1. (TCOs 2, 3, 5) We learned this semester that not only do we have to determine the
amount of income that a taxpayer must recognize for tax purposes, but we also need to
determine when that particular taxpayer must recognize the income. In other words, the
timing of the recognition of the income is a significant issue. Explain the general rules
surrounding the timing of the recognition of income, including the three primary methods of
accounting for tax purposes, the tests for each, and any notable exceptions.
2. (TCOs 2, 4, 5) This semester, we learned that Congress designed the Code to include
deductions that can be taken for losses that a taxpayer may experience. Two such
deductions are (1) the bad debt deduction and (2) the deduction for casualty losses and
theft. How does the IRS generally interpret deductions (i.e., broadly or narrowly)? How do
we determine whether a taxpayer is entitled to each of these two deductions? What is the
purpose of each of these two deductions? Are there any limits on the deduction at
issue? Finally, what generally governs when a taxpayer may take each of these two
deductions?
3. (TCOs 2, 5, 6, 7) As a tax practitioner, you often get people asking questions concerning
the tax effect of property transactions. This year is no exception. You've had individual
clients ask you the following questions this year:
1. I inherited property from my grandfather, and I received a gift of property from another
family member. How do I determine the basis in each piece of property?
2. I bought a piece of property that is used in a trade or business. Are there any tax
deductions associated with this purchase of property? If so, how do I determine the amount
of those deductions?
Answer each of these questions, explaining the applicable rules and possibilities of each.
4. (TCOs 2,3,4) One of your corporate clients has approached you about whether or not its
employees are required to include certain benefits provided by the corporation in their
income. In particular, the corporation has inquired whether the following benefits provided
by the corporation to employees would be included in an employee's taxable income:
1. The employer would like to provide a holiday present to each employee at the end of
December. It envisions providing gift cards, including a gift card for dinner at a local
restaurant and a gift card for an electronics store. It also plans on providing each
employee a $150.00 holiday "bonus" in a separate check.
2. The employer, which is in the business of providing commercial repair services (such
as plumbing, painting, and remodeling), would like to give each employee a $500.00
"credit" each year that the employee can use toward any services or goods provided
by the employer. For example, they could use the credit to have interior walls
painted, plumbing work completed, or to purchase a new window and have it
installed.
Explain to your client the general rules surrounding whether an employee must include
benefits provided by the employer in income. Then, for the two proposed benefits
mentioned above, explain whether the employee would have to include the amount in
income or what provision or exception might apply to make the proposed benefit
nontaxable. If the employer would have to make changes to the proposed benefit to render
it nontaxable, explain what changes(s) would have to be made. Finally, explain what the
resulting benefit would be to the employee and how much, if any, of the benefit the
employee could exclude from income. Make sure to detail any significant exceptions or rules
that apply to the benefit exception at issue.
5. (TCOs 1, 2, 8, 9, 10) One of your best individual clients is thinking about starting up a
new business, and he is seeking your advice on which business form he should select. In
particular, he's trying to decide whether to operate the business as an S corporation or a C
corporation. Explain to him the significant tax and non-tax issues that will arise from
choosing each of these entities as compared to the other, including how income will be
treated by the entity, the overall tax burden, and the effect of distributions of property or
earnings from the entity to your client. (Note: Do not spend time addressing other types of
business entities. Credit will only be given for discussion of the two business entities at
issue.)
6. (TCO 2,3,6,8,9,10) You are chief counsel to the Chairman of Joint Committee on
Taxation, the body primarily responsible for identifying taxation issues and their
consequences as Congress seeks to implement a comprehensive and coherent tax policy.
Currently, the United States is in a bit of an economic slump. Corporate earnings reports are
relatively weak; the stock market is about 25% off of its five-year highs, and tax revenues
are down. Largely as a result of the last issue, the government finds itself operating under
an annual deficit, and the national debt hovers around $7,000,000,000. Interest rates,
however, remain at historic lows.
The President has suggested a multiple-pronged attack to "revitalize" the economy. First, he
has proposed permanently abolishing all capital gains taxes. Second, he has proposed
permanently cutting the marginal income tax rates from 1% on the lowest taxpayers to 2–
3% on the "middle class" and 7% on the highest marginal rates of income. To partially
offset these reductions, however, he has proposed permanently halving the child-care and
earned income credits.
The Chairman has asked you for your analysis of these provisions. Please prepare a
memorandum outlining your thoughts as to each, including, but not necessarily limited to:
(1) the effect of each recommendation on revenues and deficits, both in the short and long
run;
(2) the effect of each recommendation on the economy;
(3) the relative effects of each recommendation on different socio-economic groups of
taxpayers;
(4) the relative "fairness" of each recommended change; and
(5) your conclusion as to whether any or all should be adopted.
7. (TCO 1, 2, 3, 4, 8, 10) As a newly minted CPA, you obtain your first significant position as
a tax professional: Senior Tax Accountant for one of the offices of a regional accounting
firm. Of course, the firm runs a notice of your hiring in the local newspaper. A few days
later, the editor of the newspaper calls you and asks if you might be interested in writing a
monthly column for the newspaper on tax issues. Figuring that it would be a good way to
get your name out in the community as an expert in the field (and a little free advertising to
boot!), you tell him that you would be more than happy to do so. "Great! " he says. "By the
way, I have already blocked out space for this column in the next edition of the paper. Is
there any way that you can get me your article by the end of the day today?" After you
commit to doing so, he also proceeds to tell you that you will not be paid for these
articles. "I figure that it is just a sort of public service that you could offer to the
community. I am sure you understand." (And so it begins.... Get used to a lot of this.)
You spend the next 10 minutes thinking about what you could discuss in your first
article. You would like to shake people up a little bit, and perhaps challenge their opinions
about some issues of tax law. That way, you could perhaps build up some interest in your
column, which, as you know, will be difficult to achieve under the best of circumstances!
(After all, who wants to read newspaper articles about taxes?)
Finally, you decide on a topic: You will argue to the readers that the federal income tax
should be abolished and replaced with a national property tax that is levied on both
personal property and real estate.
Required: Write an article arguing this position. You may or may not agree with this
proposition. However, based upon the materials covered in this course and the discussions
that have occurred in the TDAs, you should be able to articulate a cogent, persuasive
argument in support of this proposition. In particular, reference theories, concepts,
justifications, and anticipated economic, social, and/or other benefits that would result from
such a system. To the extent that you think strong contrary arguments could be made,
consider raising those contrary arguments and then persuasively arguing against
them. Your answer to this question will be evaluated based upon the thoroughness,
professionalism, substance, and persuasiveness of your argument.