The Pelican Partnership was formed on August 1 of the current year and admitted Morlan and Merriman as equal partners on that date. The partners both contributed $300,000 of cash to establish a children’s clothing store in the local mall. The partners spent August and September buying inventory, equipment, sup- plies, and advertising for their “Grand Opening” on October 1. The partnership will use the accrual method of accounting. The following are some of the costs incurred during Pelican’s first year of operations. Legal fees to form partnership ……………………………………………………$ 8,000 Advertising for “Grand Opening” …………………………………………………. 18,000 Advertising after opening ……………………………………………………………. 30,000 Consulting fees for establishing accounting system …………………………20,000 Rent, at $2,000 per month ……………………………………………………………. 10,000 Utilities, at $1,000 per month…………………………………………………………. 5,000 Salaries to salesclerks (beginning in October) …………………………………. 50,000 Payments to Morlan and Merriman for services ($6,000 per month each for three months) ……………………………36,000 Tax return preparation expense ………………………………………………………. 12,000 In addition, on October 1, Pelican purchased all of the assets of Granny Newcombs, Inc. Of the total purchase price for these assets, $200,000 was allocated to the Granny Newcombs trade name and logo. Determine how each of the listed costs is treated by Pelican, and identify the period over which the costs can be deducted, if any
> Green Corporation hires six individuals on January 4, 2015, all of whom qualify for the work opportunity credit. Three of these individuals receive wages of $8,500 during 2015, and each individual works more than 400 hours during the year. The other thre
> The tax credit for rehabilitation expenditures is available to help offset the costs related to substantially rehabilitating certain buildings. The credit is calculated on the rehabilitation expenditures incurred and not on the acquisition cost of the bu
> In the current year, Paul Chaing (4522 Fargo Street, Geneva, IL 60134) acquires a qualifying historic structure for $350,000 (excluding the cost of the land) and plans to substantially rehabilitate the structure. He is planning to spend either $320,000 o
> In January 2014, Iris Corporation purchased and placed in service a 1933 building that houses retail businesses. The cost was $300,000, of which $25,000 applied to the land. In modernizing the facility, Iris Corporation incurred $312,000 of renovation co
> Oak Corporation holds the following general business credit carryovers. If the general business credit generated by activities during 2015 equals $36,000 and the total credit allowed during the current year is $60,000 (based on tax liability), what amou
> Charles has a tentative general business credit of $42,000 for the current year. His net regular tax liability before the general business credit is $107,000, and his tentative minimum tax is $88,000. Compute Charles’s allowable general business credit f
> Jane and Robert Brown are married and have eight children, all of whom are eligible to be claimed as the couple’s dependents. Robert earns $94,000 working as an accountant, and Jane earns $35,000 as a teaching aide. Given their large family, they live in
> Janice is the sole owner of Catbird Company. In the current year, Catbird had operating income of $100,000, a long-term capital gain of $15,000, and a charitable contribution of $5,000. Janice withdrew $70,000 of profit from Catbird. How should Janice re
> Blue is the owner of all of the shares of Blue Bell, an S corporation. Blue is considering receiving a salary of $110,000 from the business. She will pay the 7.65% FICA taxes on the salary, and the S corporation will pay the same amount of FICA tax. If B
> Samuel Reese sold 1,000 shares of his stock in Maroon, Inc., an S corporation. He sold the stock for $15,700 after he had owned it for six years. Samuel had paid $141,250 for the stock, which was issued under § 1244. Samuel is married and separately owns
> Orange, Inc., a calendar year corporation in Clemson, South Carolina, elects S corporation status for 2015. The company generated a $74,000 NOL in 2014 and another NOL of $43,000 in 2015. Orange stock always is owned by the same four shareholders, each o
> Maple, Inc., is an S corporation with a single shareholder, Bob Maple. Bob believes that his stock basis in the entity is $50,000, but he has lost some of the records to substantiate this amount. Maple reports an ordinary loss for the year of $80,000. Wh
> If the beginning balance in Swan, Inc.’s OAA is $6,700 and the following transactions occur, what is Swan’s ending OAA balance? Depreciation recapture income ………………………………………. $ 21,600 Payroll tax penalty ……………………………………………………………. (4,200) Tax-exempt inter
> Polly has been the sole shareholder of a calendar year S corporation since its inception. Polly’s stock basis is $15,500, and she receives a distribution of $19,000. Corporate-level accounts are as follows. How is Polly taxed on the dis
> Tiger, Inc., a calendar year S corporation, is owned equally by four share- holders: Ann, Becky, Chris, and David. Tiger owns investment land that was purchased for $160,000 four years ago. On September 14, when the land is worth $240,000, it is distribu
> On January 1, Bobby and Alicia own equally all of the stock of an electing S corporation called Prairie Dirt Delight. The company has a $60,000 loss for the year (not a leap year). On the 219th day of the year, Bobby sells his half of the stock to his so
> For each of the following independent statements, indicate whether the trans- action will increase (þ), decrease (), or have no effect (NE) on the basis of a shareholder’s stock in an S corporation. a. Expenses related to tax-exempt income. b. Short-te
> Joey lives in North Carolina, a common law state. He is a shareholder in an S corporation. If he marries a nonresident alien, will the S election terminate? Would your answer change if he lived in Louisiana? Explain.
> In January 2015, Pelican, Inc., established an allowance for uncollectible accounts (bad debt reserve) of $70,000 on its books and increased the allowance by $120,000 during the year. As a result of a client’s bankruptcy, Pelican, Inc., decreased the all
> Isaac and 121 of his close friends want to form an S corporation. Isaac rea- sons that if he and his friends form a partnership, the partnership then can establish an S corporation and act as a single shareholder, thereby avoiding the 100 shareholder rul
> Which of the following can be a shareholder of an S corporation? a. Resident alien. b. Partnership. c. IRA. d. C corporation.
> State A enjoys a prosperous economy, with high real estate values and compensation levels. State B’s economy has seen better days—property values are depressed, and unemployment is higher than in other states. Most consumer goods are priced at about 10%
> Continue to consider the case of the taxpayer in Problem 42. Is it acceptable to you if the taxpayer purposely shifts its sales force among the states to reduce its tax liabilities? Data from Problem 42: Considering only the aggregate state income tax
> Evaluate the following statement: Foreign persons never are subject to U.S. taxation on U.S.-source investment income so long as they are not engaged in a U.S. trade or business.
> Give a simple answer to Andre’s question: “If I move to the United States, how will the Federal government tax my widget sales and capital gains?” Andre will be living in New York City, where state and local taxes are very high. Ignore the effects of tax
> HiramCo, a U.S. entity, operates a manufacturing business in both Mexico and Costa Rica, and it holds its investment portfolio in Sweden. How many foreign tax credit computations must HiramCo make? Be specific, and use the term basket in your answer.
> Is a foreign corporation owned equally by 100 unrelated U.S. citizens considered to be a controlled foreign corporation (CFC)? Explain.
> USCo owns 65% of the voting stock of LandCo, a Country X corporation. Terra, an unrelated Country Y corporation, owns the other 35% of LandCo. LandCo owns 100% of the voting stock of OceanCo, a Country Z corporation. Assuming that USCo is a U.S. sharehol
> Food, Inc., a domestic corporation, owns 70% of the stock of Drink, Inc., a foreign corporation. For the current year, Food receives a dividend of $20,000 from Drink. Drink’s E & P (after taxes) and foreign taxes are $6 million and $800,000, respectively
> Dorcas incurs the following research expenditures. In-house wages………………………………. $60,000 In-house supplies ………………………………. 5,000 Paid to ABC, Inc., for research……………. 80,000 a. Determine the amount of qualified research expenditures. b. Assuming that the b
> Fleming, Inc., a domestic corporation, operates in both Canada and the United States. This year, the business generated taxable income of $400,000 from foreign sources and $300,000 from U.S. sources. All of Fleming’s foreign-source income is in the gener
> USCo, a domestic corporation, reports worldwide taxable income of $1.5 mil- lion, including a $400,000 dividend from ForCo, a wholly owned foreign corporation. ForCo’s undistributed E & P totals $16 million, and it has paid $10 million of foreign income
> ABC, Inc., a domestic corporation, reports $50 million of taxable income, including $15 million of general limitation foreign-source taxable income, on which ABC paid $5 million in foreign income taxes. The U.S. tax rate is 35%. What is ABC’s foreign tax
> Klein, a domestic corporation, receives a $10,000 dividend from ForCo, a wholly owned foreign corporation. The deemed-paid (indirect) foreign tax credit associated with this dividend is $3,000. What is the total gross income included in Klein’s tax retur
> QuinnCo could not claim all of the income taxes it paid to Japan as a foreign tax credit (FTC) this year. What computational limit probably kept QuinnCo from taking its full FTC? Explain.
> USCo incurred $100,000 in interest expense for the current year. The tax book value of USCo’s assets generating foreign-source income is $5 million. The tax book value of USCo’s assets generating U.S.-source income is $45 million. How much of the interes
> Willa, a U.S. corporation, owns the rights to a patent related to a medical de- vice. Willa licenses the rights to use the patent to IrishCo, which uses the patent in its manufacturing facility located in Ireland. What is the source of the $1 million roy
> Chock, a U.S. corporation, purchases inventory for resale from distributors within the United States and resells this inventory at a $1 million profit to customers outside the United States. Title to the goods passes outside the United States. What is th
> BlueCo, a domestic corporation, incorporates GreenCo, a new wholly owned entity in Germany. Under both German and U.S. legal principles, this entity is a corporation. BlueCo faces a 35% U.S. tax rate. GreenCo earns $1,500,000 in net profits from its Ger
> Janda and Kelsey contributed $1 million each to the JKL LLC in exchange for 45% capital and profits interests in the entity. Lilli will contribute no cash, but has agreed to manage the LLC’s business operations in exchange for an $80,000 annual salary an
> During 2015, Lincoln Company hires seven individuals who are certified to be members of a qualifying targeted group. Each employee works in excess of 600 hours and is paid wages of $7,500 during the year. Determine the amount of Lincoln’s work opportunit
> The Sparrow Partnership plans to distribute $200,000 cash to its partners at the end of the year. Marjorie is a 40% partner and would receive $80,000. Her basis in the partnership is only $10,000, however, so she would recognize a $70,000 gain if she rec
> Continue with the facts presented in Problem 30, except that Suz-Anna was formed as an LLC instead of a general partnership. a. How would Suz-Anna’s ending liabilities be treated? b. How would Suzy’s basis and amount at risk be different? Explain. Data
> Suzy contributed assets valued at $360,000 (basis of $200,000) in exchange for her 40% interest in Suz- Anna GP (a general partnership). Anna contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining interest. A
> At the beginning of the tax year, Melodie’s basis in the MIP LLC was $60,000, including Melodie’s $40,000 share of the LLC’s liabilities. At the end of the year, MIP distributed to Melodie cash of $10,000 and inventory (basis of $6,000, fair market value
> In each of the following independent cases in which the partnership owns no hot assets, indicate the following. All of the partners received proportionate distributions. • Whether the partner recognizes gain or loss. • Whether the partnership recognize
> Mona and Denise, mother and daughter, operate a local restaurant as an LLC. The MD LLC earned a profit of $200,000 in the current year. Denise’s equal LLC interest was acquired by gift from Mona. Assume that capital is a material income-producing factor
> Burgundy, Inc., and Violet Gomez are equal partners in the calendar year BV LLC. Burgundy uses a fiscal year ending April 30, and Violet uses a calendar year. Burgundy receives an annual guaranteed payment of $100,000 for use of capital contributed by Bu
> Four GRRLs Partnership is owned by four unrelated friends. Lacy holds a 40% interest; each of the others owns 20%. Lacy sells investment property to the partnership for its fair market value of $200,000. Her tax basis in the property was $250,000. a. Ho
> The BCD Partnership plans to distribute cash of $20,000 to partner Barb at the end of the tax year. The partnership reported a loss for the year, and Barb’s share of the loss is $10,000. Barb holds a basis of $15,000 in the partnership interest, includin
> Emily spent $135,000 to rehabilitate a building (adjusted basis of $90,000) that originally had been placed in service in 1935. a. What is Emily’s rehabilitation expenditures tax credit? b. What would be your answer if the building was a historic structu
> Assume the same facts as in Problem 21, except that the property contributed by Lee has a fair market value of $27,500 and is subject to a nonrecourse mortgage of $20,000. a. What is Lee’s basis in his partnership interest? b. How much gain must Lee re
> Lee, Brad, and Rick form the LBR Partnership on January 1 of the current year. In return for a 25% interest, Lee transfers property (basis of $15,000, fair market value of $17,500) subject to a nonrecourse liability of $10,000. The liability is assumed b
> The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2015, Jessica contributed land valued at $600,000 to the partnership in exchange for a 50% interest. She had purchased the land in 2007 for $420,000
> Cerulean, Inc., Coral, Inc., and Crimson, Inc., form the Three Cs Partnership on January 1 of the current year. Cerulean is a 50% partner, and Crimson and Coral are 25% partners. For reporting purposes, Crimson uses a fiscal year with an October 31 year-
> Continue with the same facts of Problem 16. Consider Amy’s tax-basis capital account. a. What is Amy’s capital account at the beginning of the year? b. What is Amy’s capital account at the end of the year? c. How do the capital account balances differ fr
> Assume the same facts as in Problem 16. What income, gains, losses, and deductions does Amy report on her income tax return? Based on the information provided, what other calculations is she required to make?
> Amy and Mitchell are equal partners in the accrual basis AM Partnership. At the beginning of the current tax year, Amy’s capital account has a balance of $300,000, and the partnership has recourse debts of $200,000 payable to unrelated parties. All partn
> Phoebe and Parker are equal members of Phoenix Investors LLC. They are real estate investors who formed the entity several years ago with equal cash contributions. Phoenix then purchased a parcel of land. On January 1 of the current year, to acquire a on
> On July 1 of the current year, the R&R Partnership was formed to operate a bed-and-breakfast inn. The partnership paid $3,000 in legal fees for drafting the partnership agreement and $5,000 for accounting fees related to organizing the entity. It also pa
> Continue with the facts presented in Problem 12. At the end of the first year, SD distributes $100,000 cash to Sam. No distribution is made to Drew. a. How does Sam treat the payment? b. How much income or gain would Sam recognize as a result of the paym
> Nicholas owns business equipment with a $155,000 adjusted basis; he paid $200,000 for the equipment, and it is currently worth $173,000. Nicholas dies suddenly, and his son Alvin inherits the property. What is Alvin’s basis for the property? What happens
> Sam and Drew are equal members of the SD LLC, formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2007. Sam’s uncle purchased the land in 1982 for $30,000. The land was worth $100,000 when Sam’s uncle died. The
> Liz and John formed the equal LJ Partnership on January 1 of the current year. Liz contributed $80,000 of cash and land with a fair market value of $90,000 and an adjusted basis of $75,000. John contributed equipment with a fair market value of $170,000
> Kenisha and Shawna form the equal KS LLC with a cash contribution of $360,000 from Kenisha and a property contribution (adjusted basis of $380,000, fair market value of $360,000) from Shawna. a. How much gain or loss, if any, does Shawna realize on the
> Emma and Laine form the equal EL Partnership. Emma contributes cash of $100,000. Laine contributes property with an adjusted basis of $40,000 and a fair market value of $100,000. a. How much gain, if any, must Emma recognize on the transfer? Must Laine r
> Dove Corporation, a calendar year C corporation, had the following information for 2015: Net income per books (after-tax)………………………………………………… $386,250 Taxable income …………………………………………………………………………….120,000 Federal income tax per books ………………………………………………………
> Assume in Problem 28 that Jane receives the 50 shares of Osprey Corporation stock in consideration for the appreciated property and for the provision of accounting services in organizing the corporation. The value of Jane’s services is $35,000. a. What
> Can a sole proprietor form as a single-member limited liability company (LLC)? If so, how would such an LLC be taxed?
> During the current year, Gnatcatcher, Inc. (E & P of $1 million), distributed $200,000 each to Brandi and Yuen in redemption of some of their Gnat- catcher stock. The two shareholders are not related; they acquired their shares five years ago. Brandi and
> Fargo Corporation holds $5 million in accumulated E & P. It distributes to Leilei, one of its shareholders, land worth $310,000; basis of the land to Fargo is $260,000. Determine the Federal income tax consequences of the distribution to Fargo.
> Global Corporation distributed property with an $850,000 fair market value and a $415,000 adjusted basis to Kang, one of its shareholders. The property was subject to a $230,000 mortgage, which Kang assumed. Global’s accumulated E & P totals $3 million.
> Carla was the owner of vacant land that she was holding for investment. She paid $2 million for the land in 2013. Raymond was an investor in vacant land. He thought Carla’s land might be the site of an exit ramp from a new freeway. Raymond gave Carla $83
> On January 1 of the current year, Rhondell Corporation holds accumulated E & P of $13,000. Current E & P for the year is $84,000, earned evenly through- out the year. Elizabeth and Jonathan are the sole equal shareholders of Rhondell from January
> At the beginning of the year, Myrna Corporation (a calendar year taxpayer) holds E & P of $32,000. The corporation generates no additional E & P during the year. On December 31, the corporation distributes $50,000 to its sole share- holder, Abby, whose s
> Castle and Dorabella formed an S corporation; Castle owns 75% of the outstanding shares, and Dorabella ow ns the rest. When the entity’s AAA balance is $1 million, it distributes an asset to each shareholder; the basis of each asset to the corporation is
> Mira and Lemma are equal owners of a business entity. Each contributed $25,000 cash to the business. Then the entity acquired a $100,000 loan from a bank. This year, operating profits totaled $30,000. Determine Lemma’s interest basis at the end of the ta
> Roscoe contributes a personal-use asset, adjusted basis $15,000 and fair market value $28,000, to a new business in which he is an owner. Determine Roscoe’s recognized gain on the transfer, and the basis of the asset to the business, if the new operation
> Julio is in the 33% tax bracket. He acquired 2,000 shares of stock in Gray Corporation seven years ago at a cost of $50 per share. In the current year, Julio received a payment of $150,000 from Gray Corporation in exchange for 1,000 of his shares in Gray
> When Bruno’s basis in his interest in the MNO LLC is $150,000, he receives cash of $55,000, a proportionate share of inventory, and land in a distribution that liquidates MNO and his interest in the LLC. The inventory has a basis to the entity of $45,000
> Franco owns a 60% interest in the Dulera LLC. On December 31 of the current tax year, his basis in the LLC interest is $128,000. The fair market value of the interest is $140,000. Dulera then distributes to Franco $30,000 cash and equipment with an adjus
> Enerico contributes $100,000 cash in exchange for a 40% interest in the cal- endar year ABC LLC. This year, ABC generates $80,000 of ordinary taxable income. Enerico withdraws $10,000 cash from the partnership at the end of the tax year. a. Compute Ener
> Ten years ago, Vogel Inc., an S corporation, purchased a plot of investment land for $45,000. This year, Vogel distributed the land, now worth $120,000, to Jamari, its majority shareholder. a. Determine the effects of the distribution on the gross incom
> Larry is the sole proprietor of a trampoline shop. During 2015, the following transactions occurred. • Unimproved land adjacent to the store was condemned by the city on February 1. The condemnation proceeds were $15,000. The land, acquired in 1986, had
> Holbrook, a calendar year S corporation, distributes $15,000 cash to its only shareholder, Cody, on December 31. Cody’s basis in his stock is $20,000, Holbrook’s AAA balance is $8,000, and Holbrook holds $2,500 AEP bef
> Dion, a shareholder, owned 20% of MeadowBrook’s stock for 292 days and 25% for the remaining 73 days in the year. Using the per-day allocation method, compute Dion’s share of the following S corporation items. Sch
> Kaiwan, Inc., a calendar year S corporation, is partly owned by Sharrod, whose beginning stock basis is $32,000. During the year, Sharrod’s share of a Kaiwan long-term capital gain (LTCG) is $5,000, and his share of an ordinary loss is $18,000. Sharrod t
> Dove Corporation (E & P of $800,000) has 1,000 shares of stock outstanding. The shares are owned as follows: Julia, 600 shares; Maxine (Julia’s sister), 300 shares; and Janine (Julia’s daughter), 100 shares. Dove owns land (basis $300,000, fair market va
> Compare the tax treatment of liquidating and redemption distributions in terms of the following. a. Recognition of gain or loss by the shareholder. b. Basis of property received by the shareholder.
> For the last 11 years, Lime Corporation has owned and operated four different trades or businesses. Lime also owns stock in several corporations that it purchased for investment purposes. The stock of Lime is held equally by Sultan, an individual, and by
> Broadbill Corporation (E & P $650,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Tammy, 300 shares; Yvette, 400 shares; and Jeremy, 300 shares. Each of the shareholders paid $50 per share for the Bro
> Shonda owns 1,000 of the 1,500 shares outstanding in Rook Corporation (E & P of $1 million). Shonda paid $50 per share for the stock seven years ago. The remaining stock in Rook is owned by unrelated individuals. What are the tax consequences to Shonda i
> Silver Corporation has 2,000 shares of common stock outstanding. Howard owns 600 shares, Howard’s grandfather owns 300 shares, Howard’s mother owns 300 shares, and Howard’s son owns 100 shares. In addition, Maroon Corporation owns 500 shares. Howard owns
> How would your answer to parts (a) and (b) of Problem 36 differ if Julio were a corporate shareholder (in the 34% tax bracket) rather than an individual shareholder and the stock ownership in Gray Corporation represented a 25% interest?
> On December 1, 2013, Lavender Manufacturing Company (a corporation) purchased another company’s assets, including a patent. The patent was used in Lavender’s manufacturing operations; $49,500 was allocated to the patent, and it was amortized at the rate
> Rosalie owns 50% of the outstanding stock of Salmon Corporation. In a qualifying stock redemption, Salmon distributes $80,000 to Rosalie in exchange for one-half of her shares, which have a basis of $100,000. Compute Rosalie’s recognized loss, if any, on
> The balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement in the previous problem, supply the missing information using the percentage of sales approach. Assume that accounts payable vary with sales, wh
> Consider the following income statement for the Heir Jordan Corporation: A 20 percent growth rate in sales is projected. Prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant. What is the projecte
> The most recent financial statements for Throwing Copper Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt–equity ratio. What is the m
> For the company in the previous problem, what is the sustainable growth rate?
