Question: Discuss the tax and nontax reasons why

> Consider the following opportunities: Opportunity 1 requires a $4,000 cash payment now (year 0) but will result in $14,000 cash received in year 5. Opportunity 2 requires no cash outlay and results in $3,500 cash received in years 3 and 5. a. Use a 6 per

> Bontaine Publications, an accrual basis, calendar year corporation, publishes and sells weekly and monthly magazines to retail bookstores and newsstands. The sales agreement provides that the retailers may return any unsold magazines during the one-month

> One of your clients is planning to sell a piece of raw land and expects to incur a substantial gain on the sale. He has asked you to determine whether this gain will be considered capital gain or ordinary income. List five specific questions you should a

> Why is tax research necessary? In other words, why is it not possible for experienced tax professionals to answer all tax questions without performing tax research?

> Discuss potential differences in content and style between a research memo and a client letter communicating research results.

> Describe two alternative strategies for using a tax service to locate primary authorities.

> Explain why a researcher should consult the Citator before relying on a judicial opinion to support research conclusions.

> Explain the difference between primary and secondary authorities as sources of tax information. On which type of authority should professional tax research conclusions be based?

> Explain the difference between a tax issue and a research question.

> The Green River, which is heavily polluted by industrial waste, flows through State S. Eighty-five companies operate manufacturing facilities that border the river. State S recently enacted legislation requiring each company to pay $50,000 annually into

> How do tax payments differ from other payments that people or organizations make to governmental agencies?

> Yount Inc.’s auditors prepared the following reconciliation between book and taxable income. Yount’s tax rate is 21 percent. Net income before tax ………………………………………..$378,200 Permanent book/tax differences …………………………..(33,500) Temporary book/tax differenc

> Mr. and Mrs. Rath each own 30 percent of the voting common stock of FB Inc. Four unrelated investors each own 10 percent. Based on a recent appraisal, FB’s net worth is $10 million. Discuss the valuation issue suggested if: a. Mr. and Mrs. Rath give thei

> Identify the structural similarity between the capital loss limitation, the investment interest expense limitation, and the passive activity loss limitation.

> Discuss the potential effect of the passive activity loss limitation on the market value of profitable rental real estate activities.

> Mrs. Buckley, age 74, has $100,000 in a certificate of deposit paying 1.5 percent annual interest. In addition to this interest income, she receives Social Security and a modest pension from her former employer. Her marginal tax rate is 10 percent. Mrs.

> Contrast the income tax consequences of the yields on the following investments: a. U.S. Treasury bonds. b. Bonds issued by the State of Illinois. c. Bonds issued by a publicly held corporation at their face value. d. Bonds issued by a publicly held corp

> Employees who are compensated with restricted stock or stock options face financial risks not associated with cash compensation. Describe and compare the financial risks of these two types of equity based compensation.

> Mr. Zelig was recently promoted to an executive position by his corporate employer. The corporation now requires him to entertain clients much more frequently, and Mr. Zelig expects to incur at least $1,000 out-of-pocket business entertainment expenses e

> This year, publicly held Corporation DF paid its PFO a $1.4 million salary, only $1 million of which was deductible. It also accrued a $200,000 liability for deferred compensation payable in the year 2024 (when the PFO must retire). To what extent does e

> Mr. Burnett owns 10 percent of the stock of ABC Inc. and is the corporation’s director of marketing. ABC has a medical insurance plan for its employees. This year, it paid $1,400 of premiums to the insurance carrier for Mr. Burnett’s coverage. Contrast t

> A reasonable compensation problem for the sole shareholder of a C corporation is quite different from the reasonable compensation problem for the sole shareholder of an S corporation. What is the difference?

> Corporation H’s auditors prepared the following reconciliation between book and taxable income. H’s tax rate is 21 percent. Net income before tax ………………………………….$600,000 Permanent book/tax differences ……………….………15,000 Temporary book/tax differences  …………

> Discuss the practical reasons why the tax law authorizes the IRS to collect un with held employee payroll tax from the employer rather than the employees who were liable for the tax.

> Mr. Updike accepted an engagement to perform consulting services for MK Company. The engagement will last at least 18 months. Identify any reasons why Mr. Updike might prefer to be classified as an MK employee rather than as an independent contractor.

> Discuss the difference in the relationship between an employer and an employee and a client and an independent contractor.

> How does the fact that an employer-sponsored qualified retirement plan is administered by an independent trustee reduce the employees’ risk of participating in the plan?

> How does the fact that employees have a vested right to their benefits reduce the risk of participating in an employer-sponsored qualified retirement plan?

> Two years ago, Corporation WZ granted a stock option to an employee to purchase 2,500 shares of WZ stock for $30 per share. Since the date of grant, the market price of the stock has risen steadily and reached $31 just days ago. However, the option perio

> Discuss how the presence of a strong labor union may change the nature of the market in which rank-and-file employees negotiate with their employer.

> Individuals who are legally blind receive an additional standard deduction, while individuals with other disabilities, such as deafness or paralysis, aren’t entitled to an additional deduction. Is there a tax policy justification for the different treatm

> Why is the formula for computing individual taxable income so much more complicated than the formula for computing corporate taxable income?

> When he accepted his job, Mr. Martinez instructed his employer to withhold substantially more federal income tax from his monthly paycheck than was indicated by his marital and family situation. As a result, he routinely overpays his tax and receives a r

> For each of the following businesses, indicate the choice of taxable year corresponding to the end of each business’s natural business cycle. Your choices should match one of the following options: February 28 year-end, May 31 year-end, September 30 year

> Under the current rate structure, a high-income single person could pay more tax than a married couple on the same income. What economic circumstances might a single person cite to argue that his ability to pay tax is not necessarily greater than a marri

> Single individuals Sam and Zelle were married this year and filed their first joint return. To what extent did this change in filing status affect the following? a. Sam and Zelle’s aggregate standard deduction. b. Sam and Zelle’s aggregate child credit.

> Lefty Inc. sells its products to customers residing in Country X and Country Y. Both foreign jurisdictions have a 20 percent corporate income tax. This year, Lefty made more than $30 million of sales in both Country X and Country Y. However, it paid inco

> NY is a New York corporation that manufactures office equipment in a factory located in New York. In which of the following cases does NY have nexus with Pennsylvania? a. NY owns two retail outlets for its products in Pennsylvania. b. NY owns no tangible

> Kantor Inc. owns 100 percent of Sub 1 (a CFC in a country with a 50 percent corporate tax) and 90 percent of Sub 2 (a CFC in a country with a 10 percent corporate tax). Kantor sells goods and services to both CFCs. Is the IRS more interested in Kantor’s

> Delta Partnership carries on business in the United States and four other countries. Explain why the ordinary income generated by the foreign business is a separately stated item on Delta’s Schedule K, Form 1065.

> Column Corporation has a subsidiary operating exclusively in Country A and a subsidiary operating exclusively in Country Z. a. Both subsidiaries were incorporated under Delaware law and are therefore U.S. corporations. Can Column use the losses from the

> Togo Inc. has a subsidiary incorporated in Country H, which does not have a corporate income tax. Which of the following activities generates subpart F income? a. The subsidiary buys woolen clothing products manufactured by a Swedish company and sells th

> Halifax Inc. operates its business in Country U through a subsidiary incorporated under Country U law. The subsidiary has never paid a dividend and has accumulated more than $10 million after-tax earnings. a. Country U has a 20 percent corporate income t

> Posse Corporation plans to form a foreign subsidiary through which to conduct a new business in Country J. Posse projects that this business will operate at a loss for several years. a. To what extent will the subsidiary’s losses generate U.S. tax saving

> EFG, an accrual basis calendar year corporation, reported $500,000 net income before tax on its financial statements prepared in accordance with GAAP. EFG’s records reveal the following information: The allowance for bad debts as of January 1 was $58,000

> Mrs. Tran and Mrs. Nutter each own a small business that averages $80,000 annual income. Each woman is in the 35 percent marginal tax bracket. Mrs. Tran has decided to incorporate her business as a taxable corporation, while Mrs. Nutter has decided to co

> Refer to the facts in the previous problem. QRT purchased $30,000 of dental equipment on credit. When QRT failed to pay its bill, the seller took it to court and won a judgment for $30,000. Discuss each owner’s personal liability for this judgment assumi

> Dr. Quinn, Dr. Rose, and Dr. Tanner are dentists who practice as equal owners of QRT Dental Services. A patient of Dr. Rose’s recently sued him for medical malpractice and was awarded a $500,000 judgment. Discuss each owner’s personal liability for this

> Mr. Eros operates an antique store located on the first floor of a four story office building owned by Mr. Eros. The top three stories are leased to business tenants. Mr. Eros is considering giving a one-third interest in both the antique store and the b

> How would the tax shelter potential of closely held corporations be affected by: a. An increase in the highest individual tax rate to 43 percent? b. A decrease in the preferential tax rate on individual capital gains to 5 percent? c. Repeal of the accumu

> In what way does a corporate balance sheet provide information concerning the corporation’s exposure to the accumulated earnings tax?

> Explain the logic of the tax rate for both the accumulated earnings tax and the personal holding company tax.

> Ms. Knox recently loaned $20,000 to her closely held corporation, which needed the money for working capital. She sees no reason to document the loan other than as a “loan payable—shareholder” on the corporate balance sheet. She also sees no reason for h

> When the IRS classifies a portion of a salary payment to a shareholder/employee as a constructive dividend, which party (corporation or shareholder) bears the economic burden of the tax consequences?

> Warren Company is a calendar year, cash basis firm. On December 6, 2018, Warren paid $7,200 cash to a landscape service business that maintains the lawns and gardens around Warren’s headquarters. How much of this expenditure can Warren deduct in 2018 ass

> Corporations are allowed a dividends-received deduction for dividends from other domestic, taxable corporations. How does this deduction prevent the same corporate income from potentially three levels of tax?

> The corporate form of business is characterized by free transferability of equity interests. Describe this characteristic as it applies to publicly held corporations and closely held corporations.

> To what extent does the corporate characteristic of limited liability protect shareholders employees who perform professional services for corporate clients?

> Why are certain items of income, gain, deduction, or loss separately stated on a partnership or an S corporation tax return?

> Tom, Angela, and Peter want to become co-owners of a business enterprise. Compare their personal liability for the debts incurred by the enterprise if they organize as: a. A general partnership. b. A limited partnership. c. An LLC. d. An S corporation.

> Critique the employee payroll tax on the normative standards of convenience to the taxpayer and vertical equity.

> Corporation ABC sold its interest in KK Partnership on October 9 for $150,000. KK Partnership uses a calendar year for tax purposes. Explain the reason why Corporation ABC cannot compute gain or loss realized on the date that the sale occurs.

> Mr. Yang sold his interest in a business to an unrelated purchaser for $500,000 cash. How does Mr. Yang determine his adjusted basis for purposes of computing gain or loss realized on the sale if the business is: a. A sole proprietorship? b. A partnershi

> Four years ago, Mr. Bates purchased 1,000 shares of UPF Inc. for $10,000. These shares represent a 30 percent equity interest in UPF, which is an S corporation. This year, UPF defaulted on a $120,000 unsecured debt to a major creditor. a. To what extent

> Both Mr. A and Mr. Z are sole proprietors. This year, each proprietorship generated $85,000 net cash flow from business operations. Mr. A used the cash to expand his business, while Mr. Z used the cash to make the down payment on a new home for his famil

> LSG Company is a calendar year, cash basis taxpayer. On November 1, 2018, LSG paid $9,450 cash to the janitorial service firm that cleans LSG’s administrative offices and retail stores. How much of this expenditure can LSG deduct in 2018 assuming that: a

> This year, Soya Partnership disposed of only one operating asset and recognized a $22,000 loss on the disposition. Why must Soya report this net Section 1231 loss as a separately stated item rather than deducting the loss in the computation of ordinary b

> Can a sole proprietorship be described as a pass through entity?

> In what way is the nontaxable exchange rule for partnership formations more flexible than the nontaxable exchange rule for corporate formations?

> Determine if each of the following transactions qualifies as a nontaxable exchange: a. Firm A exchanges a 2 percent interest in MG Partnership for a 10 percent interest in KLS Partnership. b. Mr. B exchanges investment land for common stock in RV Inc. Im

> When a taxpayer transfers appreciated property to a corporation in exchange for newly issued stock and the exchange is nontaxable, the gain deferred on the exchange actually doubles. Can you explain this?

> If a corporation engages in a nontaxable exchange of assets, could the transaction result in a book/tax difference? Is this difference a permanent or a temporary difference?

> Explain the difference between a substituted basis in an asset and a carryover basis in an asset.

> Four years ago, Company PJ acquired 1,000 acres of undeveloped land. On the date of the exchange, the land’s FMV was $700,000. During the past four years, the land appreciated in value by $600,000; a recent appraisal indicated that it is worth $1.3 milli

> Two years ago, Firm OP bought a tract of land for $600,000, paying $50,000 down and borrowing the balance of the purchase price from a commercial lender. The land is the collateral for OP’s debt. To date, OP has not repaid any of the loan. a. If the debt

> Mrs. Carly called her accountant with a question. She is planning to sell nine acres of land for $380,000 cash. She purchased the land eight years ago for $195,000. She asked her accountant if her gain on sale would be a capital gain, and his answer was,

> NC Company, a retail hardware store, began business in August and elected a calendar year for tax purposes. From August through December, NC paid $319,000 for inventory to stock the store. According to a physical inventory count on December 31, NC had $6

> Both Corporation A and Corporation Z have business goodwill worth approximately $1 million. The goodwill is a capital asset to Corporation A and a Section 1231 asset to Corporation Z. Can you explain this apparently inconsistent tax characterization?

> Distinguish between a firm’s tax basis in an asset and its equity in that asset.

> Under what circumstances would a taxpayer elect not to use the installment sale method of reporting gain?

> Under what circumstances could a taxpayer have an amount realized on the disposition of an asset without any inflow of cash or property?

> Why is Section 1250 recapture inapplicable to sales of realty subject to MACRS depreciation?

> Why do both corporate and non corporate taxpayers prefer capital gains to ordinary income? Why is the preference stronger for non corporate taxpayers?

> Identify four possible differences in the computation of depreciation expense for financial statement purposes and MACRS depreciation.

> Identify the tax and nontax issues that firms must consider in adopting the LIFO method of accounting for inventories.

> Corporation J manufactures electrical appliances. Corporation K provides architectural services. During the year, both corporations paid $56,000 annual premiums to carry fire and casualty insurance on their tangible assets. Corporation J was required to

> On February 1, Mr. B purchased a business from Mr. and Mrs. S for a lump-sum price of $750,000. The business included the following balance sheet assets. Appraised FMV Accounts receivable $ …………………………….27,600  Inventory ……………………………………………….195,000  Offic

> Brillo Company uses the calendar year and the cash method of accounting. On December 29, 2018, Brillo made the following cash payments. To what extent can Brillo deduct the payment in 2018? a. $50,000 for a two-year office lease beginning on February 1,

> Discuss the strengths and weaknesses of the tax rule providing for 15-year amortization of the cost of business acquisition intangibles.

> Discuss the reasons why the Section 179 election is more valuable to small firms than to large firms.

> The manager of Firm Z, a new business that anticipates a steady growth in profits over the next decade, must decide between the cash method and the accrual method as the overall method for tax purposes. She understands that the difference between the two

> If a corporation purchases insurance on the life of its chief executive officer and the corporation is named the policy beneficiary, the premium payments are nondeductible. If the officer’s spouse and children are named as beneficiaries, the premium paym

> For many years, Mr. K, the president of KJ Inc., took the corporation’s most important clients golfing at The Links Golf Club several times a year. However, after the tax law was amended to disallow a deduction for business entertainment, Mr. K and his c

> Lester Inc. owns 55 percent of the outstanding stock of Marvin Corporation. The two corporations engage in numerous intercompany transactions that must be accounted for on both their financial statements and their tax returns. Discuss the circumstances i

> Discuss the choice of a taxable year for the following businesses: a. Retail plant and garden center. b. French bakery. c. Chimney cleaning business. d. Moving and transport business. e. Software consulting business.

> Describe the contrasting treatment of prepaid income under GAAP and under the tax law, and explain how each treatment reflects a different principle of conservatism.

> Firms generally prefer to engage in transactions that create assets instead of liabilities. However, firms prefer transactions generating deferred tax liabilities to transactions generating deferred tax assets. Can you explain this apparent contradiction

> Why do tax preferences often result in differences between book income and taxable income? Would a book/tax difference from a tax preference be a permanent difference or a temporary difference? Which type of difference is more valuable in NPV terms?

> Nello Company owed $23,400 overdue rent to its landlord, Bonview Inc. Because Nello is a desirable tenant, Bonview agreed to settle the overdue account for a $15,000 cash payment from Nello. Both Nello and Bonview are accrual basis taxpayers. a. What is

> Firm A expects to receive a $25,000 item of income in August and a second $25,000 item of income in December. The firm could delay the receipt of both items until January. As a result, it would defer the payment of tax on $50,000 income for one full year