Anna, one of your firm’s clients, is a physician who owns and operates her practice through a professional service corporation (PSC). She sees opportunities to grow the PSC, allowing her to serve more patients and generate more profits. Anna, however, cannot invest more funds in her practice because she is still paying off her medical school loans. She also is concerned that this growth would require her to spend more time managing her practice’s business aspects and less time with patients. Anna was discussing her situation with a friend, whose medical practice is in the same city. He told Anna that she should look into a practice management company (PMCo). He explained that the PSC would continue to perform the medical activities, but the PMCo would charge the PSC a fee for overseeing the practice’s business aspects. The fee would be based on the practice’s profits. This structure would allow the PMCo to invest funds to grow the business and would satisfy a state law requiring all PSC shareholders to be physicians. He mentioned that, although Anna would remain as the legal owner of the PSC’s stock, the PMCo probably would prohibit her from using that ownership to exercise control over the PSC, thereby prohibiting her from selling the PSC’s stock without the PMCo’s consent and prohibiting the PSC from paying her a dividend without the PMCo’s consent. Anna wants to explore this opportunity and has asked a tax partner in your firm what the tax ramifications would be. The partner has asked you to determine whether Anna’s PSC and the PMCo would have to file a consolidated federal income tax return. Prepare a brief memo for the partner answering this question. A partial list of resources includes: • IRC Sec. 1504 • Rev. Rul. 84-79 • PLR 201451009
> Yong received a 40% general partnership interest in the XYZ Partnership in each of the independent situations below. In each situation, assume the general partners share the economic risk of loss related to recourse liabilities according to their partner
> What is Kelly’s basis for her partnership interest in each of the following independent situations? The partners share the economic risk of loss from recourse liabilities according to their partnership interests. a. Kelly receives her 20% partnership in
> Diane and Ed have equal capital and profits interests in the DE Partnership, and they share the economic risk of loss from recourse liabilities according to their partnership interests. In addition, Diane has a special allocation of all depreciation on b
> Clark sold securities for a $50,000 short-term capital loss during the current year, but he has no personal capital gains to recognize. The C&L General Partnership, in which Clark has a 50% capital, profits, and loss interest, reported a $60,000 shor
> Refer to Example C:9-25 in the text. Provide computations showing that the partners’ total tax liability under the special allocation is less than their total liability under an equal allocation of the two types of interest income.
> On January of the current year, Becky (20%), Chuck (30%), and Dawn (50%) are partners in the BCD Partnership. During the current year, BCD reports the following results. All items occur evenly throughout the year unless otherwise indicated. Assume the cu
> Jim, Liz, and Keith are equal partners in the JLK Partnership, which uses the accrual method of accounting. All three materially participate in the business. JLK reports financial accounting income of $186,000 for the current year. The partnership used t
> Mark and Pamela are equal partners in MP Partnership. The partnership, Mark, and Pamela are calendar year taxpayers. The partnership incurred the following items in the current year: Sales……………………………………………………………………………………..$450,000 Cost of goods sold…………
> The BCD Partnership is formed in April of the current year. The three equal partners, Boris, Carlton Corporation, and Damien have had tax years ending on December 31, August 30, and December 31, respectively, for the last three years. The BCD Partnership
> Duck Corporation is owned equally by Harry, Susan, and Big Corporation. Harry and Susan are single. Eight years ago, Harry, Tom, and Big, the original investors in Duck, each paid $125,000 for their Duck stock. Susan purchased her stock from Tom five yea
> The BCD Partnership is being formed by three equal partners, Beta Corporation, Chi Corporation, and Delta Corporation. The partners’ tax year-ends are June 30 for Beta, September 30 for Chi, and October 31 for Delta. The BCD Partnership’s natural busines
> Marjorie works for a large firm whose business is to find suitable real estate, establish a limited partnership to purchase the property, and then sell the limited partnership interests. In the current year, Marjorie received a 5% limited partnership int
> Sean is admitted to the calendar year XYZ Partnership on December 1 of the current year in return for his services managing the partnership’s business during the year. The partnership reports ordinary income of $100,000 for the current year without consi
> On January 1, Julie, Kay, and Susan formed a partnership. The contributions of the three individuals are listed below. Julie received a 30% partnership interest, Kay received a 60% partnership interest, and Susan received a 10% partnership interest. They
> On May 31, six brothers decided to form the Grimm Brothers Partnership to publish and print children’s stories. The contributions of the brothers and their partnership interests are listed below. They share the economic risk of loss fro
> At the beginning of the current year, Able and Baker formed the AB Partnership by transferring cash and property to the partnership in exchange for a partnership interest, with each having a 50% interest. Specifically, Able transferred property having a
> Suzanne and Bob form the SB General Partnership as equal partners. They make the following contributions: The SB Partnership assumes the $80,000 recourse mortgage on the building that Bob contributes, and the partners share the economic risk of loss on
> Steve wishes to pass his business on to his children, Tracy and Vicki, and gives each daughter a 20% partnership interest to begin getting them involved. Steve retains the remaining 60% interest. Neither daughter is employed by the partnership, which buy
> Bob and Kate form the BK Partnership, a general partnership, as equal partners. Bob contributes an office building with a $130,000 FMV and a $95,000 adjusted basis to the partnership along with a $60,000 mortgage, which the partnership assumes. Kate cont
> Daniel has no family to inherit his 80% capital and profits interest in the CD Partnership. To ensure the continuation of the business, he gives a 20% capital and profits interest in the partnership to David, his best friend’s son, on the condition that
> Tom and Vicki are married and file a joint income tax return. They each purchase 50% of the stock in Guest Corporation from Al for $75,000. Tom is employed full-time by Guest and earns $100,000 in annual salary. Because of Guest’s financial difficulties,
> Katie works 40 hours a week as a clerk in the mall and earns $20,000. In addition, she works five hours each week in the JKL Partnership’s office. Katie, a 10% limited partner in the JKL Partnership, has been allocated a $2,100 loss from the partnership
> George, a limited partner in the EFG Partnership, has a 20% interest in partnership capital, profits, and losses. His basis in the partnership interest is $15,000 before accounting for events of the current year. In December of the current year, the EFG
> Cara, a CPA, established an accounting system for the ABC Partnership and, in return for her services, received a 10% profits interest (but no capital interest) in the partnership. Her usual fee for the services would be approximately $20,000. No sales o
> Suzanne and Laura form a partnership to market local crafts. In April, the two women spent $1,600 searching for a retail outlet, $1,200 to have a partnership agreement drawn up, and $2,000 to have an accounting system established. During April, they sign
> Helen, a 55% partner in the ABC Partnership, owns land (a capital asset) having a $20,000 basis and a $25,000 FMV. She plans to transfer the land to the ABC Partnership, which will subdivide the land and sell the lots. Discuss whether Helen should sell o
> Jeff, a 10% limited partner in the recently formed JRS Partnership, expects to have losses from the partnership for several more years. He is considering purchasing an interest in a profitable general partnership in which he will materially participate.
> Is the Sec. 704(d) loss limitation rule more or less restrictive than the at-risk rules? Explain.
> Can a recourse debt of a partnership increase the basis of a limited partner’s partnership interest? Explain.
> The BW Partnership reported the following current year earnings: $30,000 interest from tax exempt bonds, $50,000 long-term capital gain, and $100,000 net income from operations. Bob saw these numbers and told his partner, Wendy, that the partnership had
> Jane contributes valuable property to a partnership in exchange for a general partnership interest. The partnership also assumes the recourse mortgage Jane incurred when she purchased the property two years ago. a. How will the liability affect the amou
> Kobe transfers $500,000 in cash to newly formed Bryant Corporation for 100% of Bryant’s stock. In the first year of operations, Bryant’s taxable income before any payments to Kobe is $120,000. What total amount of taxable income must Kobe and Bryant each
> An existing partner wants to contribute property having a basis less than its FMV for an additional interest in a partnership. a. Should he contribute the property to the partnership? b. What are his other options? c. Explain the tax implications for
> Doug contributes services but no property to the CD Partnership upon its formation. What are the tax implications of his receiving only a profits interest versus his receiving a capital and profits interest?
> Sam wants to help his brother, Lou, start a new business. Lou is a capable auto mechanic but has little business sense, so he needs Sam to help him make business decisions. Should this partnership be arranged as a general partnership or a limited partner
> Bob and Carol want to open a bed and breakfast inn as soon as they buy and renovate a turn-of the-century home. What would be the major disadvantage of using a general partnership rather than a corporation for this business? Should they consider any othe
> P Corporation acquires all of S Corporation’s stock at the beginning of the current year in a transaction that qualifies as a Sec. 382 ownership change. P and S elect to file a consolidated tax return for the current year. At the time of the acquisition,
> The TUV Partnership is considering two compensation schemes for Tracy, the partner who runs the business on a daily basis. Tracy can be given a $10,000 guaranteed payment, or she can be given a comparably larger distributive share (and distribution) so t
> Andrew gives his brother Steve a 20% interest in the AS Partnership, and he retains a 30% interest. Andrew works for the partnership but is not paid. How will this arrangement affect the income from the AS Partnership that Andrew and Steve report?
> Roy’s father gives him a capital interest in the Family Partnership. Discuss whether the Sec. 704(e) family partnership rules apply to this interest.
> The ABC Partnership has a nonrecourse liability that it incurred by borrowing from an unrelated bank. It is secured by an apartment building owned and managed by the partnership. The liability is not convertible into an equity interest. How does this lia
> How will a partner’s distributive share be determined if the partner sells one-half of his or her beginning-of-the-year partnership interest at the beginning of the tenth month of the partnership’s tax year?
> The City of Omaha donates land worth $500,000 to Ace Corporation to induce it to locate in Omaha and create an estimated 2,000 jobs for its citizens. a. How much income, if any, must Ace report on the land contribution? b. What basis does Ace take in t
> Which of the following items can be deducted (up to $5,000) and amortized as part of a partnership’s organizational expenditures? a. Legal fees for drawing up the partnership agreement b. Accounting fees for establishing an accounting system c. Fees f
> Rick has a $50,000 basis in the RKS General Partnership on January 1 of the current year, and he owns no other investments. He has a 20% capital interest, a 30% profits interest, and a 40% loss interest in the partnership. Rick does not work in the partn
> Charles and Mary formed CM Partnership on January 1 of the current year. Charles contributed Inventory A with a $100,000 FMV and a $70,000 adjusted basis for a 40% interest, and Mary contributed $150,000 cash for a 60% interest. The partnership operates
> On the advice of his attorney, Dr. Andres, a local pediatrician, contributed several office buildings, which he had previously owned as sole proprietor, to a new Andres Partnership in which he became a one-third general partner. He gave the remaining lim
> Abe and Brenda formed the AB Partnership ten years ago as a general partnership and have been very successful with the business. However, in the current year, economic conditions caused them to lose significant amounts, but they expect the economy and th
> Sandra and John, who are unrelated, each own 50% of Alpha Corporation’s stock and 50% of Beta Corporation’s stock. For five years, Alpha has conducted manufacturing activities and sold machine parts primarily in the eastern United States. Alpha has repor
> P, R, and T Corporations have filed a consolidated tax return for a number of years using the calendar year as its tax year. Current plans call for P to purchase all of X Corporation’s stock at the close of business on June 30 of the current year from th
> Angela owns all the stock of A, B, and P Corporations. P has owned all the stock of S1 Corporation for six years. The P-S1 affiliated group has filed a consolidated tax return in each of these six years using the calendar year as its tax year. On July 10
> Mark owns all the stock of Red and Green Corporations. In each of the past five years, Red has reported approximately $125,000 of taxable income, and Green has reported NOLs of about $30,000. One-third of Red’s profits come from sales to Green, and their
> On January 10 of the current year, Mary transfers to Green Corporation a machine purchased three years ago for $100,000. On the transfer date, the machine has a $60,000 adjusted basis and a $110,000 FMV. Mary receives all 100 shares of Green stock, worth
> Wildcat Corporation is the parent company of a three-member affiliated group. Wildcat and Badger Corporations have filed consolidated tax returns for several years. Early in the current year, Wildcat purchases Hawkeye Corporation, a start-up business tha
> Alpha and Baker Corporations, accrual method of accounting corporations that use the calendar year as their tax year, have filed consolidated tax returns for several years. Baker, a 100%-owned subsidiary of Alpha, transfers a patent, equipment, and worki
> Define the term SRLY and explain its significance and application to a consolidated tax return.
> An affiliated group has a consolidated NOL for the current year. What factors could determine whether it would be advantageous or disadvantageous for the group to elect to forgo the carryback of the consolidated NOL?
> P, S, and T Corporations comprise a consolidated group. In the current year, P has a profit, while S and T both incur a loss. The net of P’s profit with S’s and T’s losses result in a consolidated NOL. In what years can P, S, and/or T deduct the consolid
> Indicate the tax treatment for each of the following dividends received by a corporation that is a member of an affiliated group filing a consolidated tax return: a. Dividend received from a corporation that is 5%-owned by the group member. b. Dividend
> An affiliated group elects to file a consolidated tax return. Explain why the group’s consolidated capital gain net income or net capital loss is not merely the sum of the members’ separate capital gain net incomes and net capital losses if they were to
> Brooklyn and Bronx Corporations become an affiliated group at the beginning of the current year. Will the corporations obtain a greater charitable contribution deduction for the current year by filing a consolidated tax return or separate tax returns?
> One consolidated group member lends money to another member of its group. Both corporations use the accrual method of accounting. Explain how the lending group member reports its interest income and how the borrowing group member reports its interest exp
> P, S1, and S2 Corporations comprise a consolidated group. The group members use the accrual method of accounting. For each of the following intercompany transactions that occur during the current year, determine the intercompany item and corresponding it
> Ted decides to incorporate his medical practice. He uses the cash method of accounting. On the date of incorporation, the practice reports the following balance sheet: All the current liabilities would be deductible by Ted if he paid them. Ted transfers
> P and S1 Corporations have filed consolidated tax returns for several years. S1 acquires all of S2 Corporation’s stock at the close of business on June 15 of the current year. Which of the following current year transactions are intercompany transactions
> Define the following terms: a. Intercompany transaction. b. Intercompany item. c. Corresponding item. d. Recomputed corresponding item. e. Matching rule. f. Acceleration rule.
> P Corporation owns all the stock of S and T Corporations, and the three corporations elected to file a consolidated tax return for the prior year. What circumstances would allow the corporations to file separate tax returns for the current year?
> Explain why the consolidated return Treasury Regulations are legislative regulations.
> P Corporation owns 100% of the stock of S1 and S2 Corporations. S1 owns 51% of S3 Corporation’s stock, and unrelated persons own the remaining 49%. S2 is a foreign corporation. Explain why the corporations included in a consolidated tax return can differ
> How do the stock ownership requirements for an affiliated group of corporations differ from those for a controlled group?
> P Corporation purchases all of S Corporation’s stock in the current year. Both corporations are includible corporations. S is P’s only subsidiary. Explain their federal income tax return filing alternatives.
> Pamela (an individual) owns 100% of P Corporation’s stock and 100% of R Corporation’s stock. P owns 100% of S Corporation’s stock and 49% of T Corporation’s stock. S owns the remaining 51% of T’s stock. All the corporations are includible corporations an
> Which of the following entities are includible in an affiliated group (if the 80% stock ownership requirements are met)? a. Domestic C corporation. b. Foreign corporation. c. Life insurance company taxed under Sec. 801. d. Limited liability company.
> Jerry transfers to Emerald Corporation property having a $32,000 adjusted basis and a $50,000 FMV in exchange for all of Emerald’s stock worth $15,000 and Emerald’s assumption of a $35,000 mortgage on the property. a. What is the amount of Jerry’s recog
> What minimum level of stock ownership does the IRC require for a corporation to be included in an affiliated group?
> For which of the following tax-related matters can an affiliated group’s parent corporation act as the group’s agent? a. Consent by a subsidiary corporation to the filing of a consolidated tax return. b. Changing a subsidiary corporation’s accounting
> During what time period can an affiliated group elect to file a consolidated tax return? How does it make the election? During what time period can it request to terminate its consolidation?
> The president of your CPA firm’s largest client, a medium-size manufacturing company, advises you that the firm is about to acquire its largest supplier. Both companies have been profitable for the past ten years. The president wants to know what tax ret
> P Corporation owns 100% of the stock of S1 and S2 Corporations. The corporations currently are filing separate tax returns. P and S1 are profitable. S2 is a start-up company that has reported losses for its first two years of operations. S1 eventually wi
> P corporation owns 100% of S Corporation’s stock and the corporations file a consolidated tax return. a. Explain why P must increase the basis in its S stock by S’s taxable income and decrease the basis by the dividends S pays to P. b. Suppose S owns 1
> What is the SRLY-Sec. 382 overlap rule? Explain its significance and application to a consolidated tax return.
> Using the facts from Problem C:8-70 below, calculate the tax liabilities of Flying Gator and T Corporations for 2016. How much larger (or smaller) would be the total of the two separate return tax liabilities if they were to file separate tax returns tha
> P and S Corporations have filed consolidated tax returns for ten years. P and S use the accrual method of accounting, and they use the calendar year as their tax year. P and S report separate return taxable income (before any consolidation adjustments an
> Carol owns all the stock of P Corporation and J Corporation. P operates six automotive service franchises in a metropolitan area. The service franchises have been a huge success in their first three years of operation, and P’s annual taxable income excee
> Barbara transfers to Moore Corporation $10,000 cash and machinery having a $15,000 basis and a $35,000 FMV in exchange for 50 shares of Moore stock. The machinery was used in Barbara’s business, originally cost Barbara $50,000, and is subject to a $28,00
> Angel Macias is considering selling his business (organized as Theta Corporation), which has the following assets and liabilities: Theta’s balance sheet also shows $200,000 of accounts payable and $400,000 in bank loans. No NOL carryov
> Tom Smith owns 100% of Alpha Corporation’s single class of stock, and Alpha owns 100% of Beta Corporation’s single class of stock. Alpha and Beta have filed separate tax returns for a number of years. Neither corporation has any NOL carryovers. Although
> Diversified Corporation operates a successful bank with ten branches. Al, Bob, and Cathy created Diversified six years ago and own all the Diversified stock in equal shares. Diversified has constructed in downtown Metropolis a new building that houses a
> ABC Corporation is the object of a hostile takeover bid by XYZ Corporation. ABC incurs a total of $400,000 in attorneys’ fees, accounting fees, and printing costs for information mailed to ABC shareholders in its effort to defeat the XYZ takeover bid. XY
> On January 10 of the current year, Austin Corporation acquires for cash 8% of Travis Corporation’s single class of stock. On August 25 of the current year, Austin makes a tender offer to exchange Austin common stock for the remaining Travis shares. Travi
> Albert Corporation is a profitable publicly traded corporation. None of its shareholders owns more than 1% of its outstanding shares. On December 31, 2016, Albert exchanged $8 million of its stock for all the stock of Turner Corporation as part of a merg
> Murray Corporation’s stock is owned by about 1,000 shareholders, none of whom own more than 1% of the outstanding shares. Pursuant to a tender offer, Said purchased all the Murray stock for $7.5 million cash at the close of business on December 31, 2016.
> For each of the following transactions, indicate the reorganization type (e.g., Type A, Type B, etc.). Assume all common stock is voting. a. Anderson and Brown Corporations exchange their assets for all the single class of stock of newly created Computer
> Discuss the tax consequences of the following corporate reorganizations to the parties to the reorganization: a. Adobe Corporation and Tyler Corporation merge under Florida law. Tyler shareholders receive for their Tyler stock $300,000 of Adobe common s
> Jim owns 80% of Gold Corporation stock. He transfers a business automobile to Gold in exchange for additional Gold stock worth $5,000 and Gold’s assumption of both his $1,000 automobile debt and his $2,000 education loan. The automobile originally cost J
> Identify the type of each of the following reorganizations. a. Briggs Corporation was originally incorporated in Georgia but now conducts most of its business in Florida. The firm transfers substantially all its Georgia assets to a new Florida corporati
> Milan Corporation is owned by four shareholders. Andy and Bob each own 40% of the outstanding common and preferred stock. Chris and Doug each own 10% of the outstanding common and preferred stock. The shareholders want to retire the preferred stock that
> Master Corporation plans a recapitalization. Explain the tax consequences of each of the following unrelated transactions: a. Holders of Class A nonvoting preferred stock exchange their stock for newly issued common stock. Master paid $300,000 of cash d
> Jean Corporation has two divisions— home cookware and electric home appliances. Bill and Bob Jean own all of Jean Corporation’s single class of stock. Bill, the older brother, owns 70% of the Jean stock, and Bob owns t
> Ruby Corporation has 100 shares of common stock outstanding. Fred, a shareholder of Ruby, exchanges his 25% interest in the Ruby stock for Garnet Corporation stock and securities. Ruby purchased 80% of the Garnet stock ten years ago for $25,000. At the t
