Question: Explain why the tax law imposes constructive

> Timpanogos Inc. is an accrual-method calendar-year corporation. For 2018, it reported financial statement income after taxes of $1,152,000. Timpanogos provided the following information relating to its 2018 activities: Required: a. Reconcile book inco

> Compute HC Inc.’s current year taxable income given the following information relating to its 2018 activities. Also, compute HC’s Schedule M-1 assuming that HC’s federal income tax expense for book purposes is $30,000. • Gross profit from inventory sales

> Compute MV, Corp.’s 2018 taxable income given the following information relating to its year 1 activities. Also, compute MV’s Schedule M-1 assuming that MV’s federal income tax expense for book purposes is $100,000. • Gross profit from inventory sales of

> Independence Corporation needs to replace some of the assets used in its trade or business and is contemplating the following exchanges: Exchange Asset Given Up by Independence Asset Received by Independence  A Office building in Chicago, IL Piece

> Convers Corporation (calendar year-end) acquired the following assets during the current tax year: Asset  Placed in Service Date Original Basis  Machinery October 25 $70,000  Computer Equipment February 3 $10,000  Delivery Truck* March

> In the current year, Jill, age 35, received a job offer with two alternative compensation packages to choose from. The first package offers her $90,000 annual salary with no qualified fringe benefits, requires her to pay $3,500 a year for parking, and pa

> Sylvana is given a job offer with two alternative compensation packages to choose from. The first package offers her $250,000 annual salary with no qualified fringe benefits. The second package offers $235,000 annual salary plus health and life insurance

> Distinguish between exclusion and deferral in a property transaction.

> Santini’s new contract for 2018 indicates the following compensation and benefits: Benefit Description Amount  Salary $130,000  Health insurance $9,000  Restricted stock granted $2,500  Bonus $5,000  Hawaii trip $4,000  Group-term life

> People sometimes confuse the applicable credit with the exemption equivalent. Describe how these terms differ and how they are related.

> What is a permanent establishment, and why is it an important part of most income tax treaties?

> What is the primary goal of the United States in negotiating income tax treaties with other countries?

> What are the potential U.S. tax benefits from engaging in an export sale?

> Compare and contrast general sales tax nexus and the new “Amazon” rule creating sales tax nexus in New York.

> States are arguing for economic income tax nexus; provide at least one reason for and one against the validity of economic income tax nexus.

> When are partnerships mandated to adjust the basis of their assets (inside basis) when a partner sells a partnership interest or receives a partnership distribution?

> Describe when a corporate shareholder must defer gains on the receipt of distributions of property from the complete liquidation of a subsidiary corporation.

> In a stock acquisition, describe the difference (if any) between the tax basis of assets held by an acquired corporation and the tax basis of the shares held by a corporate acquirer?

> Describe the applicable credit and the purpose it serves in the gift and estate tax.

> If entities taxed as partnerships and S corporations are both flow-through entities for tax purposes, why might an owner prefer one form over the other for tax purposes? List separately the tax factors supporting the decision to operate as either as an e

> Explain when an acquiring corporation would prefer to buy the target corporation’s assets directly in an acquisition.

> Reveille Corporation experienced a complete loss of its lumber mill as the result of a fire. The company received $2 million from the insurance company. Rather than rebuild, Reveille decided to distribute the $2 million to its two shareholders. No sto

> In general, what causes a stock distribution to be taxable to the recipient?

> What is the limitation on a deductible IRA contribution for 2018?

> Why might a corporation issue a stock distribution to its shareholders?

> Briefly describe the process of computing a corporation’s minimum tax credit carryover.

> ELS, an S corporation, reported a business loss of $1,000,000. Ethan, ELS’s sole shareholder, is involved in ELS’s daily business activities and he reports $1,200,000 of taxable income from sources other than ELS. What must you know in order to determine

> Deductions for traditional IRAs and contributions to Roth IRAs are phased out based on modified AGI (MAGI). In general terms how does MAGI for purposes of determining the traditional IRA deduction differ from AGI and how does it differ from MAGI for purp

> In its first year of existence, SMS, an S corporation, reported a business loss of $10,000. Michelle, SMS’s sole shareholder, reports $50,000 of taxable income from sources other than SMS. What must you know in order to determine whether she can deduct t

> How does the double taxation of corporate distributions affect whether an individual chooses to operate a business as a C corporation or as flow-through entity?

> Would a corporation with a small amount of current year taxable income (before the net operating loss deduction) and a large net operating loss carryover have a tax liability for the current year? Explain.

> What is the due date for a calendar year corporation tax return Form 1120 for 2018? Is it possible to extend the due date? Explain.

> For tax purposes, how is the compensation paid to an S corporation shareholder similar to compensation paid to an owner of an entity taxed as a partnership? How is it different?

> Why might it be a good tax planning strategy for an S corporation with one shareholder to pay a salary to the shareholder on the low end of what the services are potentially worth?

> Are taxpayers allowed to claim depreciation on assets they use for both business and personal purposes? What are the tax consequences if the business use drops from above 50 percent in one year to below 50 percent in the next?

> Describe the like-kind property requirements for real property for purposes of qualifying for a like-kind exchange. Explain whether land held for investment by a corporation will qualify as like-kind property with land held by an individual for personal

> Why might a business elect to claim a reduced §179 expense amount in the current year rather than claiming the maximum amount?

> What are the carryback and carryover periods for a net operating loss? Does it depend on the size of the corporation? Explain.

> Which of the following items is not a permanent book-tax difference? a. Tax-exempt interest income. b. Tax-exempt insurance proceeds. c. Domestic production activities deduction. d. Meal expenses. e. First-year expensing under §179.

> Lewis and Laurie are married and jointly own a home valued at $240,000. They recently paid off the mortgage on their home. The couple borrowed money from the local credit union in January of 2018. How much interest may the couple deduct in each of the fo

> Stephen transferred $17,500 to an irrevocable trust for Graham. The trustee has the discretion to distribute income or corpus for Graham’s benefit, but is required to distribute all assets to Graham (or his estate) not later than Graham’s 21st birthday.

> Cedar Corporation reported a net operating loss in 2018 of $25,000,000. In 2019, Cedar reported taxable income before any NOL carryovers of $20,000,000. What is Cedar’s taxable income in 2019 and any NOL carryover to 2020?

> MWC Corp. is currently in the sixth year of its existence (2018). In 2013– 2017, it reported the following income and (losses) (before net operating loss carryovers or carrybacks). 2013: ……………………………($ 70,000) 2014: ……………………………($ 30,000) 2015: …………………………

> Cuyahoga County, Ohio has a sales tax rate of 8.0 percent. Determine the state, local, and transit (a local transportation district) portions of the rate. You can find resources on the State of Ohio website, including the following link: http://www.ta

> Under what circumstances must a corporate shareholder recognize gains in a complete liquidation?

> How do self-employed taxpayers report home office deductions on their tax returns?

> Do all shareholders receive the same tax treatment in a complete liquidation of a corporation? Explain.

> Are companies allowed to decide who can and cannot participate in nonqualified deferred compensation plans? Briefly explain.

> Describe how goodwill amortized for tax purposes but not for book purposes (i.e., no impairment) leads to temporary book-tax differences.

> Harold owns a condo in Hawaii that he plans on using for the rest of his life. However, to ensure his sister Maude will own the property after his death, Harold deeded the remainder of the property to her. He signed the deed transferring the remainder in

> Assuming adequate amounts of corporate E&P, what is the formula for determining the amount of a noncash distribution a shareholder must include in gross income?

> Seven years ago, Halle (currently age 41) contributed $4,000 to a Roth IRA account. The current value of the Roth IRA is $9,000. In the current, year Halle withdraws $8,000 of the account balance to use as a down payment on her first home. Assuming Halle

> Paris participates in her employer’s nonqualified deferred compensation plan. For 2018, she is deferring 10 percent of her $320,000 annual salary. Assuming this is her only source of income and her marginal income tax rate is 32 percent, how much does de

> Euro Corporation, a U.S. corporation, operates through a branch in Germany. During 2018 the branch reported taxable income of $1,000,000 and paid German income taxes of $300,000. In addition, Euro received $50,000 of dividends from its 5% investment in t

> Marissa participates in her employer’s nonqualified deferred compensation plan. For 2018, she is deferring 10 percent of her $320,000 annual salary. Assuming this is her only source of income and her marginal income tax rate is 32 percent, how much tax d

> Longhaul Real Estate exchanged a parcel of land it held for sale in Bryan, Texas for a warehouse in College Station, Texas. Will the exchange qualify for like-kind treatment?

> Emily purchased a building to store inventory for her business. The purchase price was $760,000. Emily also paid legal fees of $300 to acquire the building. In March, Emily incurred $2,000 to repair minor leaks in the roof (from storm damage earlier in t

> Franco converted a building from personal to business use in May 2016 when the fair market value was $55,000. He purchased the building in July 2013 for $80,000. On December 15 of this year, Franco sells the building for $40,000. On the date of the sale,

> Are real property taxes subject to any deduction limitations? Explain.

> Can C corporations use the cash method of accounting? Explain.

> On January 1, year 1, Tyra works for Hatch Corporation. New employees must choose immediately between receiving seven NQOs (each NQO provides the right to purchase for $5 per share 10 shares of Hatch stock) or 50 restricted shares. Hatch’s stock price is

> LNS corporation reports book income of $2,000,000. Included in the $2,000,000 is $15,000 of tax-exempt interest income. NS reports $1,345,000 in ordinary and necessary business expenses. What is LNS corporation’s taxable income for the year?

> On January 1, year 1, Jessica received 10,000 shares of restricted stock from her employer, Rocket Corporation. On that date, the stock price was $10 per share. On receiving the restricted stock, Jessica made the 83(b) election. Jessica’s restricted shar

> On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. On receiving the restricted stock, Dave made the §3(b) election. Dave’s restricted shares will vest a

> On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end

> Harmer Inc. is now a successful company. In the early days (before it became profitable), it issued incentive stock options (ISOs) to its employees. Now Harmer is trying to decide whether to issue nonqualified options (NQOs) or ISOs to its employees. Ini

> Antonio received 40 ISOs at the time he started working for Zorro Corporation six years ago (each option gives him the right to purchase 20 shares of Zorro stock for $3 per share). Zorro’s share price was $3 per share at the time. Now that Zorro’s share

> Mark received 10 ISOs at the time he started working for Hendricks Corporation five years ago when Hendricks’s price was $5 per share (each option gives him the right to purchase 10 shares of Hendricks Corporation stock for $5 per share). Now that Hendri

> Haven received 200 NQOs (each option gives him the right to purchase 20 shares of Barlow Corporation stock for $7 per share) at the time he started working for Barlow Corporation three years ago when its stock price was $7 per share. Now that Barlow’s sh

> Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share) at the time he started working for Cutter Corporation three years ago. Cutter’s stock price was $15 per share. Yost exercises al

> Discuss how the property limitation restricts large businesses from taking the §179 expense.

> 1. Kathleen, age 56, works for MH, Inc. in Dallas, TX. Kathleen contributes to a Roth 401(k) and MH contributes to a traditional 401(k) on her behalf. Kathleen has contributed $30,000 to her Roth 401(k) over the past six years. The current balance in her

> In 2018, Nina contributes 10 percent of her $100,000 annual salary to her 401(k) account. She expects to earn a 7 percent before-tax rate of return. Assuming she leaves this (and any employer contributions) in the account until she retires in 25 years, w

> In 2018, Maggy (34 years old) is an employee of YBU Corp. YBU provides a 401(k) plan for all its employees. According to the terms of the plan, YBU contributes 50 cents for every dollar the employee contributes. The maximum employer contribution under th

> Matthew (48 at year-end) develops cutting-edge technology for SV, Inc. located in Silicon Valley. In 2018, Matthew participates in SV’s money purchase pension plan (a defined contribution plan) and in his company’s 401(k) plan. Under the money purchase p

> Tim has worked for one employer his entire career. While he was working, he participated in the employer’s defined contribution plan [traditional 401(k)]. At the end of 2018, Tim retires. The balance in his defined contribution plan is $2,000,000 at the

> Reggie is a self-employed taxpayer who turns 59 years old at the end of the year (2018). In 2018, his net Schedule C income was $300,000. This was his only source of income. This year, Reggie is considering setting up a retirement plan. What is the maxim

> Rita is a self-employed taxpayer who turns 39 years old at the end of the year (2018). During 2018, her net Schedule C income was $300,000. This was her only source of income. This year, Rita is considering setting up a retirement plan. What is the maxim

> Hope is a self-employed taxpayer who turns 54 years old at the end of the year (2018). In 2018, her net Schedule C income was $130,000. This was her only source of income. This year, Hope is considering setting up a retirement plan. What is the maximum a

> Elvira is a self-employed taxpayer who turns 42 years old at the end of the year (2018). In 2018, her net Schedule C income was $130,000. This was her only source of income. This year, Elvira is considering setting up a retirement plan. What is the maxim

> Sarah was contemplating making a contribution to her traditional individual retirement account for 2018. She determined that she would contribute $5,500 to her IRA and she deducted $5,500 for the contribution when she completed and filed her 2018 tax ret

> A taxpayer sells a piece of real property in year 1. The amount of year 1 real property taxes is estimated at the closing of the sale and the amounts are allocated between the buyer and the taxpayer. At the end of year 1, the buyer receives a property ta

> Alicia has been working for JMM Corp. for 32 years. Alicia participates in JMM’s defined benefit plan. Under the plan, for every year of service for JMM she is to receive 2 percent of the average salary of her three highest years of compensation from JMM

> Tater Meer purchased a new car for use in her business during 2018 for $75,000. The auto was the only business asset she purchased during the year and her business was very profitable. Calculate Tater’s maximum depreciation deductions for the automobile

> Lina purchased a new car for use in her business during 2018. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless state

> Assume that Ernesto purchased a digital camera on July 10 of year 1 for $3,000. In year 1, 80 percent of his camera usage was for his business and 20 percent was for his personal photography activities. This was the only asset he placed in service during

> Hans runs a sole proprietorship. Hans has reported the following net §1231 gains and losses since he began business. Net §1231 gains shown are before the lookback rule. Year Net §1231 Gains/(Losses)  Year 1 ($65,000)  Year 2 15,000  Year 3 0 

> Acorn Construction (calendar-year end C-corporation) has had rapid expansion during the last half of the current year due to the housing market’s recovery. The company has record income and would like to maximize its cost recovery deduction for the curre

> Assume that Sivart Corporation has 2018 taxable income of $1,750,000 for purposes of computing the §179 expense and acquired several assets during the year. The delivery truck was acquired in a nontaxable transaction. Asset  Placed in Service Basis 

> Woolard Supplies (a sole proprietorship) has taxable income in 2018 of $240,000 before any depreciation deductions (§179, bonus, or MACRS) and placed some office furniture into service during the year. The furniture had been used previously by Liz Woolar

> Chaz Corporation has taxable income in 2018 of $312,000 for purposes of computing the §179 expense and acquired the following assets during the year: Asset  Placed in Service Basis  Office furniture September 12 $780,000  Computer equipment F

> Assume that ACW Corporation has 2018 taxable income of $1,000,000 for purposes of computing the §179 expense. The company acquired the following assets during 2018: Asset  Placed in Service Basis  Machinery September 12 $470,000  Computer equi

> Consider the settlement statement in Appendix A to this chapter. What amounts on the statement are the Jeffersons allowed to deduct on their 2018 tax return? Indicate the settlement statement line number for each deductible amount (discuss any issues tha

> Dain’s Diamond Bit Drilling purchased the following assets this year. Assume its taxable income was $53,000 for purposes of computing the §179 expense (assume no bonus depreciation). Asset  Purchase Date Original Basis  Drill Bits (5-year) January

> Assume Timberline Corporation’s 2018 taxable income of $240,000 for purposes of computing the §179 expense. It acquired the following assets in 2018: Purchase Date Basis  Furniture (7-year) December 1 $450,000  Computer Equipment (5-year) Fe

> Assume TDW Corporation’s (calendar year end) has 2018 taxable income of $650,000 for purposes of computing the §179 expense. The company acquired the following assets during 2018: Asset  Placed in Service Basis  Machinery September 12 $2,270,000

> Assume AMP Corporation (calendar year end) has 2018 taxable income of $900,000 for purposes of computing the §179 expense. During 2018, AMP acquired the following assets: Asset  Placed in Service Basis  Machinery September 12 $1,550,000  Compu

> LaMont works for a company in downtown Chicago. The company encourages employees to use public transportation (to save the environment) by providing them with transit passes at a cost of $265 per month. a. If LaMont receives one pass (worth $265) each m

> Tonya Jefferson (single), a sole proprietor, runs a successful lobbying business in Washington, D.C. She doesn’t sell many business assets, but she is planning on retiring and selling her historic townhouse, from which she runs her business, to buy a pla

> On November 10 of year 1 Javier purchased a building, including the land it was on, to assemble his new equipment. The total cost of the purchase was $1,200,000; $300,000 was allocated to the basis of the land and the remaining $900,000 was allocated to