend the best method of accounting for Tedsbusiness and explain your reasoning.
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