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 employee to settle a claim of sexual harassment. To avoid negative publicity, Micro insisted that the settlement include a confidentiality agreement. Late in the year, Micro entered into a five-year licensing agreement with an unrelated firm. The agreement entitles the firm to use a Micro trade name in marketing its own product. In return, the firm will pay Micro an annual royalty of 1 percent of gross revenues from sales of the product. The firm paid a $40,000 advanced royalty to Micro on the day the agreement was finalized. For financial statement purposes, this prepayment was credited to an unearned revenue account. At its final meeting for the year, Micro’s board of directors authorized a $15,500 salary bonus for the corporation’s president to reward him for an outstanding performance. Micro paid the bonus on January 12. The president doesn’t own enough Micro stock to make him a related party for federal tax purposes. Micro was incorporated last year. On its first tax return, it reported a $21,400 net operating loss. Compute Micro’s taxable income.
> Helene Toolson, age 67, is an avid collector of historical documents and signatures.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
> Ernlo is an accrual basis corporation with a June 30 fiscal year-end. On June 2, 2018, Ernlo entered into a binding contract to purchase a six-month supply of heating oil from a local distributor at the current market price of $12,450. This price is guar
> 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
> Consider the following opportunities: Opportunity 1 requires a $4,000 cash payment now (year 0) but will result in $14,000 cash received in year 5. Opportunity 2 requires no cash outlay and results in $3,500 cash received in years 3 and 5. a. Use a 6 per
> Bontaine Publications, an accrual basis, calendar year corporation, publishes and sells weekly and monthly magazines to retail bookstores and newsstands. The sales agreement provides that the retailers may return any unsold magazines during the one-month
> One of your clients is planning to sell a piece of raw land and expects to incur a substantial gain on the sale. He has asked you to determine whether this gain will be considered capital gain or ordinary income. List five specific questions you should a
> Why is tax research necessary? In other words, why is it not possible for experienced tax professionals to answer all tax questions without performing tax research?
> Discuss potential differences in content and style between a research memo and a client letter communicating research results.
> Describe two alternative strategies for using a tax service to locate primary authorities.
> Explain why a researcher should consult the Citator before relying on a judicial opinion to support research conclusions.
> Explain the difference between primary and secondary authorities as sources of tax information. On which type of authority should professional tax research conclusions be based?
> Explain the difference between a tax issue and a research question.
> The Green River, which is heavily polluted by industrial waste, flows through State S. Eighty-five companies operate manufacturing facilities that border the river. State S recently enacted legislation requiring each company to pay $50,000 annually into
> How do tax payments differ from other payments that people or organizations make to governmental agencies?
> Yount Inc.’s auditors prepared the following reconciliation between book and taxable income. Yount’s tax rate is 21 percent. Net income before tax ………………………………………..$378,200 Permanent book/tax differences …………………………..(33,500) Temporary book/tax differenc
> Mr. and Mrs. Rath each own 30 percent of the voting common stock of FB Inc. Four unrelated investors each own 10 percent. Based on a recent appraisal, FB’s net worth is $10 million. Discuss the valuation issue suggested if: a. Mr. and Mrs. Rath give thei
> Identify the structural similarity between the capital loss limitation, the investment interest expense limitation, and the passive activity loss limitation.
> Discuss the potential effect of the passive activity loss limitation on the market value of profitable rental real estate activities.
> Mrs. Buckley, age 74, has $100,000 in a certificate of deposit paying 1.5 percent annual interest. In addition to this interest income, she receives Social Security and a modest pension from her former employer. Her marginal tax rate is 10 percent. Mrs.
> Contrast the income tax consequences of the yields on the following investments: a. U.S. Treasury bonds. b. Bonds issued by the State of Illinois. c. Bonds issued by a publicly held corporation at their face value. d. Bonds issued by a publicly held corp
> Employees who are compensated with restricted stock or stock options face financial risks not associated with cash compensation. Describe and compare the financial risks of these two types of equity based compensation.
> Mr. Zelig was recently promoted to an executive position by his corporate employer. The corporation now requires him to entertain clients much more frequently, and Mr. Zelig expects to incur at least $1,000 out-of-pocket business entertainment expenses e
> This year, publicly held Corporation DF paid its PFO a $1.4 million salary, only $1 million of which was deductible. It also accrued a $200,000 liability for deferred compensation payable in the year 2024 (when the PFO must retire). To what extent does e
> Mr. Burnett owns 10 percent of the stock of ABC Inc. and is the corporation’s director of marketing. ABC has a medical insurance plan for its employees. This year, it paid $1,400 of premiums to the insurance carrier for Mr. Burnett’s coverage. Contrast t
> A reasonable compensation problem for the sole shareholder of a C corporation is quite different from the reasonable compensation problem for the sole shareholder of an S corporation. What is the difference?
> Corporation H’s auditors prepared the following reconciliation between book and taxable income. H’s tax rate is 21 percent. Net income before tax ………………………………….$600,000 Permanent book/tax differences ……………….………15,000 Temporary book/tax differences …………
> Discuss the practical reasons why the tax law authorizes the IRS to collect un with held employee payroll tax from the employer rather than the employees who were liable for the tax.
> Mr. Updike accepted an engagement to perform consulting services for MK Company. The engagement will last at least 18 months. Identify any reasons why Mr. Updike might prefer to be classified as an MK employee rather than as an independent contractor.
> Discuss the difference in the relationship between an employer and an employee and a client and an independent contractor.
> How does the fact that an employer-sponsored qualified retirement plan is administered by an independent trustee reduce the employees’ risk of participating in the plan?
> How does the fact that employees have a vested right to their benefits reduce the risk of participating in an employer-sponsored qualified retirement plan?
> Two years ago, Corporation WZ granted a stock option to an employee to purchase 2,500 shares of WZ stock for $30 per share. Since the date of grant, the market price of the stock has risen steadily and reached $31 just days ago. However, the option perio
> Discuss how the presence of a strong labor union may change the nature of the market in which rank-and-file employees negotiate with their employer.
> Individuals who are legally blind receive an additional standard deduction, while individuals with other disabilities, such as deafness or paralysis, aren’t entitled to an additional deduction. Is there a tax policy justification for the different treatm
> Why is the formula for computing individual taxable income so much more complicated than the formula for computing corporate taxable income?
> When he accepted his job, Mr. Martinez instructed his employer to withhold substantially more federal income tax from his monthly paycheck than was indicated by his marital and family situation. As a result, he routinely overpays his tax and receives a r
> For each of the following businesses, indicate the choice of taxable year corresponding to the end of each business’s natural business cycle. Your choices should match one of the following options: February 28 year-end, May 31 year-end, September 30 year
> Under the current rate structure, a high-income single person could pay more tax than a married couple on the same income. What economic circumstances might a single person cite to argue that his ability to pay tax is not necessarily greater than a marri
> Single individuals Sam and Zelle were married this year and filed their first joint return. To what extent did this change in filing status affect the following? a. Sam and Zelle’s aggregate standard deduction. b. Sam and Zelle’s aggregate child credit.
> Lefty Inc. sells its products to customers residing in Country X and Country Y. Both foreign jurisdictions have a 20 percent corporate income tax. This year, Lefty made more than $30 million of sales in both Country X and Country Y. However, it paid inco
> NY is a New York corporation that manufactures office equipment in a factory located in New York. In which of the following cases does NY have nexus with Pennsylvania? a. NY owns two retail outlets for its products in Pennsylvania. b. NY owns no tangible
> Kantor Inc. owns 100 percent of Sub 1 (a CFC in a country with a 50 percent corporate tax) and 90 percent of Sub 2 (a CFC in a country with a 10 percent corporate tax). Kantor sells goods and services to both CFCs. Is the IRS more interested in Kantor’s
> Delta Partnership carries on business in the United States and four other countries. Explain why the ordinary income generated by the foreign business is a separately stated item on Delta’s Schedule K, Form 1065.
> Column Corporation has a subsidiary operating exclusively in Country A and a subsidiary operating exclusively in Country Z. a. Both subsidiaries were incorporated under Delaware law and are therefore U.S. corporations. Can Column use the losses from the
> Togo Inc. has a subsidiary incorporated in Country H, which does not have a corporate income tax. Which of the following activities generates subpart F income? a. The subsidiary buys woolen clothing products manufactured by a Swedish company and sells th
> Halifax Inc. operates its business in Country U through a subsidiary incorporated under Country U law. The subsidiary has never paid a dividend and has accumulated more than $10 million after-tax earnings. a. Country U has a 20 percent corporate income t
> Posse Corporation plans to form a foreign subsidiary through which to conduct a new business in Country J. Posse projects that this business will operate at a loss for several years. a. To what extent will the subsidiary’s losses generate U.S. tax saving
> EFG, an accrual basis calendar year corporation, reported $500,000 net income before tax on its financial statements prepared in accordance with GAAP. EFG’s records reveal the following information: The allowance for bad debts as of January 1 was $58,000
> Mrs. Tran and Mrs. Nutter each own a small business that averages $80,000 annual income. Each woman is in the 35 percent marginal tax bracket. Mrs. Tran has decided to incorporate her business as a taxable corporation, while Mrs. Nutter has decided to co
> Refer to the facts in the previous problem. QRT purchased $30,000 of dental equipment on credit. When QRT failed to pay its bill, the seller took it to court and won a judgment for $30,000. Discuss each owner’s personal liability for this judgment assumi
> Dr. Quinn, Dr. Rose, and Dr. Tanner are dentists who practice as equal owners of QRT Dental Services. A patient of Dr. Rose’s recently sued him for medical malpractice and was awarded a $500,000 judgment. Discuss each owner’s personal liability for this
> Mr. Eros operates an antique store located on the first floor of a four story office building owned by Mr. Eros. The top three stories are leased to business tenants. Mr. Eros is considering giving a one-third interest in both the antique store and the b
> Discuss the tax and nontax reasons why the stock in an S corporation is typically subject to a buy-sell agreement.
> How would the tax shelter potential of closely held corporations be affected by: a. An increase in the highest individual tax rate to 43 percent? b. A decrease in the preferential tax rate on individual capital gains to 5 percent? c. Repeal of the accumu
