Question: Jo and Velma are equal owners of

> McLin, Inc., a calendar year S corporation, holds $90,000 of AEP. Tobias, the sole McLin shareholder, has an $80,000 basis in his stock with a zero balance in the AAA. a. Determine the tax aspects if a $90,000 salary is paid to Tobias. b. Same as (a),

> Kesha, a sole proprietor, is engaged in a cash basis service business. In the current year, she incorporates the business to form Kiwi Corporation. She transfers assets with a basis of $500,000 (fair market value of $1.2 million), a bank loan of $450,000

> Zebra, Inc., a calendar year S corporation, incurred the following items this year. Sammy is a 40% Zebra shareholder throughout the year. Operating income …………………………………………………$100,000 Cost of goods sold …………………………………………………. (40,000) Depreciation expense

> Maul, Inc., a calendar year S corporation, incurred the following items. Tax-exempt interest income ……………………………………. $ 7,000 Sales ……………………………………………………………………. 140,000 Depreciation recapture income …………………………………. 12,000 Long-term capital gain ………………………………

> The profit and loss statement of Kitsch Ltd., an S corporation, shows $100,000 book income. Kitsch is owned equally by four shareholders. From supplemental data, you obtain the following information about items that are included in book income. Selling e

> Mary is a shareholder in CarrollCo, a calendar year S corporation. At the be- ginning of the year, her stock basis is $10,000, her share of the AAA is $2,000, and her share of corporate AEP is $6,000. At the end of the year, Mary receives a $6,000 cash d

> Junie’s share of her S corporation’s net operating loss is $50,000, but her stock basis is only $30,000. Point out the Federal income tax consequences that Junie must face.

> Scott Tyrney owns 21% of an S corporation. He is confused with respect to the amounts of the corporate AAA and his stock basis. Write a memo to the tax research file, identifying the key differences between AAA and an S shareholder’s stock basis.

> On March 2, the two 50% shareholders of a calendar year corporation decide to elect S status. One of the shareholders, Terry, purchased her stock from a previous shareholder (a nonresident alien) on January 18 of the same year. Identify any potential pro

> C&C Properties is an S corporation that owns two rental real estate under- takings: Carrot Plaza and Cantaloupe Place. Both properties produce an annual $10,000 operating loss. C&C’s Schedule K aggregates the results of the two locations into one number.

> In 2015, Susan’s sole proprietorship earns $300,000 of self-employment net income (after the deduction for one-half of self-employment tax). a. Calculate the maximum amount Susan can deduct for contributions to a defined contribution Keogh plan. b. Sup

> Rafael transfers the following assets to Crane Corporation in exchange for all of its stock. (Assume that neither Rafael nor Crane plans to make any special tax elections at the time of incorporation.) a. What is Rafael’s recognized gain or loss? b. What

> Carri and Dane, ages 34 and 32, respectively, have been married for 11 years, and both are active participants in employer qualified retirement plans. Their total AGI in 2015 is $186,000, and they earn salaries of $87,000 and $95,000, respectively. What

> Janet, age 29, is unmarried and is an active participant in a qualified retirement plan. Her modified AGI is $63,000 in 2015. a. Calculate the amount Janet can contribute to a traditional IRA and the amount she can deduct. b. Assume instead that Janet

> Charles has AGI of $94,000 during the year and the following expenses related to his employment: Lodging while in travel status……………………………………………. $5,000 Meals during travel…………………………………………………………… 4,000 Business transportation ………………………………………………………6,000

> During the year, Brenda has the following expenses related to her employment: Airfare ……………………………………………………………………………………. $8,500 Meals………………………………………………………………………………………. 4,000 Lodging ……………………………………………………………………………………. 4,900 Transportation while in travel s

> In each of the following independent situations, determine how much, if any, qualifies as a deduction for AGI under § 222 (qualified tuition and related expenses). a. Lily is single and is employed as an architect. During 2015, she spent $4,100 in tuit

> Elijah is employed as a full-time high school teacher. The school district for which he works recently instituted a policy requiring all of its teachers to start working on a master’s degree. Pursuant to this new rule, Elijah spent most of the summer of

> Upon losing his job as a plant manager in Quincy, Massachusetts, Anthony incurs $6,200 in job search expenses. Having no success in finding new employment in the same type of work, Anthony moves to Clearwater, Florida, in 2015 and begins a charter boat b

> Veronica is a key employee of Perdiz Corporation, an aerospace engineering concern located in Seattle. Perdiz would like to establish an office on the east coast of Florida and wants Veronica to be in charge of the branch. Veronica is hesitant about maki

> On Thursday, Justin flies from Baltimore (his home office) to Cadiz (Spain). He conducts business on Friday and Tuesday; vacations on Saturday, Sunday, and Monday (a legal holiday in Spain); and returns to Baltimore on Thursday. Justin was scheduled to r

> In June of this year, Dr. and Mrs. Bret Spencer traveled to Denver to attend a three-day conference sponsored by the American Society of Implant Dentistry. Bret, a practicing oral surgeon, participated in scheduled technical sessions dealing with the lat

> Allie forms Broadbill Corporation by transferring land (basis of $125,000, fair market value of $775,000), which is subject to a mortgage of $375,000. One month prior to incorporating Broadbill, Allie borrows $100,000 for personal rea- sons and gives the

> Kristen, the regional manager for a national hardware chain, is based in Atlanta. During March and April of this year, she has to replace temporarily the district manager in Jackson (Mississippi). During this period, Kristen flies to Jack- son on Sunday

> William is employed by an accounting firm and uses his automobile in connection with his work. During the month of October 2015, he works at the office for 3 days and participates in the audit of a key client for 19 days. In the audit situation, William

> George is a U.S. citizen who is employed by Hawk Enterprises, a global company. Beginning on June 1, 2015, George began working in London. He worked there until January 31, 2016, when he transferred to Paris. He worked in Paris the remainder of 2016. His

> Bluebird, Inc., does not provide its employees with any tax-exempt fringe benefits. The company is considering adopting a hospital and medical bene- fits insurance plan that will cost approximately $9,000 per employee. To adopt this plan, the company may

> Several of Egret Company’s employees have asked the company to create a hiking trail that employees could use during their lunch hour. The company owns vacant land that is being held for future expansion, but would have to spend approximately $50,000 if

> Ted works for Azure Motors, an automobile dealership. All employees can buy a car at the company’s cost plus 2%. The company does not charge employees the $300 dealer preparation fee that nonemployees must pay. Ted purchased an automobile for $29,580 ($2

> Sparrow Corporation would like you to review its employee fringe benefits program with regard to the tax consequences of the plan for the company’s president (Polly), who is also the majority shareholder. a. The company has a qualified retirement plan.

> Rosa’s employer has instituted a flexible benefits program. Rosa will use the plan to pay for her daughter’s dental expenses and other medical expenses that are not covered by health insurance. Rosa is in the 28% marginal tax bracket and estimates that t

> Finch Construction Company provides the carpenters it employs with all of the required tools. However, the company believes that this has led to some employees not taking care of the tools and to the mysterious disappearance of some of the tools. The com

> Tim is the vice president of western operations for Maroon Oil Company and is stationed in San Francisco. He is required to live in an employer-owned home, which is three blocks from his company office. The company-provided home is equipped with high-spe

> Adam transfers property with an adjusted basis of $50,000 (fair market value of $400,000) to Swift Corporation for 90% of the stock. The property is subject to a liability of $60,000, which Swift assumes. a. What is the basis of the Swift stock to Adam?

> Does the taxpayer recognize gross income in the following situations? Explain. a. Ava is a filing clerk at a large insurance company. She is permitted to leave the premises for her lunch, but she usually eats in the company’s cafeteria because it is qui

> Casey is in the 15% marginal tax bracket, and Jean is in the 35% marginal tax bracket. Their employer is experiencing financial difficulties and cannot continue to pay for the company’s health insurance plan. The annual premiums are approximately $8,000

> Samantha, an executive, has AGI of $100,000 before considering income or loss from her miniature horse business. Her outside income comes from prizes for winning horse shows, stud fees, and sales of yearlings. Samantha’s home is on 20 acres, half of whic

> Caramel Corporation has 5,000 shares of stock outstanding. In a qualifying stock redemption, Caramel distributes $145,000 in exchange for 1,000 of its shares. At the time of the redemption, Caramel has recorded paid-in capital of $800,000 and E & P of $3

> Derk owns 250 shares of stock in Rose Corporation. The remaining 750 shares of Rose are owned as follows: 150 by Derk’s daughter Rosalie, 200 by Derk’s aunt Penelope, and 400 by a partnership in which Derk holds an 80% interest. Determine the number of

> Using the legend provided, indicate which form of business entity each of the following characteristics describes. Some of the characteristics may apply to more than one form of business entity. a. Has limited liability. b. Greatest ability to raise cap

> Maurice Allred is going to purchase either the stock or the assets of Jewel Corporation. All of the Jewel stock is owned by Charley. Maurice and Charley agree that Jewel is worth $700,000. The tax basis for Jewel’s assets is $500,000. Write a letter to M

> Vladimir owns all of the stock of Ruby Corporation. The fair market value of the stock (and Ruby’s assets) is about four times his adjusted basis for the stock. Vladimir is negotiating with an investor group for the sale of the corporation. Identify the

> Hector and Walt are purchasing the Copper Partnership from Jan and Gail for $700,000; Hector and Walt will be equal partners. During the negotiations, Jan and Gail succeeded in having the transaction structured as the purchase of the partnership rather t

> Gail and Harry own the GH Partnership. They have conducted the business as a partnership for 10 years. The bases for their partnership interests are as follows. GH Partnership holds the following assets. Gail and Harry sell their partnership interests to

> Rhonda owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel, have decided that additional contributions of capital are needed if Peach is to remain successful in its competitive industry. The two shareholders have agreed

> Linda is the owner of a sole proprietorship. The entity has the following assets. Linda sells the business for $260,000 to Juan a. Determine the tax consequences to Linda, including the classification of any recognized gain or loss. b. Determine the ta

> Emily and Freda are negotiating with George to purchase the business he operates as Pelican, Inc. The assets of Pelican, Inc., a C corporation, are recorded as follows. George’s basis for the Pelican stock is $560,000. George is subjec

> Sanjay contributes land to a business entity in January of the current year for a 30% ownership interest. Sanjay’s basis for the land is $60,000, and the fair market value is $100,000. The business entity was formed three years ago by Polly and Rita, who

> Megan owns 55% and Vern owns 45% of a business entity. The owners would like to use the entity to share profits (55% for Megan and 45% for Vern) and to share losses (80% for Vern and 20% for Megan). Determine the tax consequences if the entity has a tax

> Bishop contributes undeveloped land to a business entity in January for a 40% ownership interest. Bishop’s basis for the land is $140,000, and the fair market value is $600,000. The business entity was formed three years ago by Petula and Rene, who have

> Rosa contributes $50,000 to FlipCo in exchange for a 10% ownership interest. Rosa materially participates in FlipCo’s business. FlipCo incurs a loss of $900,000 for the curren t tax year. Entity liabilities at the end of the year are $700,000. Of this am

> Indigo, Inc., a personal service corporation, incurs the following income and losses. Active income …………………$325,000 Portfolio income …………………49,000 Passive activity loss …………. 333,000 a. Calculate Indigo’s taxable income. b. Assume that instead of being

> Swift Corporation distributes land (basis of $55,000 and fair market value of $120,000) to Sam and cash ($240,000) to Allison in exchange for part of their stock. Other shareholders do not redeem any of their stock. Sam surrenders shares of stock that ha

> The Coffee Company engages in the following transactions during the taxable year. • Sells stock held for three years as an investment for $30,000 (adjusted basis of $20,000). • Sells land used in the business for $65,000. The land has been used as a pa

> John organized Toucan Corporation 10 years ago. He contributed property worth $1 million (basis of $200,000) for 2,000 shares of stock in Toucan (rep- resenting 100% ownership). John later gave each of his children, Julie and Rachel, 500 shares of the st

> For many years, Sophie has owned and operated several apartment buildings. In 2011 and upon the advice of her attorney, Sophie transferred the apartment buildings to a newly created corporation. Her main reason for incorporating the business was to achie

> ListCo reports the following income for the current tax year. Operations……………………………………………… $92,000 Tax-exempt interest income ………………………. 19,000 Long-term capital gain………………………………. 60,000 ListCo holds earnings and profits (AAA for an S corporation) of $

> Eloise contributes $40,000 to MeldCo in exchange for a 30% ownership interest. During the first year of operations, MeldCo earns a profit of $200,000. At the end of that year, MeldCo holds liabilities of $75,000. a. Calculate Eloise’s basis for her stock

> Agnes, Becky, and Carol form a business entity with each contributing the following. Their ownership percentages will be as follows. Agnes…………… 40% Becky

> Phillip and Evans form a business entity. Each contributes the following property. Three months later, the entity sells the land for $652,000 because of unexpected zoning problems. The proceeds are to be applied toward the purchase of another parcel of l

> Clay Corporation has been an S corporation since its incorporation 10 years ago. During the first three years of operations, it incurred total losses of $250,000. Since then, Clay has generated earnings of approximately $180,000 each year. None of the ea

> Tammy and Willy own 40% of the stock of Roadrunner, an S corporation. The other 60% is owned by 99 other shareholders, all of whom are single and unrelated. Tammy and Willy have agreed to a divorce and are in the process of negotiating a property settlem

> Oscar created Lavender Corporation four years ago. The C corporation has paid Oscar as president a salary of $200,000 each year. Annual earnings after taxes approximate $700,000 each year. Lavender has not paid any dividends, nor does it intend to do so

> Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525 shares by Frank and 175 shares by Grace. Their basis in the stock is $350,000 for Frank and $150,000 for Grace. As part of a stock redemption, Garnet redeems 125

> Marci and Jennifer each own 50% of the stock of Lavender, a C corporation. After each of them is paid a “reasonable” salary of $150,000, the taxable income of Lavender typically is about $800,000. The corporation is about to purchase a $2 million shoppi

> Dan and Patricia form Crane Corporation. Dan transfers land (worth $200,000, basis of $60,000) for 50% of the stock in Crane. Patricia transfers machinery (worth $150,000, adjusted basis of $30,000) and provides services worth ($50,000) for 50% of the st

> Laurie Gladin owns land and a building that she has been using in her sole proprietorship. She is going to incorporate her sole proprietorship as a C corporation. Laurie must decide whether to contribute the land and building to the corporation or to lea

> Parrott, Inc., a C corporation, is owned by Abner (60%) and Deanna (40%). Abner is the president, and Deanna is the vice president for sales. Parrott, Abner, and Deanna are cash basis taxpayers. Late in the year, Parrott encounters working capital diffic

> Turtle, a C corporation, reports taxable income of $300,000 before paying salaries to the three equal shareholder-employees, Britney, Shania, and Alan. Turtle follows a policy of distributing all after-tax earnings to the shareholders. a. Determine the

> A business entity has four equal owners. Its taxable income before the cost of certain fringe benefits paid to owners and other employees is $400,000. The amounts paid for these fringe benefits are reported as follows. a. Calculate the Federal taxable i

> Two sisters and their brother, all unmarried, own and operate a dairy farm. They live on the farm and take their meals there for the “convenience of the employer.” The fair market value of their lodging is $45,000, and the fair market value of their meal

> Heron Corporation has been in operation for 10 years. Since Heron’s crea- tion, all of its stock has been owned by Andy, who initially invested $200,000 in the corporation. Heron has been successful far beyond Andy’s expectations, and the current fair ma

> Falcon Corporation, a calendar year taxpayer, is a deepwater offshore drilling company that is planning to sell drilling equipment that it no longer needs. The drilling equipment has an adjusted basis of $400,000 ( $700,000  $300,000 depreciation Þ and

> Owl is a closely held corporation owned by eight shareholders (each has 12.5% of the stock). Selected financial information provided by Owl follows. Taxable income ……………………………………………………………$6,250,000 Positive AMT adjustments (excluding ACE adjustment) ………

> Mabel and Alan, who are in the 35% tax bracket, recently acquired a fast-food franchise. Both of them will work in the business and receive a salary of $175,000. They anticipate that the annual profits of the business, after deducting salaries, will be a

> Plum Corporation will begin operations on January 1. Earnings for the next five years are projected to be relatively stable at about $80,000 per year. The shareholders of Plum are in the 33% tax bracket. a. Plum will reinvest its after-tax earnings in t

> Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exch

> Duke and Jacquie Coleman, married filing jointly, will establish a manufacturing business. The couple anticipates that the business will be profitable immediately due to a patent that Jacquie holds; profits for the first year will be about $300,000 and w

> Gerald is an entrepreneur who likes to be actively involved in his business ventures. He is going to invest $500,000 in a business that he projects will produce a tax loss of approximately $125,000 per year in the short run. However, Gerald is confident

> Amy and Jeff Barnes will operate their florist shop as a partnership or as an S corporation. Their mailing address is 5700 Richmond Highway, Alexandria, VA 22301. After paying salaries of $100,000 to each of the owners, the shop’s annual earnings are pro

> Red, White, Blue, and Orange report taxable income as follows. a. Calculate the marginal tax rate and the effective tax rate for each of the C corporations. b. Explain why the marginal tax rate for a C corporation can exceed 35% but the effective tax rat

> Bryan operates his business as a C corporation. He is the only shareholder. The accumulated E & P is $800,000. Starting next year, Bryan will distribute $200,000 cash per year, plus all of the annual current-year earnings. Recognizing that the distributi

> Sea Green Enterprises reports the following assets and liabilities on its balance sheet. Sea Green has just lost a product liability suit with damages of $10 million being awarded to the plaintiff. Although Sea Green will appeal the judgment, legal coun

> Using the legend provided, indicate which form of business entity each of the following characteristics describes. Some of the characteristics may apply to more than one form of business entity. a. Basis for an ownership interest is increased by an inves

> Prepare a PowerPoint presentation (maximum of six slides) entitled “Planning Principles for Our Multistate Clients.” The slides will be used to lead a 20-minute discussion with colleagues in the corporate tax department. Keep the outline general, but ass

> Hernandez, which has been an S corporation since inception, is subject to tax in States Y and Z. On Schedule K of its Federal Form 1120S, Hernandez reported ordinary income of $500,000 from its business, taxable interest income of $10,000, capital loss o

> Repeat the computations of Problem 46, but now assume that State A is a sales-factor-only state and that State B uses the following weights: sales .70, payroll .15, and property .15. Data from Problem 46: PinkCo, Inc., operates in two states. It report

> Tom and Gail form Owl Corporation with the following consideration: The installment note has a face amount of $350,000 and was acquired last year from the sale of land held for investment purposes (adjusted basis of $240,000). As to these transactions, p

> Repeat the computations of Problem 46, but now assume that State B uses a double-weighted sales factor in its apportionment formula

> PinkCo, Inc., operates in two states. It reports the following results for the year. Compute the apportionment percentage for both states. Amounts are stated in millions of dollars. State A State B Totals Sales $25 $ 75 $100 Рayroll 20 30 50 Propert

> Continue with the facts of Problem 44. Using the format of Exhibit 16.3, compute state taxable income for HippCo, assuming also that the taxpayer recognized $225,000 of net rent income during the year from a warehouse building in Montana. Federal taxable

> Compute state taxable income for HippCo, Inc. Its Federal taxable income for the year is $1 million. Its operations are confined to Oregon and Montana. HippCo generates only business and interest income for the year. • Federal cost recovery deductions t

> Considering only the aggregate state income tax liability, how should a tax- payer who is a resident in State A selling widgets deploy its sales force? The states that entail the taxpayer’s entire customer base use the following flat income tax rates. S

> You are working with the top management of one of your clients in selecting the U.S. location for a new manufacturing operation. Craft a plan for the CEO to use in discussions with the economic development representatives of each of the top candidate sta

> Evaluate this statement: A state can tax only its resident individuals and the corporations and partnerships that are organized in-state.

> Warwick, Inc., a U.S. corporation, owns 100% of NewGrass, Ltd., a foreign corporation. NewGrass earns only general limitation income. During the cur- rent year, NewGrass paid Warwick a $10,000 dividend. The deemed-paid foreign tax credit associated with

> Write a memo for the tax research file on the difference between “inbound” and “outbound” activities in the context of U.S. taxation of international income.

> Lili, Inc., a domestic corporation, operates a branch in France. The earnings record of the branch is as follows. For 2013–2016, Lili, Inc., reports U.S.-source taxable income of $500,000 each year. What is the allowed FTC for 2016? As

> Assume that the value of each share of Kingfisher stock is $3,000. As to these transactions, provide the following information: a. Seth’s recognized gain or loss. Identify the nature of any such gain or loss. b. Seth’

> Night, Inc., a domestic corporation, earned $300,000 from foreign manufacturing activities, on which it paid $90,000 of foreign income taxes. Night’s foreign sales income is taxed at a 50% foreign tax rate. What amount of foreign sales income can Night e