Question: Ernlo is an accrual basis corporation with

> Firm K, a non corporate taxpayer, has owned investment land with a $600,000 basis for four years. Two unrelated parties want to acquire the land from K. Party A has offered $770,000 cash, and Party B has offered another tract of land with a $725,000 FMV.

> Firm NS owns 90 percent of Corporation T’s outstanding stock. NS also owns business realty that T needs for use in its business. The FMV of the realty is $4 million, and NS’s adjusted basis is $5.6 million. Both NS and T are in the 35 percent marginal ta

> Rocky Corporation is experiencing cash flow problems. It needs to generate an additional $60,000 of working capital and is considering selling off assets to meet this need. Rocky’s marginal tax rate is 21 percent, and it has no prior year capital gains.

> Olno Inc. has a $52,100 capital loss carryforward into its current taxable year that will expire at the end of the year. During the year, Olno realized a $141,900 capital gain on sale of land. The purchaser paid 10 percent down and gave Olno an interest-

> For its first four years of operation, Corporation Y reported the following taxable income. In 2018, Corporation Y generated $900,000 ordinary income and recognized a $20,000 loss on the sale of a capital asset. It is considering selling a second capit

> Assuming a 21 percent marginal tax rate, compute the after-tax cost of the following business expenses: a. $5,600 premium on business property and casualty insurance. b. $1,200 fine paid for business entertainment. c. $3,700 premium on key-person life in

> Mr. RH purchased 30 acres of undeveloped ranch land 10 years ago for $935,000. He is considering subdividing the land into one-third acre lots and improving the land by adding streets, sidewalks, and utilities. He plans to advertise the 90 lots for sale

> Firm Z, a corporation with a 21 percent tax rate, has $100,000 to invest in year 0 and two investment choices. Investment 1 will generate $12,000 taxable cash flow annually for years 1 through 5. In year 5, the firm can sell the investment for $100,000.

> KP Inc. is negotiating a 10-year lease for three floors of space in a commercial office building. KP can’t use the space unless a security system is installed. The cost of the system is $50,000, and it will qualify as seven-year recovery property under M

> MG, a corporation in the 21 percent marginal tax bracket, owns equipment that is fully depreciated. This old equipment is still operating and should continue to do so for four years (years 0, 1, 2, and 3). MG’s chief financial officer estimates that repa

> Company C has a 21 percent marginal tax rate and uses an 8 percent discount rate to compute NPV. The company must decide whether to lease or purchase equipment to use for years 0 through 7. It could lease the equipment for $21,000 annual rent, or it coul

> MRT, a calendar year corporation, placed the following assets in service this year. a. Compute MRT’s MACRS depreciation with respect to the assets placed in service this year. Assume MRT does not elect to use first year bonus deprecia

> Corporation VB was formed in 2018. Immediately prior to year-end, VB is considering a $500,000 deductible expenditure. It can either make the expenditure before the end of 2018, or wait until 2019. However, if it waits, the cost of the expenditure will i

> Company Y began business in February 2018. By the end of the calendar year, it had billed its clients for $3.5 million of services and had incurred $800,000 of operating expenses. As of December 31, it had collected $2.9 million of its billings and had p

> Lucille is an avid boater living near Gotham City. Gotham has recently created a harbor improvement special assessment district to oversee renovations to the public boat docks and boardwalk area surrounding the city harbor. The special assessment distric

> Lance Strong arm, a recently retired professional athlete, is writing his memoirs. He intends to direct any royalties received on the book to his favorite charitable organization. He has not yet signed a contract with a publisher. Will the future royalti

> Parmco, a calendar year corporation, made the following accruals for 2018 financial statement purposes. In each case, determine how much of the accrued expense is deductible on Parmco’s 2018 federal tax return. a. $30,000 expense and $30,000 liability fo

> Art likes to invest his spare cash in the stock market. In the past, he has focused on growth stocks and long-term value to take advantage of the preferential tax rate on long-term capital gains. He recently learned that this rate is also available for d

> Ms. Z has decided to invest $75,000 in state bonds. She could invest in State A bonds paying 5 percent annual interest or in State R bonds paying 5.4 percent annual interest. The bonds have the same risk, and the interest from both is exempt from federal

> Mr. A, who has a 35 percent marginal tax rate, must decide between two investment opportunities, both of which require a $50,000 initial cash outlay in year 0. Investment 1 will yield $8,000 before-tax cash flow in years 1, 2, and 3. This cash represents

> Firm DFG plans to open a foreign subsidiary through which to sell its manufactured goods in the European market. It must decide between locating the subsidiary in Country X or Country Z. If the subsidiary operates in Country X, its gross receipts from sa

> Mrs. O is negotiating to purchase a tract of land from DC Company, a calendar year taxpayer. DC bought this land six years ago for $480,000. According to a recent appraisal, the land is worth $800,000 in the current real estate market. According to DC’s

> Firm D is considering investing $400,000 cash in a three-year project with the following cash flows: Under each of the following assumptions, determine if Firm D should make the investment. In each case, use a 10 percent discount rate to compute NPV. a

> Firm B wants to hire Mrs. X to manage its advertising department. The firm offered Mrs. X a three-year employment contract under which it will pay her an $80,000 annual salary in years 0, 1, and 2. Mrs. X projects that her salary will be taxed at a 25 pe

> As discussed in Chapter 3, the IRS carefully scrutinizes transactions between related parties. Several different Code sections define which taxpayers are considered related parties. Suppose that Marsha and Jan are sisters. Are they considered family memb

> One of your clients is planning to start a business. She has incurred costs to investigate potential locations for the business and hired a consultant to conduct a feasibility study. She wishes to know whether such costs will be currently deductible. Lis

> Visit the website for the Tax Foundation (www.taxfoundation.org). Select the link “About Us” to read the organization’s mission statement. Select the link “Tax Topics” to research the following: a. What and when was Tax Freedom Day in 2017? b. How many a

> BZD, a calendar year corporation, made the following year-end accruals for 2018 financial statement purposes. In each case, determine how much of the accrued expense is deductible on BZD’s 2018 federal tax return. a. $55,000 expense and $55,000 liability

> Visit the website for the Congressional Budget Office (www.cbo.gov), follow the link to Budget and Economic Information, and look up the most current Monthly Budget Review. What is the CBO’s estimate of the U.S. government’s total budget surplus or defic

> Rachel Sanchez is a limited partner in HN Partnership, which operates a souvenir shop, and a member in Jams-n-Jellies LLC, which makes specialty food items and sells them at retail. Rachel has no involvement in the partnership business, but she handles a

> Todd Zimler, who files a joint income tax return with his wife, Stella, owns 85 percent of the outstanding stock of Zimler Manufacturing. In January of last year, Todd transferred a tract of investment land to the corporation in exchange for 600 shares o

> Mrs. Evelyn Baker sued her stockbroker for mismanagement of her account. The broker ultimately settled the case by paying her $250,000. The payment represented the loss in value of Mrs. Baker’s stock portfolio attributable to the mismanagement. Because t

> Early this year, Scott Lowe, age 54, became dissatisfied with the service he was receiving from the broker who managed his traditional IRA. He requested a distribution of the $48,200 balance in the account and received a check for this amount from the br

> Helene Toolson, age 67, is an avid collector of historical documents and signatures. Her collection is worth more than $300,000 and, by any measure, is an excellent investment. Helene also owns an IRA with First State Bank. She recently learned that a le

> Marion Kline was recently elected mayor of a large mid western city that furnishes its mayor with an official residence for occupancy during the term of office. The residence (house and gardens) is owned and maintained by the city, and the mayor doesn’t

> Curtis Bedford, age 73, is a professor of English at a private university. He holds a tenured position, which represents a lifetime employment contract. The university has offered Curtis a $75,000 lump-sum payment if he will retire from the faculty. If C

> Tim Loker is the five-year-old godson of Mr. and Mrs. Bryant. Tim’s parents died in an accident on December 18 of last year. Tim was seriously injured in the accident and remained hospitalized until August 12 of this year. After his discharge from the ho

> Bert Baker and Ernestine Moffet were never formally married but have lived together as husband and wife for the last 14 years. Bert and Ernestine reside in Washington, D.C., a jurisdiction that recognizes common law marriages as valid. Consequently, they

> Home Safe, an accrual basis, calendar year corporation, sells and installs home alarm systems. The contract price of a system includes four free service calls. Home Safe’s cost of each call is $75. At the end of 2018, Home Safe accrued a $48,900 expense

> In 1995, Jenson Investments, a Delaware corporation with a 35 percent federal tax rate, formed Bestmark, a wholly owned German subsidiary. Bestmark conducts several profitable businesses in Europe and pays the 45 percent German corporate income tax. Best

> Endless Summer is a Florida corporation that operates a fleet of cruise ships. It offers two categories of cruises. The first category includes round-trip cruises on ships that depart from Miami, visit various Caribbean and South American ports, and then

> Visit the website for Federation of Tax Administrators (www.taxadmin.org) under the Taxpayers & Tax Preparers menu, and use the State Tax Agencies link to go to the Illinois Department of Revenue website. Locate a copy of the Corporate Income and Replace

> Four years ago, Amy Huang contributed four acres of undeveloped land to Richter Company in exchange for a 12 percent equity interest in Richter. Amy’s tax basis in the land was $275,000, and the land’s appraised FMV on date of contribution was $430,000.

> Fair View Inc. owns and operates a golf club, which includes two 18hole courses, a driving range, a restaurant, and a pro shop. The club’s facilities can be used only by its membership, which includes all the individual shareholders as well as non shareh

> On March 1, Mr. and Mrs. Trent formed Trent Properties Inc. through which to operate a real estate management business. Both Mr. and Mrs. Trent worked full-time for modest, but reasonable, salaries. In early December, the Trents estimated that the corpor

> Fifteen years ago, Mr. and Mrs. Boyer created Brovo, a regular corporation, through which to operate a service business. The Boyers own all of Brovo’s 1,000 shares of stock with a $1.6 million aggregate tax basis. The corporate business has been extremel

> This year, Prewer Inc. received a $160,000 dividend on its investment consisting of 16 percent of the outstanding stock of TKS Inc., a taxable domestic corporation. Before considering this dividend, Prewer had a $43,500 operating loss for the year. It al

> Barry and Lynette Majors own 36 percent of the outstanding stock of Echo Valley, which has approximately $5 million earnings and profits. Echo Valley owns 38 tracts of undeveloped land in central Colorado. Barry and Lynette want to acquire one of the tra

> On December 10, 2017, the representative of a national charitable organization contacted the CEO of Wilkie Inc., a calendar year accrual basis corporation, to solicit a $100,000 donation. The CEO presented the solicitation to Wilkie’s board of directors

> In early 2018, Connor Inc. announced its intention to construct a manufacturing facility in the Shenandoah Valley. To persuade Connor to locate the facility in Augusta County, the county government contributed a six-acre tract of undeveloped county land

> At the beginning of the current year, Sandy Brewer had a zero basis in her 38 shares of stock in Lindlee, an S corporation, a zero basis in a $5,000 note from Lindlee, and a $7,400 carryforward of a prior year ordinary loss from Lindlee that she was unab

> Herold had been a calendar year S corporation since 1990. On October 10, 2018, Mrs. Hughes sold 18 shares of Herold stock to a foreign partnership, thereby terminating Herold’s S election. Herold’s taxable income for the entire 2018 calendar year was $59

> Max Coen is employed as a full-time police officer by the Memphis Police Department. He is required to abide by the department’s rules of conduct, which apply whether he is on-duty or off-duty. With the department’s permission, Max “moonlights” as a secu

> Don Ferris and Lou Lindberg are the two partners in F&L Partnership. The partnership agreement provides that all income is allocated equally between Don and Lou but in no case shall the allocation to Don be less than $75,000 per year. (In other words, Do

> On April 1, 2018, Bullen Company transferred machinery used in its business to Eaton Inc. in exchange for Eaton common stock. Both Bullen and Eaton use the calendar year for tax purposes. Bullen’s exchange of property for stock qualified as a nontaxable

> On February 2, Mr. Eugene Pomeroy transferred all the assets of his sole proprietorship (Pomeroy’s Ski Shop) to a newly created corporation, Pomeroy Ski Inc. In exchange for the business assets, Mr. Pomeroy received all 1,000 shares of the corporation’s

> Mr. Bryan Olgivie owned an indoor roller-skating rink as a sole proprietorship. On April 9, a flood completely destroyed the rink. Mr. Olgivie’s adjusted basis in the rink was $833,400. On May 15, he received a check for $1.1 million from his insurance c

> The BPL Corporation is considering selling investment land to Kaier Partnership for the land’s independently appraised FMV of $1.2 million. BPL purchased the land 20 years ago for $1.32 million cash. Mr. Larry Bass is the largest shareholder in BPL; he o

> In 1998, Big Skye Partnership paid $695,500 for a Christmas tree farm in northern Arizona. In 1991, over 300 farms and ranches in the area were granted allocations of water from a newly completed irrigation project funded by the U.S. Department of the In

> KLP, a calendar year corporation, sponsored a contest for its customers with a grand prize of $100,000 cash. Contestants could enter the contest from June 1 through November 30. KLP selected the winner and announced her name on December 20. However, it d

> Six years ago, Graham Inc., an accrual basis corporation, sold investment land (basis $562,250) to Jervil LLC and accepted Jervil’s note for the entire $865,000 sale price. The land was the collateral for the note, and Graham used the installment sale me

> For the past 12 years, George Link has operated his appliance repair business out of a 1,000-square-foot, ground floor office in a four story commercial building called 129 Main. Last year, George signed a five-year lease with Kramer Management, the owne

> Peter Nelson is employed full time as an accountant by an insurance company. In his spare time, he operates a secondary business as a self-employed wedding photographer. On January 3 of the current year, Peter purchased new video recording equipment for

> Last year, Manabee Inc. leased a computer system from ICS Company for five years. After using the system for only 10 months, Manabee realized that it was no longer adequate for its expanding business needs. As a result, Manabee negotiated with ICS to ter

> On January 1 of every year since 1993, Lanier Corporation has paid a $35,000 retainer fee to the law firm of Myer and Weeble (MW). MW specializes in structuring corporate mergers and acquisitions. In return for the annual payment, MW guarantees that it w

> Find the Internal Revenue Code on any freely accessible website and provide the URL. Do you consider the site reliable? Why or why not? What assurance, if any, does the site provide that its information is accurate and up to date?

> Elsworthy Company operates a number of public golf courses in Florida. This year, Elsworthy constructed six new greens of a type described as “modern” greens. Modern greens contain sophisticated drainage systems that include subsurface drainage tiles and

> Using an electronic research database such as Checkpoint, CCH Intelli Connect, or LexisNexis, find the case Thomas A. Curtis, M.D., Inc., 1994 T.C. Memo ¶94,015, and answer the following questions. The purpose of these questions is to enhance your skills

> Using an electronic research database such as Checkpoint, CCH Intelli Connect, or LexisNexis, find the case Mortex Manufacturing Co., Inc., T.C. Memo 1994-110, and answer the following questions. The purpose of these questions is to enhance your skills i

> Find Revenue Ruling 83-163, 1983-2 C.B. 26, and answer the following questions. The purpose of these questions is to enhance your skills in reading and interpreting authorities that you locate while doing research. a. To which Code section(s) does this r

> Cornish Inc. is an accrual basis, calendar year taxpayer. In December, a flood damaged one of Cornish’s warehouses, and Cornish contracted with a construction company to repair the damage. The company estimated that the cost of the repairs could range fr

> Find a tax glossary on any freely accessible website and provide the URL. Also find and provide a citation for the IRC section that defines a long-term capital gain. a. What is the tax glossary’s definition of a long-term capital gain? b. How does the IR

> Jetex, an accrual basis, calendar year corporation, engages in the business of long-distance freight hauling. Every year, Jetex is required to purchase several hundred permits and licenses from state and local governments in order to legally operate its

> Using an electronic research database such as Checkpoint, CCH Intelli Connect, or LexisNexis, do a keyword search on the phrase hobby loss to find secondary authorities discussing the tax treatment of losses incurred in pursuing activities as a hobby. a.

> Find the IRS Revenue Procedure that gives the standard deduction amounts for the 2017 tax year. Prepare a table reporting the standard deduction amounts and their associated filing statuses. Also report the full citation for your source, in the form of t

> IRC Section 117 provides that qualified educational scholarships are not taxable in certain circumstances. Included in this exclusion are both scholarships and fellowship grants. a. Use Section 117 and the related regulations to find definitions of the t

> Moleri, an accrual basis corporation with a fiscal taxable year ending on July 31, owns real estate on which it pays annual property tax to Madison County, Texas. The county assesses the tax for the upcoming calendar year on January 1, and the tax become

> Refer to the facts in question 9. Using an electronic research database such as Checkpoint, CCH Intelli Connect, or LexisNexis, run the keyword searches you proposed in question 9. Include both primary sources and editorial materials in your search. How

> Cheap Trade, an accrual basis, calendar year corporation, operates a discount securities brokerage business. Cheap Trade accepts orders to buy or sell marketable securities for its customers and charges them a commission fee for effecting the transaction

> Find a 2006 10th Circuit Court of Appeals decision involving Roger L. Watkins and answer the following questions. The purpose of these questions is to enhance your skills in reading and interpreting authorities that you locate while doing tax research. a

> Find Rev. Rul. 72-542, 1972-2 C.B. 37, and answer the following questions. The purpose of these questions is to enhance your skills in reading and interpreting authorities that you locate while doing tax research. a. What are the basic tax issues address

> Micro, an accrual basis corporation, reported $505,100 net income before tax on its financial statements prepared in accordance with GAAP. Micro’s records reveal the following information: Micro paid $25,000 in legal fees and $100,000 to a former employe

> 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.