Question: Fillon operates manufacturing facilities in states

> Turtle, a C corporation, reports taxable income of $300,000 before paying salaries to the three equal shareholder-employees, Britney, Shania, and Alan. Turtle follows a policy of distributing all after-tax earnings to the shareholders. a. Determine the

> A business entity has four equal owners. Its taxable income before the cost of certain fringe benefits paid to owners and other employees is $400,000. The amounts paid for these fringe benefits are reported as follows. a. Calculate the Federal taxable i

> Two sisters and their brother, all unmarried, own and operate a dairy farm. They live on the farm and take their meals there for the “convenience of the employer.” The fair market value of their lodging is $45,000, and the fair market value of their meal

> Heron Corporation has been in operation for 10 years. Since Heron’s crea- tion, all of its stock has been owned by Andy, who initially invested $200,000 in the corporation. Heron has been successful far beyond Andy’s expectations, and the current fair ma

> Falcon Corporation, a calendar year taxpayer, is a deepwater offshore drilling company that is planning to sell drilling equipment that it no longer needs. The drilling equipment has an adjusted basis of $400,000 ( $700,000  $300,000 depreciation Þ and

> Owl is a closely held corporation owned by eight shareholders (each has 12.5% of the stock). Selected financial information provided by Owl follows. Taxable income ……………………………………………………………$6,250,000 Positive AMT adjustments (excluding ACE adjustment) ………

> Mabel and Alan, who are in the 35% tax bracket, recently acquired a fast-food franchise. Both of them will work in the business and receive a salary of $175,000. They anticipate that the annual profits of the business, after deducting salaries, will be a

> Plum Corporation will begin operations on January 1. Earnings for the next five years are projected to be relatively stable at about $80,000 per year. The shareholders of Plum are in the 33% tax bracket. a. Plum will reinvest its after-tax earnings in t

> Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exch

> Duke and Jacquie Coleman, married filing jointly, will establish a manufacturing business. The couple anticipates that the business will be profitable immediately due to a patent that Jacquie holds; profits for the first year will be about $300,000 and w

> Gerald is an entrepreneur who likes to be actively involved in his business ventures. He is going to invest $500,000 in a business that he projects will produce a tax loss of approximately $125,000 per year in the short run. However, Gerald is confident

> Amy and Jeff Barnes will operate their florist shop as a partnership or as an S corporation. Their mailing address is 5700 Richmond Highway, Alexandria, VA 22301. After paying salaries of $100,000 to each of the owners, the shop’s annual earnings are pro

> Red, White, Blue, and Orange report taxable income as follows. a. Calculate the marginal tax rate and the effective tax rate for each of the C corporations. b. Explain why the marginal tax rate for a C corporation can exceed 35% but the effective tax rat

> Bryan operates his business as a C corporation. He is the only shareholder. The accumulated E & P is $800,000. Starting next year, Bryan will distribute $200,000 cash per year, plus all of the annual current-year earnings. Recognizing that the distributi

> Sea Green Enterprises reports the following assets and liabilities on its balance sheet. Sea Green has just lost a product liability suit with damages of $10 million being awarded to the plaintiff. Although Sea Green will appeal the judgment, legal coun

> Using the legend provided, indicate which form of business entity each of the following characteristics describes. Some of the characteristics may apply to more than one form of business entity. a. Basis for an ownership interest is increased by an inves

> Prepare a PowerPoint presentation (maximum of six slides) entitled “Planning Principles for Our Multistate Clients.” The slides will be used to lead a 20-minute discussion with colleagues in the corporate tax department. Keep the outline general, but ass

> Hernandez, which has been an S corporation since inception, is subject to tax in States Y and Z. On Schedule K of its Federal Form 1120S, Hernandez reported ordinary income of $500,000 from its business, taxable interest income of $10,000, capital loss o

> Repeat the computations of Problem 46, but now assume that State A is a sales-factor-only state and that State B uses the following weights: sales .70, payroll .15, and property .15. Data from Problem 46: PinkCo, Inc., operates in two states. It report

> Tom and Gail form Owl Corporation with the following consideration: The installment note has a face amount of $350,000 and was acquired last year from the sale of land held for investment purposes (adjusted basis of $240,000). As to these transactions, p

> Repeat the computations of Problem 46, but now assume that State B uses a double-weighted sales factor in its apportionment formula

> PinkCo, Inc., operates in two states. It reports the following results for the year. Compute the apportionment percentage for both states. Amounts are stated in millions of dollars. State A State B Totals Sales $25 $ 75 $100 Рayroll 20 30 50 Propert

> Continue with the facts of Problem 44. Using the format of Exhibit 16.3, compute state taxable income for HippCo, assuming also that the taxpayer recognized $225,000 of net rent income during the year from a warehouse building in Montana. Federal taxable

> Compute state taxable income for HippCo, Inc. Its Federal taxable income for the year is $1 million. Its operations are confined to Oregon and Montana. HippCo generates only business and interest income for the year. • Federal cost recovery deductions t

> Considering only the aggregate state income tax liability, how should a tax- payer who is a resident in State A selling widgets deploy its sales force? The states that entail the taxpayer’s entire customer base use the following flat income tax rates. S

> You are working with the top management of one of your clients in selecting the U.S. location for a new manufacturing operation. Craft a plan for the CEO to use in discussions with the economic development representatives of each of the top candidate sta

> Evaluate this statement: A state can tax only its resident individuals and the corporations and partnerships that are organized in-state.

> Warwick, Inc., a U.S. corporation, owns 100% of NewGrass, Ltd., a foreign corporation. NewGrass earns only general limitation income. During the cur- rent year, NewGrass paid Warwick a $10,000 dividend. The deemed-paid foreign tax credit associated with

> Write a memo for the tax research file on the difference between “inbound” and “outbound” activities in the context of U.S. taxation of international income.

> Lili, Inc., a domestic corporation, operates a branch in France. The earnings record of the branch is as follows. For 2013–2016, Lili, Inc., reports U.S.-source taxable income of $500,000 each year. What is the allowed FTC for 2016? As

> Assume that the value of each share of Kingfisher stock is $3,000. As to these transactions, provide the following information: a. Seth’s recognized gain or loss. Identify the nature of any such gain or loss. b. Seth’

> Night, Inc., a domestic corporation, earned $300,000 from foreign manufacturing activities, on which it paid $90,000 of foreign income taxes. Night’s foreign sales income is taxed at a 50% foreign tax rate. What amount of foreign sales income can Night e

> Skills, Inc., a U.S. corporation, reports current foreign-source income classified in two different FTC income baskets. It earns $50,000 in passive foreign- source income, and it suffers a net loss of $30,000 in the general limitation basket. What is the

> Hart Enterprises, a domestic corporation, owns 100% of OK, Ltd., an Irish corporation. OK’s gross income for the year is $10 million. Determine whether any of the following transactions produce Subpart F gross income for the current year. a. OK earned $

> Discuss the policy reasons for the existence of the Subpart F rules. Give two examples of Subpart F income.

> Orion, Inc., a U.S. corporation, reports foreign-source income and pays foreign taxes for the tax year as follows. Orion’s worldwide taxable income is $600,000, and U.S. taxes before the FTC are $210,000 (assume a 35% rate). What is Ori

> Harold, Inc., a domestic corporation, earned $500,000 from foreign manufacturing activities on which it paid $150,000 of foreign income taxes. Harold’s foreign sales income is taxed at a 45% foreign tax rate. Both sales and manufacturing income are assig

> Crank, Inc., a U.S. corporation, operates a branch sales office in Ghana. During the current year, Crank earned $200,000 in taxable income from U.S. sources and $50,000 in taxable income from sources in Ghana. Crank paid $5,000 in income taxes to Ghana.

> Drake, Inc., a U.S. corporation, operates a branch sales office in Turkey. During the current year, Drake earned $500,000 in taxable income from U.S. sources and $100,000 in taxable income from sources in Turkey. Drake paid $40,000 in income taxes to Tur

> USCo, a domestic corporation, reports worldwide taxable income of $500,000, including a $300,000 dividend from ForCo, a wholly owned foreign corporation. ForCo’s undistributed E & P totals $1 million, and it has paid $200,000 of foreign incom

> ABC, Inc., a domestic corporation, owns 100% of HighTax, a foreign corporation. HighTax has $50 million of undistributed E & P, all of which is attributable to general limitation income, and $30 million of foreign income taxes paid. HighTax distributes a

> Sarah incorporates her small business but does not transfer the machinery and equipment used by the business to the corporation. Instead, the machinery and equipment are leased to the corporation for an annual rent. What tax rea- sons might Sarah have fo

> Mary, a U.S. citizen, is the sole shareholder of CanCo, a Canadian corporation. During its first year of operations, CanCo earns $14 million of foreign-source taxable income, pays $6 million of Canadian income taxes, and distributes a $2 mil- lion divide

> FoldIt, a U.S. business, paid income taxes to Mexico relative to profitable sales of shipping boxes it made in that country. Can it claim a deduction for these taxes in computing U.S. taxable income? A tax credit? Both? Explain.

> Create, Inc., produces inventory in its foreign manufacturing plants for sale in the United States. Its foreign manufacturing assets have a tax book value of $5 million and a fair market value of $15 million. Its assets related to the sales activity have

> Describe the different approaches used by countries to tax the earnings of their citizens and residents generated outside the borders of the country.

> Evaluate this statement: It is unfair that the United States taxes its citizens and residents on their worldwide income.

> Miha Ohua is the CFO of a U.S. company that has operations in Europe and Asia. The company has several manufacturing subsidiaries in low-tax foreign countries where the tax rate averages 6%. These subsidiaries purchase raw materials used in the productio

> Beckett Corporation has nexus with states A and B. Apportionable income for the year totals $800,000. Beckett’s apportionment factors for the year use the following data. Compute Beckett’s B taxable income for the year

> Castle Corporation conducts business and has nexus in states A, B, and C. All of the states use a three-equal-factors apportionment formula, with the factors evenly weighted. Castle generates $555,000 apportionable income and $75,000 allocable income rel

> Chirp Corporation owns two subsidiaries. Song, located in State A, generated $500,000 taxable income this year. Bird, located in State B, generated a $100,000 loss for the period. a. Determine Song’s taxable income in States A and B, assuming that the s

> In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payments to its sole owner, Sasha. In addition, Azure has interest on municipal bonds of $25,000. Sasha has significant income from other s

> Enders, Inc., a domestic corporation, reports $290,000 total taxable income for the year, consisting of $208,800 in U.S.-source business profits and $81,200 of income from foreign investment securities. Overseas tax authorities with- held $24,000 in inco

> Cordero, Inc., is a calendar-year taxpayer and a CFC for the entire tax year. Vance Company, a U.S. corporation, owns 75% of Cordero’s one class of stock for the entire year. Cordero’s Subpart F income for the year is $450,000, and no distributions were

> Determine whether each of the following transactions is a preference (P) is an adjustment (A), or is not applicable (NA) for purposes of the corporate AMT. a. Depletion in excess of basis taken by Giant Oil Company. b. Accelerated depreciatio

> Buford sells an apartment building for $720,000. His adjusted basis is $500,000 for regular income tax purposes and $550,000 for AMT purposes. Calculate Buford’s: a. Gain for regular income tax purposes. b. Gain for AMT purposes. c. AMT adju

> Greiner, Inc., a calendar year S corporation, holds no AEP. During the year, Chad, an individual shareholder, receives a $30,000 cash distribution from Greiner. Prior to the distribution, Chad’s basis in his Greiner stock is $25,000. a. Determine Chad’s

> Calculate the AMT for the following cases in 2015. The individual taxpayer reports regular taxable income of $450,000 and no tax credits. Tentative Minimum Tax Filing Status Case 1 Case 2 Single Married, filing jointly $200,000 $100,000 200,000 100,0

> Included in Alice’s regular taxable income and in her AMT base is a $300,000 capital gain on the sale of stock she owned for three years. Alice is in the 35% tax bracket for regular income tax purposes. In calculating her regular income tax liability, sh

> Peach Corporation (a calendar year company) recorded the following trans- actions. Taxable income ……………………………………………………………………………………………. $5,000,000 Regular tax depreciation on realty in excess of ADS (placed in service in 1991) ………………………………………………………………………

> In each of the following independent situations, determine the tentative mini- mum tax. Assume that the company is not in small corporation status. AMTI (before the Exemption Amount) $150,000 Quincy Corporation Redland Corporation 160,000 Tanzen Cor

> Purple Corporation, a calendar year taxpayer, began operations in 2013. It reported the following amounts for its first four tax years. Calculate Purple’s positive and negative ACE adjustments for each year. Unadjusted AMTI ACE 201

> Ellie and Linda are equal owners in Otter Enterprises, a calendar year business. During the current year, Otter Enterprises has $320,000 of gross income and $210,000 of operating expenses. In addition, Otter has a long-term capital gain of $15,000 and ma

> Based on the following facts, calculate adjusted current earnings (ACE). Alternative minimum taxable income (AMTI before ACE adjustment) ……………. $5,120,000 Municipal bond interest ……………………………………………………………………………….…630,000 Expenses related to municipal bond

> Maize Corporation (a calendar year corporation) reports the following information for the years listed. Compute the ACE adjustment for each year. 2014 2015 2016 Adjusted current earnings Unadjusted AMTI $5,000,000 $5,000,000 $7,000,000 3,000,000 8,00

> Flicker, Inc., a closely held corporation, acquired a passive activity this year. Gross income from operations of the activity was $160,000. Operating expenses, not including depreciation, were $122,000. Regular income tax depreciation of $49,750 was com

> Pheasant, Inc., is going to be subject to the AMT in 2015. The corporation owns an investment building and is considering disposing of it and investing in other realty. Based on an appraisal of the building’s value, the realized gain would be $85,000. Ed

> Allie, who was an accounting major in college, is the controller of a medium- size construction corporation. She prepares the corporate tax return each year. Due to reporting a home construction contract using the completed contract method, the corporati

> Rust Company is a real estate construction business with average annual gross receipts of $3 million. Rust uses the completed contract method on a particular contract that requires 16 months to complete. The contract is for $500,000, with estimated costs

> In March 2015, Grackle, Inc., acquired used equipment for its business at a cost of $300,000. The equipment is five-year class property for regular income tax purposes and for AMT purposes. Grackle does not claim any available additional first-year depre

> Falcon, Inc., owns a silver mine that it purchased several years ago for $925,000. The adjusted basis at the beginning of the year is $400,000. For the year, Falcon deducts depletion of $700,000 (greater of cost depletion of $290,000 or perce

> Aqua, Inc., a calendar year corporation, has the following gross receipts and taxable income for 2012 through 2015: Aqua’s first year of operations was 2012. a. When is Aqua first exempt from the AMT as a small corporation? b. Is Aqu

> Blue Horizons, Inc., a U.S. corporation, is a manufacturing concern that sells most of its products in the United States. It also does some business in the European Union through various branches. During the current year, Blue Horizons has taxable income

> In the current year, Riflebird Company had operating income of $220,000, operating expenses of $175,000, and a long-term capital loss of $10,000. How do Riflebird Company and Roger, the sole owner of Riflebird, report this information on their respective

> Ahmed Zinna (16 Southside Drive, Charlotte, NC 28204), one of your clients, owns two retail establishments in downtown Charlotte and has come to you seeking advice concerning the tax consequences of complying with the Americans with Disabilities Act. He

> Tom, a calendar year taxpayer, informs you that during the year, he incurs expenditures of $40,000 that qualify for the incremental research activities credit. In addition, it is determined that his research-credit base amount for the year is $32,800. a

> In March 2015, Sparrow Corporation hired three individuals—Austin, Adam, and Angela—all of whom are certified as long-term family assistance recipients. Each of these individuals earned $11,000 during 2015. Only Adam continued to work for Sparrow in 2016

> 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