Federal Income Taxation

Federal Income Taxation HW#11
Name Course Instructor Date
Chapter 13:
Questions
Please answer the following questions at the end of Chapter 13:#1, 3, 7, 13, 15, 41 & 42 1 Ivan invests in land, and Grace invests in taxable bonds. The land appreciates by $8,000 each year, and the bonds earn interest of $8,000 each year. After holding the land and bonds for five years, Ivan and Grace sell them. There is a $40,000 realized gain on the sale of the land and no realized gain or loss on the sale of the bonds. Are the tax consequences to Ivan and Grace the same for each of the five years? Explain.
A taxable bond is taxed at the local and state levels and at times at the federal level. The recognized gain of $40,000 is the same for land and taxable bond, but there is a difference in timing recognition of the gain. Grace will include the interest income of $8,000 in her gross income for each of the five years. Ivan will recognize the $40,000 gain in the fifth year when he sells the land. Interest is taxed as ordinary income, while the land sales are considered a long-term capital gain. Capital gains taxed are at a lower rate than ordinary income.
3. If a taxpayer sells property for cash, the amount realized consists of the net proceeds from the sale. For each of the following, indicate the effect on the amount realized if:
a. The property is sold on credit.
The issue of cash sale or sale on credit does not affect the amount realized. The amount realized includes both the cash received at the time of sale and the cash to be received in the future
b. A mortgage on the property is assumed by the buyer.
The mortgage assumption increases the amount realized by the seller.
c. A mortgage on the property is assumed by the seller.
The assumption by the seller of the buyer's mortgage decreases the amount realized by the seller
d. The buyer acquires the property subject to a mortgage of the seller.
The buyer's acquisition of the property is subject to the mortgage of the seller increases the amount realized by the seller
e. Stock that has a basis to the purchaser of $6,000 and a fair market value of $10,000 is received by the seller as part of the consideration.
The seller’s receipt to of $10,000 stock by the seller increases the amount realized by $10,000.
7 Auralia owns stock in Orange Corporation and Blue Corporation. She receives a $10,000 distribution from both corporations. Information from Orange states that the $10,000 is a dividend. Blue states that the $10,000 is not a dividend. What could cause the instructions to differ as to the Federal income tax consequences?
Corporations issue stock dividend to common shareholders and dividends are distributed from earnings and profits .The amount in excess of the distribution over the earnings and profits is treated as capital recovery where the basis of the stock is reduced. When basis of the stock is reduced to zero, the amount of any subsequent distributions is a capital gain if the stock is a capital asset. Given the instructions from Blue, likely received a nondividend distribution that was not from the earnings and profits.
13 LO.4 Marilyn owns land that she acquired three years ago as an investment for
$250,000. Because the land ...