Questions and Answers of Taxation

A corporation has operating income of $75,000. What is its taxable income if it receives a $20,000 dividend from another corporation in which it has the following ownership? a. 10% b. 65% c. 90%
The Crane Corporation issues $1,500,000 in bonds with a 7.5 percent interest rate. If its marginal tax rate is 35 percent, what is its after-tax cost of the debt?
A corporation has taxable income of $1,500,000. If it distributes its after-tax income to its shareholders whose dividend tax rate is 15 percent, what are the total tax and the combined effective tax
Palmdale Corporation has a regular tax liability of $94,000. It is eligible for a $54,000 general business credit for the current year and has a $30,000 general business credit carryover from the
Jenkins Corporation had $675,000 of taxable income last year and $575,000 this year. What is the minimum amount that it must submit for each estimated quarterly tax payment to avoid any penalty for
Carrie received 10 shares of Collie common stock as a 10 percent dividend on the 100 common shares she currently owns. She paid $4,400 for the original shares. If she sells the 10 shares that she
Clarington Corporation, a calendar year taxpayer, has 2 shareholders, Adam and Eve. Adam owns 40 percent and Eve 60 percent of the corporation's stock. In each of the following situations, determine
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
Locate and read Section 385 of the Internal Revenue Code and develop a comprehensive list of factors that indicate legitimate debt. What is the status of the regulations that are to expand on this
Several years ago, Congress repealed the General Utilities Doctrine. Locate and read General Utilities & Operating Co. v Helvering, 296 U.S. 200 (1935). Summarize this case. What was the General
Locate and read Internal Revenue Code Sections 267, 318, and 544. Compare the definition of family in each of these sections.
June owned all the stock of Corporation A. Over the years, the corporation had been very successful but had never paid any dividends, although it had substantial earnings and profits. June wanted to
What is the unextended due date for the income tax return of a corporation whose fiscal year ends on February 28? What is its extended due date? In what months must it make estimated payments for the
What is the purpose of corporate earnings and profits? Why isn't taxable income used to determine if a distribution is a dividend? Discuss.
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 the purpose of the accumulated adjustments account if the S corporation has always been an S corporation?
What is the income limit for claiming a passive loss deduction under the passive activity real property business exception to material participation?
The BDC Partnership has three partners with the following partnership interest percentages and tax-year ends: B has 35 percent ownership and a Dec. 31 year end; D owns 45 percent and has a June 30
John received a proportionate nonliquidating distribution of $10,000 cash and inventory with a zero basis and a fair market value of $12,000 from a partnership in which he has a basis of $8,000. a.
Quenton received a proportionate nonliquidating distribution of $8,000 cash, inventory with a $5,000 basis and a fair market value of $7,000, and a Section 1231 asset with a $7,000 basis and a fair
The ABC Partnership makes a proportionate nonliquidating distribution to one of its partners of two Section 1231 assets. Asset A has a basis of $40,000 and a fair market value of $15,000; Asset B has
National Partnership makes a proportionate nonliquidating distribution toone of its partners of two Section 1231assets. Asset X has a basis of $40,000 and a fair market value of $15,000; Asset B has
Capital Partnership makes a proportionate liquidating distribution to one of its partners of $5,000 cash, $6,000 inventory (FMV = $10,000), and land with a $20,000 basis and an $11,000 fair market
Alexandra received a $40,000 cash liquidating distribution for her 25 percent interest in ABC Partnership that had a $62,500 outside basis. Immediately prior to the distribution, the partnership had
Walter sells his 40 percent interest in Kennel Kids Playground with a partnership basis interest of $40,000 to George for $60,000. The partnership has the following assets: Cash = $50,000, inventory
The Rents-Are-Us Partnership owns a large apartment building with a fair market value of $2,100,000, a basis of $1,600,000, and a mortgage encumbering it of $500,000. Kenneth sells his 20 percent
Refer to the information in the preceding problem. If the partnership sells the land for $27,000 after holding it for three years, what are the tax consequences to Alpha, Beta, and Gamma?Information
Bob is a 50 percent owner of Barco Enterprises. During 2016, Barco earned $80,000 in net income after subtracting Bob's $50,000 salary. Bob also withdrew $20,000 from Barco during the year. Bob would
Explain the difference between the effects of liabilities of an S corporation on a shareholder's stock basis and the effect of liabilities of a partnership on a partner's partnership interest basis.
Alfred has investments in three passive activities: In year 1, PA-1 had a gain of $3,000, PA-2 had a loss of $10,000, and PA-3 had a loss of $5,000. In year 2, PA-1 has a gain of $12,000, PA-2 has a
On March 15, 2014, James Smith formed a business to rent and service vending machines providing healthy snack alternatives and juices to the local middle and high schools. He operates the business as
Explain the difference between the entity and aggregate theories applicable to a partnership and give an example of the effect of these theories on partnership transactions.
Roberta Wynn has been a partner in the Cato Partnership for a number of years. With the permission of the other partners, she sells her partnership interest to a third party. At the time of sale, her
The partners of JPG Partnership want to change the form of entity from a partnership to a corporation. The corporation can be formed in several ways: The partnership can distribute the assets to the
Explain the difference between inside and outside basis for partners and the partnership.
What is the difference between a partner's guaranteed payment and his salary?
What is the lifetime unified credit for 2016 and its related exclusion equivalent?
How is the value of estate property determined and what is the alternate valuation date?
Contrast the difference in bases for an appreciated asset that is given as a gift versus one that is inherited.
How is the net investment income surtax calculated for a trust? Explain how a trust can avoid this tax.
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
Cindy, an 18-year-old full-time student, has $3,400 interest income from a trust established by her grandparents. Cindy also earned $6,000 working at a part-time job. She lives at home with her
Jessica owns investment land currently worth $5,000,000. She paid $3,000,000 for the land 10 years ago. She expects that the land will probably increase in value to at least $8,000,000 before she
Steven had a taxable estate of $8,850,000 when he died in 2016. If he had no prior taxable gifts, what is his net estate tax liability?
Sondra and Jason, a wealthy married couple, won $96 million in a 2016Powerball drawing. They decided to share some of this new wealth immediately with some of their friends and family. They paid
Julie had a gross estate of $7 million when she died in 2016. Her funeral expenses were $26,000; her administrative expenses were $30,000; her charitable deduction was $350,000; and her marital
Your client, Ted, would like your assistance in selecting one of the following assets to give to his 16-year-old daughter.The corporate stock pays only $100 in dividend income each year but has
When Godfrey died in 2016, his assets were valued as follows: Asset Date of Death Valuation Valuation Six Months
Oscar (age 70) and Maggie (age 60) were married and jointly owned a personal residence valued at $3,800,000 when Oscar died in 2016. Oscar also owned stocks valued at $4,700,000; an art collection
Two years ago, Herbert, a widower, made a gift of marketable securities to his 35-year-old daughter, Sabrina, on which he paid a federal gift tax of $3 million. When Herbert died in 2016,his estate
Samantha is a single parent providing the sole support for her six-year-old daughter, Hillary. They live in an area where the public school is known to have problems with drugs and other crimes.
Explain the basic provisions of the Coverdale Education Savings plan.
Ashley runs a small business in Boulder, Colorado, that makes snow skis. She expects the business to grow substantially over the next three years. Because she is concerned about product liability and
Discuss the probable non-revenue justifications for each of the following aspects of the tax law. a. A tax credit is allowed for amounts spent to furnish care for minor children while the parent
Jang, a resident of Washington (which imposes a general sales tax), goes to Oregon (which does not impose a general sales tax) to purchase his automobile. Will Jang successfully avoid the Washington
Discuss the application of a general sales tax. a. Do all states impose a general sales tax? b. Does the Federal government impose a general sales tax?
Locate the following Code citations, and list the subchapter, part, and subpart in which it is located. Then give a brief topical description of each. a. § 708 (a). b. § 1371 (a). c. § 2503 (a).
Mini, in Problem 12, reports $800,000 of pretax book net income in 2017. For that year, Mini did not deduct any bad debt expense for book purposes but did deduct $15,000 in bad debt expense for tax
Using the facts of Problem 14, determine the following. a. The 2017 end-of-year balance in Mini's deferred tax asset and deferred tax liability balance sheet accounts. b. The cost to Mini of the
Ion Corporation reports an income tax expense/payable for book purposes of $200,000 and $250,000 for tax purposes. According to Ion's management and financial auditors, Ion only will be able to use
Prance, Inc., earns pretax book net income of $800,000 in 2016. Prance acquires a depreciable asset that year, and first-year tax depreciation exceeds book depreciation by $80,000. Prance reported no
Ovate, Inc., earns $140,000 in book income before tax and is subject to a 35% marginal Federal income tax rate. Ovate records a single temporary difference: Warranty expenses deducted for book
Prance, in Problem 3, reports $600,000 of pretax book net income in 2017. Prance's book depreciation exceeds tax depreciation that year by $20,000. Prance reports no other temporary or permanent
Using the facts of Problem 10, determine the following. a. The 2017 end-of-year balance in Prance's deferred tax asset and deferred tax liability balance sheet accounts. b. The value to Prance of
Mini, Inc., earns pretax book net income of $750,000 in 2016. Mini deducted $20,000 in bad debt expense for book purposes. This expense is not yet deductible for tax purposes. Mini records no other
Zhong is considering three alternative investments of $10,000. Zhong is in the 25% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected
Al is a physician who conducts his practice as a sole proprietor. During 2017, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2016.
Selma operates a contractor's supply store. She maintains her books using the cash method. Selma wants to know whether the accrual basis of accounting would be preferable for her business. At the end
Trip Garage, Inc. (459 Ellis Avenue, Harrisburg, PA 17111), is an accrual basis taxpayer that repairs automobiles. In late December 2017, the company repaired Samuel Mosley's car and charged him
Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effects of each of the following transactions on the company's 2017 gross income
Laura recently was diagnosed with cancer and has begun chemotherapy treatments. A cancer specialist has given Laura less than one year to live. She has incurred sizable medical bills and other
Basu, who was experiencing financial difficulties, adjusted his debts as follows. Determine the Federal income tax consequences from these events. a. Basu is an attorney. Basu owed his aunt Veena
How does the tax benefit rule apply in the following cases? a. In 2015, the Orange Furniture Store, an accrual method taxpayer, sold furniture on credit for $1,000 to Sammy. Orange's cost of the
Brad is the president of the Yellow Corporation. He and other members of his family control the corporation. Brad has a temporary need for $50,000, and the corporation has excess cash. He could
Apply the imputed interest rules in the following situations. a. Mike loaned his sister Shonda $90,000 to buy a new home. Mike did not charge interest on the loan. The Federal rate was 4%. Shonda
Rodrigo buys wrecked cars and stores them on his property. Recently, he purchased a 1990 Ford Taurus for $400. If he can sell all of the usable parts, his total proceeds from the Taurus will be over
Glenda, a calendar year and cash basis taxpayer, rents property from Janice. As part of the rental agreement, Glenda pays $8,400 rent on April 1, 2017, for the 12 months ending March 31, 2018. a. How
Duck, an accrual basis corporation, sponsored a rock concert on December 29, 2017. Gross receipts were $300,000. The following expenses were incurred and paid as indicated: Expense
The Robin Corporation is owned as follows: Isabelle .......................................................... 26% Peter, Isabelle's husband ..................................... 19% Sonya,
Lupe, a cash basis taxpayer, owns 55% of the stock of Jasper Corporation, a calendar year accrual basis C corporation. On December 31, 2017, Jasper accrues a performance bonus of $100,000 to Lupe
Broadbill Corporation, a calendar year C corporation, has two unrelated cash method shareholders: Marcia owns 51% of the stock, and Zack owns the remaining 49%. Each shareholder is employed by the
Egret Corporation, a calendar year C corporation, was formed on March 6, 2017, and opened for business on July 1, 2017. After its formation but prior to opening for business, Egret incurred the
Blue Corporation, a manufacturing company, decided to develop a new line of merchandise. The project began in 2017. Blue had the following expenses in connection with the project:The new product will
Sarah Ham, operating as a sole proprietor, manufactures printers in the United States. For 2017, the proprietorship has QPAI of $400,000. Sarah's modified AGI was $350,000. The W-2 wages paid by the
In 2017, Rose, Inc., has QPAI of $4 million and taxable income of $3 million. Rose pays independent contractors $500,000. Rose's W-2 wages are $600,000, but only $400,000 of the wages are paid to
Stanford owns and operates two dry cleaning businesses. He travels to Boston to discuss acquiring a restaurant. Later in the month, he travels to New York to discuss acquiring a bakery. Stanford does
In 2017, Gray Corporation, a calendar year C corporation, holds a $75,000 charitable contribution carryover from a gift made in 2012. Gray is contemplating a gift of land to a qualified charity in
Dan Simms is the president and sole shareholder of Simms Corporation, 1121 Madison Street, Seattle, WA 98121. Dan plans for the corporation to make a charitable contribution to the University of
On December 23, 2017, the directors of Partridge Corporation, an accrual basis calendar year taxpayer, authorized a cash contribution of $10,000 to the American Cancer Association. The payment is
Joseph Thompson is president and sole shareholder of Jay Corporation. In December 2017, Joe asks your advice regarding a charitable contribution he plans to have the corporation make to the
On November 4, 2015, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2015 and 2016, respectively, Blue took $642 and $5,128 of cost
Juan, a sole proprietor, acquires a new 5-year class asset on March 14, 2017, for $200,000. This is the only asset Juan acquired during the year. He does not elect immediate expensing under § 179.
Debra acquired the following new assets during 2017:Date _________________ Asset ____________ CostApril 11 .................. Furniture .............. $40,000July 28 ..................... Trucks
On May 5, 2017, Christy purchased and placed in service a hotel. The hotel cost $10.8 million. Calculate Christy's cost recovery deductions for 2017 and for 2027?
Janice acquired an apartment building on June 4, 2017, for $1.6 million. The value of the land is $300,000. Janice sold the apartment building on November 29, 2023. a. Determine Janice's cost
Sandstorm Corporation decides to develop a new line of paints. The project begins in 2017. Sandstorm incurs the following expenses in 2017 in connection with the project: Salaries
Olga is the proprietor of a small business. In 2017, the business's income, before consideration of any cost recovery or § 179 deduction, is $250,000.Olga spends $610,000 on new 7-year class assets
On June 5, 2016, Javier Sanchez purchased and placed in service a 7-year class asset costing $550,000 for use in his landscaping business, which he operates as a single member LLC (Sanchez
On October 15, 2017, Jon purchased and placed in service a used car. The purchase price was $25,000. This was the only business-use asset Jon acquired in 2017. He used the car 80% of the time for
On June 5, 2016, Leo purchased and placed in service a new car that cost $20,000. The business-use percentage for the car is always 100%. Leo claims any available additional first-year depreciation.

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