South-Western Federal Taxation 2022: Individual Income Taxes 45th edition by James C. Young Test ban

b.
​Suppose that Noah inadvertently omitted gross income of $76,000. When does the statute of limitations on assessments expire?
c.
​Suppose the omission was deliberate, not inadvertent. When does the statute of limitations on assessments expire?
 
ANSWER:  a.Three years from April 15, 2021.
b.
​If more than 25% of gross income is omitted, a six-year statute applies (i.e., six years from April 15, 2021). In this case, it does because $76,000 is more than $75,000 (25% × $300,000).
c.If fraud is involved, the statute never expires.
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174. Without obtaining an extension, Pam files her income tax return 55 days after the due date. With her return, she pays an additional tax of $60,000. Disregarding any interest element, what is Pam’s penalty for failure to pay and to file?
ANSWER:  $6,000. Disregarding the interest element, Pam’s total penalties are as follows:
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Failure to pay penalty (0.5% × $60,000 × 2 months) $    600
Plus:Failure to file penalty (5% × $60,000 × 2 months)$6,000  
 Less failure to pay penalty for same period   (600)   5,400
Total penalties  $6,000
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175. On his 2021 income tax return, Andrew omitted income and overstated deductions to the extent that his income tax was understated by $500,000. Disregarding any interest element, what is Andrew’s penalty if the understatement was due to:
 
a.Negligence.
b.Civil fraud.
c.Criminal fraud.
 
ANSWER:  a.$100,000 (20% × $500,000).
b.$375,000 (75% × $500,000).
c.Various fines and/or prison sentence.
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176. Several years ago, Logan purchased extra grazing land for his ranch at a cost of $240,000. In 2021, the land is condemned by the state for development as a highway maintenance depot. Under the condemnation award, Logan receives $600,000 for the land. Within the same year, he replaces the property with other grazing land. What is Logan’s tax situation if the replacement land cost:
 
a.$210,000?
b.$360,000?
c.$630,000?
d.Why?
 
ANSWER:  a.
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​The full realized gain of $360,000 [$600,000 (condemnation proceeds) – $240,000 (cost of land)] must be recognized, because only $210,000 was reinvested. The condemnation proceeds of $600,000 exceed the amount reinvested by more than $360,000.
b.
​Because only $360,000 was reinvested in replacement property, $240,000 ($600,000 – $360,000) of the gain must be recognized.
c.Because the full $600,000 was reinvested, no realized gain need be recognized.
d.
​If some of the gain is not reinvested, consistent with the wherewithal to pay concept, there exists the ability to pay the tax. Thus, gain is recognized to the extent the proceeds are not reinvested.
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177. Paige is the sole shareholder of Citron Corporation. During the year, she leases a building to Citron for a monthly rental of $80,000. If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved?
ANSWER:  The rent charged by Paige is not “arms length”; as such, Citron Corporation’s rent deduction is $60,000 (not $80,000). The $20,000 difference is a nondeductible dividend distribution. For Paige, the change merely requires reclassification. Instead of $80,000 of rent income, she has $60,000 of rent income and $20,000 of dividend income.
 
178. In 1990, Martina leased real estate to Drab Corporation for 20 years. Drab Corporation made significant capital improvements to the property. In 2009, Drab decided not to renew the lease and vacated the property. At that time, the value of the improvements was $800,000. Martina sells the real estate in 2021 for $1,200,000 of which $900,000 is attributable to the improvements. When is Martina taxed on the improvements made by Drab Corporation?
ANSWER:  Martina is not subject to taxation on the improvements until she disposes of the property (i.e., 2021). After a controversial Supreme Court decision years ago, Congress clarified the tax law to make it more consistent with the wherewithal to pay concept.
 
Essay
 
179. The Federal income tax is based on a pay-as-you-go system and has become a “mass tax.” Explain this statement.
ANSWER:  The pay-as-you-go system is present in the wage and other withholding procedures. In the case of self-employed persons, it is manifested in the required quarterly payments for estimated taxes. The income tax became a mass tax during World War II when its coverage was extended to 74% of the population (from less than 6% in 1939).