The Gallagher Farms has been in business for a number of years. During the peak planting and harvesting season, it hired a number of temporary workers. To house the temporary workers, it built three buildings that were essentially dormitories that had bathing and sleeping facilities. It provided meals in a central kitchen with an attached dining area. The dormitories were built in 1983 and depreciated under ACRS accelerated methods. Recently, the state declared that the buildings were inadequate for the workers. Gallagher Farms has decided to sell the buildings and the portion of the land on which they sit. It expects to have a $100,000 gain on the land and a $75,000 gain on the sale of the buildings.
> List five items that are added to a corporation’s taxable income to determine earnings and profits. List five items that are deducted from a corporation’s taxable income to determine earnings and profits.
> Can a corporation have negative amounts in both its current and accumulated earnings and profits accounts? Explain.
> What is the difference between accumulated and current earnings and profits?
> In what year are casualty losses deducted? What choices are available if the casualty occurs in a presidentially declared disaster area?
> What limits are placed on the deductibility of casualty and theft losses of personal-use property?
> How is a casualty loss that completely destroys business or investment property measured? How is a casualty loss that partially destroys business or investment property measured?
> How is a casualty loss that completely destroys personal-use property measured? How is a casualty loss that partially destroys personal-use property measured?
> What is an indirect exchange? What are the two most common forms of indirect exchanges?
> What is a nonsimultaneous exchange? What are the critical factors in qualifying a nonsimultaneous exchange for tax deferral?
> What is boot? What effect does boot have on a like-kind exchange?
> Is a depreciation deduction allowed for a warehouse used in business in the year it is sold? If yes, explain how it is calculated.
> What is a corporate reorganization? Briefly define each of the types of corporate reorganizations.
> Why do you think businesses are allowed an additional year to find qualifying replacement real estate for realty that is condemned?
> What do you believe led to the conclusion that a sole proprietorship should report its results on the owner’s tax return?
> When a business rents tangible property for use in its business, it may incur up-front costs to acquire the lease on the property. How do you think these leasehold costs are treated for tax purposes?
> Explain the general provisions applicable to a partner transferring property to a partnership in exchange for a partnership interest.
> Locate and read Publication 547: Casualties, Disasters, and Thefts. Where is a casualty loss on a personal-use asset reported? Where is a casualty gain on personal-use property reported?
> Locate and read Publication 544: Sales and Other Disposition of Assets. How is a like-kind exchange reported? If there is a recognized gain, how is that reported?
> The Cabot Corporation has had financial problems for several years. The two shareholders have discussed liquidating the corporation, but they are concerned that they will have to pay a large tax bill because of the corporation’s low basis in its assets a
> When Chet died on March 12, 2017, he owned $900,000 in stock of ABC Corporation and $100,000 in City of Omaha bonds. The ABC Corporation declared a cash dividend on March 1 that was payable to shareholders of record on March 15. In early April, the execu
> The Lincoln Trust is a simple trust whose only investments are in corporate bonds producing interest income. The trustee is thinking about moving some of the investments into municipal bonds.
> At the time of Frank’s death, he had received $6,000 in credit card bills that had not been paid.
> Jorge is a resident and citizen of Spain. He invests $500,000 in Miami Beach real estate. When Jorge died in 2017, he owned $6,000,000 in assets in Spain in addition to the Miami Beach real estate.
> Jennifer plans to establish a trust in which she will place all her income-producing investments. She will be the income beneficiary for the balance of her life, with her son having a remainder interest. She plans to name herself as trustee.
> In year 1, Loren and Tim enter into a property settlement agreement under which Tim agrees to pay $600,000 to Loren in return for the release of her marital rights. The payment is to be made in three annual installments of $200,000 each. Loren and Tim di
> Ten years ago, Carolyn created a revocable trust using marketable securities valued at $500,000. The trust department at the local bank is the trustee. Under the terms of the trust, Carolyn retained a life estate with a remainder interest for her grandch
> How do liabilities assumed by a corporation affect a shareholder transferring property to it in a qualifying Section 351 transfer?
> Martha provides the sole support for her son, David, who lives at home while he attends school. Martha gives David a $40,000 automobile for his 18th birthday.
> The Gemini Corporation, an S corporation, wants to expand its lines of business. To do so quickly, it acquires 85 percent of the stock of Trojan Corporation, a regular C corporation.
> Craig is a 20 percent shareholder in an S corporation and works an average of 20 hours per week in the business. His wife, Lynn, is a full-time employee of the corporation. The corporation provides fully paid health and life insurance benefits for hersel
> ABCD partnership, a calendar-year partnership, has four owners: A owns a 20 percent interest; B a 25 percent interest; C a 40 percent interest; and D the remaining 15 percent interest. Some of the partners have been having difficulty working with each ot
> Carol and her husband own 35 percent each of a land development partnership. Carol owns a piece of land purchased six years ago for $60,000 that has been declining in value. The partnership wants to buy the land for development but is only willing to pay
> Shana is a 20 percent limited partner in the STU partnership. Her basis in her partnership interest is $40,000 when she decides to abandon her partnership interest. The partnership’s balance sheet reports net assets of $203,000, liabilities of $200,000 a
> The owner of a corporation used corporate funds to pay for his home, all the home’s expenses, and numerous other personal expenses. This went on for a number of years until the corporation was audited. The IRS asserted that the use of the corporate funds
> Sweeney was the chairman of Sweeney, Inc., a large hardware and lumber store. When Sweeney became ill, his son took over the business but sold the property and all the inventory of lumber valued at $2,000,000 within a year. Shortly thereafter, Sweeney re
> Seven years ago, the Bonnet Corporation redeemed all of Joe Bonnet’s stock as a complete termination of interest. At the time, Joe signed a waiver of family attribution rules because his three sons retained all their stock. As part of this arrangement, J
> Barry is very dedicated to the arts and has made a career of purchasing copyrights to various art forms. Once purchased, he publicizes these works to capitalize on the copyrights and has been very successful. Last year, he acquired a book manuscript that
> What is the critical requirement of a corporate formation to ensure tax-deferred property transfers to all participants?
> Carlson Manufacturing’s plant was condemned by the federal government to allow for expansion of one of its secured locations for government employees. The government paid the company $6,800,000 for the property that had a basis of $2,500,000 and it moved
> Barry owned a number of rental properties. One of the rental properties was located next to his personal residence. Both properties were condemned by the state. Barry found a perfect residence to replace the rental property almost immediately but not one
> Claiborne, Inc. has received an offer to purchase its manufacturing facilities for $7,500,000. If sold, it would have a gain of $5,000,000 on the property. Claiborne has found an ideal location for a new facility, but the only available property is three
> The Timmins Corporation has three acres of land on which its warehouse and offices are located. The state condemned two acres of the land for an extension of a highway frontage road. The strip that was condemned took the warehouse and parking area, leavi
> Karen purchased her personal auto two years ago from a local new car dealer. Since purchasing the car, she took it into the dealer for major warranty repairs five different times and minor repairs a total of fourteen times. She is so unhappy with the car
> The Westlawn Corporation is located in a flood plain. Twelve years ago, its offices were flooded when the nearby river overflowed. Six years ago, the area received 12 inches of rain in a sixhour period, the river overflowed, and the offices flooded again
> Seth and Jacob are brothers who own all of Marboro Corporation’s 2,000 shares of outstanding common stock. Seth owns 1,100 shares to Jacob’s 900 shares, and this has caused many problems over the years. They have not spoken to each other except through t
> Kwan Lu bought 100 shares of Duchco stock on July 25, year 3, for $1,000. The company declared bankruptcy on July 8 of year 5, and his stock became worthless.
> Geralyn and Marco sold their home and moved into a smaller home. They used their Section 121 election to exclude their $20,000 gain on the sale of the larger home. Six months after they moved into the smaller home, Geralyn died. Two months later Marco ha
> Martco, a manufacturer and seller of eyeglasses and contact lenses, purchased all the stock of Fetco, a manufacturer of hearing aids. Management of Martco quickly had second thoughts about keeping Fetco in business and liquidated the company. Martco was
> What is an installment sale? If a transaction qualifies for installment sale treatment, when will the taxpayer be taxed on the sale? What does a taxpayer do if the taxpayer does not want to use the installment method?
> Monicon Corporation purchased a $24,000 computer in 2014 and elected to expense it under Section 179. In 2017, the IRS audited Monicon and determined that its taxable income was incorrectly calculated and was only $20,000 before considering Section 179 e
> Marble Corporation purchased 300-year-old marble statutes that it displays in the entrance hall of its main office building.
> Demark Corporation took delivery of a new machine on December 31, 2017. Due to the high number of employees out for the holidays, the machine was not set up for use until January 3, 2018.
> James Corporation had a net operating loss of $30,000 before claiming any depreciation deductions. James purchased $26,000 in equipment in 2017 but claimed no depreciation on its 2017 tax return.
> How do you think assets that are acquired and disposed of in the same tax year are handled for depreciation purposes?
> Compare the treatment of distributions of depreciated and appreciated property by an S corporation to that of a partnership.
> Why do you think Congress passed the law that allows an LLC to elect to be treated as a corporation or a partnership?
> Joan is 15 and a dependent on her parents’ return. If she has $4,400 income from her trust fund this year, how much income tax will she pay if her parents have $150,000 of taxable income?
> George transfers investment securities worth $200,000 with a tax basis of $130,000 to a trust, naming himself as trustee. The terms of the trust agreement require the trustee to pay all dividends and interest to George’s brother, Mark. George has the rig
> On May 10 of the current year, Claire purchased 1,000 shares of ABCO stock for $10 per share because she believed the price had hit bottom. She did not know that her broker had sold 500 shares that he held in her brokerage account at $18 per share on Apr
> Determine whether each of the following situations involves the transfer of a present interest or a future interest. a. A trust is established for the donor’s 8-year-old daughter. The trustee can decide how much income to pay the daughter each year. At
> Moe, Larry, and Curly form a partnership with each partner having an equal share in profits and losses. Moe and Curly each contribute $50,000 cash to the partnership. Larry contributes a piece of land valued at $170,000. The land has a basis of $125,00
> During the current year, Cherie gives $30,000 cash to her daughter, Helen, and a remainder interest in investment land to her sister, Silvia. The remainder interest is valued at $40,000. In the current year, John, Cherie’s husband, gives Dan $18,000 in m
> Ginny made the following gifts during the current year. Her husband, Ken, made no gifts during the year. • Gift of land valued at $250,000 to her husband • Gift of $20,000 in stock to her daughter • Gift of $32,000 to her sister to pay for medical exp
> John gave $30,000 to each of his 10 grandchildren this year. Lisa, his wife, made no gifts during the year. a. How much are John’s taxable gifts if gift splitting is not elected? b. How much are John’s taxable gifts if gift splitting is elected?
> Julie had a gross estate of $7 million when she died in 2017. Her funeral expenses were $26,000; her administrative expenses were $30,000; her charitable deduction was $350,000; and her marital deduction was $600,000. She made no prior taxable gifts. Wha
> Edward gave 15,000 shares of ABC stock to Valerie on July 15. On July 15, the highest selling price for the stock was $40 per share, and the lowest selling price was $36 per share. What is the value of this gift before any exclusions?
> JR received 10,000 shares of Jones-Redding valued at $50 per share in exchange for a building valued at $1,000,000 and the assumption of the building’s $500,000 mortgage. What are the tax consequences for JR if the building has a basis of (a) $1,200,000;
> Benjamin has made no previous taxable gifts. Determine his gift tax if he makes $14,000,000 (after annual exclusions) in taxable gifts in 2017.
> Carolyn has made no previous taxable gifts. Determine her potential gift tax if she makes $2,650,000 in taxable gifts in the current year after each donee’s annual exclusion but before her lifetime exclusion.
> Charlie exchanged land valued at $450,000 and a sports car valued at $50,000 for a 40 percent interest in a partnership that planned to build an apartment complex on the property. The land has a $325,000 basis and the auto a $40,000 basis. Explain the ta
> In June of year 1, Angelina (a calendar-year taxpayer) becomes the beneficiary of a new calendar-year trust. At the same time, Angelina also becomes the beneficiary of an estate that elects a March 31 fiscal year-end. In December of year 1, Angelina rece
> Wayne created a trust six years ago for the benefit of his children. In the current year, when the value of the trust assets is $1,000,000, Wayne transfers additional property valued at $300,000 into the trust. Because Wayne is concerned that he might ne
> Thomas died on August 15 of the current year. On September 2, his estate received a check for $2,000 from Thomas’s former employer for his final pay period. On September 18, Thomas’s estate received a $70,000 distribution from his employer’s retirement p
> Glen transferred corporate stock worth $300,000 with a tax basis of $160,000 to an irrevocable trust. No gift taxes are paid. The terms of the trust require the independent trustee to distribute the trust income annually to Glen’s sister, Barbara. Any ca
> Mary is John’s surviving spouse. He used $450,000 of his gift and estate tax exclusion for his lifetime gifts and his estate used $2,300,000 of his estate tax exclusion in closing his estate. What is Mary’s estate tax exclusion when she dies if she and J
> Peter exchanges a building valued at $400,000 for land also valued at $400,000 in a qualifying like-kind exchange. The building has a basis of $230,000. What are Peter’s realized gain or loss and the basis of the land?
> Samson’s gross estate was valued at $1 million when he died. Determine the value of his taxable estate before any credits using the following information: • The executor’s fees were $16,000. • His funeral expenses were $15,000. • A cash donation of $1
> When Ben died, his executor elected the alternate valuation date. What value is included in the gross estate for each of the following properties? a. Marketable securities valued at $80,000 at date of death, valued at $89,000 six months after death, and
> Laura transferred property valued at $120,000 into an irrevocable trust. Laura is to receive one-half of the income each year for the balance of her life. The other half of the income and the remainder interest are to go to Robert. One year before her de
> Five years ago, Jason purchased a $400,000 life insurance policy on his life. For each of the following, indicate how much of the $400,000 policy proceeds are included in his gross estate. a. The proceeds are payable to his estate. b. The proceeds were
> What provisions apply to a personal residence that is subject to an involuntary conversion?
> Which of the following items are included in the decedent’s gross estate? a. A life estate in a trust that pays the decedent $25,000 per year until he dies b. A remainder interest in a trust worth $60,000 owned by the decedent c. A one-half interest i
> Cora was in Europe from Thanksgiving of 2016 until early January of 2017. When she returned to her home, she found it had been broken into and jewelry with a fair market value of $40,000 and a basis of $54,000 was missing. Her adjusted gross incomes in 2
> Determine the credit for the gift and estate tax exclusion if the indexed exclusion in 2017 is $5,500,000.
> What is the gift tax annual exclusion and why was it enacted?
> Sharon transferred property into an irrevocable trust, but she retained the right to change the beneficiaries. What circumstances are required for this transfer to be a completed gift?
> Discount Auto Company sold an automobile at a $2,000 discount to an unrelated customer. Is this a gift?
> What distinguishes a simple trust from a complex trust?
> What is income in respect of a decedent, and how is it taxed?
> What are the three categories into which business losses are separated? What type of business interest is always considered a passive activity?
> Explain the principal difference between an LLP and an LLC.
> Explain the functional-use test. Explain the taxpayer-use test.
> What is the income limit for claiming a passive loss deduction under the passive activity real property business exception to material participation?
> What is the purpose of the accumulated adjustments account if the S corporation has always been an S corporation?
> Why do the basis and at-risk rules usually prevent the same amount of losses from passing through to shareholders of S corporations?
> What is a terminating event in relation to an S corporation?
> A married couple file jointly and have a $10,000 net long-term capital gain. What are the maximum tax rates applicable to that gain if their total taxable income would otherwise be taxed at 15 percent, 25 percent, 33 percent, or 39.6 percent and the gain
> Which entities discussed in this chapter insulate the owners from the general liabilities of the entity?
> Why are corporations permitted to file consolidated returns?
> Explain the tax treatment of services transferred to a partnership in exchange for a partnership interest.
