Question: What are the primary nontax factors to

> Return to the facts of problem 53. Assume that the property Toby contributes is encumbered by a $20,000 mortgage that is assumed by Landscape Developers. How does this affect the tax results for each of the entity forms? Data from Problem 53: Toby exc

> Toby exchanges property worth $80,000 (basis of $55,000) for a 20% interest in Landscape Developers. What are the tax effects of the exchange if Landscape is organized as a. A partnership b. A corporation c. An S corporation

> Are brokerage commissions paid on the sale of stock a current period expense? Explain.

> Emmon and Darcy are equal owners of Golf Instruction Academy (GIF). The business has been profitable, and they would like to expand their operations. Tiger owns Power Golf. Emmon and Darcy will make Tiger an equal owner of GIF (i.e., each will have a

> John and Katerina form JK Enterprises in the current year. John contributes $200,000 in cash for a 40% interest. Katerina contributes real estate valued at $480,000 and encumbered by a mortgage of $180,000 that is assumed by the business. Katerina's ba

> Miko and Mona form M&M Beverages in the current year. Miko contributes $20,000 in cash and delivery trucks worth $70,000 for a 30% interest. Miko's basis in the delivery trucks is $80,000. Mona contributes $30,000 and land worth $130,000 (basis = $10

> Billy Bob is employed by the Pony Ranch Corporation and owns 1% of the corporation’s stock. The corporation provides excludable meals and lodging for Billy Bob at a cost of $12,000 annually. a. Can the Pony Ranch Corporation deduct the costs of the meal

> Natalie operates her bookkeeping service as a corporation. She is the sole shareholder and is an employee functioning as the chief operating officer. The corporation employs several other individuals and offers them good fringe benefits: group term lif

> Colleen, Rosemary and Suzanne are owners of a software development firm. Colleen owns 45% of the business, Rosemary 30%, and Suzanne 25%. The net operating income from the business is $220,000. Assume Suzanne is paid a salary of $45,000. For each of

> Enterprise Business Systems, pays the $5,000 health and accident insurance policy of its owner Gena. The business's net operating income for the year is $60,000 before considering Gena's benefit. Determine the business's net income for the year and the

> Artis owns 40% of the Rhode Island Chile Parlor (RICP). During the current year, Rhode Island gives Artis fringe benefits worth $4,000 in addition to his $30,000 salary. RICP’s net taxable income before considering the payments to Artis is $160,000. A

> Rolf owns 20% of Chaminade Corporation. During the current year, Chaminade reports operating income of $240,000 and pays $60,000 in cash dividends. Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each

> Raquel is an employee of Jones Company and owns a 30% interest in the company. Her salary is $44,000. She also receives a $10,000 cash distribution from Jones. During the current year, Jones's operating income is $130,000. identify the tax issue(s) p

> In determining the amount of a realized gain or loss to be recognized in the current year, certain types of gains and losses are deferred while others are disallowed. What is the difference between deferring a gain or loss realized in the current period

> A former clergyman with a degree in counseling decides to go into business for himself. He contracts with four large corporations to provide alcohol, drug, and psychological analysis for their employees. The contracts require him to be available on a

> Shirley and Roseann form Rosa Corporation with each contributing assets and cash in exchange for all of the corporation's stock. Shirley and Roseann each own 50% of the stock immediately after the exchange. Shortly thereafter, Shirley sells all her sto

> Ruiz and his two brothers founded a social club called the Last Snake Inn in 1996. They want to take advantage of a new state law that lets them serve beer, liquor, and wine to their patrons on Sundays. To do so, the club must obtain a special liquor li

> Recently, there has been a lot of discussion about what is commonly referred to as “corporate tax shelters” as a means of corporations' avoiding paying income tax. Discussions in Congress may lead to legislation aimed at closing corporate “loopholes” in

> The IRS has established procedures to simplify taxpayers' choice of entity for tax purposes. The procedures are referred to as the "check-the-box" regulations. Use the Internet to find articles or discussions about these rules and how they are applied

> Ariel and Mia agree to combine their business assets to form the A&M Corporation. Ariel’s business assets are worth $135,000 and have a basis of $80,000. Mia’s business assets are worth $200,000, have a basis of $165,000, and are encumbered by a $90,00

> Ben and Pete form a corporation to run a real estate investment management company. Ben contributes cash of $40,000 to the corporation in exchange for 50% of its stock. Pete obtains his 50% ownership interest by contributing land with a fair market val

> Rikki and Rhonda are equal owners of LilMark Corporation. To expand their operations, Marsha will contribute a building worth $80,000 for which she will receive a one-third ownership interest in the corporation. Marsha’s basis in the building is $30,00

> Robbie is the vice president of Mailer Corporation. He owns 40% of Mailer, which is organized as an S corporation. Robbie's salary is $75,000, and he receives group-term life insurance and health and accident insurance that cost $3,000. Mailer's opera

> Miriam is a self-employed computer consultant. Her business nets $120,000 annually, and she takes $85,000 of the earnings in salary. Miriam is considering incorporating her computer consulting business. Identify the tax issue(s) posed by the facts pres

> What is unrecaptured Section 1250 gain, and how is the gain taxed?

> Assume that you are a CPA and a tax specialist. Your clients include Ale and Grains, Inc., an S corporation, and Gustav and Heidi Lager, a married couple who are shareholders and the operators of Ale and Grains. The S corporation has expanded to include

> Which entity form(s) recognize owners as employees of the business?

> What are the tax differences between a corporation and a personal service corporation?

> What are the tax consequences of receiving an ownership interest in an entity in exchange for services rendered to the entity?

> What is the tax treatment for a guaranteed payment?

> Compare the requirements for a tax-free exchange of property for an ownership interest in a partnership with the requirements for a corporation.

> What is the rationale for not taxing transfers of property in exchange for an ownership interest?

> What is the tax treatment of health insurance premiums paid on behalf of: a. A sole proprietor b. A partner c. An owner-employee of a corporation d. An owner-employee of an S corporation

> Is all compensation paid to an employee deductible? Discuss the circumstances in which employee compensation cannot be deducted.

> Compare the tax treatment of fringe benefits provided to an owner of a corporation with the treatment of fringe benefits provided to an owner of a. A sole proprietorship b. A partnership c. An S corporation

> Some tax theorists have noted that in most cases, a sale of a depreciable asset will not be accorded capital gain treatment. What would prompt tax theorists to make this statement?

> Barney is a farmer who has the following transactions during 2017: a. A barn that had cost $36,000 in 2009 with an adjusted basis of $16,000 is destroyed by a tornado. Barney's insurance pays him $26,000 for the casualty. b. Barney's prize bull, for whi

> Why is it important for an owner to also be classified as an employee of the business for tax purposes?

> Which entity(ies) is/are subject to double taxation?

> Armand is an owner of Content Company. During the current year, he receives a $15,000 cash distribution from Content. What is the tax effect of the receipt of the $15,000 if Content is organized as: a. A partnership b. A limited liability company c. A

> Compare the incidence of taxation for each of the following entities: a. Sole proprietorship b. Partnership c. Corporation d. S corporation

> How is a limited liability partnership different from a partnership?

> How is a limited liability company different from a corporation?

> What are the requirements to qualify for the S corporation election?

> What are the nontax differences between a corporation and an S corporation?

> Limiting the liability of the owner(s) of a business is often the primary motive for using the corporate form. Under what circumstances may the use of a corporation not shield the owner(s) from all liabilities of the business?

> Discuss the comparative advantages and disadvantages of general partnerships and limited partnerships.

> Are buildings always Section 1250 property? If not, explain the circumstances under which a building would not be Section 1250 property.

> Compare and contrast the characteristics of sole proprietorships, partnerships, corporations, S corporations, limited liability companies, and limited liability partnerships.

> Which types of tax entities generally cannot elect to use the cash method of accounting?

> Why are restrictions placed on the selection of a tax year by partnerships and S corporations?

> What is the difference between a calendar year and a fiscal year?

> Which of the following are organizational costs? a. State fees for incorporation b. Legal and accounting fees incident to organization c. Expenses for the sale of stock d. Organizational meeting expenses

> How do S corporation liabilities affect the basis of an S corporation shareholder's stock?

> Why might a shareholder recognize a gain on an exchange of property for an ownership interest when a partner making the same exchange with a partnership would not recognize a gain?

> What is the tax effect of a corporation's assuming the debt of a shareholder on property that is exchanged for an ownership interest in the corporation?

> Why are partners allowed to add their share of partnership debts to their bases?

> How are the recapture provisions for Section 1245 and Section 1250 property different?

> Explain the difference between a recourse debt and a nonrecourse debt.

> How do liabilities affect the basis of a partner's interest in a partnership?

> Discuss the basis of an ownership interest received in exchange for property and the basis of the property received in exchange for an ownership interest in the hands of the entity.

> Jacqui and Joanne plan to buy a bed and breakfast inn for $200,000. Jacqui will contribute $20,000 toward the purchase and operate the enterprise. Joanne's primary role is that of investor. She will contribute $100,000. However, she will be an active par

> Nan wants to incorporate her sole proprietorship and will transfer cash of $5,000 and property with a fair market value of $60,000 and a basis of $20,000. The corporation will assume the $55,000 mortgage on the property. Nan will be paid a salary of $4

> Ken and Helen own a bed and breakfast in Vermont. They acquired the property in 2002 for $190,000, and their adjusted basis in it is $95,000. The property is worth $260,000, and they have a mortgage of $100,000. Both are tired of the cold winters and

> In October 2017, fire completely destroys the principal residence of Olaf, who is 63 and single, and lives in Bemidji, Minnesota. He owned the home for 16 years; his adjusted basis is $58,000. Olaf receives insurance proceeds of $200,000. Olaf plans to

> A fire in the factory of Franny's Famous Frankfurters destroys several stuffing machines. The machines have an adjusted basis of $125,000 and a fair market value of $225,000. Franny's insurance company reimburses Franny's $100,000 for the destruction o

> Evelyn's Excavating Service traded an excavator for a new backhoe. The excavator has a fair market value of $37,000 and an adjusted basis of $24,000. The backhoe is worth $34,000. The owner of the backhoe, Susan, agrees to assume Evelyn's $8,000 loan o

> Maya exchanges an office building with a fair market value of $200,000 and a basis of $110,000 for $20,000 cash and a warehouse with a fair market value of $300,000. In the exchange, she assumes the $120,000 mortgage on the warehouse. a. Has Maya given

> The chapter noted that all depreciable property is subject to the depreciation recapture rules. What is the intent of the depreciation recapture rules?

> Return to the facts of problem 34. Two years after acquiring the new computer, Olga sells it for $6,000. The adjusted basis of the computer is $3,800. What is the character of the recognized gain on the sale of the computer? Data from Problem 34: Olg

> Olga trades in a computer she had used in her trade or business for a new computer. The old computer cost Olga $5,300 and has an adjusted basis of $800. The computer dealer gives her a $1,200 trade-in allowance on the old computer, and Olga pays the rem

> Jerry sells his delivery truck which has a basis of $25,000 to Tom’s Truck Company for $10,000. On the same day, he purchases a new truck from Tom’s Truck Company at a cost of $40,000. a. Does Jerry recognize any gain or loss on the old truck? b. What i

> Shirley has an old tractor that has an adjusted basis of $9,000 and a fair market value of $5,000. She wants to trade it in on a new tractor that costs $25,000. Write a memorandum to Shirley advising her about how to structure the transaction to optimi

> Fremont Corporation and Dement Corporation exchange equipment with the following particulars. What are Fremont's and Dement’s realized and recognized gains or losses on the exchange and the bases in the equipment they acquire in the exc

> Jose owns a warehouse in Mexico City with a basis of $430,000 and a fair market value of $700,000. Lucien owns a warehouse in Boulder, Colorado with a basis of $200,000 and a fair market value of $700,000. Jose and Lucien agree to exchange the warehou

> Leon exchanges an office building which he held as investment property for a bowling alley. His office building has a basis of $175,000, a fair market value of $160,000, and is subject to a mortgage of $40,000. The fair market value of the bowling alle

> Armando owns a pizza parlor. Because his business is declining, he trades his old pizza oven in on a smaller oven that is worth $12,000. The old oven cost $30,000 and has an adjusted basis of $18,000. Because Armando's oven is worth $15,000, he agrees

> Tinh exchanges business equipment with an adjusted basis of $55,000 (initial basis was $105,000) for business equipment worth $42,000 and $20,000 in cash. a. What is Tinh's realized gain or loss on the old equipment? b. How much of the realized gain or

> Beaver Corporation owns a parcel of land with a fair market value (FMV) of $75,000 and a basis of $40,000. Beaver exchanges the land for a building with a FMV of $65,000. The corporation also receives $10,000 in cash. Both properties are investment pr

> Explain the lookback rule as it applies to the Section 1231 netting procedure.

> Pauline's Pastry Shop decides to remodel its offices this year. As part of the remodeling, Pauline's trades furniture with a cost of $12,000 that had been expensed in the year of purchase (Section 179 expense election) for new furniture costing $22,000.

> Jalapeno Company trades in its old delivery van for a new delivery van. The old van cost $22,000 and has an adjusted basis of $15,000. Jalapeno is given a $13,000 trade-in allowance on the new van and pays the remaining $14,000 of the $27,000 purchase

> Return to the facts of problem 22. Assume that Mayfair Corporation exchanges its machine for another machine worth $18,000. a. How much boot must be paid to make the exchange, and who must pay the boot? b. Does the corporation have a recognized gain

> Mayfair Corporation exchanges a machine with a fair market value of $15,000 and an adjusted basis of $10,000 for land in Nevada with a fair market value $15,000. Does Mayfair have a recognized gain on the exchange? Explain.

> Which of the following exchanges of property are like-kind exchanges? a. Horace trades his personal use auto for another personal use auto. b. Lian trades an office building she rents out for a warehouse to use in her business. c. Arthur owns a hardware

> Which of the following exchanges of property are like-kind exchanges? a. Land traded for an airplane. b. A warehouse used in a trade or business exchanged for land to be used as a personal residence. c. Land in Greece held as an investment for a hotel in

> Which of the following transfers meet the exchange requirement for deferral under like-kind exchange provisions? a. Bonita sells her rental condominium in Park City and uses the proceeds as a down payment to buy a rental condominium in Breckenridge. b. E

> Honre Corporation's warehouse and Filip Company's office building were located side by side until a fire raced through both structures, completely destroying them. The warehouse has an adjusted basis of $250,000 and a fair market value (FMV) before the

> Gary and Gertrude are married on April 8, 2016. They use Gertrude’s home as their residence. Gertrude purchased the home on November 14, 2014, for $60,000. On February 19, 2017, Gertrude is killed in an automobile accident. Gary is distraught and sel

> Kerri and John are married. On May 12, 2017, they sell their home for $190,000 and purchase another residence costing $225,000. What is Kerri and John’s realized and recognized gain in each of the following cases? a. They purchased the residence for $85

> One primary problem in properly accounting for property dispositions is differentiating capital assets and Section 1231 property. Why is it important to correctly identify as either a capital asset or a Section 1231 property an asset that has been dispo

> Manuel and Rita sell their home in Minneapolis for $495,000, incurring selling expenses of $25,000. They had purchased the residence for $85,000 and made capital improvements totaling $20,000 during the 20 years they lived there. They buy a new residenc

> Mai, a single taxpayer, sells her residence in the suburbs for $300,000. She bought the house twelve years ago for $60,000 and made $30,000 of improvements to it. Mai buys a new downtown condominium for $155,000 a few weeks after she sells her suburban

> Aretha sells her house on June 9, 2017, for $220,000 and pays commissions of $10,000 on the sale. She had purchased the house for $60,000 and made capital improvements costing $15,000. What are Aretha’s realized and recognized gain in each of the follow

> In each of the following cases, determine the amount of realized gain or loss and the recognized gain or loss: a. Cheryl sells her house for $73,000 and she pays $4,000 in commissions on the sale. She paid $83,000 for the house 4 years earlier. b. In

> Alley's automobile dealership, which has an adjusted basis of $400,000, is destroyed by a hurricane in the current year. Alley's receives $600,000 from its insurance company to cover the loss. Alley's has begun to rebuild the dealership at an estimated

> MacKenzie owns a boat rental business. During the current year, a tidal wave sweeps through the harbor where she keeps her boats anchored. Four boats are totally destroyed, but the rest of the rental fleet escapes serious damage. MacKenzie replaces the

> A fire totally destroys a manufacturing plant owned by Ansel Corporation. The plant, located in Louisiana, has been used for more than 30 years and is fully depreciated. Ansel's insurance pays $500,000 for the destruction. In analyzing qualified replac

> One of Reddy's Fancy Dog Food factories is destroyed by a tornado. The factory has an adjusted basis of $375,000. Reddy's receives $540,000 from its insurance company to cover the loss. What is the minimum amount of gain that must be recognized in eac

> Refer to the facts of problem 44. Write a letter to Grant Industries explaining why it might want to recognize the entire gain on the condemnation. Data from Problem 44: Grant Industries' warehouse is condemned by the city on August 18, 2017. Because