Tax 655 Federal Income Tax of Corporations and Partnerships Problems
Question # 00071592
Posted By:
Updated on: 05/19/2015 12:03 AM Due on: 05/27/2015
NOTE
Complete the problems as presented in this document. You may create a new
document and/or spreadsheet as needed. Any memo should be no more than 3
pages in length. Please state any assumptions used if problems are not clear.
Problem 1
Your client, a physician, recently purchased a yacht on which he flies a pennant
with a medical emblem on it. He recently informed you that he purchased the
yacht and flies the pennant to advertise his occupation and thus attract new
patients. He has asked you if he may deduct as ordinary and necessary business
expenses the costs of insuring and maintaining the yacht. In search of an
answer, consult RIAs CHECKPOINT TAX available on-line through the SNHU
Shapiro Library. Explain the steps taken to find your answer.
Problem 2
Stacey Small has a small salon that she has run for a few years as a sole
proprietorship. The proprietorship uses the cash method of accounting and the
calendar year as its tax year. Stacey needs additional capital for expansion and
knows two people who might be interested in investing. One would like to
practice hairdressing in the salon. The other would only invest.
Stacey wants to know the tax consequences of incorporating the business. Her
business assets include a building, equipment, accounts receivable and cash.
Liabilities include a mortgage on the building and a few accounts payable, which
are deductible when paid.
Write a memo to Stacey explaining the tax consequences of the incorporation.
As part of your memo examine the possibility of having the corporation issue
common and preferred stock and debt for the shareholders property and money.
Problem 3
Five years ago, Lacey, Kaylee, and Doug organized a software corporation, DLK,
which develops and sells Online Meetings software for businesses. DLK is a C
corporation. Each individual contributed $10,000 to the company in exchange for
1,000 shares of DLK stock (for a total of 3,000 shares). The corporation also
borrowed $250,000 from ACME Venture Capital to finance operating costs and
capital expenditures.
Because of intense competition, DLK struggled for the first few years of operation
and the corporation sustained chronic losses. This year, Lacey, DLKs president,
decided to seek additional funds to finance DLKs working capital.
CME declined to extend additional funds because of the money already invested
in DLK. High Tech Venture Capital Inc. proposed to lend DLK $100,000, but at a
10% premium over the prime rate. (Other software manufacturers in the same
market can borrow at a 3% premium.) First Round Capital proposed to invest
$50,000 of equity capital into DLK, but on the condition that the investment firm
be granted the right to elect five members to DLKs board of directors.
Discouraged by the high cost of external borrowing, Lacey decides to approach
Kaylee and Doug.
Lacey suggests to Kaylee and Doug that each of the three original investors
contribute an additional $25,000 to DLK in exchange for five 20-year debentures.
The debentures will be unsecured and subordinate to ACMEs debt. Annual
interest on the debentures will accrue at a floating 5% premium over the prime
rate. The right to receive interest payments will be cumulative; that is each
debenture holder is entitled to past and current interest payments before DLKs
board can declare a common stock dividend. The debentures would be both
nontransferable and noncallable. Lacey, Kaylee and Doug have asked you, their
tax accountant, to advise them on the tax implications of the proposed financing
agreement. After researching the issue, issue your advice in a tax research
memo. At a minimum, you should consult the following authorities:
IRC. Sec 385
Rudolph A. Hardman, 60 AFTR 2d 87-5651, 82-7 USTC ¶9523 (9th Cir.,
1987)
Tomlinson v. The 1661 Corporation, 19 AFTR 2d 1413, 67-1 USTC ¶9438
(5th Cir., 1967)
Problem 4
Which of the following groups constitute a controlled group? (Any stock not listed
below is held by unrelated individuals each owning less than 1% of the
outstanding stock.) For brother-sister corporations, which definition applies?
a. Mark owns 90% of the single classes of stock of Hot and Ice Corporations.
b. Johnson and Carey Corporations each have only a single class of stock
outstanding. The two controlling individual shareholders own the stock as
follows:
Stock Ownership
Percentages
Sharehold
er
Johnson
Corp.
Carey
Corp
David
60%
80%
Kelly
30%
0%
c. Red, Blue and ABC Corporations each have a single class of stock
outstanding. The stock is owned as follows:
Stock Ownership
Percentages
Sharehold
er
Blue Corp.
ABC Corp
Red
80%
50%
Blue
40%
Red Corporations stock is widely held by over 1,000 shareholders, none of
whom owns directly or indirectly more than 1% of Reds stock.
d. Helm, Oak, Walnut and Zinnia Corporations each have a single class of stock
outstanding. The stock is owned as follows:
Stock Ownership Percentages
Shareholde
r
Helm
Corp.
Oak Corp
James
100%
90%
Helm
Walnut
Walnut Corp
Zinnia
Corp
80%
30%
60%
Problem 5
Eric and Denise are partners in ED Partnership. Eric owns a 60% capital, profits
and loss interest. Denise owns the remaining interest. Both materially participate
in the partnership activities. At the beginning of the current year, EDs only
liabilities are $50,000 in accounts payable, which remain outstanding at yearend. In August, ED borrowed $120,000 on a nonrecourse basis from Delta Bank.
The loan is secured by property with a $230,000 FMV. These are EDs only
liabilities at year-end. Basis for the partnership interest at the beginning of the
year is $40,000 for Denise and $60,000 for Eric before considering the impact of
liabilities and operations. ED has a $200,000 ordinary loss during the current
year. How much loss can Eric and Denise recognize?
Problem 6
Linda pays $100,000 cash for Jerrys ¼ interest in the JILL Partnership. The
partnership has a Sec. 754 election effect. Just before the sale of Jerrys interest,
JILLs balance sheet appears as follows:
Partnerships
Basis
FMV
Assets:
Cash
$75,000
$75,000
Land
$225,000
$325,000
$300,000
$400,000
Jerry
$75,000
$100,000
Instrument Corp
$75,000
$100,000
Logo Corp
$75,000
$100,000
Lighthouse Corp
$75,000
$100,000
$300,000
$400,000
Total
Partners' capital
Total
a. What is Lindas total optional basis adjustment?
b. If JILL Partnership sells the land for its $325,000 FMV immediately after
Linda purchases her interest, how much gain or loss will the partnership
recognize?
c. How much gain will Linda report as a result of the sale?
Problem 7
Monte and Allie each own 50% of Raider Corporation, an S corporation. Both
individuals actively participate in Raiders business. On January 1, Monte and
Allie have adjusted bases for their Raider stock of $80,000 and $90,000
respectively. During the current year, Raider reports the following results:
Ordinary loss
$175,000
Tax-exempt interest
income
20,000
Long-term capital loss
32,000
Raiders balance sheet at year-end shows the following liabilities: accounts
payable, $90,000; mortgage payable, $30,000; and note payable to Allie,
$10,000.
a. What income and deductions will Monte and Allie report from Raiders
current year activities?
b. What is Montes stock basis on December 31?
c. What are Allies stock basis and debt basis on December 31?
d. What loss carryovers are available for Monte and Allie?
e. Explain how the use of the losses in Part a would change if instead Raider
were a partnership and Monte and Allie were partners who shared profits,
losses and liabilities equally.
Problem 8
Tom Hughes died in 2009 with a gross estate of $3.9 million and debt of $30,000.
He made post-1976 taxable gifts of $100,000, valued at $80,000 when he died.
His estate paid state death taxes of $110,200. What is his estate tax base?
Complete the problems as presented in this document. You may create a new
document and/or spreadsheet as needed. Any memo should be no more than 3
pages in length. Please state any assumptions used if problems are not clear.
Problem 1
Your client, a physician, recently purchased a yacht on which he flies a pennant
with a medical emblem on it. He recently informed you that he purchased the
yacht and flies the pennant to advertise his occupation and thus attract new
patients. He has asked you if he may deduct as ordinary and necessary business
expenses the costs of insuring and maintaining the yacht. In search of an
answer, consult RIAs CHECKPOINT TAX available on-line through the SNHU
Shapiro Library. Explain the steps taken to find your answer.
Problem 2
Stacey Small has a small salon that she has run for a few years as a sole
proprietorship. The proprietorship uses the cash method of accounting and the
calendar year as its tax year. Stacey needs additional capital for expansion and
knows two people who might be interested in investing. One would like to
practice hairdressing in the salon. The other would only invest.
Stacey wants to know the tax consequences of incorporating the business. Her
business assets include a building, equipment, accounts receivable and cash.
Liabilities include a mortgage on the building and a few accounts payable, which
are deductible when paid.
Write a memo to Stacey explaining the tax consequences of the incorporation.
As part of your memo examine the possibility of having the corporation issue
common and preferred stock and debt for the shareholders property and money.
Problem 3
Five years ago, Lacey, Kaylee, and Doug organized a software corporation, DLK,
which develops and sells Online Meetings software for businesses. DLK is a C
corporation. Each individual contributed $10,000 to the company in exchange for
1,000 shares of DLK stock (for a total of 3,000 shares). The corporation also
borrowed $250,000 from ACME Venture Capital to finance operating costs and
capital expenditures.
Because of intense competition, DLK struggled for the first few years of operation
and the corporation sustained chronic losses. This year, Lacey, DLKs president,
decided to seek additional funds to finance DLKs working capital.
CME declined to extend additional funds because of the money already invested
in DLK. High Tech Venture Capital Inc. proposed to lend DLK $100,000, but at a
10% premium over the prime rate. (Other software manufacturers in the same
market can borrow at a 3% premium.) First Round Capital proposed to invest
$50,000 of equity capital into DLK, but on the condition that the investment firm
be granted the right to elect five members to DLKs board of directors.
Discouraged by the high cost of external borrowing, Lacey decides to approach
Kaylee and Doug.
Lacey suggests to Kaylee and Doug that each of the three original investors
contribute an additional $25,000 to DLK in exchange for five 20-year debentures.
The debentures will be unsecured and subordinate to ACMEs debt. Annual
interest on the debentures will accrue at a floating 5% premium over the prime
rate. The right to receive interest payments will be cumulative; that is each
debenture holder is entitled to past and current interest payments before DLKs
board can declare a common stock dividend. The debentures would be both
nontransferable and noncallable. Lacey, Kaylee and Doug have asked you, their
tax accountant, to advise them on the tax implications of the proposed financing
agreement. After researching the issue, issue your advice in a tax research
memo. At a minimum, you should consult the following authorities:
IRC. Sec 385
Rudolph A. Hardman, 60 AFTR 2d 87-5651, 82-7 USTC ¶9523 (9th Cir.,
1987)
Tomlinson v. The 1661 Corporation, 19 AFTR 2d 1413, 67-1 USTC ¶9438
(5th Cir., 1967)
Problem 4
Which of the following groups constitute a controlled group? (Any stock not listed
below is held by unrelated individuals each owning less than 1% of the
outstanding stock.) For brother-sister corporations, which definition applies?
a. Mark owns 90% of the single classes of stock of Hot and Ice Corporations.
b. Johnson and Carey Corporations each have only a single class of stock
outstanding. The two controlling individual shareholders own the stock as
follows:
Stock Ownership
Percentages
Sharehold
er
Johnson
Corp.
Carey
Corp
David
60%
80%
Kelly
30%
0%
c. Red, Blue and ABC Corporations each have a single class of stock
outstanding. The stock is owned as follows:
Stock Ownership
Percentages
Sharehold
er
Blue Corp.
ABC Corp
Red
80%
50%
Blue
40%
Red Corporations stock is widely held by over 1,000 shareholders, none of
whom owns directly or indirectly more than 1% of Reds stock.
d. Helm, Oak, Walnut and Zinnia Corporations each have a single class of stock
outstanding. The stock is owned as follows:
Stock Ownership Percentages
Shareholde
r
Helm
Corp.
Oak Corp
James
100%
90%
Helm
Walnut
Walnut Corp
Zinnia
Corp
80%
30%
60%
Problem 5
Eric and Denise are partners in ED Partnership. Eric owns a 60% capital, profits
and loss interest. Denise owns the remaining interest. Both materially participate
in the partnership activities. At the beginning of the current year, EDs only
liabilities are $50,000 in accounts payable, which remain outstanding at yearend. In August, ED borrowed $120,000 on a nonrecourse basis from Delta Bank.
The loan is secured by property with a $230,000 FMV. These are EDs only
liabilities at year-end. Basis for the partnership interest at the beginning of the
year is $40,000 for Denise and $60,000 for Eric before considering the impact of
liabilities and operations. ED has a $200,000 ordinary loss during the current
year. How much loss can Eric and Denise recognize?
Problem 6
Linda pays $100,000 cash for Jerrys ¼ interest in the JILL Partnership. The
partnership has a Sec. 754 election effect. Just before the sale of Jerrys interest,
JILLs balance sheet appears as follows:
Partnerships
Basis
FMV
Assets:
Cash
$75,000
$75,000
Land
$225,000
$325,000
$300,000
$400,000
Jerry
$75,000
$100,000
Instrument Corp
$75,000
$100,000
Logo Corp
$75,000
$100,000
Lighthouse Corp
$75,000
$100,000
$300,000
$400,000
Total
Partners' capital
Total
a. What is Lindas total optional basis adjustment?
b. If JILL Partnership sells the land for its $325,000 FMV immediately after
Linda purchases her interest, how much gain or loss will the partnership
recognize?
c. How much gain will Linda report as a result of the sale?
Problem 7
Monte and Allie each own 50% of Raider Corporation, an S corporation. Both
individuals actively participate in Raiders business. On January 1, Monte and
Allie have adjusted bases for their Raider stock of $80,000 and $90,000
respectively. During the current year, Raider reports the following results:
Ordinary loss
$175,000
Tax-exempt interest
income
20,000
Long-term capital loss
32,000
Raiders balance sheet at year-end shows the following liabilities: accounts
payable, $90,000; mortgage payable, $30,000; and note payable to Allie,
$10,000.
a. What income and deductions will Monte and Allie report from Raiders
current year activities?
b. What is Montes stock basis on December 31?
c. What are Allies stock basis and debt basis on December 31?
d. What loss carryovers are available for Monte and Allie?
e. Explain how the use of the losses in Part a would change if instead Raider
were a partnership and Monte and Allie were partners who shared profits,
losses and liabilities equally.
Problem 8
Tom Hughes died in 2009 with a gross estate of $3.9 million and debt of $30,000.
He made post-1976 taxable gifts of $100,000, valued at $80,000 when he died.
His estate paid state death taxes of $110,200. What is his estate tax base?
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Solution: Tax 655 Federal Income Tax of Corporations and Partnerships Problems