Taxation in the U.S.: Problem Sets

4-25
Billy Dent, as the owner of an apartment building, receives and makes the following payments during 2011:

How much rental income must Billy Dent include on his 2011 income tax return?

5,000+4,000= $9,000

4-32
Arnold and Barbara Cane were divorced in June 2011. Pursuant to the divorce decree, Arnold is obliged to perform as follows:

a. Transfer title of their personal home to Barbara. They purchased the house in 1998 and their basis today is $400,000. The fair market value of the house is $500,000. The house is subject to a 25-year, $250,000 mortgage.

b. Arnold is to continue making payments on the house until it is fully paid off. In 2011, Arnold made payments totaling $18,000. c. Arnold is to make $3,000 per month payments to Barbara. Of this amount one-half is for child support. The divorce decree further states that alimony is to cease upon the death of the wife. In 2011, he made six payments.

How do the transactions in the divorce agreement affect Arnold's and Barbara's taxable income?

a. Transaction will not affect Arnold's and Barbara's taxable income.

b. Transaction will not affect Arnold's and Barbara's taxable income.
c. Barbara will report the $9,000 she receives in alimony as gross income for the 2011 tax year. Arnold will report the $9,000 he paid in alimony to Barbara as a deduction for the 2011 tax year.

5-26
Fluent, an investor in stocks and bonds wanted to increase his portfolio but wanted to minimize his tax liability on the income from the bonds. He is presented with the following alternative investments: U.S. Series EE bonds, bonds for industrial development for mass transit, and qualified veterans' mortgage bonds. Which should he choose for his investment? Why?

The investor should consider the U.S. Series EE bonds, because the interest received on those types of bonds is excludable from gross income.

6-29
Which of the following trade or business expenditures of Ajax Inc. are deductible on its current year tax return? If an expenditure is not deductible, explain why it is not a valid deduction.

The following expenditures are deductible on Ajax’s current year tax return:
Salaries and wages $400,000
Entertainment expenses (50 percent limitation) 12,500
Total $412,500
6-34
For the current month, Jackson Cement Co. incurred payroll expenses as follows: a. Jackson may claim a deduction of $675,000 for salary and wage expense.

b. The company may deduct $51,638 as payroll tax expense ($41,850 + $9,788). The employees’ shares of these taxes are withheld from their paychecks, but must be paid over to the Treasury Department, along with the employer’s shares. Jackson can claim a deduction only for the employer’s share of payroll taxes.