Questions and Answers of Essentials Federal Taxation

Research Problem 4. Scott and Brooke are the sole shareholders of Tanager Company, a calendar year Subchapter S corporation. After several loss years, in December 2012, Tanager is forced to borrow
Research Problem 3. During 2013, Jayden Steele received a distribution of $24,000 on stock he owns in Razorbill Corporation. He had planned to report this amount as dividend income until he talked to
Research Problem 2. Aaron and Leona (father and daughter) started Pottery Heaven in the late 1990s. Shortly after beginning business, Pottery Heaven was incorporated with stock issued as follows: 700
Research Problem 1. Tyler and Travis Best are brothers and equal shareholders in Maize Corporation, a calendar year C corporation. In 2012, they incurred travel and entertainment expenses on behalf
64. LO.8 Brenda has a one-third capital interest in the Partridge Partnership; the other two-thirds is held by her brothers and sisters. In 2012, Brenda sells land (basis of$300,000) to Partridge for
63. LO.8, 9 As of January 1, 2012, Norman has a basis of $90,000 in his 30% capital interest in the Plata Partnership. He and the partnership use the calendar year for tax purposes.The partnership
62. LO.8 Aiden has a 30% capital interest in the Oro Partnership and is entitled to a yearly guaranteed payment of $40,000. As of January 1, 2013, Aiden’s basis in the partnership interest is
61. LO.8 The Pheasant Partnership had the following transactions in the current year:Operating income $700,000 Cost of goods sold 400,000 Capital gains—Long-term $20,000 Short-term 10,000 30,000
59. LO.7 Ida owns 30% of the stock in Mockingbird, a calendar year S corporation. Her basis in the stock as of January 1, 2013, is $120,000. Mockingbird has an operating loss of$500,000 in 2013 and
58. LO.7, 9 Jim Olsen owns all of the stock in Drake, a calendar year S corporation. For calendar year 2013, Drake anticipates an operating loss of $160,000 and could, if deemed worthwhile, sell a
57. LO.7 Assume the same facts as in Problem 56. Kirby Turner is a 20% shareholder in Thrasher Corporation. She is aware of the tax consequences of the various items listed on the Schedule K–1
55. LO.6 Justin is one of the shareholders in Flicker, a closely held family C corporation.When his basis in the stock is $120,000, Justin receives a distribution of $150,000 from Flicker. Assume
54. LO.6, 9 The stock of Emerald Corporation is held equally by Barney and Faye. The shareholders would like to receive, as a dividend, value of $800,000 each. The corporation has the following
53. LO.6 Harold, Marcia, and Richard are equal shareholders in Pelican Corporation, a calendar year C corporation. During 2013, Pelican makes a $150,000 distribution to its three shareholders. Of the
51. LO.5 Elton, Neil, Courtney, and Zelma form Ecru Corporation with the following investments:Basis to Transferor Fair Market Value Number of Shares Issued From Elton—cash $ 200,000 $ 200,000 200
50. LO.5, 9 Doris, Walt, and Pat form Swan Corporation with the following investments:Basis to Transferor Fair Market Value Number of Shares Issued From Doris—cash $200,000 $200,000 200 From
49. LO.4 Puce, a calendar year C corporation, had the following Schedule M–1 transactions on its Form 1120 for 2013:Taxable income $100,000 Federal income tax 22,250 Excess capital losses over
48. LO.4 In each of the following independent situations, determine the C corporation’s Federal income tax liability for calendar year 2013.Corporation Taxable Income Sparrow $ 45,000*Warbler
47. LO.3 Puffin Corporation was formed on July 1, 2013, and incurred qualifying organizational expenditures. It uses a calendar year and wants to accelerate any deductions that are available. Based
46. LO.3 Determine the dividends received deduction for each of the following independent situations.Assume that the percentage of stock owned in the corporation paying the dividend is 30% for Green
44. LO.2 For each of the following independent situations, determine the domestic production activities deduction (DPAD) for 2013.Corporation Qualified Production Activities Income Taxable
42. LO.2 During 2013, Siskin Corporation (a C corporation) had the following transactions:Income from operations $500,000 Expenses from operations 425,000 Dividends from domestic corporations (less
41. LO.2 On December 6, 2013, Kestrel Company (a calendar year taxpayer) authorizes a cash donation of $40,000 to the Memphis Public Library. The pledge is carried out as follows: $10,000 on December
40. LO.2, 7 Robin had the following capital transactions in 2013:LTCG $10,000 LTCL 8,000 STCG 2,000 STCL –0–Robin also had a net long-term capital loss in 2012 of $2,000, which it could not
39. LO.2 Taupe, a calendar year taxpayer, has the following capital transactions for 2013:long-term capital loss of $4,000 and a short-term capital loss of $4,000. How are these items handled for tax
38. LO.2, 7 Citron, a calendar year taxpayer, began business in January 2012. It had a long-term capital gain of $5,000 in 2012 and a long-term capital loss of $10,000 in 2013.For both years, Citron
37. LO.2 Garnet has the following capital asset transactions during 2013:Long-term capital gain $8,000 Short-term capital gain 3,000 Further, Garnet has an excess capital loss carryforward of $6,000
35. LO.8 A guaranteed payment to one partner affects the operating income (or loss) that passes through to the other partners. Explain this statement.
34. LO.8 What are guaranteed payments? When might such payments be used?
33. LO.8 Carlos and his parents are equal partners in the Puce Partnership. Carlos sells property to Puce for a realized loss. Puce later sells the property to a third party (i.e., an outsider) for a
32. LO.8 Blaine, Cassie, and Kirstin are equal partners in the Maize Partnership. During the year, Maize has qualified dividends, charitable contributions, and a domestic production activities
30. LO.7, 8 S corporations and partnerships are categorized as “pass-through entities.”Why?
29. LO.7 Cynthia and Doug are equal shareholders in Penguin, a calendar year S corporation.At the end of 2012, Penguin has an operating loss. Although Cynthia and Doug have the same basis in their
28. LO.7 Alexis, Brayden, Brooke, and Charles are equal shareholders in Azul Corporation(a calendar year S corporation). During the year, Azul has a short-term capital loss, qualified dividend
27. LO.7 Stork Corporation is a closely held C corporation that was formed several years ago. In 2010, Stork made an election to be treated as an S corporation. After obtaining S status, Stork has
24. LO.6 The stock of Grouse Corporation (a C corporation) is owned equally by a sister and two brothers: Mary, Rex, and Orson. During the year, the following transactions occur:a. Mary sells
23. LO.6 When a corporation distributes property as a dividend, what are the tax effects on the corporation and its shareholders under the following assumptions?a. The property has declined in
22. LO.6 Tom is one of the shareholders of Flamingo Corporation, a calendar year C corporation.During 2012, Tom receives a dividend distribution from Flamingo of $20,000.In early 2013, Flamingo
20. LO.5 Small, closely held corporations are often formed with a minimum of capital investment. Key assets used in the business are then leased to the corporation by the shareholders. What are the
19. LO.4 Beige Corporation has lower taxable income than Drab Corporation. Yet Beige’s marginal income tax rate is 39%, while Drab’s marginal rate is 35%. Explain how this variance can occur.
18. LO.3 Mallard Corporation was formed in December 2012 and plans to use the cash basis of accounting. Mallard incurred one-half of its organizational expenses in December 2012 and one-half in
17. LO.3 Some corporations may be able to avoid capitalizing and amortizing organizational expenditures. Explain.
16. LO.3 Two small C corporations have invested in the stock of IBM Corporation. Although they own the same number and type of shares, one corporation is able to claim a larger dividends received
15. LO.3 The dividends received deduction does not always completely eliminate the effect of taxation of dividend income at the corporate shareholder level. Explain this statement.
14. LO.2 Kite, a calendar year C corporation, incurs a net operating loss for 2013. What factors should be considered before Kite Corporation chooses to carry back the loss?
13. LO.2 Wren Corporation does no manufacturing but is engaged exclusively in marketing.Is it still possible that Wren may be able to claim a domestic production activities deduction (DPAD)? Explain.
12. LO.2 In connection with the domestic production activities deduction, what is the difference between individual and C corporation taxpayers?
11. LO.2 If a C corporation donates ordinary income property to a qualified charity, the measure of the amount of the deduction is the adjusted basis of the property. Do you agree with this
10. LO.2 In late December 2013, Gray Corporation (a calendar year C corporation)pledges a $50,000 donation to a local relief agency formed to fight AIDS in Africa.Although Gray’s board of directors
9. LO.2, 7, 8 The taxpayer has excess capital losses (both short-term and long-term) for the current year. Discuss the income tax ramifications of the losses if the taxpayer is:a. An individual.b. A
8. LO.2 A C corporation invests and trades in real estate. During the year, it sells a tract of land for a substantial loss. Because the land was held both for resale and as an investment, the loss
7. LO.2 Brown purchased a stock investment on March 8, 2012. The investment has substantially appreciated in value, and Brown plans to sell and recognize the gain. The sale date would be either March
6. LO.2, 3 Contrast the income taxation of individuals and C corporations as to each of the following:a. Alternative minimum tax.b. Dividend income.c. Use of the cash method of accounting.d.
5. LO.1 The Owen brothers have obtained financing to start a new venture. The business will be high-risk as to potential liability and is expected to incur losses before becoming profitable. What
4. LO.1 For calendar year 2010, Mario filed a Form 8332 and elected to treat his sole proprietorship as a C corporation. For 2013, he wants to revert back to a sole proprietorship for tax purposes.a.
3. LO.1 Presuming that no election is made under the check-the-box Regulations, how will the following businesses be treated for Federal income tax purposes?a. A one-person entity not incorporated
2. LO.1, 9 Why are limited liability companies advantageous?
1. LO.1 What purpose is served by the check-the-box Regulations?
LO.9 Identify the advantages and disadvantages of the various forms for conducting a business.
LO.8 Review the tax consequences of forming and operating a partnership.
LO.7 Assess the utility and effect of the Subchapter S election.
LO.6 Explain the tax rules governing the operation of corporations.
LO.5 Describe the tax rules governing the formation of corporations.
LO.4 Calculate the corporate tax liability and comply with various procedural and reporting requirements.
LO.3 Recognize and calculate the tax deductions available only to corporations.
LO.2 Contrast the income tax treatment of individuals with that applicable to corporations.
LO.1 Identify those entities that are treated as corporations for Federal income tax purposes.
Research Problem 8. Using newspapers, magazine articles, and other resources, prepare a report on stock appreciation rights to present to your class.
Research Problem 7. Search the Internet for a U.S. 801(k) plan. Explain what it is.
Research Problem 6. Locate and download an Internet retirement calculator. Use this program to help you answer the questions in Problems 38 and 39.
Research Problem 5. Before Lemon Corporation engaged in a B reorganization with Green Corporation, some of the employees of Lemon had unexercised options to purchase stock of Lemon. Under an employee
Research Problem 4. Jim Raby transfers one-half of his compensatory stock options (ISOs and nonqualified stock options) to his ex-wife as part of a divorce settlement. Discuss the tax aspects of this
Research Problem 3. Frequently, a football or basketball coach moves to another university and incurs an obligation to make a payment to the old university under a buyout provision in his or her
Research Problem 2. John Curran and his wife own a construction company, and they want to set up two new corporations that will be owned by their Roth IRAs. The two Rothowned corporations will then
Research Problem 1. On August 4, 2010, Alex Rodriguez hit his 600th home run into the security netting at Yankee Stadium. A security guard at Yankee Stadium named Frankie Babilonia retrieved the ball
56. LO.10 Zariat has the retirement assets listed below. She plans to retire and start withdrawing amounts on which to live. Rank the accounts in the order from which she should make withdrawals so
55. LO.10 Lou’s employer provides a qualified cafeteria plan under which he can choose cash of $9,000 or health and accident insurance premiums worth approximately $7,000.Assuming that Lou is in
54. LO.4, 5, 6, 10 Sara Reid, age 35, is the owner of a small business. She is trying to decide whether to go with a § 401(k) plan or a simplified employee pension plan. She is not interested in a
53. LO.9 On November 19, 2011, Rex is granted a nonqualified stock option to purchase 100 shares of Tan Company. On that date, the stock is selling for $8 per share, and the option price is $9 per
51. LO.8 On July 2, 2010, Black Corporation sold 1,000 of its common shares (worth $14 per share) to Earl, an employee, for $5 per share. The sale was subject to Earl’s agreement to resell the
50. LO.8 On February 20, 2008, Tom (an executive of Hawk Corporation) purchased 100 shares of Hawk stock (selling at $20 a share) for $10. A condition of the transaction was that Tom must resell the
46. LO.6 Gene, age 34, and Beth, age 32, have been married for nine years. Gene, who is a college student, works part-time and earns $1,500. Beth is a high school teacher and earns a salary of
45. LO.6 In 2014, Joyce receives a $4,000 distribution from her Coverdell Education Savings Account, which has a fair market value of $10,000. Total contributions to her CESA have been $7,000.
44. LO.4, 6 Louis is a participant in a SIMPLE IRA of his employer Brown, Inc. During 2013, he contributes 8% of his salary of $63,000, and his employer contributes 3%. What is the total amount that
43. LO.6 Carri and Dane, ages 34 and 32, respectively, have been married for 11 years, and both are active participants in employer qualified retirement plans. Their total AGI in 2013 is $181,000,
42. LO.6 Dana, age 54, has a traditional deductible IRA with an account balance of$107,600, of which $77,300 represents contributions and $30,300 represents earnings. In 2013, she converts her
41. LO.6 Jimmy establishes a Roth IRA at age 47 and contributes a total of $89,600 over 18 years. The account is now worth $112,000. How much of these funds may Jimmy withdraw tax-free?
38. LO.4, 6 Janet, age 29, is unmarried and is an active participant in a qualified retirement plan. Her modified AGI is $61,000 in 2013.a. Calculate the amount that Janet can contribute to a
37. LO.4, 5 Harvey is a self-employed accountant with earned income from the business of $120,000 (after the deduction for one-half of his self-employment tax). He has a profit sharing plan (e.g.,
36. LO.2, 4, 5, 6 In 2013, Susan’s sole proprietorship earns $300,000 of self-employment net income (after the deduction for one-half of self-employment tax).a. Calculate the maximum amount that
35. LO.4 Shyam is a participant in a SIMPLE § 401(k) plan. He elects to contribute 4% of his $40,000 compensation to the account, while his employer contributes 3%. What amount will not vest
34. LO.4, 10 Amber’s employer, Lavender, Inc., has a § 401(k) plan that permits salary deferral elections by its employees. Amber’s salary is $99,000, and her marginal tax rate is 33%.a. What is
33. LO.4 In 2013, Magenta Corporation paid compensation of $45,300 to the participants in a profit sharing plan. During 2013, Magenta Corporation contributed $13,200 to the plan.a. Calculate
29. LO.1, 4 Concept, Inc., has a profit sharing plan with some participants earning$255,000 or more. The company can maximize its participants’ annual additions by using what percentage profit
28. LO.2 Mauve, Inc., uses a two- to six-year graded vesting approach in its retirement plan.Calculate the nonforfeitable percentage for each of the following participants based upon the years of
27. LO.2 Sparrow, Inc., uses a three- to seven-year graded vesting approach in its retirement plan. Calculate the nonforfeitable percentage for each of the following participants based upon the years
25. LO.2 Blonde Corporation has a calendar year retirement plan covering its participants.William, age 21, is hired on January 31, 2012, and he meets the service requirement over the next 12 months
24. LO.9 What are the major advantages of nonqualified stock options?
23. LO.8 What is the spread with respect to an incentive stock option? How is it treated under the tax law?
22. LO.7 What conditions cause the golden parachute arrangement to be penalized?

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