Question: Explain the differences between the tax treatment

> In 2017, Ginger Graham, age 46 and wife of Greg Graham, engaged in the transactions described below. Determine Ginger’s gift tax liability for 2017 if she and Greg elect gift splitting and Greg gave their son Stevie stock valued at $80,000 during 2017. G

> Morris Jory, a long-time tax client of the firm that employs you, has made substantial gifts during his lifetime. Mr. Jory transferred Jory Corporation stock to 14 donees in December 2016. Each donee received shares valued at $14,000. Two of the donees w

> Your client, Karen Kross, recently married Larry Kross. Karen is age 72, quite wealthy, and in reasonably good health. To date, she has not made any taxable gifts, but Larry made taxable gifts totaling $900,000 in 1998. Karen is considering giving each o

> When Kayla’s basis in her interest in the JKL Partnership is $30,000, she receives a current distribution of office equipment. The equipment has an FMV of $40,000 and basis of $35,000. Kayla will not use the office equipment in a business activity. What

> Assume the corporation in Problem C:11-61 (and C:6-56) had been an S corporation for its first 12 years, during which it distributed just enough cash for the shareholder to pay taxes on the pass-through income. Thus, the S corporation reinvested after-ta

> Problem C:6-56 considered two alternative forms for doing business. Now consider a third alternative. The C corporation could make an S election effective at the beginning of the current year (the 13th year), operate as an S corporation for the next 20 y

> One way to compare the accumulation of income by alterative business entity forms is to use mathematical models. The following models express the investment after-tax accumulation calculation for a particular entity form: Flow-through entities (S corpora

> Alice, a single taxpayer, will form Morning Corporation in the current year. Alice plans to acquire all of Morning’s common stock for a $100,000 contribution to the corporation. Morning will obtain additional capital by borrowing $75,000 from a local ban

> Joe Stephens formed Sigma Corporation on January 4 of Year 1, and the corporation immediately made an S election effective for that year. In forming the corporation, Joe contributed $50,000 cash in exchange for 100% of Sigma’s stock. Shortly thereafter,

> One of your wealthy clients, Cecile, invests $100,000 for sole ownership of an electing S corporation’s stock. The corporation is in the process of developing a new food product. Cecile anticipates that the new business will need approximately $200,000 i

> Cato Corporation incorporated six years ago in California, with Tim and Elesa, husband and wife, owning all the Cato stock. Immediately thereafter, Cato made an S election effective for that year. Tim and Elesa filed the necessary consents to the electio

> Sigma Corporation, an S corporation with one shareholder, incurred the following items Year 1 and Year 2: At the beginning of Year 1, the corporation had AAA and OAA balances of zero and accumulated E&P of $6,000. At the beginning of Year 1, the sha

> Hal organized Stable Corporation five years ago and has continued to own all its stock. The corporation made an S election one year after its incorporation. At the beginning of the current year, Stable reports the following earnings accumulations: Accum

> Curt incorporates Vogel Corporation on January 15 of the current year. Curt makes a $70,000 capital contribution including land having a $12,000 FMV, and Vogel makes a timely S election for this year. Vogel reports $60,000 of ordinary income, $40,000 of

> What is an electing large partnership? What are the advantages to the partnership of electing to be taxed under the electing large partnership rules?

> George and Martha formed Washington Corporation as an S corporation several years ago. George and Martha each have a 50% interest in the corporation. At the beginning of the current year, their stock bases are $45,000 each. In the current year, the corpo

> Tammy organized Sweets Corporation in January of the current year, and the corporation immediately elected to be an S corporation. Tammy, who contributed $40,000 in cash to start the business, owns 100% of the corporation’s stock. Sweets’ current year re

> For each of the following items, indicate whether the item will increase, decrease, or cause no change in the S corporation’s ordinary income (loss), AAA, and in the shareholder’s stock basis. The corporation was formed four years ago and made its S elec

> Tina, a single taxpayer, owns 100% of Rocket Corporation, an S corporation. She has an $80,000 stock basis for her investment on January 1 of the current year (Year 1). During the first 11 months of Year 1, Rocket reports an ordinary loss of $100,000. Th

> Stein Corporation, an S corporation, has 400 shares of stock outstanding. Chuck and Linda own an equal number of these shares, and both actively participate in Stein’s business. Chuck and Linda each contributed $60,000 when they organized Stein on Septem

> Harry and Rita formed Alpha Corporation as an S corporation, with each shareholder contributing $10,000 in exchange for stock. In addition, Rita loaned the corporation $7,000, and the corporation borrowed another $8,000 from the bank. In the current year

> In the current year, Harold and Faye form Entity Company by each contributing $50,000 to the company in exchange for a 50% ownership interest. In addition, the company borrows $40,000 from First Bank. In the current year, the company incurs a $110,000 lo

> Tom owns 100% of Hammer Corporation, an S corporation. Tom has a $100,000 stock basis on January 1. Tom actively participates in Hammer’s business. Hammer’s operating results were not good in the current year, with the corporation reporting an ordinary l

> Assume the same facts as in Problem C:11-42. Assume further that Raider Corporation reports $75,000 of ordinary income, $20,000 of tax-exempt income, and a $25,000 long-term capital gain in the next year. a. What income and deductions will Monte and All

> Monte and Allie each own 50% of Raider Corporation, an S corporation. Both individuals actively participate in Raider’s business. On January 1, Monte and Allie have adjusted bases for their Raider stock of $80,000 and $90,000, respectively. During the cu

> What are the advantages of a firm being formed as a limited liability company (LLC) instead of as a limited partnership?

> Bright Corporation, an S corporation, has been 100% owned by Betty since its creation 12 years ago. The corporation has been profitable in recent years and, in the current year (assume a non-leap year), reports ordinary income of $240,000 after paying Be

> Redfern Corporation, a calendar year taxpayer, has been an S corporation for several years. Rod and Kurt each own 50% of Redfern’s stock. On July 1 of the current year (assume a non-leap year), Redfern issues additional common stock to Blackfoot Corporat

> Toyland Corporation, an S corporation, uses the calendar year as its tax year. Bob, Alice, and Carter own 60, 30, and 10 shares, respectively, of the Toyland stock. Carter’s basis for his stock is $26,000 on January 1 of the current year (assume a non-le

> Al and Ruth each own one-half the stock of Chemical Corporation, an S corporation. During the current year (assume a non-leap year), Chemical earns $15,000 per month of ordinary income. On April 5, Ruth sells her entire stock interest to Patty. The corpo

> Mike and Nancy are equal shareholders in MN Corporation, an S corporation. The corporation, Mike, and Nancy are calendar year taxpayers. The corporation has been an S corporation during its entire existence and thus has no accumulated E&P. The shareholde

> Theta Corporation formed 15 years ago. In its first year, it elected to use the cash method of accounting and adopted a calendar year as its tax year. It made an S election on August 15 of last year, effective for Theta’s current tax year. At the beginni

> Oliver organized North Corporation 15 years ago. The corporation made an S election last year after it accumulated $60,000 of E&P as a C corporation. As of December 31 of the current year, the corporation has distributed none of its accumulated E&P. In t

> Indicate in each of the following independent situations whether the taxpayer can accomplish what is proposed. Provide adequate authority for your answer including any special elections that are needed or requirements that must be satisfied. Assume all i

> Peter and his wife, Alice, own all the stock of Galleon Corporation. Galleon made its S election 12 years ago. Peter and Alice sold one-half their Galleon stock to a partnership owned by Rob and Susan (not husband and wife) at the close of business on De

> Tango Corporation, a calendar year taxpayer, has been an S corporation for several years. Tango’s business activities have become very profitable in recent years. On June 16, 2017, its sole shareholder desires to revoke the S election. a. How does Tango

> What is a publicly traded partnership? Are all publicly traded partnerships taxed as corporations?

> Orlando Corporation, a calendar year taxpayer, has been an S corporation for several years. On July 9, 2017, Orlando authorizes a second class of nonvoting preferred stock that pays a 10% annual dividend. The corporation issues the stock to Sid on Septem

> Voyles Corporation, a calendar year taxpayer formed five years ago, desires to make an S election beginning in 2017. Sue and Andrea each own one-half of the Voyles stock. a. How does Voyles make the S election? b. When can Voyles file its election form

> Carl Carson, a single taxpayer, owns 100% of Delta Corporation. During 2017, Delta reports $150,000 of taxable income. Carl reports no income other than that earned from Delta, and Carl claims the standard deduction. a. What is Delta’s income tax liabil

> Beta Corporation, an S corporation with one shareholder, incurred the following items: At the beginning of Year 1, the shareholder’s stock basis was $20,000, and her debt basis was $16,000. a. Assuming the corporation has no accumulat

> Jennelle and Paula are equal partners in the J&P Manufacturing Partnership. The partnership will form J&P Corporation by exchanging the assets and liabilities of the J&P Manufacturing Partnership for all the corporation’s stock on September 1 of the curr

> Glacier Smokeries has been an S corporation since its inception six years ago. On January 1 of the current year, the corporation’s two equal shareholders, Adam and Rodney, had adjusted bases of $175,000 and $225,000, respectively, for their S corporation

> Peter owns 50% of Air South Corporation, an air charter service. His S corporation stock basis at beginning of the year is $100,000. Air South has not done well this year and will report an ordinary loss of $375,000. What tax issues should Peter consider

> Williams Corporation has operated as a C corporation for the last seven years. The corporation has assets with a $450,000 adjusted basis and an $800,000 FMV. Liabilities amount to $100,000. Dan Williams, who uses a calendar year as his tax year, owns all

> What taxes must an S corporation prepay by making quarterly estimated tax payments? Can a shareholder owning S corporation stock use the corporation’s estimated tax payments to reduce the amount of his or her individual estimated tax payments? Explain.

> What is an accumulated adjustments account (AAA)? What income, gain, loss, and deduction items do not affect this account assuming the S corporation has an accumulated E&P balance?

> What are the advantages and disadvantages to the partnership and its partners when a partnership termination is caused by a sale of at least a 50% capital and profits interest?

> What nonliquidating distributions made by an S corporation are taxable to its shareholders? Taxfree to its shareholders?

> Explain the positive and negative adjustments to the basis of an S corporation shareholder’s stock investment and the basis of an S corporation debt owed to the shareholder.

> What is a post-termination transition period? What loss carryovers can an S corporation shareholder deduct during this period?

> What actions can an S corporation shareholder take before year-end to increase the amount of the S corporation’s losses he or she can deduct in the year they are incurred?

> What limitations apply to the amount of loss pass-through an S corporation shareholder can deduct? What happens to any losses exceeding this limitation? What happens to losses if the shareholder transfers his or her stock?

> Explain the procedures for allocating an S corporation’s ordinary income or loss to each of the shareholders. What special allocation elections are available?

> What are Subchapter C earnings and profits (E&P)? How does the existence of such E&P affect the S corporation’s ability to earn passive income?

> At the time Cable Corporation makes its S election, it elects to use a fiscal year based on a Sec. 444 election. What other requirements must Cable satisfy to continue to use its fiscal year election for future tax years?

> What tax years can a newly created corporation that makes an S election adopt for its first tax year? If a fiscal year is permitted, does it require IRS approval?

> Lucia has a $20,000 basis in her limited partnership interest before her retirement from the partnership. Her share of partnership assets have a $23,000 FMV, and the partnership has no Sec. 751 assets. In addition to being paid cash for her full share of

> After an S corporation revokes or terminates its S election, how long must the corporation wait to make a new election? What circumstances permit an early reelection?

> What is an inadvertent termination? What actions must the S corporation and its shareholders take to correct an inadvertent termination?

> Will the following events cause an S election to terminate? a. The S corporation earning 100% of its gross receipts in its first tax year from passive sources b. The S corporation issuing nonvoting stock that has a dividend preference c. The S corporati

> Lance and Rodney are contemplating starting a new business to manufacture computer software games. They expect to encounter losses in the initial years. Lance’s CPA has talked to them about using an S corporation. Rodney, while reading a business publica

> Celia, age 30, is leaving a major systems development firm to establish her own firm. She will design computer-based systems for small- and medium sized businesses. Celia will invest $100,000 in the business. She hopes to operate near her breakeven point

> Julio, age 50, is a U.S. citizen who has a 28% marginal tax rate. He has operated the A&B Automotive Parts Company for a number of years as a C corporation. Last year, A&B reported $200,000 of pre-tax profits, from which it paid $50,000 in salary and $25

> Review the completed C corporation, partnership, and S corporation tax returns presented in Appendix B. List three major tax reporting similarities and three major tax reporting differences in either content or format among the three tax returns.

> Jeff and John organized Tampa Corporation 18 years ago and have each owned 50% of the corporation since its inception. In the current year, Tampa reports ordinary income/taxable income of $40,000. Assume the business does not qualify for the U.S. product

> RST business entity reported the following items during the current year: Dividends from 25%-owned domestic corporation…………………………$ 19,000 Municipal bond interest received…………………………………………………….18,000 Corporate bond interest received……………………………………………………29,

> Cara, Bob, and Steve want to begin a business on January 1, 2018. The individuals are considering three business forms—C corporation, partnership, and S corporation. • Cara has investment land with a $36,000 adjusted basis and a $50,000 FMV that she

> Tom is a 55% general partner in the RST Partnership. Tom wants to retire, and the other two partners, Stacy and Rich, want to continue the partnership business. They agree that the partnership will liquidate Tom’s interest in the partnership by paying hi

> Javier is retiring from the JKL Partnership. In January of the current year, he has a $100,000 basis in his partnership interest when he receives a $10,000 cash distribution. The partnership plans to distribute $10,000 each month this year, and Javier wi

> Ricky and Sharon married at age 22, started a family, and bought a house. At age 30, they began making a contribution of $4,000 to a traditional IRA. They continued making these contributions annually until age 60. If the average return on their investme

> Assuming an 8% return, how much would Barry have if he could invest an additional $1,000 per year that his employer would match beginning at age 35?

> How much would Barry have if he could earn a 10% return on his investment beginning at age 35?

> Barry has just become eligible for his employer-sponsored retirement plan. Barry is 35 and plans to retire at 65. Barry calculates that he can contribute $3,600 per year to his plan. Barry’s employer will match this amount. If Barry can earn an 8% return

> Maryanne paid $300 for a call option on a stock. The option gives her the right to buy the stock for $27 per share until March 1. On February 15, the stock price rises to $32 per share, and Maryanne exercises her option. What is Maryanne’s return from th

> Teresa purchased a call option on a stock for $250. The option allows her to purchase the stock for $40 per share if she exercises the option by December 31. On December 15, the stock rises to $60 per share, and Teresa exercises the option. What is Teres

> Hope invested $9,000 in a mutual fund when the price per share was $30. The fund has a load fee of $300. How many shares did she purchase?

> Hunter invested $7,000 in shares of a load mutual fund. The load of the fund is 7%. When Hunter purchased the shares, the NAV per share was $70. A year later, Hunter sold the shares at a NAV of $68 per share. What is Hunter’s return from selling

> Hope (from problem 1) later sells her shares in the mutual fund for $37 per share. What would her return be in problems 1 and 2? Data from Problem 1: Hope invested $9,000 in a mutual fund when the price per share was $30. The fund has a load

> Mark owns a mutual fund with a NAV of $45.00 per share and expenses of $1.45 per share. What is the expense ratio for Mark’s mutual fund?  

> If Hope (from problem 1) had invested the same amount of money in a no-load fund with the same price per share, how many shares could she have purchased? Data from Problem 1: Hope invested $9,000 in a mutual fund when the price per share was $30.

> With your help, Dave and Sharon Sampson have now established a financial plan. Among their key financial planning decisions were the following: • Budgeting. They decided to revise their budget to make it possible to start saving. By reducing their spend

> The Sampsons have been evaluating methods for investing money that will ultimately be used to support their children’s college education. They have concluded that a mutual fund is better suited to their needs than investing in individual stocks or indivi

> The Sampsons have been evaluating methods for investing money that will ultimately be used to support their children’s college education. They have concluded that a mutual fund is better suited to their needs than investing in individual stocks or indivi

> The Sampsons have been evaluating methods for investing money that will ultimately be used to support their children’s college education. They have concluded that a mutual fund is better suited to their needs than investing in individual stocks or indivi

> Ezra works for a firm that offers a 100% match up to 4% of his salary on retirement contributions. How much will Ezra accumulate in 20 years if he contributes 4% of his salary of $100,000 per year assuming his account earns an 8% annual return?

> Lloyd and his wife, Jean, have no retirement plan at work, but they contribute $4,000 each year to a traditional IRA. They are in a 25% marginal tax bracket. What tax savings will they realize for these contributions annually?

> Thomas earns $45,000 per year. What retirement plan should Thomas consider under the following circumstances? a. He works for a large private firm. b. He works at a university. c. He owns a small firm with employees.

> How much would Barry (from problem 1) have at retirement if he had started this plan at age 25? Data from Problem 1: Barry has just become eligible for his employer-sponsored retirement plan. Barry is 35 and plans to retire at 65. Barry calculates that

> Cedrick works for an employer that has a profit sharing retirement system. Assuming Cedrick made $133,000 last year, what is the maximum amount his employer can contribute to his retirement account?

> Briefly describe two popular retirement plans for self-employed individuals.

> Discuss the choices an employee has to manage a retirement account on leaving an employer.

> Discuss profit-sharing and employee stock ownership plans (ESOPs).

> Compare and contrast a Simplified Employee Pension (SEP) plan and a Savings Incentive Match Plan for Employees (SIMPLE).

> Discuss the general characteristics of a 401(k) plan. What is a 403(b) plan?

> Briefly discuss the key retirement planning decisions an individual must make.

> What is a defined- contribution plan? Why are many employers switching to this type of plan? List some of the benefits a defined-contribution plan offers to employees.

> What is a defined-benefit plan? What is vesting? What does it mean to be fully vested?

> Describe how employer-sponsored retirement plans work in general.

> Discuss some of the concerns about the future of Social Security.