Sara owns 60% of Mayfield Corporation’s single class of stock. A group of five family members and three key employees own the remaining 40%. Mayfield is a calendar year taxpayer that uses the accrual method of accounting. Sara is a Mayfield officer and director and uses the cash method of accounting. During the period Year 1 through Year 3, Sara received the following amounts as salary and nontaxable fringe benefits from Mayfield: Year 1, $160,000; Year 2, $240,000; and Year 3, $290,000. She earned these amounts evenly throughout the tax years in question. In Year 4, upon auditing Mayfield’s tax returns for Year 1 through Year 3, a revenue agent determined that reasonable compensation for Sara’s services for the three years in question is $110,000, $165,000, and $175,000, respectively. The bylaws of Mayfield were amended on December 15, Year 2, to provide that: Any payments made to an officer of the corporation, including salary, commissions, bonuses, other forms of compensation, interest, rent, or travel and entertainment expenses incurred, and which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service, shall be reimbursed by such officer to the corporation to the full extent of such disallowance. Following the disallowance of $240,000 of the total salary expense, the board of directors met and requested that Sara reimburse Mayfield for the portion of her salary deemed to be excessive. Because of the large amount of money involved, the board of directors approved an installment plan whereby Sara would repay the $240,000 in five annual installments of $48,000 each over the period Year 5 through Year 9. The corporation would not charge Sara interest on the unpaid balance of $240,000. Prepare a memorandum for your tax manager explaining what salary and fringe benefits are taxable to Sara in the period Year 1 through Year 3 and what reimbursements Sara can deduct during the period Year 5 through Year 9.
> Assume the same facts as in Problem C:5-38 except Water Corporation sells the machine for $9,000 on August 31 of Year 3. Determine the following: a. Water’s gain or loss on the machine’s sale for regular tax and AMT purposes. b. The amount of Water’s A
> On June 1 of Year 1, Water Corporation places into service a machine costing $10,000. The machine is seven-year property under the MACRS rules and has a 12-year class life. Water does not elect Sec. 179 expensing, and assume that bonus depreciation is no
> Willis Corporation is a calendar year corporation that forms on April 1 of Year 1. Willis Corporation reports the following gross receipts: Year………………………….Gross Receipts 1…………………………….$ 3,000,000 2……………………………….5,400,000 3……………………………….7,400,000 4……………….……
> Westwood Corporation has $100,000 of taxable income and $20,000 of tax preference items in the current year. Westwood’s positive and negative AMT adjustment items (other than the ACE adjustment) are $38,000 and $45,000, respectively, and its ACE amount i
> In the current year, Whitaker Corporation has taxable income of $700,000 and tax preference items of $100,000. It also has $250,000 of positive AMT adjustment items and $80,000 of negative AMT adjustment items (neither of which includes the ACE adjustmen
> Woodland Corporation reports the following financial accounting results and other depreciation information for the current year: Sales revenue…………………………………..…………………………………..$ 2,000,000 Plus: Interest income on municipal bonds…………………………………..300,000 Minus:
> McHale is a C corporation owned by eight individuals, three of whom own 51% of the stock and comprise the board of directors. The corporation operates a successful automobile repair parts manufacturing business. It has accumulated $2 million of E&P and e
> Peter Jones has owned all 100 shares of Trenton Corporation stock for the past five years. This year, Mary Smith contributes property with a $50,000 basis and an $80,000 FMV for 80 newly issued Trenton shares. At the same time, Peter contributes $15,000
> Parrish is a closely held C corporation. Robert and Kim Parrish own all its stock. The corporation, now in its second month of operation, expects to earn $200,000 of gross income in the current tax year. This income is expected to consist of approximatel
> Bird Corporation purchases machinery for $3 million and places it in service in June 2017. Installation costs are $75,000. The machine replaces an old machine that Bird purchased several years ago, which Bird sells at a $125,000 financial accounting prof
> Determine whether the following statements about the accumulated earnings tax are true or false: a. Before the IRS can impose the accumulated earnings tax, it need only show that tax avoidance was one of the motives for the corporation’s unreasonable ac
> Different rules for calculating the accumulated earnings credit apply to operating companies, holding and investment companies, and service companies. Explain the differences.
> Explain the Bardahl formula. Why have some tax authorities said that this formula implies a greater degree of mathematical precision than is actually the case? Does the Bardahl formula apply to service companies?
> Gamma Corporation has generated substantial cash flows from its manufacturing activities. It has only a moderate need to reinvest its earnings in existing facilities or for expansion. In recent years, the corporation has amassed a large investment portfo
> How, in its first year of operation, can a newly formed corporation be subject to the PHC tax but not the AMT and the accumulated earnings tax?
> The accumulated earnings tax is imposed only when the corporation is “formed or availed of for the purpose of avoiding the income tax.” Does tax avoidance have to occur at the corporate or the shareholder level for the accumulated earnings tax to be impo
> Explain the following statement: “Although the accumulated earnings tax can be imposed on both publicly held and closely held corporations, the tax is likely to be imposed primarily on closely held corporations.”
> Explain the implication of the following statement: “Like many dogs, the threat (bark) of the PHC tax is much worse than the actual penalties assessed in connection with its (bite).”
> What are the Sec. 351 reporting requirements?
> Determine whether the following statements regarding the PHC tax are true or false: a. In a given tax year, a corporation might not owe the PHC tax even though it is deemed to be a PHC. b. A sale of a large tract of land held for investment can make a
> Explain the advantages of a deficiency dividend. What requirements must a PHC and its shareholders meet to use a deficiency dividend to reduce or eliminate the PHC tax liability? Can a deficiency dividend eliminate interest and penalties, in addition to
> Define the term consent dividend. How can a consent dividend be used to avoid the PHC and accumulated earnings taxes? In each case, what requirements must be met by the distributing corporation and/or its shareholders to qualify a consent dividend for th
> Grayson Corporation is a calendar year taxpayer. In the following independent situations, which of the pro rata dividends paid by Grayson during the current year are eligible for the dividends-paid deduction when it calculates its PHC tax for the current
> Which of the following income items, when received by a corporation, are included in personal holding company income (PHCI)? Indicate whether any special circumstances would exclude an income item that is generally includible in PHCI. a. Dividends b. I
> Because of its quality investments, Carolina Corporation has always generated 30% to 40% of its gross income from passive sources. In the current year, Carolina sold a block of stock in a company it acquired several years ago. As a result of the sale, th
> Which of the following corporate forms are exempt from the PHC tax? The accumulated earnings tax? a. Closely held corporations b. S corporations c. Professional corporations d. Tax-exempt organizations e. Publicly held corporations f. Corporations
> The personal holding company tax and the accumulated earnings tax reflect efforts to prevent use of the corporate entity to avoid taxation. Explain the congressional intent behind these two tax measures.
> In the current year, Burbank Corporation incurs an AMT for the first time. Its AMT is due to an ACE adjustment resulting from Burbank’s receiving $4 million of life insurance proceeds upon the death of the corporation’s chief executive officer. The polic
> Discuss the regular tax and AMT depreciation rules applicable to the following types of property acquired in the current year. a. Section 1250 property—a factory building b. Section 1245 property—a drill press
> Why might shareholders avoid Sec. 351 treatment? Explain three ways they can accomplish this end.
> Indicate whether the following items are includible in regular taxable income, preadjustment AMTI, and/or ACE. Also indicate whether a corporation must make a positive, negative, or zero adjustment when calculating preadjustment AMTI and when calculating
> Some tax scholars say tax-exempt interest on state or local bonds that are not private activity bonds can, because of the ACE adjustment, produce three different effective tax rates depending on the corporation’s tax situation: (1) a 0% effective tax rat
> Florida Corporation incurs AMT for the first time in the current year. The main reason for incurring the AMT is a $2 million gain on a current year installment sale that Florida is recognizing over ten years for regular tax purposes. Explain to Florida’s
> What adjustment does a corporation make if ACE is more than preadjustment AMTI? If ACE is less than preadjustment AMTI?
> Identify each of the following as a tax preference item (PREF), an AMT adjustment item to calculate preadjustment AMTI (ADJ), an item to adjust from preadjustment AMTI to ACE (ACE), or none of these (NONE): a. Percentage depletion in excess of a propert
> Determine whether the following statements relating to the AMT for a corporation are true or false. If false, explain why. a. Tax preference items only increase AMTI. b. A corporation uses the same NOL carryover amount for regular tax and AMT purposes.
> Menifee Corporation has conducted business for several years, and its annual gross receipts never have been more than $4 million. Jackie, who has owned all of Menifee’s stock since she incorporated it, purchases all of Estill Corporation’s stock in the c
> Agnew Corporation operates a small manufacturing business. During Year 1 (its first tax year, which is 12 months long), Agnew sells goods for $3.8 million for which the cost of goods sold is $2.8 million. Agnew’s owner estimates that future sales and cos
> What special rules (if any) apply to the AMT calculation for the following entities: a. Corporations, particularly small ones b. Controlled groups c. S corporations
> Dunn Corporation is not a small corporation exempt from the AMT. Dunn’s CPA does not calculate the AMT because he knows that Dunn’s taxable income is less than the $40,000 AMT exemption amount allowed to corporations. Is the CPA correct in his belief? Ex
> What are the advantages of business bad debt treatment when a shareholder’s loan or advance to a corporation cannot be repaid? What must the debtholder show to claim a business bad debt deduction?
> Define the following terms relating to the AMT: a. Tax preference item b. AMT adjustment item c. Adjusted current earnings d. Alternative minimum taxable income e. AMT exemption amount f. Tentative minimum tax g. Minimum tax credit
> For each of the following statements, indicate whether the statement is true for the PHC tax only, the accumulated earnings tax only, both taxes, or neither tax. a. The tax is imposed only if the corporation satisfies certain stock ownership and income
> Explain Congress’ intent for enacting the AMT.
> Stock in Random Corporation is owned equally by two individual shareholders. During the current year, Random reports the following results: Income: Rentals………………………………………………………………$200,000 Dividend (from a 25%-owned domestic corporation)…………….30,000 Taxa
> Eagle Corporation operates a family business established by Edward Eagle, Sr. ten years ago. Edward Eagle, Sr. died, and the Eagle stock passed to his children. The corporation operates rental property and also invests in dividend paying stock and corpor
> Goss Corporation is a leading manufacturer of hangers for the laundry and dry cleaning industry. The family-owned business has prospered for many years and has generated approximately $100 million of sales and $8 million in after-tax profits. Your accoun
> John owns all 100 shares of stock in Jamaica Corporation, which has $100,000 of current E&P. John would like to receive a $50,000 distribution from the corporation. Jamaica owns several assets that it could distribute to John. What are the tax consequenc
> Fifteen years ago, husband and wife Stuart and Marsha Widell organized Widell Engineering Associates (WEA), a Delaware corporation that builds, repairs, and manages waste treatment plants throughout the Southwest. The Widells capitalized WEA with cash of
> John and Jean own 80% and 20%, respectively, of Plum Corporation stock. Thanks to their hard work, Plum’s software sales have sky rocketed. In its first year of operation Plum’s earnings were minimal, but four years later, Plum grossed $10 million. Plum
> What are the advantages of Sec. 1244 loss treatment when a stock investment becomes worthless? What conditions must be met to qualify for this treatment?
> Bruce and Bob organize Black LLC on May 10 of the current year. What is the entity’s default tax classification? Are any alternative classification(s) available? If so, (1) how do Bruce and Bob elect the alternative classification(s) and (2) what are the
> Scott and Lynn Brown each own 50% of Benson Corporation stock. During the current year, Benson made the following distributions to its shareholders: Benson had E&P of $250,000 immediately before the distributions. Prepare a memorandum for your tax m
> When the IRS audited Winter Corporation’s current year tax return, the IRS disallowed $10,000 of travel and entertainment expenses incurred by Charles, an officer-shareholder, because of inadequate documentation. The IRS asserted that the $10,000 expendi
> Jane owns 150 of the 200 outstanding shares of Parent Corporation stock. Parent owns 160 of the 200 outstanding shares of Subsidiary Corporation stock. Jane sells 50 shares of her Parent stock to Subsidiary for $40,000. Jane’s basis in her Parent shares
> Bob owns 60 of the 100 outstanding shares of Dazzle Corporation stock and 80 of the 100 outstanding shares of Razzle Corporation stock. Bob’s basis in his Dazzle shares is $12,000, and his basis in his Razzle shares is $8,000. Bob sells 30 of his Dazzle
> Fran owns all 100 shares of Star Corporation stock. Her stock basis is $60,000. On December 1 of the current year, Star distributes 50 shares of preferred stock to Fran in a nontaxable distribution. In the year of the distribution, Star’s total E&P is $1
> Bailey is one of four equal unrelated shareholders of Checker Corporation. Bailey has held Checker stock for four years and has a basis in her stock of $40,000. Checker has $280,000 of current and accumulated E&P and distributes $100,000 to Bailey. a. W
> Alice, Bob, Carol, the ABC Partnership, Franklin Corporation, and the Gleason Family Trust own shares of Holston Corporation’s single class of stock as follows: The Holston shareholders have owned their shares for more than one year. T
> Andrew, Bea, Carl, and Carl, Jr. (Carl’s son), and Tetra Corporation own all of the single class of Excel Corporation stock as follows: Andrew, Bea, and Carl are unrelated. Bea owns 75% of the Tetra stock, and Andrew owns the remaining
> Alan, Barbara, and Dave are unrelated. Each has owned 100 shares of Time Corporation stock for five years and each has a $60,000 basis in those shares. Time’s E&P is $240,000. Time redeems all 100 of Alan’s shares for their $100,000 FMV. a. What are the
> White Corporation has 100 shares of stock outstanding. Ann owns 40 of these shares, and unrelated individuals own the remaining 60 shares. White redeems 30 of Ann’s shares for $30,000. In the year of the redemption, White has $30,000 of paid-in capital a
> What are the advantages and disadvantages of using debt in a firm’s capital structure?
> John died on March 3, 2017. His gross estate of $8.25 million includes First Corporation stock (400 of the 1,000 outstanding shares) worth $5 million or $12,500 per share ($5,000,000/400). This FMV amount also is the estate’s basis in the stock (see Chap
> Unrelated parties Amy, Beth, Carla, and Delta Corporation each own 25 of the 100 outstanding shares of Axle Corporation stock. In a transaction that qualifies as a partial liquidation, Axle distributes $20,000 cash to each shareholder in exchange for fiv
> Of the 9,500 shares of Favor Corporation stock outstanding, Olsen owns 6,100 shares. Unrelated parties own the remaining shares. To bolster its stock price, Favor plans to reduce the total number of shares outstanding by redeeming some of the shares held
> Four unrelated shareholders own Benton Corporation’s 400 shares of outstanding stock. As indicated below, Benton redeems a total of 100 shares for $500 per share from three of its shareholders. Each shareholder has a $230 per share basi
> Paul owns all 100 shares of Presto Corporation stock. His basis in the stock is $10,000. Presto has $100,000 of E&P. Presto redeems 25 of Paul’s shares for $30,000. What are the tax consequences of the redemption to Paul and to Presto?
> Moose Corporation’s 400 shares of outstanding stock are owned as follows: Name ……………….……………….……………….…… Shares Lara (an individual) ……………….………………….….………60 LMN Partnership (Lara is a 20% partner)………………..50 LST Partnership (Lara is a 70% partner).……
> Trusty Corporation has a single class of common stock outstanding. Jim owns 200 shares, which he purchased for $50 per share two years ago. On April 10 of the current year, Trusty distributes to its common shareholders one right to purchase for $60 one c
> Moss Corporation has a single class of common stock outstanding. Tillie owns 1,000 shares, which she purchased five years ago for $100,000. Moss declares a stock dividend payable in 8% preferred stock having a $100 par value. Each shareholder receives on
> Wilton Corporation has a single class of common stock outstanding. Robert owns 100 shares, which he purchased six years ago for $100,000. In the current year, when the stock is worth $1,200 per share, Wilton declares a 10% dividend payable in common stoc
> Forward Corporation is owned by a group of 15 shareholders. During the current year, Forward pays $550,000 in salary and bonuses to Alvin, its president and controlling shareholder. The corporation’s marginal tax rate is 34%, and Alvin’s marginal tax rat
> What factors did Congress mandate to be considered in determining whether indebtedness is classified as debt or equity for tax purposes?
> King Corporation is a profitable manufacturing concern with $800,000 of E&P. It is owned in equal shares by Harry and Wilma, husband and wife. Both individuals are actively involved in the business. Determine the tax consequences of the following indepen
> During the current year, Zeta Corporation distributes the assets listed below to its sole shareholder, Susan. For each asset listed, determine the gross income recognized by Susan, her basis in the asset, the amount of gain or loss recognized by Zeta, an
> On May 15 of the current year, Quick Corporation distributes to its shareholder Calvin a building having a $250,000 FMV and used in Quick’s business. The building originally cost $180,000. Quick claimed $30,000 of straight-line depreciation, so that the
> On May 10 of the current year, Stowe Corporation distributes to its shareholder Arlene $20,000 in cash and land (a capital asset) having a $50,000 FMV. The land has a $15,000 adjusted basis (for both taxable income and E&P purposes) and is subject to a $
> In the current year, Sedgwick Corporation has $100,000 of current and accumulated E&P. On March 3, Sedgwick distributes to its shareholder Dina a parcel of land (a capital asset) having a $56,000 FMV. The land has a $40,000 adjusted basis (for both taxab
> At the beginning of the current (non-leap) year, Charles owns all of Pearl Corporation’s outstanding stock. His basis in the stock is $80,000. On July 1, he sells all his stock to Donald for $125,000. During the year, Pearl, a calendar year taxpayer, mak
> Pink Corporation is a calendar year taxpayer. Pete owns one-third (100 shares) of Pink stock. His basis in the stock is $25,000. Cheryl owns two-thirds (200 shares) of Pink stock. Her basis in the stock is $40,000. On June 10 of the current year, Pink di
> Clover Corporation is a calendar year taxpayer. Connie owns all of its stock. Her basis in the stock is $10,000. On April 1 of the current (non-leap) year Clover distributes $52,000 to Connie. Determine the tax consequences of the cash distribution in ea
> Investors formed Peach Corporation in Year 1. Its current E&P (or current E&P deficit) and distributions for Years 1 through 4 are as follows: What is Peach’s accumulated E&P at the beginning of Years 1 through 4? Curre
> Water Corporation reports $500,000 of taxable income for the current year. The following additional information is available: • For the current year, Water reports an $80,000 long-term capital loss and no capital gains. • Taxable income includes $80,0
> How does the assignment of income doctrine apply to a Sec. 351 exchange?
> Beach Corporation, an accrual basis taxpayer, reports the following results for the current year: a. What is Beach’s taxable income? b. What is Beach’s current E&P? Income: Gross profit from manufacturing ope
> Alabre Corporation has 150,000 shares of common stock outstanding and pays quarterly dividends of $0.15 per share. At the beginning of the current year, the balance in its accumulated E&P account is $23,000. Alabre would like to have sufficient E&P to pa
> Jana owns all 100 shares of Stone Corporation stock having a $1 million FMV. Her basis in the stock is $400,000. Stone’s E&P balance is $600,000. Michael would like to purchase the stock but wants only the corporation’s non-cash assets valued at $750,000
> George owns 100 of the 1,000 outstanding shares of Polar Corporation common stock. Under the Sec. 318 family attribution rules, to which of the following individuals will ownership of George’s stock be attributed? In other words, who is deemed to constru
> Marsha receives a $10,000 cash distribution from Dye Corporation in April of the current year. At the beginning of the year, Dye has $4,000 of accumulated E&P and $8,000 of current E&P. Dye also distributed $10,000 in cash to Barbara, who purchased all 2
> George owns all 100 shares of Gumby’s Pizza Corporation. The shares are worth $200,000, while George’s basis is only $70,000. Mary and George have reached a tentative agreement under which George will sell all his shares to Mary. However, Mary is unwilli
> Price Corporation has 100 shares of common stock outstanding. Price repurchased all of Penny’s 30 shares for $35,000 cash during the current year. Three years ago, Penny received the shares as a gift from her mother. Her basis in the shares is $16,000. P
> Neil purchased land from Spring Harbor, his 100%-owned corporation, for $275,000. The corporation purchased the land three years ago for $300,000. Similar tracts of land located nearby have sold for $400,000 in recent months. What tax issues should be co
> Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?
> What is a constructive dividend? Under what circumstances is the IRS likely to argue that a constructive dividend has been paid?
> Mark transfers all the property of his sole proprietorship to newly formed Utah Corporation in exchange for all the Utah stock. Mark has claimed depreciation on some of the property. Under what circumstances is Mark required to recapture previously claim
> Walnut Corporation owns a building with a $120,000 adjusted basis and a $160,000 FMV. Walnut’s E&P is $200,000. Should the corporation sell the building and distribute the sales proceeds to its shareholders or distribute the building to its shareholders
> Hickory Corporation owns a building with a $160,000 adjusted basis and a $120,000 FMV. Hickory’s E&P is $200,000. Should the corporation sell the building and distribute the sales proceeds to its shareholders or distribute the property to its shareholder
> Does the timing of a distribution matter as to whether it is taxed as a dividend or treated as a return of capital? Explain.
> Badger Corporation was incorporated in the current year. It reports an $8,000 NOL on its initial tax return. Badger distributes $2,500 to its shareholders. Is it possible for this distribution to be taxed as a dividend to Badger’s shareholders? Explain.
