TAX 655 Final Exam

Tax Final

TAX 655 Final Exam

 

Notes

 

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 RIA’s CHECKPOINT TAX available
on-line through the SNHU Shapiro Library. Explain the steps taken to find your
answer.

 

Ch
1- research


Ch
2 – Tax considerations and choosing a business entity


Ch
3 – Taxation of “C” corporations (Capital structure)


Ch11
– S corporations


Ch
9 - Taxation of Partnerships and partners


Ch
8 – Special Partnership issues


Ch
12 – Federal Gift Tax


Ch
13 – Federal Estate Tax


 

 

 

 

 

Problem


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


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




Shareholder


 


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




Shareholder


 


Blue Corp.


 


ABC Corp




Red


 


80%


 


50%




Blue


 


 


 


40%






 

Red Corporation’s stock
is widely held by over 1,000 shareholders, none of whom owns directly or
indirectly more than 1% of Red’s 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




Shareholder


 


Helm Corp.


 


Oak Corp


 


Walnut Corp


 


Zinnia Corp




James


 


100%


 


90%


 


 


 


 




Helm


 


 


 


 


 


80%


 


30%




Walnut


 


 


 


 


 


 


 


60%






 

 

 

 

 

 

Problem
4


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, ED’s only
liabilities are $50,000 in accounts payable, which remain outstanding at
year-end. 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 ED’s 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?

 

 

Ordinary loss = 200000 Interest to partners = 40000 &
60000 = 100000 Hence actual loss = 300000 The partners should recognize this.
The liabilities have nothing to do here

 

Problem
5


Linda pays $100,000 cash
for Jerry’s ¼ interest in the JILL Partnership. The partnership has a Sec. 754
election effect. Just before the sale of Jerry’s interest, JILL’s balance sheet
appears as follows:




 


 


Partnership’s
Basis


 


FMV




Assets:


 


 


 


 




Cash


 


$75,000


 


$75,000




Land


 


$225,000


 


$325,000




Total


 


$300,000


 


$400,000




Partners' capital


 


 


 


 




Jerry


 


$75,000


 


$100,000




Instrument Corp


 


$75,000


 


$100,000




Logo Corp


 


$75,000


 


$100,000




Lighthouse Corp


 


$75,000


 


$100,000




Total


 


$300,000


 


$400,000




 

a.     
What is Linda’s 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
6


Monte and Allie each own
50% of Raider Corporation, an S corporation. Both individuals actively
participate in Raider’s 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




Raider’s 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
Raider’s current year activities?

b.     
What is Monte’s stock basis on December 31?

c.      
What are Allie’s 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
7


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?

 

Problem 7 solution










Gross Estate


 $  3,900,000




Less: Debt


 $     (30,000)




Less: State estate taxes paid


 $   (110,200)




Taxable Estate


 $  3,759,800




Post 1976 Gifts


 $     100,000




Estate tax base


 $  3,859,800








 

 

 
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