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Accounting 5135

Fall 2015
Naples
ANSWER SHEET -- TEST #1
MULTIPLE CHOICE (30 points; 3 points each)
1.

a.

The only trial court in which a taxpayer may request a jury trial is in the District
Court. The remaining statements are all true.
2.
a.
A cash-basis taxpayer must recognize income as cash is received, so $500 would
have to be recognized if Kathy is a cash-basis taxpayer. Revenue Procedure
200434 allows an accrual-basis taxpayer to use the all-events test in the first year
so long
as any remaining income is picked up in the next tax year. So in
2015 Kathy would
recognize 1/5 of the $500 (10/50 lessons taken) if she was an
accrual
taxpayer.
3.
d.
The motorcycle is a personal use asset. The sale of a personal use asset at a loss is
never recognized for tax purposes.
4.
e.
Prizes and awards are fully includible in gross income. The exception in Sec. 74(b)
is very narrow. She would have had to give away the award to "charity", but
the
problem states that she kept the money.
5.
a.
The payments are not alimony because the payments would continue after the death
of the payee. Thus this is just part of a property division for which there are
no tax
consequences to either party.
6.
e.
A general sales taxes and property (ad valorem) taxes are only imposed by
state/local governments. VAT taxes are not currently imposed in the U.S.
7.
c.
Tax legislation begins in the House of Representatives. No such committee as in d.
8.
b.
The Appeals Division may take into account hazards of litigation in compromising
on issues. While the amount of the compromise may not be as generous to the
taxpayer if Appeals feels the IRS will ultimately prevail, it may still compromise.
9.
a.
A representative has a duty of confidentiality and therefore may never inform the
IRS.. Circular 230 is a Treasury document, not a Congressional statute. The
return position standard is a lower standard than more likely than not.
10.
a.
The doctrine of constructive receipt would normally apply, but for the substantial
restrictions in canceling the policy.

SHORT ESSAY PROBLEMS (30 points; 6 points each)


1.
Goldy has his choice of which permissible trial court to litigate his tax case, if litigation
becomes necessary. One such choice is the U.S. Tax Court. Since a court will generally follow its
own precedents, Goldy can practically be assured of winning if he litigates in the Tax Court. The
Tax Court does not have to follow the reasoning of the 9th Circuit because Goldy's case would be
appealed to the 8th Circuit Court of Appeals (Golsen rule). If Goldy litigates in the District Court or
Claims Court (or in an eventual appeal to the 8th Circuit), those courts would be free to decide how
they believe best, with the prior decisions influencing their decisions, but not controlling the result.
Generally the 9th Circuit opinion would have greater influence than a lower court, but the Tax Court
is also often influential because of the tax expertise of its judges. The prior case therefore does not
control the ultimate disposition of Goldy's case and he would have a good chance of prevailing.
2.
A cash-basis taxpayer has gross income when actually or constructively receive a cash or
cash equivalent. Connie actually received $90,000, and constructively received $10,000 in 2015.
The October 31 agreement will be effective to defer only salary earned after that date, or for two
months. The October salary will be deemed constructively received since it had already been
earned prior to the agreement and she had a right to receive the income in 2015, but chose not to.
The last two months are not constructively received because once she signed the agreement; she had
no right to the money until 2016. So she will report a total of $100,000 gross income in 2015.
3.
Code Section 215(c) provides for no substantive rule in itself; it merely directs Treasury to
prescribe regulations. Congress is specifically delegating its lawmaking powers to Treasury in this
narrow instance. Consequently, if there were no regulations issued there would be no law.
However, once regulations are issued, such regulations become legislative regulations. Challenging
such regulations is like challenging the laws of Congress; there must be a showing that the law is
unconstitutional. Moreover, temporary regulations have the same force and effect as final
regulations. Thus Mary must comply, or challenge the law as unconstitutional. The possibility of
Mary prevailing under such a standard is slim to none (Question assumed in facts that payment was
indeed alimony).
4.
Most returns are computer classified under the discriminant function system (DIF). DIF
attempts to measure audit potential on the basis of return information outside the normal or expected
range. In this case the client is obviously contributing far more to charity than her taxable income
would suggest which is why the IRS computers keep kicking out her return to be audited.
Consequently she isnt being picked on but rather her return is very unusual and therefore looks
suspicious on its face.
5.
Annuities are taxed by dividing each payment between a recovery of capital (not taxable)
and a "profit" component (taxable). Social security is not taxed until certain thresholds are reached,
and for high-income taxpayers up to 85% of their social security may be taxable. Consequently,
low-income taxpayers would not want to change the current system for taxing social security since
taxing it the same as annuities would force them to pay some tax. On the other hand, high-income
taxpayers taking 85% of their social security into their gross incomes would likely benefit from
being allowed to exclude a bigger portion of their social security as a return of capital.