Make the following assumptions, unless otherwise indicated in the question:
- All individual taxpayers are calendar year, cash method taxpayers and all corporate taxpayers are calendar year, accrual method taxpayers.
- Taxpayers (other than C Corporations) are high income taxpayers with a marginal rate of 35% for ordinary income and 20% for capital gain in the "other gain" group. Also, assume C corporations are taxed at a 20% rate for all C Corporation income.
- If a question specifies an actual year (e.g. “2018”), apply the actual law in effect in that year. Otherwise, assume post-Tax Cuts and Jobs Act law is in effect in all years.
- If trade or business real property includes a building, assume that all of the taxpayer’s basis in the real property is allocable to the building.
- Depreciable property placed in service is not subject to §168(k) bonus depreciation or the anti-abuse convention for property placed in service in the last quarter of the year. To simplify calculations, assume that the recovery period for residential real property is 30 years (instead of the actual 27.5 years) and the recovery period for commercial real property is 40 years (instead of the actual 39 years.) Unless otherwise indicated, state the applicable convention that would apply, but disregard the convention for purposes of calculating depreciation deductions.
- The taxpayer has not elected out of the default § 453 installment sale reporting rules.
- If a taxpayer sells or exchanges § 1231 property at a gain, assume that the taxpayer has no other sales or exchanges of § 1231 property in that year.
- The Alternative Minimum Tax does not apply to the taxpayer.
- Where the fact pattern names two people together (e.g., Beth and Ben), assume that the two people are married and file a joint return.
- In order to simplify your calculations, assume (unrealistically) that the "applicable federal rate" (AFR) is 10% compounding semiannually.
- Assume that the future value of $1,000 in 3 years, with annual interest equal to 10%, compounding semiannually, is $1,340, as indicated in the following chart:
Value of $1,000 investment for 3 years with yield-to-maturity ( YTM) of 10% (compounding semiannually):
Initial investment
After 1st 6-month period
After 2nd 6-month period
After 3rd 6-month period
After 4th 6-month period
After 5th 6-month period
After 6th 6-month period
$1,000
$1,050
$1,102.50
$1,157.63
$1,215.50
$1,276.29
$1,340
- Assume that the future value of $1,000 in 3 years, with annual interest equal to 5%, compounding semiannually, is $1,160, as indicated in the following chart:
Value of $1,000 investment for 3 years with YTM of 5% (compounding semiannually):
Initial investment
After 1st 6-month period
After 2nd 6-month period
After 3rd 6-month period
After 4th 6-month period
After 5th 6-month period
After 6th 6-month period
$1,000
$1,025
$1,051
$1,077
$1,104
$1,131
$1,160