ASSIGNMENT
Ethics & Equity
The Taxation of Alimony and the Alimony Tax Gap
Should those who are legally required to transfer their income in the form of alimony to another party be required to pay tax on that income? What role, if any, should the potential loss in tax revenue, whether due to the differences in the tax rates of payors and recipients or the potential overreporting of alimony by payors, play in the decision? Are there other factors that should be considered?
LO.5 Tax Planning
Identify tax planning strategies for minimizing gross income and the present value of the related tax.
Discussion Questions
Question 28
Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 24% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years.
The alternatives are:
A taxable corporate bond yielding 5.333% before tax and the interest can be reinvested at 5.333% before tax.
A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return).
Land that will increase in value.
The gain on the land is classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds? For this analysis, ignore the effect of property taxes on the land.
Use the future value tables in Appendix E as needed for your calculations and comparisons. Present your answers using spreadsheet software such as Microsoft Excel.
Question 30
Determine the taxpayer’s gross income for tax purposes in each of the following situations:
Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for corporate stock with a fair market value of $12,000 at the time of the exchange. Deb’s cost of the bond was $10,000. The value of the stock had decreased to $11,000 by the end of the year.
Deb needed $10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the $10,000. Deb’s cost of the stock was $3,000. Based on her broker’s advice, instead of selling the stock, she borrowed the $10,000 using the stock as collateral for the debt.
Deb’s boss gave her two tickets to the Rabid Rabbits rock concert because she met her sales quota. At the time she received the tickets, each ticket had a face price of $200 and was selling on eBay for $300. On the date of the concert, the tickets were selling for $250 each. Deb and her son attended the concert.
Question 36
Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effect of each of the following transactions on the company’s 2022 gross income assuming that the company uses any available options to defer its taxes.
In December 2021, the company received a $1,200 advance payment from a customer for an appliance that Drake special-ordered from the manufacturer. The appliance did not arrive from the manufacturer until January 2022, and Drake immediately delivered it to the customer. The sale was reported in 2022 for financial accounting purposes.
In October 2022, the company sold a 6-month service contract for $240. The company also sold a 36-month service contract for $1,260 in July 2022.
On December 31, 2022, the company sold an appliance for $1,200. The company received $500 cash and a note from the customer for $700 and $240 interest, to be paid at the rate of $10 a month for 24 months. Because of the customer’s poor credit record, the fair market value of the note was only $600. The cost of the appliance was $750.
LO.2, In 2022, Wright’s, Inc., signs a contract to design and deliver 100 laptop computers customized to perform certain functions required by a customer. Wright’s will be paid $300 per computer but must deliver all 100 laptops to fulfill the contract. At the end of 2022, Wright’s has completed and delivered 75 laptops and recognizes $22,500 (75 × $300) in revenues in its audited financial statements.
Assuming Wright’s is an accrual basis taxpayer, how much gross income must it recognize in its 2022 taxable income?
(How) would your answer change if the contract allowed the customer to cancel the contract prior to delivery of the 100 computers but required them to pay for any computers completed prior to cancellation?
Question 40
Rusty has been experiencing serious financial problems. His annual salary was $100,000, but a creditor garnished his salary for $20,000 [i.e., the employer paid the creditor (rather than Rusty) the $20,000]. To prevent creditors from attaching his investments, Rusty gave his investments to his 21-year-old daughter, Rebecca. Rebecca received $5,000 in dividends and interest from the investments during the year. Rusty transferred some cash to a Swiss bank account that paid him $6,000 interest during the year. Rusty did not withdraw the interest from the Swiss bank account. Rusty also hid some of his assets in his wholly owned corporation that received $150,000 rent income but had $160,000 in related expenses, including a $20,000 salary paid to Rusty. Rusty reasons that his gross income should be computed as follows:
Determine Rusty’s gross income for the year, and explain any differences between your calculation and Rusty’s.
