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business
south western federal taxation

Questions and Answers of South Western Federal Taxation

LO.3 Orion, Inc., a U.S. corporation, has foreign-source income and pays foreign taxes for the tax year as follows.Income Taxes Passive category $150,000 $ 13,000 General category 300,000 150,000
LO.3 Food, Inc., a domestic corporation, owns 70% of the stock of Drink, Inc., a foreign corporation. For the current year, Food receives a dividend of $20,000 from Drink.Drink’s post-1986 E & P
LO.3 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
LO.3 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
LO.3 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
LO.3 Fleming, Inc., a domestic corporation, operates in both Canada and the United States. This year, the business generated taxable income of $400,000 from foreign sources and $300,000 from U.S.
LO.3 USCo, a domestic corporation, reports worldwide taxable income of $500,000, including a $100,000 dividend from ForCo, a wholly owned foreign corporation. ForCo’s post-1986 undistributed
LO.3 USCo, a domestic corporation, reports worldwide taxable income of $1,500,000, including a $300,000 dividend from ForCo, a wholly owned foreign corporation. ForCo’s post-1986 undistributed
LO.3 ABC, Inc., a domestic corporation, owns 100% of HighTax, a foreign corporation.HighTax has $50 million of post-1986 undistributed earnings, all of which is attributable to general limitation
LO.3 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
LO.3 ABC, Inc., a domestic corporation, has $40 million of taxable income, including$12 million of general limitation foreign-source taxable income, on which ABC paid $4.8 million in foreign income
LO.3 Explain why a U.S. taxpayer must recapture an overall foreign loss in calculating the foreign tax credit limitation.
LO.3 USCo, a domestic corporation, receives a $10,000 dividend from ForCo, a wholly owned foreign corporation. The deemed-paid (indirect) foreign tax credit associated with this dividend is $3,000.
LO.3 What is the purpose of the foreign tax credit limitation?
LO.3 USCo incurred $100,000 in interest expense for the current year. The tax book value of USCo’s assets generating foreign-source income is $5 million. The tax book value of USCo’s assets
LO.3 USCo, a domestic corporation, owns the rights to a patent related to a medical device. USCo licenses the rights to use the patent to IrishCo, a foreign corporation.IrishCo uses the patent in a
LO.3 USCo, a domestic corporation, purchases inventory for resale from distributors within the United States and resells this inventory to customers outside the United States, with title passing
LO.3 Ocean, Inc., produces inventory in its foreign manufacturing plants for sale in the United States. Its foreign manufacturing assets have a tax book value of $7 million and a fair market value of
LO.3 Determine the source (U.S. or foreign) of the following items of income.a. Interest income paid by a foreign corporation.b. Dividend income paid by a U.S. corporation that has no foreign
LO.3 Describe the different approaches used by countries to tax the earnings of their citizens and residents generated outside the borders of the country.
LO.2 Explain why an income tax treaty between the United States and Germany can be very favorable to a U.S. person who earns investment or business income from Germany.
LO.3 Evaluate this statement: It is unfair that the United States taxes its citizens and residents on their worldwide income.
LO.3 BlueCo, a domestic corporation, incorporates GreenCo, a new wholly owned entity in Germany. Under both German and U.S. legal principles, this entity is a corporation.Assume that BlueCo faces a
LO.1 Liang, a U.S. citizen, owns 100% of ForCo, a foreign corporation not engaged in a U.S. trade or business. Absent any dividends or Subpart F inclusions, is Liang subject to any U.S. income tax on
LO.1 What is the meaning of the statement ‘‘U.S. persons are taxed on their worldwide income’’?
LO.6, 7 C&C Properties is an S corporation and owns two rental real estate undertakings: C R I T I CAL THINKING Carrot Plaza and Cantaloupe Place. Both properties produce an annual $10,000 operating
LO.1 One of your clients, Texas, Inc., is considering electing S status. Both of Texas’s equal shareholders paid $30,000 for their stock. As of the beginning of 2010, Texas’s Subchapter C NOL
LO.4, 5 Gert is the owner of all of the shares of an S corporation. Gert is considering receiving a salary of $80,000 from the business. She will pay 7.65% FICA taxes on the salary, and the S
LO.6 Claude Bergeron sold 1,000 shares of Ditta, Inc., an S corporation located in C R I T I CAL THINKING Concord, North Carolina, for $9,000. He has a stock basis of $107,000 in the shares.Assuming
LO.6, 7 Robin, Inc., a calendar C corporation in Gainesville, Florida, elects S status for DE C I S ION MAKING 2010. The company generated a $54,000 NOL in 2009 and an NOL of $34,000 in 2010. At all
LO.4, 5, 6 Friedman, Inc., an S corporation, holds some highly appreciated land and inventory, and some marketable securities that have declined in value. It anticipates a sale of these assets and a
LO.8 Lejeune, Inc., an S corporation in Boone, North Carolina, reports operating revenues of $400,000, taxable interest of $380,000, operating expenses of $250,000, and deductions attributable to the
LO.8 Sonny, Inc., an S corporation in Polly Beach, South Carolina, has a recognized builtin gain of $95,000 and taxable income of $80,000. It holds a $7,000 NOL carryforward and a $9,000 business
LO.6 Assume the same facts as in Problem 26, except that Jeff’s share of corporate taxable income is only $8,000, and there is no distribution. However, the corporation repays the $10,000 loan
LO.6 Assume the same facts as in Problem 26, except that there is no $15,000 distribution, but the corporation repays the loan principal to Jeff. Discuss the tax effects.
LO.6 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
LO.7 Cardinal, Inc., an S corporation, reports a $102,000 operating loss during the year(not a leap year). At the beginning of the year, Barbara and Sally each own one-half of the stock. On the 102nd
LO.5, 6 Chris Valletta, the sole shareholder of Taylor, Inc., elects to terminate the S election, effective at the end of 2010. As of the end of 2010, Taylor, Inc., has AAA of$80,000 and OAA of
LO.4, 6, 7 Candy owns 40% of the stock of Park, Inc., an S corporation. Her stock basis is$25,000, and she loaned $10,000 to the corporation during the year. How much of Park’s$100,000 operating
LO.4, 6, 7 Cloris owns 35% of the stock of Jacket, Inc., an S corporation, and she lends the corporation $7,000 during the year. Her stock basis in the Jacket stock at the end of the year is $25,000.
LO.4, 6 Valence Corporation’s Form 1120S shows ordinary income of $88,000 for the year. Daniel owns 40% of the Valence stock throughout the year. The following information is obtained from the
LO.5 Assume the same facts as in Problem 19, except that the two shareholders consent to an AAA bypass election (i.e., to distribute AEP first).
LO.5 Money, Inc., a calendar year S corporation, has two unrelated shareholders, each owning 50% of the stock. Both shareholders have a $400,000 stock basis as of January 1, and Money has AAA of
LO.4, 7 A calendar year S corporation has an ordinary loss of $80,000 and a capital loss of COMMUNI CAT IONS$20,000. Ms. Muhammad owns 30% of the corporate stock and has a $24,000 basis in her stock.
LO.4 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
LO.5, 6 Heather, a 57% owner of an S corporation, has a stock basis of zero at the beginning of the year. Heather’s basis in a $28,000 loan made to the S corporation and evidenced by a corporate
LO.4, 5 Palin, Inc., a calendar year S corporation, is owned equally by four shareholders, Alice, Bill, Charles, and Donald. The company owns a plot of land that was purchased for$140,000 three years
LO.4, 5 Goblins, Inc., a calendar year S corporation, has $90,000 of AEP. Tobias, the sole DE C I S ION MAKING shareholder, has an $80,000 basis in his stock with a zero balance in the AAA.a.
LO.4 McKain, Inc., a calendar year S corporation, incurs the following items. I S SUE ID Sales $141,000 Depreciation recapture income 12,000 Short-term capital gain 17,020 Cost of goods sold
LO.4 An S corporation’s profit and loss statement shows net profits of $101,000 (book income). The corporation has three equal shareholders. From supplemental data, you obtain the following
LO.5 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
LO.4 The profit and loss statement of Strategy, Inc., an S corporation, shows net profits of $101,000 (book income). The corporation has four equal shareholders. From supplemental data, you obtain
LO.5, 6 Betty is a shareholder in a calendar year S corporation. At the beginning of the year, her stock basis is $10,000, her share of AAA is $2,000, and her share of corporate AEP is $6,000. She
LO.6, 7 Lynch’s share of her S corporation’s net operating loss is $41,000, but her stock basis is only $29,000. Point out any tax consequences to Lynch.
LO.6 For each of the following independent statements, indicate whether the transaction will increase (+), decrease (), or have no effect (NE) on the basis of a shareholder’s stock in an S
LO.5, 6 Caleb Hudson owns 10% of an S corporation. He is confused with respect to his AAA and stock basis. Write a memo to Caleb identifying the key differences between AAA and his stock basis.
LO.2 Which of the following can be a shareholder of an S corporation?a. Partnership.b. Corporation.c. Nonresident alien.d. Estate.e. Charitable organization exempted from taxation.f. IRA.g. Minor
LO.3 Ninety-nine individuals own all of the shares of Woodpecker Corporation. Hal and Mary Jones want to buy into the corporation, and then to direct the entity to make an S election. Can Woodpecker
LO.3 Burt is the custodian at Quaker Inn, an S corporation that has paid him bonuses over E THI C S AND EQUI TY the years in the formof shares in the corporation. Burt now holds 276 shares in Quaker
LO.3 On March 2, the two 50% shareholders of a calendar year corporation decide to I S SUE ID elect S status. One of the shareholders, Terry, purchased her stock from a previous shareholder (a
LO.1 What are some tax differences between a partnership and an S corporation?
LO.5 Melinda, Gabe, and Pat each contributed $10,000 cash to start up the MGP General Partnership on January 1 this year. Each partner shares equally in partnership income, losses, deductions, gains,
LO.5, 6 Peggy and Cindy, parent and child, operate a local apparel shop as a partnership.The PC Partnership earned a profit of $80,000 in the current year. Cindy’s equal partnership interest was
LO.6 Tom Garrison is a 30% member of GF&E, LLC. He purchased the interest as an investment. Although he is not currently involved in the LLC’s day-to-day operations, he plans to become more active
LO.4, 7 Sonya, a calendar year individual, owns 20% of Philadelphia Cheese Treats, Inc., a C corporation that was formed on February 1, 2010. She receives a $5,000 monthly salary from the
LO.7 FredCo and Fran are equal partners in the calendar year F & F Partnership. FredCo uses a fiscal year ending June 30, and Fran uses a calendar year. FredCo receives an annual guaranteed payment
LO.3 Comment on the validity of each of the following statements.a. Since a partnership is not a taxable entity, it is not required to file any type of Federal income tax return.b. Generally, a
LO.7 Four GRRLs Partnership is owned by four sisters. Lisa holds a 70% interest; each of the others owns 10%. Lisa sells investment property to the partnership for its fair market value of $100,000.
The partnership will use the accrual method of accounting. The following are some of the costs incurred during Heron’s first year of operations.Legal fees to form partnership $ 2,000 Advertising
LO.2, 3 The Heron Partnership was formed on July 1 of the current year and admitted Carl and Megan as equal partners on that date. The partners contributed $200,000 cash each to establish a
LO.5, 6 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.
LO.2, 4, 5 Sam has operated a microbrewery (sole proprietorship) in southern Oregon I S SUE ID for the past 15 years. The business has been highly profitable lately, and demand for the product will
LO.2 Assume the same facts as in Problem 16, except that the property contributed by Lee has a fair market value of $27,500 and is subject to a nonrecourse mortgage of $20,000.a. What is Lee’s
LO.2 Lee, Brad, and Rick form the LBR Partnership on January 1 of the current year. In return for a 25% interest, Lee transfers property (basis of $15,000, fair market value of $17,500) subject to a
LO.4, 5, 6 Your client, the Williams Institute of Technology (WIT), is a widely held C corporation and is not subject to the passive loss limitations. WIT is a 60% partner in the Research Industries
Carol contributed $30,000 cash, and land with a fair market value of $60,000 and an adjusted basis of $40,000. Connie contributed equipment with a fair market value of $90,000 and an adjusted basis
LO.1, 2 Carol and Connie formed the equal CC Partnership on January
LO.4, 5 Erica and Greg are equal partners in the accrual basis EG Partnership. At the beginning of the current tax year, Erica’s capital account has a balance of $120,000, and the partnership has
LO.4 Assume the same facts as in Problem 11, with the following exceptions.l Reece purchased the land five years ago for $120,000. Its fair market value was $90,000 when it was contributed to the
LO.2, 4 Phoebe and Parker are equal members of the Phoenix Partnership. They are real estate investors who formed the partnership several years ago with equal cash contributions. Phoenix then
LO.3 On July 1 of the current year, the R&R Partnership was formed to operate a bed and breakfast inn. The partnership paid $3,000 in legal fees for drafting the partnership agreement, and $5,000 for
LO.2, 5 The SueBart LLC distributes the following assets to its member, Bart.l $10,000 cash.l An account receivable with a $10,000 value and a $0 basis to the entity.l A parcel of land with a $10,000
LO.5 Describe the tax treatment of a proportionate nonliquidating distribution of cash, land, and inventory. How are the partner’s basis in the property received and the partner’s gain or loss on
At the end of the first year, the partnership distributes $50,000 cash to Ben. No distribution is made to Beth.a. How does Ben treat the payment?b. How much income or gain would Ben recognize as a
LO.2 Continue with the facts presented in Problem
LO.2, 5 Beth and Ben are equal members of the BB Partnership, formed on June 1 of the current year. Ben contributed land that he inherited from his father three years ago.Ben’s father purchased the
LO.2, 3 Block, lnc., a calendar year general contractor, and Strauss, Inc., a development I S SUE ID corporation with a July 31 year-end, formed the equal SB LLC on January 1 of the current year.
LO.2, 4 Justin and Tiffany form the equal TJ Partnership. Justin contributes cash of I S SUE ID$20,000 and land (fair market value of $80,000, adjusted basis of $65,000), and Tiffany contributes the
LO.2 Tom and Liz form an equal partnership with a $60,000 cash contribution from Tom DE C I S ION MAKING and a contribution of property (basis of $75,000, fair market value of $60,000) from Liz.a.
LO.2 Chip and Marty form an equal partnership with a cash contribution of $200,000 from Chip and a property contribution (adjusted basis of $100,000 and a fair market value of $200,000) from Marty.a.
LO.2, 4 Bobbi and Carl plan to form the BC Partnership, in which each partner will own I S SUE ID a 50% interest. Bobbi will contribute appreciated land, and Carl will contribute cash.What is the tax
LO.7 The stock of Hawk Corporation is owned equally by three sisters, Michele, Melanie, C R I T I CAL THINKING and Miranda. Hawk owns land (basis of $250,000, fair market value of $210,000) that it
LO.7 Compare the tax treatment of liquidating and redemption distributions in terms of C R I T I CAL THINKING the following.a. Recognition of gain or loss by the shareholder.b. Basis of property
LO.7 Cardinal Corporation has 1,000 shares of common stock outstanding. Hubert owns C R I T I CAL THINKING 300 of the shares, Hubert’s father owns 100 shares, Hubert’s uncle owns 100 shares, and
LO.7 Sean owns 1,000 shares or 40% of the outstanding stock of Crane Corporation C R I T I CAL THINKING(E & P of $900,000). Sean purchased the stock 15 years ago for $50,000. For the last eight
LO.7 Teal Corporation (E & P of $900,000) has 2,000 shares of common stock outstanding. The shares are owned by the following individuals: Ann, 800 shares; Bonnie, 600 shares; and Lucy, 600 shares.
LO.7 Shawn owns 200 of the 1,000 shares outstanding of Hawk Corporation (E & P of$700,000). Shawn paid $150 per share for the stock nine years ago. The remaining stock in Hawk is owned as follows:
LO.1, 7 How would your answer to parts (a) and (b) of Problem 28 differ if Julio were a corporate shareholder (in the 34% tax bracket) rather than an individual shareholder and the stock ownership in
LO.1, 7 Assume in Problem 26 that Julio has a capital loss carryover of $110,000 in the current tax year. Julio has no other capital gain transactions during the year. What amount of the capital loss
LO.1, 7 How would your answer to Problem 26 differ if Julio were a corporate shareholder (in the 34% tax bracket) rather than an individual shareholder and the stock ownership in Gray Corporation

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