Six years ago, Leticia, Monica, and Nathaniel organized Lemona Corporation to develop and sell computer software. Each individual contributed $10,000 to Lemona in exchange for 1,000 shares of Lemona stock (for a total of 3,000 shares issued and outstanding). The corporation also borrowed $250,000 from Venture Capital Associates to finance operating costs and capital expenditures. Because of intense competition, Lemona struggled in its early years of operation and sustained chronic losses. This year, Leticia, who serves as Lemona’s president, decided to seek additional funds to finance Lemona’s working capital. Venture Capital Associates declined Leticia’s request for additional capital because of the firm’s already high credit exposure to the software corporation. Hi-Tech Bank proposed to lend Lemona $100,000, but at a 10% premium over the prime rate. (Other software manufacturers in the same market can borrow at a 3% premium.) Investment Managers LLC proposed to inject $50,000 of equity capital into Lemona, but on the condition that the investment firm be granted the right to elect five members to Lemona’s board of directors. Discouraged by the “high cost” of external borrowing, Leticia turned to Monica and Nathaniel. She proposed to Monica and Nathaniel that each of the three original investors contribute an additional $25,000 to Lemona, each in exchange for five 20-year debentures. The debentures would be unsecured and subordinated to Venture Capital Associates debt. Annual interest on the debentures would accrue at a floating 5% premium over the prime rate. The right to receive interest payments would be cumulative; that is, each debenture holder would be entitled to past and current interest payments before Lemona’s board could declare a common stock dividend. The debentures would be both nontransferable and noncallable. Leticia, Monica, and Nathaniel have asked you, their tax accountant, to advise them on the tax implications of the proposed financing arrangement. After researching the issue, set forth your advice in a client letter. At a minimum, you should consult the following authorities: • IRC Sec. 385 • Rudolph A. Hardman, 60 AFTR 2d 87-5651, 87-2 USTC ¶9523 (9th Cir., 1987) • Tomlinson v. The 1661 Corporation, 19 AFTR 2d 1413, 67-1 USTC ¶9438 (5th Cir., 1967)
> Assume that you are a loan officer of a bank. A local church is seeking a $4 million, 20‐year loan to construct a new classroom building. Church officers submit a comprehensive financial report that was audited by a reputable CPA firm. In summary form (t
> The statement of net position (i.e., a balance sheet) of a midsized city reports outstanding debt of $1,200,000,000. The city has a population of 800,000. The city is about to adopt the provisions of a new GASB pronouncement that changes the way defined
> Public officials, it is often charged, promote measures intended to make the government “look good” in the short term but that may be deleterious in the long term. Assume that the following actions, designed to increase a reported surplus, were approved
> A city operates a computer service department. The department maintains and repairs the computers of all other city departments, billing them for each job performed. The billing rates are established to cover the repair service’s full c
> How and why might the importance of the budget affect generally accepted accounting principles for external (general‐purpose) reports?
> You probably have never imagined the possibility of being an accountant who could have a direct impact on improving global ecosystems. Accountants who work for Ecotour Expeditions, Inc., an ecotourism company, might manage accounting details for guest ai
> You are responsible for preparing all of the journal entries for Regional Financial Services. You have correctly prepared the following entry for financial services provided on December 15: Your boss has asked you to change the date from December 15 to
> You work as an accounting clerk. You have received the following information supplied by a client, S. Winston, from the client’s bank statement, the client’s tax returns, and a variety of other July documents. The clie
> You are the new bookkeeper for a small business. The bookkeeper whose job you are taking is training you on the business’s manual system. As he journalizes, he writes the account number in the Post. Ref. column because he believes it’s easier. His thinki
> A friend of yours, Anika Valli, has decided to open a spa to serve her small resort town of about 7,000 people and 4 million tourists annually. She has named the business All About You Spa to convey the idea that the business intends to pamper those who
> Scott and Dave each invested $100,000 cash when they formed the SD Partnership and became equal partners. They agreed that the partnership would pay each partner a 5% guaranteed payment on his $100,000 capital account. Before the two guaranteed payments,
> Last year, Patty contributed land with a $4,000 basis and a $10,000 FMV in exchange for a 40% profits, loss, and capital interest in the PD Partnership. Dave contributed land with an $8,000 basis and a $15,000 FMV for the remaining 60% interest in the pa
> Rugby Corporation has a $50,000 NOL in the current year. Rugby’s taxable income in each of the previous two years was $25,000. Rugby expects its taxable income for next year to exceed $400,000. What issues should Rugby consider with respect to the use of
> You are the CPA who prepares the tax returns for Don, his wife, Mary, and their two corporations. Don owns 100% of Pencil Corporation’s stock. Pencil’s current year taxable income is $100,000. Mary owns 100% of Eraser Corporation’s stock. Eraser’s curren
> Williams Corporation sold a truck with an adjusted basis of $100,000 to Barbara for $80,000. Barbara owns 25% of the Williams stock. What tax issues should Williams and Barbara consider with respect to the sale/purchase?
> When is a corporate tax return due for a calendar-year taxpayer? What extension(s) of time in which to file the return are available?
> Describe the situations in which a corporation must file a tax return.
> What penalties apply to the underpayment of estimated taxes? The late payment of the remaining tax liability?
> What is a “large” corporation for purposes of the estimated tax rules? What special rules apply to such large corporations?
> What corporations must pay estimated taxes? When are the estimated tax payments due?
> Explain the tax consequences to both the corporation and a shareholder-employee if an IRS agent determines that a portion of the compensation paid in a prior tax year exceeds a reasonable compensation level.
> What are the tax advantages of substituting fringe benefits for salary paid to a shareholder-employee?
> Explain how the IRS has interpreted the phrase “in control immediately after the exchange” for purposes of a Sec. 351 exchange.
> What are the major advantages and disadvantages of filing a consolidated tax return?
> Why do special restrictions on using the progressive corporate tax rates apply to controlled groups of corporations? List five restrictions on claiming multiple tax benefits that apply to controlled groups of corporations.
> Describe the three types of controlled groups.
> What special restrictions apply to the deduction of a loss realized on the sale of property between a corporation and a shareholder who owns 60% of the corporation’s stock? What restrictions apply to the deduction of expenses accrued by a corporation at
> Crane Corporation incurs a $75,000 NOL in the current year. In which years can Crane use this NOL if it makes no special elections? When might a special election to forgo the carryback of the NOL be beneficial for Crane?
> Why are corporations allowed a dividends-received deduction? What dividends qualify for this special deduction?
> Carver Corporation uses the accrual method of accounting and the calendar year as its tax year. Its board of directors authorizes a cash contribution on November 3 of Year 1, that the corporation pays on March 9 of Year 2. In what year(s) is it deductibl
> Describe three ways in which the treatment of charitable contributions by individual and corporate taxpayers differ.
> What are start-up expenditures? How are they treated for tax purposes?
> What are organizational expenditures? How are they treated for tax purposes?
> How is “control” defined for purposes of Sec. 351(a)?
> Compare the tax treatment of capital gains and losses by a corporation and by an individual.
> Stan and Susan, two calendar year taxpayers, are starting a new business to manufacture and sell digital circuits. They intend to incorporate the business with $600,000 of their own capital and $2 million of equity capital obtained from other investors.
> Port Corporation wants to change its tax year from a calendar year to a fiscal year ending June 30. Port is a C corporation owned by 100 shareholders, none of whom own more than 5% of the stock. Can Port change its tax year? If so, how can it accomplish
> List four types of differences that can cause a corporation’s book income to differ from its taxable income.
> What is the advantage of a special apportionment plan for the benefits of the 15%, 25%, and 34% tax rates to members of a controlled group?
> Budget Corporation is a personal service corporation. Its taxable income for the current year is $75,000. What is Budget’s income tax liability for the year?
> Deer Corporation is a C corporation. Its taxable income for the current year is $200,000. What is Deer Corporation’s income tax liability for the year?
> Why is a dividends-received deduction disallowed if the stock on which the corporation pays the dividend is debt-financed?
> Zero Corporation contributes inventory (computers) to State University for use in its mathematics program. The computers have a $1,225 cost basis and a $2,800 FMV. How much is Zero’s charitable contribution deduction for the computers? (Ignore the 10% li
> High Corporation incorporates on May 1 and begins business on May 10 of the current year. What alternative tax years can High elect to report its initial year’s income?
> What items are considered to be property for purposes of Sec. 351(a)? What items are not considered to be property?
> The Chief Executive Officer of a client of your public accounting firm saw the following advertisement in a financial newspaper: DONATIONS WANTED The Center for Restoration of Waters A Nonprofit Research and Educational Organization Needs Donations—Auto
> Susan Smith accepted a new corporate client, Winter Park Corporation. One of Susan’s tax managers conducted a review of Winter Park’s prior year tax returns. The review revealed that an NOL for a prior tax year was incorrectly computed, resulting in an o
> Marquette Corporation, a tax client since its creation three years ago, has requested that you prepare a memorandum explaining its estimated tax requirements for the current year. The corporation is in the fabricated steel business. Its earnings have bee
> Jackson Corporation prepared the following book income statement for its year ended December 31, 2017: • For tax: Seven-year MACRS property for which the corporation made no Sec. 179 election in the acquisition year and elected out
> John plans to transfer the assets and liabilities of his business to Newco in exchange for all of Newco’s stock. The assets have a $250,000 basis and an $800,000 FMV. John also plans to transfer $475,000 of business related liabilities to Newco. Under Se
> Your clients, Lisa and Matthew, are planning to form Lima Corporation. Lisa will contribute $50,000 cash to Lima for 50 shares of its stock. Matthew will contribute land having a $35,000 adjusted basis and a $50,000 FMV for 50 shares of Lima stock. Lima
> In an exchange qualifying for Sec. 351 tax-free treatment, Greta receives 100 shares of White Corporation stock plus a right to receive another 25 shares. The right is contingent on the valuation of a patent contributed by Greta. Because the patent licen
> Bob and Carl transfer property to Stone Corporation for 90% and 10% of Stone stock, respectively. Pursuant to a binding agreement concluded before the transfer, Bob sells half of his stock to Carl. Prepare a memorandum for your tax manager explaining why
> Anne and Michael own and operate a successful mattress business. They have decided to take the business public. They contribute all the assets of the business to newly formed Spring Corporation each in exchange for 20% of the stock. The remaining 60% is
> What are the tax consequences for the transferor and transferee when property is transferred to a newly created corporation in an exchange qualifying as nontaxable under Sec. 351?
> Eric Wright conducts a dry cleaning business as a sole proprietorship. The business operates in a building that Eric owns. Last year, Eric mortgaged for $150,000 the building and the land on which the building sits. He used the money for a down payment o
> Bob Jones has a small repair shop that he has run for several years as a sole proprietorship. The proprietorship uses the cash method of accounting and the calendar year as its tax year. Bob needs additional capital for expansion and knows two people who
> Assume the same facts as in Problem C:2-57. a. Given the nursery’s operating prospects, what business forms might Paula and Mary consider and why? b. In light of their proposed use of debt and equity, how might Paula and Mary structure a partnership to
> Paula Green owns and operates the Green Thumb Nursery as a sole proprietorship. The business has total assets with a $260,000 adjusted basis and a $500,000 FMV. Paula wants to expand into the landscaping business. She views this expansion as risky and th
> Assume the same facts as in Problem C:2-55. a. Under what circumstances is the tax result in Problem C:2-55 beneficial, and for which shareholders? Are the shareholders likely to be pleased with the result? b. If the shareholders decide that meeting th
> Ed and Fay together own 100% of the common stock of an existing corporation. On January 2 of the current year, they made the following additional transfers to the corporation, which qualify under Sec. 351. Ed transferred equipment (having a $55,000 FMV a
> On March 1 of the current year, Alice, Bob, Carla, and Dick form Bear Corporation and transfer the following items: Alice purchased the land and building several years ago for $12,000 and $50,000, respectively. Alice has claimed straight-line depreciatio
> Six years ago, Donna purchased land as an investment. The land cost $150,000 and is now worth $480,000. Donna plans to transfer the land to Development Corporation, which will subdivide it and sell individual tracts. Development’s income on the land sale
> What entities or business forms are available for a new enterprise? Explain the advantages and disadvantages of each.
> Sarah and Rex formed SR Entity on December 28 of last year. The entity operates on a calendar tax year. Each individual contributed $800,000 cash in exchange for a 50% ownership interest in the entity (common stock if a corporation; partnership interest
> The following advertisement appeared in a financial journal: $17 MILLION CASH WITH ADDITIONAL CASH AVAILABLE $105 MM TAX LOSS GOOD THROUGH 2031 CAPITAL GROUP, INC. NASDAQ listed w/300 shareholders WANTS TO ACQUIRE COMPANY with Net Before Tax Audited Earn
> Alice, Beth, and Carl formed the ABC Partnership early in Year 1. Alice and Beth each contributed $100,000 for their partnership interests, and Carl contributed land having a $100,000 FMV and $160,000 adjusted basis. The land remained a capital asset to
> Almost two years ago, the DEF Partnership was formed when Demetrius, Ebony, and Farouk each contributed $100,000 in cash. They are equal general partners in the real estate partnership, which has a December 31 year-end. The partnership uses the accrual m
> Your clients, Lisa and Matthew, plan to form Lima General Partnership. Lisa will contribute $50,000 cash to Lima for a 50% interest in capital and profits. Matthew will contribute land having a $35,000 adjusted basis and a $50,000 FMV to Lima for the rem
> Caitlin and Wally formed the C & W Partnership on September 20, 2017. Caitlin contributed cash of $195,000, and Wally contributed office furniture with a FMV of $66,000. He bought the furniture for $60,000 on January 5, 2017, and placed it in service on
> Assume the same facts as in Problem C:2-51 except that Lois gave the Water stock to her daughter, Sue, six months after she received it. The stock had a $120,000 FMV when Lois acquired it and when she made the gift. Sue sold the stock two years later for
> Dad gives Son a 20% capital and profits interest in the Family Partnership. Dad holds a 70% interest, and Fred, an unrelated individual, holds a 10% interest. Dad and Fred work in the partnership, but Son does not. Dad and Fred receive reasonable compens
> Pam and Susan own the PS Partnership. Pam takes care of daily operations and receives a guaranteed payment for her efforts. What amount and character of income will each partner report in each of the following independent situations? a. The PS Partnersh
> Allen and Bob are equal partners in the AB Partnership. Bob manages the business and receives a guaranteed payment. What amount and character of income will Allen and Bob report in each of the following independent situations? a. The AB Partnership earn
> Kara owns 35% of the KLM Partnership and 45% of the KTV Partnership. Lynn owns 20% of KLM and 3% of KTV. Maura, Kara’s daughter, owns 15% of KTV. No other partners own an interest in both partnerships or are related to other partners. The KTV Partnership
> Susan, Steve, and Sandy own 15%, 35%, and 50%, respectively, in the SSS Partnership. Susan sells securities for their $40,000 FMV to the partnership. What are the tax implications of the following independent situations? a. Susan’s basis in the securiti
> At the beginning of year 1, Ed and Fran each contributed $1,000 cash to EF Partnership as equal partners. The partnership immediately borrowed $98,000 on a nonrecourse basis and used the contributed cash and loan proceeds to purchase equipment costing $1
> Kate, Chad, and Stan are partners in the KCS Partnership, which operates a manufacturing business. The partners formed the partnership ten years ago with Kate and Chad each as general partners having a 40% capital and profits interest. Kate materially pa
> Eve and Tom own 40% and 60%, respectively, of the ET Partnership, which manufactures clocks. The partnership is a limited partnership, and Eve is the only general partner. She works full-time in the business. Tom essentially is an investor in the firm an
> Mary and Gary are partners in the MG Partnership. Mary owns a 40% capital, profits, and loss interest. Gary owns the remaining interest. Both materially participate in partnership activities. At the beginning of the current year, MG’s only liabilities ar
> The KC Partnership is a general partnership that manufactures widgets. The partnership uses a calendar year as its tax year and has two equal partners, Kerry and City Corporation, a widely held corporation. On January 1 of the current year, Kerry and Cit
> Lois, who is single, transfers property with an $80,000 basis and a $120,000 FMV to Water Corporation in exchange for all 100 shares of Water stock. The shares qualify as Sec. 1244 stock. Two years later, Lois sells the shares for $28,000. a. What are t
> Debate the following proposition: All corporate formation transactions should be taxable events.
> Tina purchases an interest in the TP Partnership on January 1 of the current year for $50,000. The partnership uses the calendar year as its tax year and has $200,000 in recourse liabilities when Tina acquires her interest. The partners share economic ri
> Yong received a 40% general partnership interest in the XYZ Partnership in each of the independent situations below. In each situation, assume the general partners share the economic risk of loss related to recourse liabilities according to their partner
> What is Kelly’s basis for her partnership interest in each of the following independent situations? The partners share the economic risk of loss from recourse liabilities according to their partnership interests. a. Kelly receives her 20% partnership in
> Diane and Ed have equal capital and profits interests in the DE Partnership, and they share the economic risk of loss from recourse liabilities according to their partnership interests. In addition, Diane has a special allocation of all depreciation on b
> Clark sold securities for a $50,000 short-term capital loss during the current year, but he has no personal capital gains to recognize. The C&L General Partnership, in which Clark has a 50% capital, profits, and loss interest, reported a $60,000 shor
> Refer to Example C:9-25 in the text. Provide computations showing that the partners’ total tax liability under the special allocation is less than their total liability under an equal allocation of the two types of interest income.
> On January of the current year, Becky (20%), Chuck (30%), and Dawn (50%) are partners in the BCD Partnership. During the current year, BCD reports the following results. All items occur evenly throughout the year unless otherwise indicated. Assume the cu
> Jim, Liz, and Keith are equal partners in the JLK Partnership, which uses the accrual method of accounting. All three materially participate in the business. JLK reports financial accounting income of $186,000 for the current year. The partnership used t
> Mark and Pamela are equal partners in MP Partnership. The partnership, Mark, and Pamela are calendar year taxpayers. The partnership incurred the following items in the current year: Sales……………………………………………………………………………………..$450,000 Cost of goods sold…………
> The BCD Partnership is formed in April of the current year. The three equal partners, Boris, Carlton Corporation, and Damien have had tax years ending on December 31, August 30, and December 31, respectively, for the last three years. The BCD Partnership
> Duck Corporation is owned equally by Harry, Susan, and Big Corporation. Harry and Susan are single. Eight years ago, Harry, Tom, and Big, the original investors in Duck, each paid $125,000 for their Duck stock. Susan purchased her stock from Tom five yea
> The BCD Partnership is being formed by three equal partners, Beta Corporation, Chi Corporation, and Delta Corporation. The partners’ tax year-ends are June 30 for Beta, September 30 for Chi, and October 31 for Delta. The BCD Partnership’s natural busines
> Marjorie works for a large firm whose business is to find suitable real estate, establish a limited partnership to purchase the property, and then sell the limited partnership interests. In the current year, Marjorie received a 5% limited partnership int
> Sean is admitted to the calendar year XYZ Partnership on December 1 of the current year in return for his services managing the partnership’s business during the year. The partnership reports ordinary income of $100,000 for the current year without consi
> On January 1, Julie, Kay, and Susan formed a partnership. The contributions of the three individuals are listed below. Julie received a 30% partnership interest, Kay received a 60% partnership interest, and Susan received a 10% partnership interest. They
> On May 31, six brothers decided to form the Grimm Brothers Partnership to publish and print children’s stories. The contributions of the brothers and their partnership interests are listed below. They share the economic risk of loss fro
> At the beginning of the current year, Able and Baker formed the AB Partnership by transferring cash and property to the partnership in exchange for a partnership interest, with each having a 50% interest. Specifically, Able transferred property having a
