Accounting 5135 Answer Sheet

                                                                               Accounting 5135

                                                                                   Fall 2016

                                                                                     Naples

        ANSWER SHEET

        FINAL EXAMINATION

MULTIPLE CHOICE  (36 Points; 3 points each)

1.        c.        Rest are above-the-line deductions.

2.        b.        Only tuition payments (or medical payments) made directly to the educational                         institution (or hospital) are not considered gifts.  The promise here cannot be                                considered a quid pro quo since D receives nothing in exchange.  Revocable trusts                         (or mere designation of beneficiaries that can be revoked any time) are not gifts                         because they are not beyond the control of the giver.  Insurance proceeds are paid                        due to death, and gifts must be made while alive.  

3.        a.        Capital expenditures can qualify for medical expenses.  This one would be clearly                         allowed on the limited facts.

4.        d.        Since no physical injury has occurred, the compensatory damages are taxable.                         Punitive damages are always taxable.

5.        e.        The correct answer is $0.  Life insurance is an exclusion from GI.  There was no                         transfer for consideration here.

6.        a.        The payment is not a scholarship because compensation for services.

7.        b.        All personal use assets are capital.

8.        e.        FICA is imposed on both the employer and employee.  FUTA is imposed only on

employers.  Independent contractors pay twice the amount as employees (since paying both employers’ and employees’ portions).  Finally, while the amount of social security an employee is capped ($117,000 in 2016), there is no cap on the Medicare portion, so the person earning $300,000 will pay more in FICA than the person earning $200,000.

9.         a.         $5M each less $14,000 annual exclusion each.  Andrea and Joseph each have credit  

                ($5.45M equivalance) to reduce gift to zero.  

10.        d.        Appeals from a U.S. District Court go to the taxpayer’s home circuit of the U.S.

                Circuit Court of Appeals.

11.        b.        Inclusion of property held in joint tenancy depends on the purchase contribution of

each owner.  Here, Elton furnished 80% of the funds and Trudy 20%.  None of Trudy’s funds came from Elton, so Elton would include 80% of the FMV of the property at his death.

12.        e.        For AMT you take away deductions for taxes (so large home would pay more real                         estate taxes) and exemptions (large family).  The AMT also limits you to straight-                        line depreciation.  So all would be factors.

PROBLEMS  (72 Points; 9 points each)

1.        As a cash-basis taxpayer, Norm has income when property is actually or constructively received in cash or a cash equivalent.  The document is a cash equivalent since it could be immediately sold for cash.  In the absence of other information its value would be the $5,000 owed to Norm and accepted for payment.  The issue is whether going over to the bar is a “substantial limitation” such that constructive receipt should not apply.  The fact that it was merely inconvenient for Norm to pick the check up in 2016 would not likely be held to be a “substantial limitation” and therefore Norm would likely have $5,000 income in 2016.  

2.        

        (a)        Real estate for real estate will qualify as a like-kind exchange.  But gain will still

have to be recognized at the lesser of gain realized ($70,000) or boot received ($20,000).  Here the lesser is $20,000.  The new basis will have to preserve the $50,000 of realized but unrecognized gain.  Thus $100,000 FMV of new property - $50,000 postponed gain = $50,000 basis in the new property.  

        (b)        An automobile for an automobile will qualify as a like-kind exchange so long as

                business or investment property.  But since there is a $3,000 realized loss (and

                Section 1031 applies to both gains and losses), there is no gain recognized despite

                Sam receiving boot.  Sam’s basis in the Mercedes is $33,000 ($30,000 FMV of new

                car + $3,000 postponed loss).

        (c)        The business truck for office furniture will not qualify as a like-kind exchange

                because they are not in the same asset class.  Thus Sam will recognize the $2,000