Questions and Answers of Taxation

Mrs. K owns her own consulting firm, and her husband, Mr. K, owns a printing business. This year, Mrs. K's consulting business generated $89,000 taxable income. Mr. K's business operated at a loss.
ROJ Inc. purchased a 20-acre industrial complex consisting of three warehouses and two office buildings surrounded by parking lots. About 12 acres of the land is undeveloped. ROJ paid a lump-sum
WRT owns a chain of retail bookstores. It recently decided to add coffee bars in each store to sell gourmet coffee drinks and pastries to the bookstore customers. WRT has not yet obtained the
Company JJ, a calendar year corporation, bought an airplane for use in its oil and gas business in December. The manufacturer delivered the plane to the company's hangar on December 19. Because of
Firm F's adjusted basis in operating asset A is $75,000. If the firm carries $75,000 of property insurance on this asset, is it adequately protected against risk of loss?
In year 1, Maxim sold investment land with a tax basis of $77,000. Payment consisted of $10,000 cash down and the purchaser's note for $90,000. The note is payable in equal installments of $45,000 in
Zeno Inc. sold two capital assets in 2017. The first sale resulted in a $53,000 capital loss, and the second sale resulted in a $25,600 capital gain. Zeno was incorporated in 2013, and its tax
In its first taxable year, Band Corporation recognized $957,500 ordinary business income and a $5,500 capital loss. In its second taxable year, Band recognized $1,220,000 ordinary business income, a
Lemon Corporation generated $324,600 of income from ordinary business operations. It also sold several assets during the year. Compute Lemon's taxable income under each of the following alternative
Since its formation, Roof Corporation has incurred the following net Section 1231 gains and losses:a. In year 4, Roof sold only one asset and recognized a $7,500 net Section 1231 gain. How much of
Corporation Q, a calendar year taxpayer, has incurred the following Section 1231 net gains and losses since its formation in 2014:a. In 2017, Corporation Q sold only one asset and recognized a $4,000
On March 1, DS Company, a calendar year taxpayer, recognized a $15,000 loss on sale of marketable securities. On May 12, it recognized an $85,000 Section 1231 gain on sale of an office building. In
Corporation TJ ceased business operations and was dissolved under state law. On the last day of its existence, TJ's balance sheet showed $2,200 unamortized organizational costs and $12,000
At the beginning of the year, Firm GH owned 8,200 shares of common stock in LSR, a publicly held corporation. GH's basis in these shares was $290,000. On a day when LSR stock was trading at $1.14
Firm LD, a calendar year taxpayer, owns 20,000 shares of MXP stock with a $160,000 basis. In November, LD's chief financial officer learned that MXP had just declared bankruptcy. The CFO was unable
Company LR owns a commercial office building. Four years ago, LR entered into a long-term lease with Lessee M for 2,400 square feet of office space. LR spent $13,600 to finish out the space to meet
Firm WD sold depreciable realty for $225,000. The firm purchased the realty 12 years earlier for $350,000 and deducted $155,000 MACRS depreciation through date of sale. During an audit of the tax
Corporation AD operates four antique dealerships. Last year, it sold a 200-year-old desk to its sole shareholder, Mr. C, for $35,000. AD reported its $2,700 gain as ordinary income from the sale of
Mr. V sold his sole proprietorship to an unrelated party for a lump-sum price of $900,000. The contract of sale specifies that $100,000 is for a covenant not to compete Mr. V's promise not to operate
Why doesn't Congress extend the wash sale rule to apply to realized gains?
This year, Firm B recognized a $100,000 capital gain on the sale of investment land. Toward the end of the year, the firm plans to sell stock from its investment portfolio to generate a $100,000
Why is the label "nontaxable exchange" a misnomer?
In a nontaxable exchange, do the tax consequences to one party in any way depend on the tax consequences to the other party?
Is the substituted basis of the qualifying property received in a nontaxable exchange more or less than the cost of that property?
Firm Q, a real estate broker, exchanged 16 acres of land for a commercial warehouse owned by Company M. Company M, a light industrial business, plans to hold the land as a long-term investment. Is
Company W exchanged the following assets for Black-acre, investment land worth $2 million: ________________________ Company W's Basis ______________ FMV Real property used in
Under what conditions can the destruction of property by casualty or theft result in an economic loss but a realized gain?
Firm ML, a non-corporate taxpayer, exchanged residential rental property plus $15,000 cash for 20 acres of investment land with a $200,000 FMV. ML used the straight-line method to compute
Alice and Brendan exchanged the following business real estate:a. If Alice's adjusted basis in the undeveloped land was $360,000, compute Alice's realized gain, recognized gain, and basis in the
On June 2, 2017, a tornado destroyed the building in which FF operated a fast-food franchise. FF's adjusted basis in the building was $214,700. In each of the following cases, determine FF's
On January 10, 2015, a fire destroyed a warehouse owned by NP Company. NP's adjusted basis in the warehouse was $530,000. On March 12, 2015, NP received a $650,000 reimbursement from its insurance
On October 18 of last year, a flood washed away heavy construction equipment owned by Company K. The adjusted tax basis in the equipment was $416,000. On December 8 of last year, Company K received a
Lydia and Oliver want to form a partnership to conduct a new business. They each contribute the following assets in exchange for equal interests in LO Partnership. Lydia's tax basis in the
Ten years ago, Ms. Dee purchased 1,000 shares of Fox common stock for $124 per share. On June 2 of the current year she sold 500 shares for $92 per share. Compute Ms. Dee's recognized loss on sale
Eight years ago, SW purchased 1,000 shares of Delta stock. On May 20 of the current year, it sold these shares for $90 per share. In each of the following cases, compute SW's recognized gain or loss
Ten years ago, Janine purchased 100 shares of Mega stock for $245 per share. On September 10 of the current year, she sold all 100 shares for $200 per share. a. Compute Janine's realized and
Watson, a calendar year corporation, reported $1,250,000 net income before tax on its financial statements prepared in accordance with GAAP. During the year, Watson exchanged one piece of commercial
Firm M exchanged an old asset with a $9,100 tax basis and a $21,000 FMV for a new asset worth $18,500 and $2,500 cash. a. If the exchange is nontaxable, compute Firm M's realized and recognized gain
ST Inc. and Firm WX are negotiating an exchange of the following business properties:ST agrees to pay $150,000 cash to WX to equalize the value of the exchange. ST's adjusted basis in the office
Company JK disposed of the following items of business equipment in a like-kind exchange:In exchange for the two items, JK received like-kind equipment worth $50,000 and $5,000 cash? Identify the tax
Company T operated a drive-in movie theater for over a decade. Three years ago, the company ceased operations because so few people were attending the outdoor facility. This year, the entire facility
In 2015, an office building owned by Firm F was completely destroyed by fire. F's adjusted basis in the building was $485,000, and its insurance reimbursement was $550,000. On its 2015 tax return, F
In 2015, an industrial plant owned by Company C, a calendar year taxpayer, was destroyed in a flood. C's adjusted basis in the plant was $1.65 million, and the company received a $2 million insurance
In 2016, transportation equipment owned by Corporation ABC was stolen. The adjusted basis in the equipment was $105,000, and ABC received a $400,000 insurance reimbursement. It immediately paid
Mr. P, a professional architect, entered into an agreement with Partnership M under which he designed three buildings for the partnership and transferred a copyright for design software to the
On April 1, 2017, 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
This year, Firm Q, a cash basis taxpayer, remitted $26,800 FICA payroll tax to the federal government. However, the firm deducted only $13,400 FICA tax on its income tax return. Can you explain this
Critique the employee payroll tax on the normative standards of convenience to the taxpayer and vertical equity?
Why is only half of a sole proprietor's self-employment tax deductible in the computation of taxable income?
James Jones is the owner of a small retail business operated as a sole proprietorship. During 2016, his business recorded the following items of income and expense: Revenue from inventory sales
Amit is a partner in Reynolds Partnership. This year, Amit's Schedule K-1 from Reynolds reflected $50,000 of ordinary income, $1,000 of interest income, and a cash distribution of $35,000. Amit's
Kari is a partner in Lizard Partnership. This year, Kari's share of partnership ordinary income is $20,000, and she received a cash distribution of $30,000. Kari's tax basis in her partnership
Rochelle is a partner in Megawatt Partnership. For 2017, her schedule K-1 from the partnership reported the following share of partnership items: Ordinary income .......................
Jayanthi and Krish each own a 50 percent general partner interest in the JK Partnership. The following information is available regarding the partnership's 2016 activities: Sales revenue
Refer to the facts in the preceding problem. a. Complete Schedule K, Form 1065, for the partnership. b. Complete Schedule K-1, Form 1065, for Jayanthi? Information from preceding problem Sales
Zelda owns a 60 percent general interest in YZ Partnership. At the beginning of 2016, the adjusted basis in her YZ interest was $95,000. For 2016, YZ generated a $210,000 business loss, earned
Refer to the facts in the preceding problem. In 2017, YZ generated $7,000 ordinary business income and $18,000 dividend and interest income. The partnership made no distributions. At the end of the
At the beginning of 2017, Ms. P purchased a 20 percent interest in PPY Partnership for $20,000. Ms. P's Schedule K-1 reported that her share of PPY's debt at year-end was $12,000, and her share of
On January 1, 2016, Leo paid $15,000 for 5 percent of the stock in BLS, an S corporation. In November, he loaned $8,000 to BLS in return for a promissory note. BLS generated a $600,000 operating loss
Refer to the facts in the preceding problem. BLS generated $408,000 ordinary business income in 2017.a. How much of Leo's share of this income is included in his 2017 taxable income?b. Compute Leo's
For each of the following situations, indicate whether the corporation is eligible to elect S corporation status. a. Carman Corporation has two shareholders, Carla and Manuel. Carla is a United
Wanda is a 20 percent owner of Video Associates, which is treated as a pass through entity for federal income tax purposes. This year, Wanda was allocated $45,000 of ordinary income from Video
Mr. Williams is employed by BDF Inc. Compute BDF's 2017 employer payroll tax with respect to Mr. Williams assuming that: a. His annual compensation is $60,000. b. His annual compensation is $200,000?
Refer to the facts in the preceding problem. Assume that in the year 2018, the Social Security base amount increases to $131,000. Compute BDF's 2018 employer payroll tax with respect to Mr. Williams
For 2017, Ms. Deming earned wages totaling $225,000. Calculate any .9 percent additional Medicare tax owed, assuming that: a. Ms. Deming is single. b. Ms. Deming files a joint return with her husband
Calculate the total Social Security and Medicare tax burden on a sole proprietorship earning 2017 profit of $300,000, assuming a single sole proprietor?
Mrs. Singer owns a profitable sole proprietorship. For each of the following cases, use a Schedule SE, Form 1040, to compute her 2016 self-employment tax and her income tax deduction for such tax. a.
In 2017, Wilma Way's sole proprietorship, WW Bookstore, generated $120,000 net profit. In addition, Wilma recognized a $17,000 gain on the sale of business furniture and shelving, all of which was
Ellie has operated a sole proprietorship for six years during which net profit has been stable and Ellie's marginal tax rate has been a constant 25 percent. Ellie projects that her profit next year
Paula's Schedule K-1 from an LLC reported a $12,000 share of ordinary loss and a $1,900 share of capital loss. Paula's adjusted basis in her LLC interest before consideration of these losses was
Marcus, a cash basis individual, is a general partner in MNOP Partnership. Both Marcus and MNOP use a calendar year for tax purposes. According to the partnership agreement, MNOP pays a $10,000
David's Schedule K-1 from DES, an S corporation, reported $8,900 tax-exempt interest and $4,700 ordinary loss. David's adjusted basis in his stock before consideration of these items was
Mr. and Mrs. West are the only shareholders in WW, an S corporation. This year, WW paid $21,000 to the caterers who provided food for the couple's silver wedding anniversary celebration. Identify the
The 100 shares of NS's outstanding stock are owned by seven unrelated individuals. NS has an S corporation election in effect. Late in the year, one individual announces to his fellow shareholders
BR Inc. owns a 20 percent interest in a limited partnership. All the other partners are individual shareholders in BR. This year, BR sold land to the partnership for use in the partnership's business
JKL Partnership uses the calendar year for tax purposes. For the current calendar year, the partnership generated $1 million ordinary business income. Corporation L, a 10 percent limited partner in
Javier is a full-time employee of B Inc. and operates a sole proprietorship. This year, his salary was $70,000, and his net earnings from self-employment were $60,000. Identify the tax issue or
Lola owns a 15 percent limited interest in AF Partnership, which uses a calendar year for tax purposes. On April 12, Lola sold her entire interest to the R Corporation; consequently, she was a
Nine years ago, Fred paid $20,000 cash for a 2 percent limited interest in a very profitable partnership. Every year Fred has properly included his distributive share of partnership income in taxable
Four individuals are evaluating the tax cost of operating their business as an S corporation. They assume that the corporation will pay no tax on its annual business income. They plan to incorporate
Mr. Yang just sold his entire 20 percent interest in DK Partnership to an unrelated purchaser for $7,500. Mr. Yang's adjusted basis in the interest was zero, and he had a $12,000 carry forward of DK
Herold had been a calendar year S corporation since 1990. On October 10, 2017, Mrs. Hughes sold 18 shares of Herold stock to a foreign partnership, thereby terminating Herold's S election. Herold's
On March 1, 2017, Eve and Frank each contributed $30,000 cash to the newly formed EF Partnership in exchange for a 50 percent general interest. The partnership immediately borrowed $50,000 from an
To what extent does the corporate characteristic of limited liability protect shareholders/ employees who perform professional services for corporate clients?
In your own words, explain the conclusion that corporations do not pay tax-people do.
RP Inc. owns 59 percent of QV's voting stock. RP's board of directors elects the majority of the members of QV's board of directors and thereby controls QV's management. Are RP and QV an affiliated
Cramer Corporation, a calendar year, accrual basis-corporation, reported $1 million of net income after tax on its financial statements prepared in accordance with GAAP. The corporation's books and
Myamo was incorporated on January 1, 2015, and adopted a calendar year for tax purposes. It had the following gross receipts for its first three taxable years:2015..........................
Northup was incorporated on January 1, 2012, and adopted a calendar year for tax purposes. It had the following gross receipts for its first six taxable years:2012 ..............................
Hall Corporation was formed in 2013 and was exempt from AMT for that year. From 2014 through 2016, its regular tax and tentative minimum tax were as follows:a. Compute Hall's tax for 2014, 2015, and
In 2016, Bartley Corporation's federal income tax due was $147,000. Compute the required installment payments of 2017 tax in each of the following cases: a. Bartley's 2017 taxable income is
In 2016, NB Inc.'s federal taxable income was $242,000. Compute the required installment payments of 2017 tax in each of the following cases:a. NB's 2017 taxable income is $593,000.b. NB's 2017
Leona, whose marginal tax rate on ordinary income is 39.6 percent, owns 100 percent of the stock of Henley Corporation. This year, Henley generates $1 million of taxable income.a. If Henley wants to
Adams Corporation manufactures appliances. This year, the government increased the corporate tax rate by 5 percent. Adams responded by raising its prices. Customer demand remained steady; therefore,
Shine Inc. manufactures laundry detergent and other cleaning products. This year, the government increased the corporate tax rate by 2 percent. The marketing department determined that Shine could
In its first year, Barsky Corporation made charitable contributions totaling $30,000. The corporation's taxable income before any charitable contribution deduction was $250,000. In its second year,
Greentown Foundation is a nonprofit corporation exempt from federal income tax. Its purpose is to solicit volunteers to plant and tend public gardens and greenbelts located in inner cities. The board
M&M is a publicly held corporation, and its stock trades on Nasdaq. This year, M&M contributed 15,000 shares of its newly issued common stock to a local charity. At the date of contribution,
Several years ago, Ferris Corporation purchased heavy machinery for $618,000. It sold the machinery this year for $500,000. Through date of sale, MACRS depreciation on the machinery was $320,000,
Wiggins Corporation is a calendar year taxpayer. For the past nine years, its taxable income has been stable, averaging $2 million per year. Through November of this year, its taxable income was

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