Homework Chapter 4
3. Allen visits Reno, Nevada, once a year to gamble. This year his gambling loss was $25,000. He commented to you, “At least I didn’t have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $3,000. “What are the relevant tax issues for Allen? Allen received something of value from the casino. Under the broad concept of income, the airfare and hotel accommodations would be considered income. However, Allen could argue that the income should be matched with his $25,000 in gambling losses on the trip, and when the income and losses are combined, the net effect is an economic loss
7. Why does the constructive receipt …show more content…
Both loans were due on demand. No interest was charged on the loans, and the Federal rate was 8% for all relevant dates. Vito used the money to purchase a boat, and he had $1,100 of investment income. Determine the tax consequences to Vito and Vito, Inc. in each of the following situations:
a. The loans are considered employer-employee loans.
The employer-employee loan would be eligible for the $10,000 exemption through June 30, 2011. However, in July 2012, the total outstanding loans exceed $10,000. The $100,000 exemption does not apply to these loans. Therefore, interest is imputed on the $12,000 amount of the loans for the period July through December 2012. Vito, Inc. has interest income and Vito has compensation income of $480 [.08($12,000 6/12)]. Vito also has interest expense of $480 and Vito, Inc. has compensation expense of the same amount. Note that employer-employee loans are not eligible for the $100,000 exemption
b.The loans are considered corporation-shareholder loans.
A corporation-shareholder loan is not eligible for the $100,000 exemption and usually does not qualify for the $10,000 exemption (i.e., cannot satisfy the requirement that tax avoidance not be a principal purpose of the loan). Therefore, for 2011 and 2012, the corporation has interest income and dividends paid (not deductible) as follows: 2011 ($8,000 8% 6/12) $320 2012 ($8,320 8% 6/12) ($8,320 + $333 + $4,000)(.08)(6/12) $333 506 $839 Vito has dividend income and interest