ACCT 323 Federal Income Tax I

Prof. McClain

Provide short answers to the following questions. Your responses should be in the

range of a half to a page in length.

1. Regarding like kind exchanges under 1031, discuss which of the following are

qualifying property. In each case, explain why or why not it is a qualifying

property:

a. personal auto traded for a new auto

This is not a qualifying property because there is loss recognized. Like-kind exchange

does not allow for the exchange of personal property. The margin will not be stagnant

due to depreciation of the personal auto.

b. Stock exchanged for bonds

There is an exchange of stocks and bonds and as such, it is not a qualifying property. The

general rules of 1031 exchange does not allow for exchange of stock for bonds because

they are considered personal.

c. Business equipment exchanged for business delivery truck

This is a qualifying property because there are no taxable gains. Losses and profits are

also not realized in this type of exchange. This kind of exchange gets reported in the IRS

form 8825.

d. Business manufacturing building exchanged for office building

This is a qualifying property since the office because both properties are used for

business. Both [arties can defer the capital gains tax during its exchange. However, if the

office is held for personal use, this will not be a qualifying property because profit and

loss will be realized during the exchange in addition to capital gain tax.

e. Merchandise inventory exchanged for other merchandise inventory

This is not a qualifying property. Although business is involved, however, the general

rules of the 1031 exchange does not allow for the exchange of inventory. This is not a

qualifying property.

2. State the time requirements for a 1031 exchange in terms of maximum time

between giving up the property and receiving the property. Describe how

intermediaries can be used as a middle man in 1031 exchanges. What are the time

rules for property being constructed?

1031 is termed as a major tax deferral opportunity. According to the 1031

exchange rule, there are several and therefore unlimited times that an individual may roll

over to the exchange rates. In addition, there are a number of real estate interests, which

are termed at “like-kind”. Intermediaries can be used as middlemen in during the like-

kind property exchange on the 1031 terms. The terms rules that are constructed are based

on the ownership of different properties. If someone owns a property and another person

wants to own it, the affirmation of persuading the party is dependent on several factors

but most likely, the situation is unlike.

3. Which of the following are excluded from gross income and which are included

in gross income? Explain your answers!

a. inheritance from a deceased parent

It is excluded from gross income since the income is not accounted for tax. The

inheritance is like being paid in intervals to a point that it is paid, credited, or distributed

out of income from the property.

b. inheritance from a deceased friend who is not related by blood-

This will be included in the gross income because it will be taken as income from a

decedent. The transfer of the property will require taxation from the authorities for the

person to be fully recognized as the owner to avoid confusion in future.

c. Value of employee training provided by the employer, which training could

also be used by the employee for other jobs for other employers-

This will be included in the gross income because it represents the cost that the company

is willing to undertake to improve its productivity. This is because the amount used is

from the income of the company.

d. Unanticipated gift of a free iPad received from the employer, in appreciation

of the employee appearing on a local talk show and saying nice things about the

company-

This will be included in the gross income because the amount used to buy the ipad is

distributed from the income of the property/company. The employer was just acting on

behalf of the company.

e. Unanticipated gift of a free iPad received from the employer, in appreciation

of the employee checking in on the boss’s home while the boss was away on a 3-week

vacation-

This will be excluded from gross income because the amount used to buy the ipad is

distributed out of the income of the property/company. The employer himself will have

taken care of the cost and not the company.

4. Which of the following are excluded from Bill’s gross income this year, and

which are included in this year’s gross income? Explain your answers!

a. Bill earns $2,000 from Frank helping Frank research a book. Bill’s son

Johnny is in college and needs to pay for it. After the $2,000 is earned, Bill asks

Frank to pay the money to Johnny instead of to him.-

This will be included in Bill’s gross income this year because he earned the money and

used it to pay for his expense which in this case is his son’s school fees. The money

Frank gave Bill is considered as a cost to his project and hence taxable.

b. Bill earns $2,000 from Frank helping Frank research a book. Bill’s son

Johnny is in college ad needs to pay for it. Before he did the work and earned the

money, Bill asked Frank to pay the money after it is earned to Johnny instead of to

him-

This will not be included in Bill’s gross income this year. The amount that Frank paid as

fees for Johnny is more of a debt to Bill rather than income. He took the money before

consenting to work for Frank.

c. Bill has been making a very large commission income this year and expects to

be in the top tax bracket. He expects to make a much lower income next year and

to be in a lower tax bracket next year. On October 1

, he asks his employer to

hang onto any more income he earns that year and to pay it to him in January.

It will be included in Bill’s gross income because he earned the money during the

previous year. The money was only withheld but the income had already been earned.

5. What are the allowable tax accounting method(s) for the following taxpayers?

a. Husband and wife file separately. Wife uses accrual method. What can the

husband use?

Cash method accounting method is used. The husband can still use accrual method if

need be. These are the two accounting methods that the taxpayers can be allowed when

filing a joint return or even when filing separately.

b. C corporation with assets of $60 million and $30 million annual sales.

Accrual method is used as the tax accounting method. Accrual method is preferred

because it can easily match the expenses against the income of the company.

c. Estate of a deceased taxpayer

Cash tax accounting methods will be used. For such a small business, cash accounting

method is preferred due to its simplicity.

d. John Smith who operates a grocery store as a proprietorship (Schedule C)

business-

Cash accounting method is used for this case. The business does not involve complicated

task or operations.

e. John Smith who is just an employee receiving a W-2, but who has been using the

accrual method for the last 5 years-

Cash method is used for accounting for John Smiths taxable income.

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