On July 1 of the current year, the R & R Partnership (a limited partnership using a calendar tax year) was formed to operate a bed-and-breakfast. 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 paid $10,000 in syndication costs to locate and secure investments from limited partners. In addition, before opening the inn for business, the entity paid $15,500 for advertising and $36,000 in costs related to an open house just before the grand opening of the property. The partnership opened the inn for business on October 1. a. How are these expenses classified? b. How much may the partnership deduct in its initial year of operations? c. How are costs treated that are not deducted currently?
> Five unrelated U.S. individuals own all of the shares of Popping, a corporation organized in the United States but operating fully in the country Vivace. Mariam, one of the shareholders, asks you whether the income from Popping will be taxed to her immed
> Joy Marcus owns several income-producing assets, including a stock portfolio and a small services proprietorship. She wants to start up a new corporation in the country Molto, where the income tax rates are about one-third of those in the United States,
> Randall operates his distribution business in several countries. He wants to move some equipment to a new office in South Africa. This equipment includes assets with a large acquisition price and accumulated MACRS depreciation. The assets to be transferr
> Honk, Inc., a U.S. corporation, purchases weight-lifting equipment for resale from HiDisu, a Japanese corporation, for 60 million yen. On the date of purchase, 105 yen is equal to $1 U.S. (¥105:$1). The purchase is made on December 15, 2016, with payment
> Indeco, a U.S. C corporation, operates Grange, a sales branch in Staccato. Indeco’s U.S. corporate marginal tax rate is 35%; it is 20% for Staccato. Grange’s pre-tax profit for the year is $1 million. There is no incom
> Klein, a domestic corporation, receives a $10,000 dividend from ForCo, a wholly owned foreign corporation. The deemed-paid FTC associated with this dividend is $3,000. What is the total gross income included in Klein’s tax return as a result of this divi
> Cordeio, Inc., is a CFC for the entire tax year (not a leap year). Vancy Company, a U.S. corporation, owns 75% of Cordeio’s one class of stock for the entire year. Subpart F income is $450,000, and no distributions have been made during the year. Both en
> Shonda receives dividend income from the following foreign and domestic corporations in the current tax year. Determine the amount of U.S.-sourced income for each corporation. Percentage of U.S. Income for Past 3 Years Dividends Corporation Receive
> When can a partnership use the cash method of accounting?
> Tom is the treasurer of the City Garden Club, a new entity in the community. A friend who is the treasurer of the garden club in a neighboring community tells Tom that it is not necessary for City Garden Club to file a request for exempt status with the
> Velocity, Inc., a foreign corporation, operates a U.S. branch. It reports the following tax results and other information for the year. Pretax earnings effectively connected with a U.S. trade or business………$900,000 U.S. corporate tax (at 34%)……………………………
> Enders, Inc., a domestic corporation that invests in foreign securities, reports total taxable income for the tax year of $290,000, consisting of $208,800 in U.S.-source business profits and $81,200 of income from foreign sources. Foreign taxes of $24,00
> Use Exhibit 24.1 to provide the required information for Warbler Corporation, whose Federal taxable income totals $10 million. Warbler apportions 70% of its manufacturing income to State C. Warbler generates $4 million of nonapportionable income each yea
> Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land held for three years as an investment (adjusted basis of $250,000, fair market value of $490,000). The land is subject to a liability of $520,000. a. What are the
> Although private foundations generally are exempt from Federal income tax, they may be subject to two types of certain excise taxes. Identify these taxes, and discuss why they are imposed on private foundations.
> Dread Corporation operates in a high-tax state. The firm asks you for advice on a plan to outsource administrative work done in its home state to independent contractors. This work now costs the company $750,000 in wages and benefits. Dread’s total payro
> Indicate for each transaction whether a sales (S) or use (U) tax applies or whether the transaction is nontaxable (N). Where the laws vary among states, assume that the most common rules apply. All taxpayers are individuals. a. A resident of State A purc
> 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
> Assume the same facts as in Problem 31, except that A uses a single-factor apportionment formula that consists solely of sales and B uses a three-factor apportionment formula that equally weights sales, property (at historical cost), and payroll. State B
> When Bruno’s basis in his LLC interest is $150,000, he receives cash of $55,000, a proportionate share of inventory, and land in a distribution that liquidates both the LLC and his entire LLC interest. The inventory has a basis to the LLC of $45,000 and
> Sweeney originally contributed $175,000 in cash for a one-fourth interest in the Gilbert LLC. During the several years that Sweeney was a member of the LLC, his share of the LLC’s income was $90,000 and he withdrew $75,000 cash. The LLC’s liabilities are
> Shelly Zumaya (2220 East Hennepin Avenue, Minneapolis, MN 55413) is the president and sole shareholder of Kiwi Corporation (stock basis of $400,000). Incorporated in 2006, Kiwi Corporation’s sole business has consisted of the purchase and resale of used
> Megan is an accountant for KnoxCo. She is a telecommuter and works most days from her home in Tennessee. Twice a month, she travels to Georgia for a staff meeting at the employer’s Atlanta headquarters. In which state’s payroll factor should Megan’s comp
> Explain the tax consequences to a shareholder of a corporation in the process of liquidation under the general rule of § 331.
> Paloma purchased all of the outstanding Dove stock six years ago. Dove has prospered under Paloma’s direction, and now Hawk Corporation is interested in acquiring Dove, but not directly. Hawk forms a new subsidiary, called Starling, whose purpose is to m
> Target Corporation holds assets with a fair market value of $4 million (adjusted basis of $2.2 million) and liabilities of $1.5 million. It transfers assets worth $3.7 million to Acquiring Corporation in a “Type C” reorganization, in exchange for Acquiri
> Jed acquired 25% of the stock of Alpha (basis of $100,000) 12 years ago, and the other 75% was purchased by Zia (basis of $400,000) three years ago. Alpha enters into a tax-free consolidation with Beta, in which Jed will receive an 8% interest in the new
> Quail Corporation was created six years ago through contributions from Kasha ($900,000) and Frank ($100,000). In a transaction qualifying as a reorganization, Quail exchanges all of its assets currently valued at $1.8 million (basis of $1.2 million) for
> The Open Museum is an exempt organization that operates a gift shop. The museum’s annual operations budget is $3.2 million. Gift shop sales generate a profit of $900,000. Another $600,000 of investment income is generated by the museum’s endowment fund.
> On April 27, 2017, Auk Corporation acquires 100% of the outstanding stock of Amazon Corporation (E & P of $750,000) for $1.2 million. Amazon Corporation has assets with a fair market value of $1.4 million (basis of $800,000), no liabilities, and no loss
> Warwick, Inc., a U.S. corporation, owns 100% of NewGrass, Ltd., a foreign corporation. NewGrass earns only general limitation income. During the current year, NewGrass paid Warwick a $10,000 dividend. The deemed-paid foreign tax credit associated with th
> On July 22, 2016, Lilac Corporation purchased 25% of the Coffee Corporation stock outstanding. Lilac Corporation purchased an additional 40% of the stock in Coffee on March 24, 2017, and an additional 20% on May 2, 2017. On September 25, 2017, Lilac Corp
> Orange Corporation purchased bonds (basis of $350,000) of its wholly owned subsidiary, Green Corporation, at a discount. Upon liquidation of Green pursuant to § 332, Orange receives payment in the form of land worth $400,000, the face amount of the bonds
> The trend in state income taxation is to move to an apportionment formula that places extra weight on the sales factor. Many states now use sales-factor- only apportionment. Explain why this development is attractive to the taxing states.
> The stock in Ivory Corporation is owned by Gold Corporation (80%) and Imelda (20%). Gold Corporation purchased its shares in Ivory nine years ago at a cost of $650,000, and Imelda purchased her shares in Ivory four years ago at a cost of $175,000. Ivory
> The stock of Magenta Corporation is owned by Fuchsia Corporation (95%) and Marta (5%). Magenta is liquidated in the current year, pursuant to a plan of liquidation adopted earlier in the year. In the liquidation, Magenta distributes various assets worth
> Pursuant to a complete liquidation in the current year, Scarlet Corporation distributes to Jake land (basis of $425,000, fair market value of $390,000) that was purchased three years ago and held as an investment. The land is subject to a liability of $2
> For the built-in loss limitation to apply, the property must have been acquired by the corporation as part of a plan whose principal purpose was to recognize a loss on the property by the liquidating corporation. Explain.
> Polly Ling is a successful professional golfer. She is a resident of a country that does not have a tax treaty with the United States. Ling plays matches around the world, about one-half of which are in the United States. Ling’s reputation is without ble
> Jerry Jeff Keen, the CFO of Boots Unlimited, a Texas corporation, has come to you regarding a potential restructuring of business operations. Boots has long manufactured its western boots in plants in Texas and Oklahoma. Recently, Boots has explored the
> Willa, a U.S. corporation, owns the rights to a patent related to a medical device. Willa licenses the rights to use the patent to IrishCo, which uses the patent in its manufacturing facility located in Ireland. What is the sourcing of the $1 million roy
> The board of directors of White Pearl, Inc., a private foundation, consists of Charlyne, Beth, and Carlos. They vote unanimously to provide a $500,000 grant to Carlos. The grant is to be used for travel and education and does not qualify as a permitted g
> Elmwood, Inc., a domestic corporation, owns 15% of Correy, Ltd., a Hong Kong corporation. The remaining 85% of Correy is owned by Fortune Enterprises, a Canadian corporation. At the end of the current year, Correy has $400,000 in undistributed E & P and
> 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
> Regarding the apportionment formula used to compute state taxable income, does each of the following independent characterizations describe a taxpayer that likely is based in state or out of state? Explain. a. The sales factor is positively correlated wi
> For purposes of the related-party loss limitation within the context of a complete liquidation of a corporation, what is the definition of disqualified property?
> Phoebe and Parker are equal members in Phoenix Investors LLC. They are real estate investors who formed the LLC several years ago with equal cash contributions. Phoenix then purchased a parcel of land. On January 1 of the current year, to acquire a one-t
> 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-e
> Browne and Red, both C corporations, formed the BR Partnership on January 1, 2015. Neither Browne nor Red is a personal service corporation, and BR is not a tax shelter. BR’s gross receipts were $4.6 million, $5 million, $6 million, and $7 million, respe
> Tom and Missy form TM Partnership, Ltd. (a limited partnership), to own and operate certain real estate. Tom contributed land, and Missy contributed cash to be used for setting up the entity and creating a plan for developing the property. Once a develop
> The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2017, Jessica contributed land valued at $600,000 to the partnership, in exchange for a 50% interest in JM. She had purchased the land in 2009 for $42
> Continue with the facts presented in Problem 32. At the end of the first year, the LLC distributes $100,000 of cash to Sam. No distribution is made to Drew. a. Under general tax rules, how would the payment to Sam be treated? b. Under general tax rules,
> Continue with the facts presented in Problem 32. Facts from Problem 32. Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2009. Sam’s uncle purchased the land in 1984
> Clario, S.A., a Peruvian corporation, manufactures furniture in Peru. It sells the furniture to independent distributors in the United States. Because title to the furniture passes to the purchasers in the United States, Clario reports $2 million in U.S.
> Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2009. Sam’s uncle purchased the land in 1984 for $30,000. The land was worth $100,000 when Sam’s uncle died. The fair
> Fish, Inc., an exempt organization, reports unrelated business income of $500,000 (before any charitable contribution deduction). During the year, Fish makes charitable contributions of $54,000, of which $38,000 are associated with the unrelated trade or
> From the perspective of the parent corporation, contrast the tax consequences of a subsidiary liquidation under the general nonrecognition rules with a subsidiary liquidation that follows a § 338 election.
> Assume the same facts as in Problem 30, except that Mike sells his land to a third party for $100,000 and then contributes that cash to the partnership in addition to the original $40,000 contribution. The partnership locates equivalent land that it purc
> Mike and Melissa form the equal MM Partnership. Mike contributes cash of $40,000 and land (fair market value of $100,000, adjusted basis of $120,000), and Melissa contributes the assets of her sole proprietorship (value of $140,000, adjusted basis of $11
> 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 t
> 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
> BDD Partnership is a service-oriented partnership that has three equal general partners. One of them, Barry Evans, sells his interest to another partner, Dale Allen, on December 31 of the current tax year for $90,000 of cash and the assumption of Barry&a
> In each of the following independent liquidating distributions in which the partnership also liquidates, determine the amount and character of any gain or loss to be recognized by each partner and the basis of each asset (other than cash) received. In ea
> Last year, a shareholder transferred land (basis of $650,000, fair market value of $575,000) to Roadrunner Corporation in a § 351 transaction. This was the only property transferred to Roadrunner at that time. During the current year, Roadrunner Corporat
> At the beginning of the tax year, Melodie’s basis in the MIP LLC was $60,000, including her $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 of $1
> In each of the following independent cases in which the partnership owns no hot assets, indicate: • Whether the partner recognizes gain or loss. • Whether the partnership recognizes gain or loss. • The partner’s adjusted basis for the property distribute
> Save the Squirrels, Inc., a § 501(c)(3) organization that feeds the squirrels in municipal parks, receives a $250,000 contribution from Animal Feed, Inc., a corporation that sells animal feed. In exchange for the contribution, Save the Squirrels will ide
> The stock of Quail Corporation is held as follows: 85% by Pheasant Corporation and 15% by Gisela, an individual. Quail Corporation is liquidated in December of the current year pursuant to a plan adopted earlier in the year. At the time of its liquidatio
> When Teri’s outside basis in the TMF Partnership is $80,000, the partnership distributes to her $30,000 of cash, an account receivable (fair market value of $60,000, inside basis to the partnership of $0), and a parcel of land (fair market value of $60,0
> In general, what are the tax consequences of a § 338 election?
> Gil’s outside basis in his interest in the GO Partnership is $100,000. In a proportionate current distribution, the partnership distributes to him cash of $30,000, inventory (fair market value of $40,000, basis to the partnership of $20,000), and land (f
> Four GRRLs Partnership is owned by four girlfriends. 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 (Lacy’s basis is $250,000). a. How much loss, if any, ma
> Jasmine Gregory is a 20% member in Sparrow Properties LLC, which is a lessor of residential rental property. Her share of the LLC’s losses for the current year is $100,000. Immediately before considering the deductibility of this loss, Jasmine’s capital
> The BCD Partnership plans to distribute cash of $20,000 to partner Brad at the end of the tax year. The partnership reported a loss for the year, and Brad’s share of the loss is $10,000. At the beginning of the tax year, Brad’s basis in his partnership i
> IrishCo, a manufacturing corporation resident in Ireland, distributes products through a U.S. office. Current-year taxable income from such sales in the United States is $12 million. IrishCo’s U.S. office deposits working capital funds in short-term cert
> Dunne, Inc., a U.S. corporation, earned $500,000 in total taxable income, including $50,000 in foreign-source taxable income from its branch manufacturing operations in Brazil and $20,000 in foreign-source income from interest earned on bonds issued by D
> Weather, Inc., a domestic corporation, operates in both Fredonia and the United States. This year, the business generated taxable income of $600,000 from foreign sources and $900,000 from U.S. sources. All of Weather’s foreign source income is in the gen
> Brandy, a U.S. corporation, operates a manufacturing branch in Chad, which does not have an income tax treaty with the United States. Brandy’s worldwide Federal taxable income is $30 million, so it is subject to a 35% marginal tax rate.
> An exempt municipal hospital operates a pharmacy that is staffed by a pharmacist 24 hours per day. The pharmacy serves only hospital patients. Is the pharmacy likely an unrelated trade or business? Explain.
> An exempt organization is considering conducting bingo games on Thursday nights as a way of generating additional revenue to support its exempt purpose. Before doing so, however, the president of the organization has come to you for advice regarding the
> Really Welcome, Inc., a tax-exempt organization, receives 30% of its support from disqualified persons. Another disqualified person has agreed to match this support if Really Welcome will appoint him to the organization’s board of directors. What tax iss
> Davis, an officer for a § 501(c)(3) organization, receives benefits that are inappropriate in the context of a charitable entity. The excess benefits are determined to be $35,000. Davis does not pay back the excess benefits to the organization before the
> Helpers, Inc., a qualifying § 501(c)(3) organization, incurs lobbying expenditures of $250,000 for the taxable year and grass roots expenditures of $0. Exempt purpose expenditures for the taxable year are $1,200,000. Helpers elects to be eligible to make
> Rejoice, Inc., a private foundation, has existed for 10 years. Rejoice held undistributed income of $160,000 at the end of its 2015 tax year. Of this amount, $90,000 was distributed in 2016, and $70,000 was distributed during the first quarter of 2017. T
> Sean Moon is president, secretary, treasurer, sole director, and sole shareholder of Streetz, an S corporation real estate company. He manages all aspects of the company’s operations, and he is the only person working at the company tha
> Alice owns 100 percent of Medical Data, a C corporation, and 100 percent of Your Realtors, an S corporation. She worked full-time for Medical Data (i.e., she materially participated in the entity), but Alice did not materially participate in Your Realtor
> 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 interest
> Tiger, Inc., a calendar year S corporation, is owned equally by four shareholders: 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 distribute
> Orange, Inc., a calendar year corporation in Clemson, South Carolina, elects S corporation status for 2017. The company generated a $74,000 NOL in 2016 and another NOL of $43,000 in 2017. Orange recorded no other transactions for the year. At all times i
> Green Corporation’s assets are valued at $920,000 after payment of all corporate debts, except for $134,000 of taxes payable on net gains it recognized on the liquidation. Bruno, an individual and the sole shareholder of Green, has a basis of $280,000 in
> Blue is the owner of all of the shares of an S corporation, and 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 Blue
> 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 is the owner of
> In Problem 44, how much of the Whitman loss belongs to Ann and Becky? Becky’s stock basis is $41,300. Facts from Problem 44 At the beginning of the year, Ann and Becky own equally all of the stock of Whitman, Inc., an S corporation. Whitman generates a
> At the beginning of the year, Ann and Becky own equally all of the stock of Whitman, Inc., an S corporation. Whitman generates a $120,000 loss for the year (not a leap year). On the 189th day of the year, Ann sells her half of the Whitman stock to her so
> 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
> Assume the same facts as in Problem 40, except that Jeff’s share of corporate taxable income is only $8,000 and there is no cash distribution. However, the corporation repays the $10,000 loan principal to Jeff. Discuss the related Federal income tax effe
> Assume the same facts as in Problem 40, except that there is no cash distribution, but the corporation repays the loan principal to Jeff. Discuss the tax effects. Facts from Problem 40 At the beginning of the year, Ann and Becky own equally all of the s
> Jeff, a 52% owner of an S corporation, has a stock basis of zero at the beginning of the year. Jeff’s basis in a $10,000 loan made to the corporation and evidenced by a corporate note has been reduced to zero by pass-through losses. During the year, his
> Zebra, Inc., a calendar year S corporation, incurred the following items this year. Sammy is a 40% Zebra shareholder throughout the year. Operating income………………………………………………………………..$100,000 Cost of goods sold………………………………………………………………..(40,000) Depreciatio
