Problem 1: Chapter 2 (25 pts total, 5 pts each)

Brown Corporation has the following items for the year 2013. Its income statement is as follows.

Income Sales Cost of goods sold Gross Profit Dividends received from stock investments in

Less than 20% owned U.S. corporations Interest income

State bonds

Corporate bonds Total Income

Expenses Salaries Taxes (state, local, and payroll) Repairs and maintenance Net Capital Loss Interest expense:

Loan to purchase state bonds

Other business loans Advertising

Depreciation for book purpose* Charitable contributions Employee benefit programs (a regular corporate expense) Premiums on term life insurance policies on lives

of Janet and Kim Total expenses

Net income before taxes Federal Income tax Net income per books

*Depreciation for tax purposes is $110,000.

(a) What is the dividend received deduction?

$12,000 16,000

25,000 7,000

$4,440,000 (1,840,000)

2,600,000 35,000

28,000 $2,663,000

174,000

181,000 132,000 80,000 100,000 48,000

1,000,000 190,000 112,000

32,000 (1,900,000)

763,000 (282,370) 480,630

(This is a deduction. So write the number and the sign. For example, if the answer is -1000, write -1000 or -1,000)

(b) How much interest income does Brown need to include in its taxable income? (c) How much net capital loss deduction can Brown take?

(d) How much charitable contribution deduction can Brown take?

Hint: The charitable contribution deduction is limited to 10% of taxable income before the CCD, DRD, NOL and CL carryback, and the DPAD. Taxable income before the CCD and DRD (we have no NOL or CL carryback or DPAD in this problem) is $885,000.

(e) What is Brown's taxable income this year?

Problem 2: Chapter 4 (25 pts total, 5 pts each)

Kelly, Tanya, and Barry form The Paint Corporation.

Kelly transfers a building (A/B $40,000, FMV $100,000);

Tanya invests $60,000 cash and performs services worth $15,000.

Barry transfers equipment (A/B $50,000, FMV $25,000) and land (A/B $40,000, FMV $50,000).

They each receive 50 shares in The Paint Corporation, and each share is worth $1,500.

Kelly also receives $10,000 cash from the corporation. The corporation assumes a $15,000 debt that Kelly owes on the building. The $15,000 debt is for tax avoidance.

(a) What is Kelly's recognized gain? (b) What is Kelly's stock basis? (c) What is the corporation's basis in the building? (d) What is Tanya's stock basis? (e) What is the corporation's basis in the equipment?

Note: For this tax year 2018.