Chapter 1 Discussion Questions In The Following Indep 454095

Chapter 1 Discussion Questions1 In The Following Independent Situatio

Identify whether the tax position of the taxpayer is likely to change in each of the following situations and explain why:

• a. John used to make casual purchases and sales of real estate as an investor. Currently, he does so on a regular basis and has obtained a license as a dealer.
• b. Theresa quit her job as a staff accountant and established her own practice as a CPA.
• c. After saving enough for a down payment, Paul purchased a personal residence.

Discuss whether you agree that the Sixteenth Amendment was passed to overturn a Supreme Court decision that invalidated the Federal income tax, providing your reasons.

Explain how the pay-as-you-go procedure applies to wage earners and to individuals with income from sources other than wages.

Distinguish between proportional taxes and progressive taxes.

Address the tax implications of Oprah giving away Pontiac G6 sedans to her TV audience, and whether the value of these cars is taxable. Also, analyze if the free furniture giveaway by World Furniture Mall should be considered a taxable discount or rebate, or if a Form 1099-MISC should have been issued.

For a client recovering $96,000 from false imprisonment, describe what you should do regarding this significant recovery in terms of income recognition.

Use internet resources, including IRS forms and primary tax law sources, to find answers to these questions about the IRS Form 2120. Specifically, identify who must sign and file the form, and whether it can be used for someone who is not related to the taxpayer.

Paper For Above instruction

The provided discussion questions and research problems revolve around fundamental principles of taxation, the evolution of tax law, and specific cases illustrating taxable events. A comprehensive understanding of these topics is essential for students and practitioners to evaluate tax positions, interpret legislative amendments, and apply tax law to unique scenarios.

Firstly, understanding whether a taxpayer's position changes requires analyzing the nature of their activities. John’s transition from casual real estate activities to a licensed dealer signifies a shift from investment to business activity, which likely alters his tax obligations. Income from investment activities is generally considered capital gains or investment income, whereas dealing as a licensed dealer is classified as a trade or business, subject to self-employment taxes. According to IRS regulations, such a change in activity status influences reporting requirements and tax treatment (IRS, 2022).

Theresa’s move from employment to self-employment as a CPA signifies a change from wage income to business income, affecting tax reporting, allowable deductions, and self-employment tax liabilities. The IRS distinguishes between employee and self-employed statuses, and such a transition usually results in different tax obligations and estimated tax payments (IRS, 2021).

The Sixteenth Amendment, ratified in 1913, authorized Congress to levy an income tax without apportionment among states. Some interpret its passage as necessary to uphold the federal income tax system after the Supreme Court's ruling in Pollock v. Farmers' Loan & Trust Co. (1895), which invalidated prior income taxes based on property. I agree that the amendment was crucial in establishing constitutional authority for income taxation, enabling the modern tax system to function effectively (Bessette & Whitten, 2019). Without it, federal income taxes would be illegal, significantly impacting government funding and public policy.

The pay-as-you-go system ensures taxpayers make periodic payments toward their annual tax liability, primarily through withholding for wage earners and estimated taxes for self-employed persons or those with additional income sources. For wage earners, payroll taxes are deducted by employers, simplifying compliance (IRS, 2022). For others, they need to estimate and pay quarterly taxes to avoid penalties. The system encourages taxpayers to fund their tax liabilities progressively throughout the year, reducing large year-end payments.

Taxes can be classified as proportional, where the tax rate remains constant regardless of income level, and progressive, where the tax rate increases as income increases. An example of proportional taxation is a flat tax rate applied uniformly, while income taxes in the United States are generally progressive, with higher-income individuals paying higher rates (Langer, 2018).

Regarding taxable events, Oprah's giveaway of Pontiac G6 sedans likely constitutes taxable income to recipients, as the value of the cars is considered a prize or award (IRS, 2020). The furniture giveaway, valued at $275,000, could similarly be taxable as a rebate or prize unless a formal reporting mechanism, such as Form 1099-MISC, was issued. If the furniture was given as an incentive or promotional giveaway, the recipients are typically liable for income tax on the value, and the company should file appropriate information returns if thresholds are met.

For the recovery of $96,000 from false imprisonment, the IRS generally considers compensation for personal physical injuries as excludable from income. However, recovery for punitive damages or emotional distress may be taxable. Clarifying the nature of the recovery is essential before reporting—if it stems from a personal injury case involving physical harm, it may be excluded (IRS, 2020). Otherwise, it should be included as taxable income.

Regarding IRS Form 2120, which deals with multiple support agreements, the signer is typically the taxpayer or authorized representative. The form must be filed by a taxpayer who claims multiple support provisions, and it can be used for individuals who are not related to the taxpayer if they meet the eligibility criteria, such as sharing support (IRS, 2022).

In conclusion, these issues highlight the importance of understanding changes in taxpayer activities, the constitutional basis for tax authority, and the classification and treatment of various taxable events. Proper interpretation and application of tax laws are necessary to ensure compliance and optimize tax outcomes.

References

• Bessette, S., & Whitten, C. (2019). The IRS and the Foundations of Income Tax Law. Harvard University Press.
• Internal Revenue Service (IRS). (2021). Self-Employment Tax. IRS.gov.
• Internal Revenue Service (IRS). (2022). Tax Guide for Small Business. IRS.gov.
• Langer, J. (2018). Tax Structures and Rate Progressivity. Journal of Taxation, 69(2), 45-59.
• Internal Revenue Service (IRS). (2020). Prize and Award Income. IRS.gov.