Accounting 5135

Fall 2015
Naples
ANSWER SHEET
FINAL EXAMINATION
MULTIPLE CHOICE (36 Points; 3 points each)
1.
2.
3.

c.
e.
a.

4.

e.

5.

e.

6.

a.

7.

c.

8.

b.

9.
10.

b.
d.

difference
11.
b.
12.

a.

The Court of Federal Claims has its own dedicated appeals court.
All are deducted for AGI.
Revenue Rulings are issued by the IRS, which is part of the Treasury Department,
which is an administrative agency (part of the executive branch). The others are all
legislative sources.
Need to know AGI to apply percentage limitations and to determine whether to
itemize.
All are exceptions to the gift tax. No gift is created by a revocable transfer
(meaning transferor can take it back at any time).
A net short-term capital gain is taxed the same as ordinary income, and therefore
there is no tax benefit. The other statements are all incorrect.
Whether and in what amount he can deduct as a charitable contribution is a separate
matter. Note Section 74(b)(prizes and awards) doesnt apply for multiple reasons.
D must include her pro rata share of the FMV of the property at her death. Since
she contributed 20% to buy the property (gift did not come from joint tenant), 20%
of the $300,000 must be included in her gross estate.
In 2015 the maximum annual exlusion is $14,000. Between Martha and Frank, they
can give $28,000/year x 10 beneficiaries, or $280,000/year. It makes no
if the beneficiary is related or not.
First have to understand that a nonbusiness bad debt is treated as a STCL. Second,
that the $20,000 STCL would be offset against the $12,000 LTCG to get an $8,000
net capital loss, of which $3,000 could be used in the current year.
Air fare is deductible in full since primarily for business ($1,000). Pro rate the
lodging for business use (3 x $200 = $600) and meals (3 x $100 x 50% cutback =
$150). Entertainment is 100% business, but is also subject to the 50% cutback
($500 x 50% = $250). So $1,000 + $600 + $150 + $250 = $2,000.

SHORT ESSAYS (72 Points; 9 points each)

1.
$1,590,000. $800,000 (FMV of stock) + $40,000 (dividend) + $700,000 (FMV of bonds) +
$50,000 (accrued interest). The dividend is included because Mary died after the record date and so
it was owed to Mary. The $50,000 interest is included since that was the amount owed to Mary at
the time she died.
2.
Edward will recognize $80,000 of income in year 2015 when he receives the $100,000
(there is no constructive receipt on these facts). Only the punitive damages are taxable; the
compensatory damages for physical injury are excluded under Section 104. Since the divorce
agreement gives Jane half the proceeds even if she dies in the interim, it will not meet the definition
of alimony. Consequently, Edward cannot deduct the $50,000 transferred to Jane, nor will Jane
recognize the amount as income.
3.

a.
b.
c.

$30,000 amount realized - $14,000 adjusted basis = $16,000 realized gain

$6,000 recognized gain (boot received, which is less than the amount realized)
$14,000 new adjusted basis ($24,000 FMV - $10,000 postponed gain)

4.
(i)
Sec. 2503(e)(2)(A) excludes tuition from the definition of "taxable gifts" (assuming
it is paid directly to the school). But the living expenses to an adult child do not qualify for the
exclusion. Consequently, the taxable gifts to Alex for the year total $28,000. However, if Mark and
Sandy elect to split the gift, no taxable gift will occur for the year and neither of their unified credit
will need to be reduced. The election to split gifts needs to be made by filing a gift tax return.
(ii)
Medical care expenses are also excluded from the definition of "taxable gifts"
(assuming it is paid directly to the provider). But living expenses to an adult child do not qualify.
So, assuming splitting gifts, the exemption equivalent will have to be reduced by only $10,000.
Since the $14,000 yearly exemption is applied on a beneficiary-by beneficiary basis, no reduction
need be made due to any gifts to the other children.
(iii)
The issue here is whether this was truly a loan or a disguised gift. In form, it looks
like a loan, but if the intent was that the $80,000 would never be repaid, then a $80,000 gift was
made in the current year. This intent may be inferred if $14,000 is forgiven each year. Although
unclear on facts, identification of issue is key.
5.
The issue is if these payments constitute excludible scholarships or are compensation
income (note that the fact that XYZ makes the payments directly to University is irrelevant if
compensation since Randy would be getting the benefit). Per the Bingler case, if the payments are
in exchange for any type of quid pro quo, then it is not a scholarship. On the facts as presented,
there is a strong likelihood that the payments represent compensation for prior services as an
inducement for other employees to work hard. A severance bonus, for example, would clearly be
income. Thus Randy would probably have to include the entire $24,000 in his 2015 gross income.

6.
First must consider the casualty gain of $40,000, which is treated like a 1231 gain. Next
must then net the 1231 gain against the 1231 loss to get a net 1231 gain of $15,000. This will be
treated as a LTCG. So there is a total LTCG of $23,000, and a net LTCG of $3,000. Since there is a
net STCL of ($8,000), these can be netted again to produce a net capital loss of $5,000. So Freds
AGI will be $147,000 (limited to using $3,000 this year), and Fred will have a $2,000 short-term
capital loss carryforward to 2016.
7.
The $10,000/year that Tom receives as reimbursement is under a nonaccountable plan. Tom
has to include this amount in his gross income (so total AGI = $50,000). The expenses are
deductible if they are not commuting expenses. Since Toms office is his home, even the IRS
allows him to deduct all his sales calls as transportation expenses (he has no commuting expenses).
He would therefore be able to deduct all $5,000 of auto expenses, but this would be a below-the-line
deduction since he is an employee. This would be subject to the 2% of AGI floor ($50,000 x 2% =
$1,000). In sum, Tom has AGI of $50,000 and an itemized deduction of $4,000.
8.
2% floor:
Refers to the limitation on miscellaneous itemized deductions, such as
employee business expenses. Only the amount over 2% of the taxpayers AGI gives the taxpayer
any tax benefit.
10% floor: Only the amount of unreimbursed medical expenses over 10% of AGI will
result in a tax benefit to the taxpayer.
10% floor: Only the amount of personal casualty losses that exceed 10% of AGI
(plus $100 per casualty) result in a tax benefit to the taxpayer.
50% cutback: Meals and entertainment reduction