CHAPTER 6 DEDUCTIONS AND LOSSES: IN GENERAL

1. Sandra sold 500 shares of Wren Corporation to Bob, her brother, for its fair market value. She had paid $26,000 for the stock. Calculate Sandra’s and Bob’s gain or loss under the following circumstances:

a. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $18,000.

b. Sandra sold the shares to Bob for $30,000. One year later, Bob sold them for $27,000.

c. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $28,000.

2. The stock of Eagle, Inc. is owned as follows:

Tom	23%
Tom’s uncle	22%
Tom’s daughter	7%
Tom’s sister	15%
Tom’s spouse	15%
Tom’s nephew	8%
Tom’s CPA, unrelated	10%

Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate Tom’s realized and recognized loss associated with the sale.

3. Tracy invested in the following stocks and bonds during 2014.

Blue, Inc. $25,000

City of Falcon bonds 75,000

To finance the investments, she borrowed $100,000 from Swan Bank. Interest expense paid on the loan during 2014 was $5,000. During 2014, Tracy received $1,250 of dividend income from Blue, Inc. and $3,000 of interest income on the municipal bonds.

a. Determine the amount of Tracy’s gross income.

b. Determine the maximum amount of Tracy’s deductible interest expense.

4. Trade or business expenses are classified as deductions forAGI. Section 212 expenses, barring certain exceptions, are classified as deductions fromAGI. What are these exceptions?

5. Are all personal expenses disallowed as deductions?

6. Under what circumstance can a bribe be deducted?

7. Can a trade or business expense be deductible if it is necessary but not ordinary?

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8. Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is notmet?

9. If part of a shareholder/employee’s salary is classified as unreasonable, determine the effect on the:

a. Shareholder/employee’s gross income.

b. Corporation’s taxable income.

10. What losses are deductible by an individual taxpayer?

11. Bruce owns several sole proprietorships. Must Bruce use the same accounting method for each of these businesses?

12. Max opened his dental practice (a sole proprietorship) in March 2014. At the end of the year, he has unpaid accounts receivable of $62,000 and no unpaid accounts payable. Should Max use the accrual method or the cash method for his dental practice?