Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, ST 98765. The corporation uses the

Question:

Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, ST 98765. The corporation uses the calendar year and accrual basis for both book and tax purposes. It is engaged in the sale of musical instruments with an employer identification number (EIN) of XX-2023021. The company incorporated on December 31, 2017, and began business on January 2, 2018. Table C:3-3 contains balance sheet information at January 1, 2021, and December 31, 2021. Table C:3-4 presents an unaudited GAAP income statement for 2021. These schedules are presented on a book basis. Other information follows the tables.

TABLE C:3-3:

Estimated Tax Payments (Form 2220):
The corporation deposited estimated tax payments as follows:

Taxable income in 2020 was $1.2 million, and the 2020 tax was $252,000. The corporation earned its 2021 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods. Assume the underpayment penalty rate remains at 3% for the second quarter of 2022 (regardless of any announced rate change).

Inventory and Cost of Goods Sold (Form 1125-A):

The corporation uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected on Form 1125-A. No other costs or expenses are allocated to cost of goods sold.

Bad Debts:

For tax purposes, the corporation uses the direct writeoff method of deducting bad debts. For book purposes, the corporation uses an allowance for doubtful accounts. During 2021, the corporation charged $40,000 to the allowance account, such amount representing actual writeoffs for 2021.

Organizational Expenditures:

The corporation incurred less than $5,000 of organizational expenditures in the year it began business. For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct the entire amount of expenditures in the year it began business. Therefore, no amortization expenditures appear in the tax return or book financial statements for the current year.

Capital Gains and Losses:

The corporation sold 100 shares of PDQ Corp. common stock on October 8, 2021, for $145,000. The corporation acquired the stock on December 11, 2020, for $90,000. The corporation also sold 75 shares of JSB Corp. common stock on June 18, 2021, for $110,000. The corporation acquired this stock on September 18, 2019, for $120,000. The corporation has a $15,000 capital loss carryover from 2020. These transactions were not reported to the corporation on Form 1099-B.

Fixed Assets and Depreciation:

For book purposes: The corporation uses straight-line depreciation over the useful lives of assets as follows: store building, 50 years; equipment, ten years; and trucks, five years. The corporation takes a half-year’s depreciation in the year of acquisition and the year of disposition and assumes no salvage value. The book financial statements in Tables C:3-3 and C:3-4 reflect these calculations.

For tax purposes: All assets are MACRS property as follows: store building, 39-year nonresidential real property; equipment, seven-year property; and trucks, five-year property. The corporation acquired the store building for $2 million and placed it in service on January 2, 2018. The corporation acquired two pieces of equipment for $250,000 (Equipment 1) and $500,000 (Equipment 2) and placed them in service on January 2, 2018. The corporation acquired the trucks for $100,000 and placed them in service on July 18, 2019. The trucks are not listed property and are not subject to the limitation on luxury automobiles.

The corporation did not make the expensing election under Sec. 179 or take bonus depreciation on any property acquired before 2021. Accumulated tax depreciation through December 31, 2020, on these properties is as follows:

On October 16, 2021, the corporation sold for $280,000 Equipment 1 that originally cost $250,000 on January 2, 2018. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on October 17, 2021, the corporation acquired and placed in service a piece of equipment costing $600,000. Assume these two transactions do not qualify as a like-kind exchange. The new equipment is seven-year property. The corporation made the Sec. 179 expensing election with regard to the new equipment for the entire cost of this property. Where applicable, use published IRS depreciation tables to compute 2021 depreciation (reproduced in Appendix C of this text).

Other Information:
• Ignore the accumulated earnings tax.
• The corporation received dividends (see Income Statement in Table C:3-4) from taxable, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns less than 20%.
• The corporation paid $100,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings.
• The state income tax in Table C:3-4 is the exact amount of such taxes incurred during the year.
• The corporation is not entitled any credits.
• Ignore the financial statement impact of any underpayment penalties incurred on the tax return.

Required:

Prepare the 2021 corporate tax return for Melodic Musical Sales, Inc. along with any necessary supporting schedules.
Optional: Prepare both Schedule M-3 (but omit Schedule B and Form 8916-A) and Schedule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3. Note to Instructor: See solution in the Instructor’s Resource Manual for other option information to provide to students.

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