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business
south western federal taxation

Questions and Answers of South Western Federal Taxation

LO.2 Rex, age 45, is an officer of Blue Company, which provides him with the following nondiscriminatory fringe benefits in 2010:l Hospitalization insurance premiums for Rex and his dependents. The
LO.1 Rob performs services for Dave. In ascertaining whether Rob is an employee or an independent contractor, discuss the relevance of each of the separate factors appearing below:a. The work is not
LO.6 Vladimir owns all the stock of Ruby Corporation. The fair market value of the stock I S SUE ID(and Ruby’s assets) is about four times his adjusted basis for the stock. Vladimir is negotiating
LO.6 Tom and Walt are purchasing the Copper Partnership from Jan and Gail for DE C I S ION MAKING$425,000; Tom and Walt will be equal partners. During the negotiations, Jan and Gail succeeded in
LO.6 Gail and Harry own the GH Partnership. They have conducted the business as a DE C I S ION MAKING partnership for 10 years. The bases for their partnership interests are as follows.Gail
LO.6 Linda is the owner of a sole proprietorship. The entity has the following assets.Asset Basis FMV Cash $10,000 $10,000 Accounts receivable –0– 25,000 Office furniture and fixtures* 15,000
LO.6 Emily and Freda are negotiating with George to purchase the business that he operates in corporate form (Pelican, Inc.). The assets of Pelican, Inc., a C corporation, are as follows.Asset Basis
LO.5 Sanjay contributes land to a business entity in January 2010 for a 30% ownership interest. Sanjay’s basis for the land is $60,000, and the fair market value is $100,000. The business entity
LO.5 Megan owns 60% and Vern owns 40% of a business entity. The owners would like to use the entity to share profits (60% for Megan and 40% for Vern) and to share losses(90% for Vern and 10% for
LO.5 Abby and Velma are equal owners of the AV Partnership. Abby invests $75,000 cash in the partnership. Velma contributes land and a building (basis to her of $50,000, fair market value of
LO.5 Bishop contributes undeveloped land to a business entity in January for a 40%ownership interest. Bishop’s basis for the land is $140,000, and the fair market value is$600,000. The business
LO.5 Rosa contributes $50,000 to a business entity in exchange for a 10% ownership interest. Rosa materially participates in the business. The business entity incurs a loss of$900,000 for 2010. The
LO.5 Beige, Inc., a personal service corporation, has the following types of income and losses.Active income $219,000 Portfolio income 37,000 Passive activity losses 240,000a. Calculate Beige’s
LO.5 Swift Corporation distributes land (basis of $12,000 and fair market value of$30,000) to Sam and cash ($45,000) to Allison in exchange for part of their stock. Other shareholders do not redeem
LO.5 The Coffee Company engages in the following transactions during the taxable year.l Sells stock held for three years as an investment for $30,000(adjusted basis of $20,000).l Sells land used in
LO.5 Amber holds a 20% interest in a business to which she contributed $100,000 as part of the initial ownership group. During the life of the business, the following have occurred.l $200,000
LO.5 An entity reports the following income for the current year.Operations $92,000 Tax-exempt interest income 19,000 Long-term capital gain 60,000 The entity has earnings and profits (AAA for an S
LO.5 Eloise contributes $40,000 to a business entity in exchange for a 30% ownership interest. During the first year of operations, the entity earns a profit of $200,000. At the end of that year, the
LO.5 Agnes, Becky, and Carol form a business entity with each contributing the following.Adjusted Basis Fair Market Value Agnes: Cash $100,000 $100,000 Becky: Land 60,000 120,000 Carol: Services
LO.5 Buddy and Bobby form a business entity with each contributing the following DE C I S ION MAKING property.Buddy Bobby Cash $150,000 Land $150,000**Fair market value. Bobby’s adjusted basis is
LO.4 Eagle Corporation has been an electing S corporation since its incorporation 10 DE C I S ION MAKING years ago. During the first three years of operations, it incurred total losses of
LO.4 Tammy and Arnold own 40% of the stock of Roadrunner, an S corporation. The I S SUE ID other 60% is owned by 99 other shareholders, all of whom are single and unrelated.Tammy and Arnold have
LO.4 Oscar created Lavender Corporation four years ago. The C corporation has paid I S SUE ID Oscar as president a salary of $200,000 each year. Annual earnings after taxes approximate $700,000 each
LO.4 Since Garnet Corporation was formed six years ago, its stock has been held 750 DE C I S ION MAKING shares by Frank and 250 shares by Grace. Their basis in the stock is $240,000 for Frank and
LO.3, 4 Flower, Inc., reports taxable income of $700,000 for 2010. Flower has been in business for many years and long ago used up its accumulated earnings credit. Flower has no additional
LO.4 Marci and Jennifer each own 50% of the stock of Lavender, a C corporation. After DE C I S ION MAKING paying each of them a ‘‘reasonable’’ salary of $150,000, the taxable income of
LO.4 Laurie Gladin owns land and a building that she has been using in her sole proprietorship. She is going to incorporate her sole proprietorship as a C corporation.Laurie must decide whether to
LO.4 Swan, Inc., a C corporation, is owned by Abner (70%) and Fran (30%). Abner is the president, and Fran is the vice president for sales. Swan, Abner, and Fran are cash basis taxpayers. Late in
LO.4 Turtle, a C corporation, has taxable income of $600,000 before paying salaries to the three equal shareholder-employees, Britney, Shania, and Alan. Turtle follows a policy of distributing all
LO.4 A business entity’s 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
LO.4 Three unmarried sisters own and operate a farm. The live on the farm and take their meals on the farm for the ‘‘convenience of the employer.’’ The fair market value of their lodging is
LO.4 Heron Corporation has been in operation for 10 years. Since Heron’s creation, all E THI C S AND EQUI TY of the stock has been owned by Andy, who initially invested $200,000 in the
LO.3 Offshore Fishing Corporation, a calendar year taxpayer, is going to sell real estate DE C I S ION MAKING that it no longer needs. The real estate is located in Corpus Christi, Texas, and has an
LO.3 Parrott is a closely held corporation owned by 10 shareholders (each has 10% of the stock). Selected financial information provided by Parrott follows.Taxable income $5,250,000 Positive AMT
LO.3 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 $150,000. They anticipate that the annual
Earnings for the next five years are projected to be relatively stable at about $90,000 per year. The shareholders of Clay are in the 33% tax bracket.a. Clay will reinvest its after-tax earnings in
LO.3 Clay Corporation will begin operations on January
LO.2, 3 Jack, an unmarried taxpayer, is going to establish a manufacturing business. He anticipates that the business will be profitable immediately due to a patent that he holds.He anticipates that
LO.3 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
LO.1, 2, 3 Amy and Jeff Barnes are going to operate their florist shop as a partnership or as an S corporation. Their mailing address is 5700 Richmond Highway, Alexandria, VA 22300. After paying
LO.3 Red, Green, Blue, and Purple generate taxable income as follows.Corporation Taxable Income Red $ 98,000 Green 295,000 Blue 800,000 Purple 50,000,000a. Calculate the marginal and effective tax
LO.3, 4 Bryan operates his business as a C corporation. He is the only shareholder. The accumulated E & P is $800,000. Starting next year, he plans on distributing $200,000. In future years, he
LO.2 The Shale Company reports the following assets and liabilities on its balance sheet.Net Book Value Fair Market Value Assets $675,000 $975,000 Liabilities 200,000 200,000 Shale has just lost a
LO.5, 6 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
LO.2, 3, 4, 5, 6 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
LO.7 Grayson, who is single with no dependents and does not itemize, provides you with the following information for 2010.Short-term capital loss $ 4,000 Long-term capital gain 19,000 Municipal bond
LO.4, 5 Calculate the AMT for the following cases in 2010. The individual taxpayer reports regular taxable income of $450,000 and no tax credits.Tentative AMT Filing Status Case 1 Case 2 Single
LO.7 Included in Alice’s regular taxable income and in her AMT base is a $300,000 capital gain on the sale of stocks that she owned for three years. Alice is in the 35% tax bracket for regular
LO.7 For 2010, Peach Corporation (a calendar year company) had the following transactions.Taxable income $5,000,000 Regular tax depreciation on realty in excess of ADS(placed in service in 1990)
LO.7 In each of the following independent situations, determine the tentative minimum tax. Assume the company is not in small corporation status.AMTI (Before the Exemption Amount)Quincy Corporation
LO.4, 5 Determine whether each of the following transactions is a preference (P), an adjustment (A), or not applicable (NA) for purposes of the corporate AMT.a. Depletion in excess of basis taken by
LO.6 Purple Corporation, a calendar year taxpayer, reported the following amounts.Calculate Purple’s positive and negative ACE adjustments.Preadjusted AMTI ACE 2008 $85,000,000 $70,000,000 2009
LO.6 Based upon the following facts, calculate adjusted current earnings (ACE).Alternative minimum taxable income (AMTI) $5,120,000 Municipal bond interest 630,000 Expenses related to municipal bonds
LO.6 Maize Corporation (a calendar year corporation) reports the following information for the years listed.2009 2010 2011 Adjusted current earnings $5,000,000 $5,000,000 $7,000,000 Unadjusted AMTI
LO.5 Flicker, Inc., a closely held corporation, acquired a passive activity in 2010. Gross income from operations of the activity was $160,000. Operating expenses, not including depreciation, were
LO.5 Pheasant, Inc., is going to be subject to the AMT in 2010. The corporation owns an investment building and is considering disposing of it and investing in other realty. Based on an appraisal of
LO.5 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
LO.5 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
LO.5 Josepi’s construction company uses the completed contract method. During the three-year period 2010–2012, Josepi recognized the following income on his two construction contracts.Year
LO.4 In March 2010, Grackle, Inc., acquired used equipment for its business at a cost of DE C I S ION MAKING$300,000. The equipment is five-year class property for regular income tax purposes and for
LO.4 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
LO.3 Aqua, Inc., a calendar year corporation, reports the following gross receipts and taxable income.Year Gross Receipts Taxable Income 2001 $6,000,000 $1,450,000 2002 6,200,000 1,375,000 2003
LO.2 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
LO.2 Dan DeRose (333 East Shore Drive, Wyckoff, NJ 07481), one of your clients, owns two COMMUNI CAT IONS retail establishments in downtown Wyckoff and has come to you seeking advice concerning the
LO.2 Matt, 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
LO.2 Green Corporation hired three individuals—Sam, Libby, and Ellie—all of whom are certified as long-term family assistance recipients. Each of these individuals earned$14,000 during 2010. Sam
LO.2 Cardinal Corporation hires five individuals on January 3, 2010, all of whom qualify for the work opportunity tax credit. Two of the individuals receive wages of $9,000 during 2010, and each
LO.2 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
LO.2 In the current year, Simon Cho (4588 Norris Avenue, St. Charles, IL 60174)acquires a qualifying historic structure for $250,000 (excluding the cost of the land) and plans to substantially
LO.2 In January 2009, Iris Corporation purchased and placed into service a 1933 building that houses retail businesses. The cost was $300,000, of which $25,000 applied to the land. In modernizing the
LO.2 Clint, a self-employed engineering consultant, is contemplating purchasing an old building for renovation. After the work is completed, Clint plans to rent out two-thirds of the floor space to
LO.2 Spruce Corporation holds the following general business credit carryovers.2006 $ 5,000 2007 15,000 2008 5,000 2009 20,000 Total carryovers $45,000 If the general business credit generated by
LO.2 Connie has a tentative general business credit of $42,000 for the current year. Her net regular tax liability before the general business credit is $107,000, and her tentative minimum tax is
LO.3, 7 Miha Ohua is the CFO of a U.S. company that has operations in Europe and I S SUE ID Asia. The company has several manufacturing subsidiaries in low-tax foreign countries where the tax rate
LO.6, 7 As the director of the multistate tax planning department of a consulting firm, COMMUNI CAT IONS you are developing a brochure to highlight the services it can provide. Part of the brochure
LO.6 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
LO.6 Determine for your state and two of its neighbors:a. Whether a Federal affiliated group is allowed to file a consolidated return with the state.b. What the return is called (i.e., a
LO.7 Diagram the creation of an investment subsidiary in Delaware, by Parent, a Massachusetts corporation conducting all of its current sales activities through a single subsidiary, Junior,
LO.6 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
LO.6 Repeat the computations of Problem 44, but now assume that State A is a salesfactor-only state and that State B uses the following weights: sales .70, payroll .15, and property .15.I S SUE ID
LO.6 Repeat the computations of Problem 44, but now assume that State B uses a doubleweighted sales factor in its apportionment formula.
LO.6 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
LO.6 Continue with the facts of Problem 42.Using the format of Figure 13.2, compute state taxable income for HippCo, assuming also that the taxpayer recognized $225,000 of net rent income during the
LO.6 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
LO.5 Continue to consider the case of the taxpayer in Problem 40.Is it acceptable to you E THI C S AND EQUI TY if the taxpayer purposely shifts its sales force among the states so as to reduce its
LO.5 Considering only the aggregate state income tax liability, how should a taxpayer, DE C I S ION MAKING resident in State A and selling widgets, deploy its sales force? The states that entail the
LO.5 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
LO.5 What is the function of the Multistate Tax Commission? Why have some U.S. states not joined the MTC?I S SUE ID COMMUNICATIONS
LO.5 Evaluate this statement: A state can tax only its resident individuals and the corporations and partnerships that are organized in-state.
LO.4 ForCo, a foreign corporation not engaged in a U.S. trade or business, received a$500,000 dividend from USCo, a domestic corporation. ForCo incurred $20,000 in expenses related to earning the
LO.3 Hillman, 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 Hillman a $10,000
LO.3, 4 Write a short memo on the difference between ‘‘inbound’’ and ‘‘outbound’’ COMMUNI CAT IONS activities in the context of U.S. taxation of international income.
LO.3 Lili, Inc., a domestic corporation, operates a branch in France. The earnings C R I T I CAL THINKING record of the branch is as follows.Year Taxable Income(Loss)Foreign Taxes Paid 2008 ($
LO.4 Evaluate the following statement: Foreign persons are never subject to U.S. taxation on U.S.-source investment income so long as they are not engaged in a U.S. trade or business.
LO.4 Explain the purpose of determining whether a foreign person is engaged in a U.S.trade or business.
LO.3 Ames, Inc., a U.S. corporation, owns 100% of Boone, Ltd., a United Kingdom corporation. Boone purchases finished inventory from Ames and sells the inventory to customers in the U.K. and Germany.
LO.3 Snowball Enterprises, a domestic corporation, owns 100% of Aussie, Ltd., an Australian corporation. Determine whether any of the following transactions produce Subpart F gross income for the
LO.3 Is a foreign corporation owned equally by 100 unrelated U.S. citizens considered a controlled foreign corporation?
LO.3 USCo owns 55% of the voting stock of LandCo, a Country X corporation. IrishCo, an unrelated Country Y corporation, owns the other 45% of LandCo. LandCo owns 100% of the voting stock of OceanCo,
LO.3 Discuss the policy reasons for the existence of the Subpart F rules. Give two examples of Subpart F income.

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