33. Since these expenses relate to Beth’s CPA practice and all are paid by her, she can deducther expenses and those for Steve in calculating AGI. The expenses reduce her AGI by$3,575.Conference registration ($500 + $500) $1,000Airline tickets ($900 + $600) 1,500Taxi fares 75Lodging ($700 + $300) 1,000$3,575pp. 6-2 and 6-334. a. Carlton’s AGI is calculated as follows:Gross income:Salary income $72,000Dividend income 4,000Interest income 3,000 $79,000Deductions for AGI:Alimony paid $12,000Traditional IRA contribution 3,000Loss on sale of stock 900 (15,900)Adjusted gross income $63,100b. Itemized deductions:Contributions to First Church $ 2,500Real estate taxes on personal residence 1,800Mortgage interest on personal residence 6,000State income taxes 3,500Total itemized deductions $13,800Since the standard deduction for 2004 of $4,850 is less than Carlton’s itemizeddeductions of $13,800, he should itemize deductions in 2004. pp. 6-3 to 6-535. With IRA Without IRAContribution ContributionGross income $10,200 $10,200Contribution to IRA (3,000) (-0-)AGI $ 7,200 $10,200Itemized deductions:Charitable contribution $ 2,000 $ 2,000Medical expenses [$2,200 – (7.5% X AGI)] 1,660 1,435Casualty loss [($3,500 – $100) – (10% X AGI)] 2,680 2,380Total itemized deductions $ 6,340 $ 5,815Thus, the $3,000 IRA contribution would increase Julie’s itemized deductions by $525($6,340 – $5,815). pp. 6-3 to 6-5 and Example 236. a. Drew and Cassie are trying to use the salaries to reduce the taxable income ofThrush to zero ($800,000 – $400,000 – $300,000 – $100,000). By so doing, theycan avoid the potential for double taxation.b. If the salaries paid to the children are deemed reasonable, Thrush’s taxableincome is reduced to zero. Each child will report gross income of $25,000.The more likely result is that a substantial portion of the $100,000 salarypayments will be labeled as unreasonable compensation. In this case, Thrush’staxable income will be increased by the amount of unreasonable compensation.Each of the children will report gross income equal to the amount labeledreasonable compensation. Drew and Cassie will have additional dividend incomeequal to the amount of the unreasonable compensation.pp. 6-6 and 6-737. a. Jill can deduct the following losses against the $25,000 recognized gain:Loss on sale of Green, Inc. stock $ 3,500Loss on sale of Aqua, Inc. bonds 1,500Loss on sale of rental property 2,300Loss on sale of investment land 5,000$12,300The $1,200 loss on the sale of Jill’s personal use refrigerator, the $7,000 loss onthe sale of her personal use car, and the $9,000 loss on the sale of her personal usevacation home are not deductible because they are personal use assets.b. The $12,300 deductible loss is classified as a deduction for AGI (i.e., it offsets$12,300 of the $25,000 recognized gain), since it is a loss on the sale of businessand investment property.pp. 6-4 and 6-740. Gross receipts $300,000Less:Coliseum rental $ 25,000Food (cost of goods sold) 30,000Souvenirs (cost of goods sold) 60,000Performers 100,000 (215,000)Net income for 2004 $ 85,000Since Duck is an accrual basis taxpayer, it may accrue and deduct the costs of theperformers of $100,000 even though not paid until January 5, 2005 (i.e., the economicperformance test is satisfied). However, the cleaning cost of $10,000 may not bededucted until 2005 when the services are performed (i.e., at that time, the economicperformance test is satisfied). pp. 6-9 and 6-1042. a. The effect of the illegal betting parlor on Chris’s AGI is as follows:Gross income $900,000Deductible expenses:Salaries $360,000Rent 24,000Utilities 3,600Telephone 5,000Life insurance premiums 30,000 (422,600)Increase in AGI $477,400Neither the illegal kickbacks of $40,000 nor the bribes to police of $20,000 isdeductible since these expenses violate public policy.b. For an illegal drug activity, all of the expenses are disallowed. Therefore, itwould appear that the illegal drug operation would increase Chris’s AGI by$900,000. However, the $200,000 cost of goods sold is viewed as a reduction incalculating gross income rather than as an expense. Therefore, the illegal drugoperation increases Chris’s AGI by $700,000 ($900,000 – $200,000).pp. 6-13, 6-14, and Example 1643. Polly’s deduction for the political contributions is $0. Political contributions cannot bededucted. p. 6-1444. a. Under the first option, the salary of Amber’s president would be $1,170,000($900,000 + $270,000). Since Amber is a publicly held corporation, only$1,000,000 of this salary is deductible, with the balance of $170,000 beingdisallowed as excessive executive compensation. The $26,000 ($20,000 +$6,000) contribution to the defined contribution pension plan would bedeductible.Under the second option, all of the compensation paid to the president isdeductible assuming the statutory requirements for a performance-basedcompensation program are satisfied. Thus, only the second option providesAmber with a deduction for all of the president’s proposed compensation.pp. 6-14 and 6-15b. Willis, Hoffman, Maloney, and Raabe, CPAs5191 Natorp BoulevardMason, OH 45040September 17, 2004Ms. Agnes RiddleChairperson of the Board of DirectorsAmber, Inc.100 James TowerCleveland, OH 44106Dear Ms. Riddle:I am responding to your inquiry regarding the proposed compensation plans forAmber’s president. Under one proposal, both the salary and the pensioncontribution will be increased by 30%. Under the other option, a performance-basedcompensation program will be implemented which is projected to provideabout the same additional compensation and pension contribution for thepresident.The 30% increase option will produce a salary of $1,170,000 and a pensioncontribution of $26,000. Of this amount, only $1,026,000 ($1,000,0000 salaryand $26,000 pension contribution) can be deducted by Amber. The salary paid tothe president in excess of $1,000,000 is disallowed as excessive executivecompensation.Under the performance-based compensation option, all of the compensation(salary, bonus, and pension contribution) can be deducted assuming that theperformance-based compensation satisfies the following requirements:Such compensation is based on company performance according to aformula approved by a board of directors compensation committee(comprised solely of two or more outside directors) and by shareholdervote. The performance must be certified by this compensationcommittee.I recommend that you