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business
south western federal taxation

Questions and Answers of South Western Federal Taxation

LO.1, 7 Julio is in the 35% tax bracket. He acquired 1,000 shares of stock in Gray Corporation seven years ago at a cost of $250 per share. In the current year, Julio received a payment of $500,000
LO.7 Joseph and Erica, husband and wife, jointly own all of the stock in Velvet Corporation. The two are currently involved in divorce proceedings, and pursuant to those negotiations they have agreed
LO.6 Julie Swanson bought 5,000 shares of Great Egret Corporation stock two years ago for $12,000. Last year, Julie received a nontaxable stock dividend of 1,000 shares in Great Egret Corporation. In
LO.6 Denim Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. One right and $60 entitle the holder to subscribe to one share of stock.One right is issued for
LO.6 Katie purchased 5,000 shares of Grebe Corporation common stock six years ago for$80,000. In the current year, Katie received a preferred stock dividend of 400 shares, while the other holders of
LO.1, 3 Your client, Heron Corporation, has a deficit in accumulated E & P of $300,000.Starting this year, it expects to generate annual E & P of $150,000 for the next four years and would like to
LO.5 Orange Corporation would like to transfer excess cash to its sole shareholder, DE C I S ION MAKING Danielle, who is also an employee. Danielle is in the 28% tax bracket, and Orange is in the 34%
LO.5 Parrot Corporation is a closely held company with accumulated E & P of $300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50% share in Parrot, and they share
LO.1, 2, 4 Purple Corporation has accumulated E & P of $65,000 at the beginning of the DE C I S ION MAKING year. Its current-year taxable income is $320,000. On December 31, Purple distributed
LO.1, 2, 3, 4 Cerulean Corporation has two equal shareholders, Eloise and Olivia. Eloise I S SUE ID acquired her Cerulean stock three years ago by transferring property worth $700,000, basis of
LO.4 Raven Corporation owns three automobiles that it uses in its business. It no longer DE C I S ION MAKING needs two of these cars and is considering the possibility of distributing them to its two
LO.1, 4 Green Corporation, with E & P of $600,000, distributes land (worth $300,000, adjusted basis of $340,000) to Michael, its sole shareholder. The land is subject to a liability of $130,000,
LO.1, 4 Kathryn owns all of the outstanding stock in Copper Corporation. Kathryn purchased her stock in Copper 11 years ago, and her basis is $18,000. At the beginning of this year, the corporation
LO.1, 3 Eagle Corporation and Jack each own 50% of Hawk Corporation’s common stock. On January 1, Hawk reports a deficit in accumulated E & P of $300,000. Its current E & P is $130,000. During the
LO.1, 3 Bunting Corporation (a calendar year taxpayer) had a deficit in accumulated E & P of $250,000 at the beginning of the current year. Its net profit for the period January 1 through September
If Turkey made a distribution of $75,000 to its sole shareholder on July 1, how is the shareholder taxed?
LO.1, 3 At the beginning of its taxable year, Turkey Corporation had E & P of $405,000.For the calendar year, Turkey incurred a deficit in current E & P of $550,000, which includes a $405,000 loss on
LO.2 Penguin Corporation (a cash basis, calendar year taxpayer) had the following income and expenses in the current year.Income from services $400,000 Salaries paid to employees 70,000 Tax-exempt
LO.2 In each of the following independent situations, indicate the effect on taxable income and E & P, stating the amount of any increase (or decrease) as a result of the transaction. Assume E & P
LO.1, 3 Mia, the sole shareholder of Penguin Corporation, sold her Penguin stock to Sophia on July 30 for $400,000. Mia’s basis in the stock was $300,000 at the beginning of the year. Penguin
LO.1, 3 Complete the following schedule. For each case, assume the shareholder has ample basis in the stock investment.Accumulated E & P Beginning of Year Current E & P Cash Distributions(All on Last
LO.1, 3 Gadwall Corporation is a calendar year taxpayer. At the beginning of the current year, Gadwall has accumulated E & P of $350,000. The corporation incurs a current E & P deficit of $400,000
LO.2 In determining Red Corporation’s current E & P for 2010, how should taxable income be adjusted as a result of the following transactions?a. Interest on municipal bonds received in 2010.b. A
LO.1, 2, 3 On September 30, Sparrow Corporation, a calendar year taxpayer, sold a parcel of land (basis of $300,000) for a $900,000 note. The note is payable in five installments, with the first
LO.2 Compute current E & P for Jade Corporation (a calendar year, accrual basis taxpayer). Jade had the following transactions during 2010, its second year of operation.Taxable income $330,000
LO.2 Indigo Corporation, a calendar year taxpayer, receives dividend income of$300,000 from a corporation in which it holds a 10% interest. Indigo also receives interest income of $45,000 from
LO.1, 3 At the start of the current year, Capon Corporation (a calendar year taxpayer)has accumulated E & P of $120,000. Capon’s current E & P is $80,000, and during the year, it distributes
LO.3 Ted is an agent for Waxwing Corporation, an airline manufacturer, and is negotiating a sale with a representative of the U.S. government and with a representative of a developing country.
LO.3 Linda operates a drug-running operation. Which of the following expenses she incurs can reduce taxable income?a. Bribes paid to border guards.b. Salaries to employees.c. Price paid for drugs
LO.3 Quail Corporation anticipates that being positively perceived by the individual who is elected mayor will be beneficial for business. Therefore, Quail contributes to the campaigns of both the
LO.3 Carmine, Inc., a tobacco manufacturer, incurs certain expenditures associated with political contributions and lobbying activities. Which of these expenditures can be deducted?Payments to
LO.3 Address the following issues.a. Which of the following is a related party under § 267?l Father l Brother l Niece l Sister-in-law l Cousin l Grandson l Corporation and a shareholder who owns 59%
LO.3 Jarret owns City of Savannah bonds with an adjusted basis of $100,000. During the year, he receives interest payments of $3,000. Jarret partially financed the purchase of the bonds by borrowing
LO.1 Drew and his wife Cassie own all of the stock of Thrush, Inc. Cassie is the president and Drew is the vice president. Cassie and Drew are paid salaries of $400,000 and$300,000, respectively,
LO.3 Edward, an attorney, is hired by a major accounting firm to represent it and clients in dealing with members of the U.S. Congress. The accounting firm is supporting liability reform that would
LO.3 Judy, the owner of a very successful restaurant chain, is exploring the possibility of expanding the chain into a city in the neighboring state. She incurs $38,000 of expenses associated with
Determine the amount that Judy can deduct in the current year for investigating these two businesses.DECISION MAKING COMMUNICATIONS
LO.3 Eleanor Saxon sold stock (basis of $65,000) to her brother, Ridge, for $59,000, the fair market value.a. What are the tax consequences to Eleanor?b. What are the tax consequences to Ridge if he
LO.4 In 2010, Gray Corporation, a calendar year C corporation, holds a $75,000 DE C I S ION MAKING charitable contribution carryover from a gift made in 2005. Gray is contemplating a gift of land to
LO.4 Dan Simms is the president and sole shareholder of Simms Corporation, 1121 Madison Street, Seattle, WA 98121. Dan plans for the corporation to make a charitable contribution to the University of
LO.5 Blue Corporation, a manufacturing company, decided to develop a new line of merchandise. The project began in 2010. Blue had the following expenses in connection with the project.2010 2011
LO.5 Sarah Ham, operating as a sole proprietor, manufactures printers in the United States. For 2010, the proprietorship has QPAI of $400,000. Sarah’s modified AGI was$290,000. The W–2 wages paid
LO.5 In 2010, Rose, Inc., has QPAI of $4 million and taxable income of $3 million. Rose pays independent contractors $500,000. Rose’s W–2 wages are $600,000, but only$400,000 of the wages are
LO.6 On November 4, 2008, Blue Company acquired an asset (27.5-year residential real property) for $100,000 for use in its business. In 2008 and 2009, respectively, Blue took$321 and $2,564 of cost
LO.6 Juan, a sole proprietor, acquires a new five-year class asset on March 14, 2010, for$100,000. This is the only asset acquired by Juan during the year. He does not elect immediate expensing under
If Congress reenacts additional first-year depreciation for 2010, he elects not to take additional first-year depreciation. On July 15, 2011, Juan sells the asset.a. Determine Juan’s cost recovery
LO.6 On May 5, 2010, Christy purchased and placed in service a hotel. The hotel cost$1.8 million. Calculate Christy’s cost recovery for 2010. For 2020.
LO.6 Janice acquired an apartment building on June 4, 2010, for $1.4 million. The value of the land is $200,000. Janice sold the apartment building on November 29, 2016.a. Determine Janice’s cost
LO.6 During the month of March 2010, Sam constructed agricultural fences on his farm.The cost of the fencing was $70,000. Sam does not elect immediate expensing under§ 179, but an election to not
LO.6 On January 1, 2003, Jim leased a building to be used in his business as an office building. The lease will terminate on December 31, 2010. On February 2, 2004, Jim made a capital improvement to
LO.6 On July 10, 2001, Wade purchased and placed in service a warehouse. The C R I T I CAL THINKING warehouse cost $850,000. On May 7, 2010, Wade sold the warehouse.a. Determine Wade’s cost
LO.6 Lori, who is single, purchased a new copier (five-year class property) for $50,000 DE C I S ION MAKING and new furniture (seven-year class property) for $275,000 on May 20, 2010. Lori expects
If Congress reenacts additional first-year depreciation for 2010, she elects not to take additional first-year depreciation.a. Determine Lori’s total deduction if the § 179 expense is first taken
LO.6 Olga is the proprietor of a small business. In 2010, the business income, before consideration of any cost recovery or § 179 deduction, is $250,000. Olga spends $850,000 on new seven-year class
LO.6 On March 10, 2010, Yoon purchased three-year class property for $20,000. On DE C I S ION MAKING December 15, 2010, he purchased five-year class property for $340,000. Yoon has net business
LO.6 John Johnson is considering acquiring an automobile at the beginning of 2010 that COMMUNI CAT IONS he will use 100% of the time as a taxi. The purchase price of the automobile is $35,000.John
LO.6 On October 15, 2010, Jon purchased and placed in service a new car. The purchase price was $25,000. This was the only business-use asset Jon acquired in 2010. He used the car 80% of the time for
LO.6 On June 5, 2010, Leo purchased and placed in service a new car that cost $20,000.The business-use percentage for the car is always 100%. If Congress reenacts additional first-year depreciation
LO.6 On May 28, 2010, Mary purchased and placed in service a new $40,000 car. The car C R I T I CAL THINKING was used 60% for business, 20% for production of income, and 20% for personal use in 2010.
If Congress reenacts additional first-year depreciation for 2010, she elects not to take additional first-year depreciation. Compute the cost recovery and any cost recovery recapture in 2011.
LO.6 In 2010, Muhammad purchased a new computer for $14,000. The computer is used 100% for business. Muhammad did not make a § 179 election with respect to the computer. If Congress reenacts
LO.1 Monty loaned his friend Ned $20,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $14,000, Ned filed for bankruptcy and notified
LO.2 Many years ago, Jack purchased 400 shares of Canary stock. During the current I S SUE ID year, the stock became worthless. It was determined that the company ‘‘went under’’because
LO.1 Jake and Mary Snow are residents of the state of New York. They are cash basis E THI C S AND EQUI TY taxpayers and file a joint return for the calendar year. Jake is a licensed master
LO.1, 2 Mable and Jack file a joint return. For the current year, they had the following items:Salaries $180,000 Loss on sale of § 1244 stock acquired two years ago 105,000 Gain on sale of § 1244
LO.2 Mary, a single taxpayer, purchased 10,000 shares of § 1244 stock several years ago at DE C I S ION MAKING a cost of $20 per share. In November of the current year, Mary receives an offer to
LO.2 Paul Sanders, a married taxpayer who files a joint return with his wife, acquired stock in a corporation that qualified as a small business corporation under § 1244. The stock cost$30,000 and
LO.3 Grackle Farming, Inc., owns a 500-acre farm in Minnesota. A tornado hit the area DE C I S ION MAKING and destroyed a farm building and some farm equipment and damaged a barn.Fortunately for
LO.3 In 2007, John opened an investment account with Randy Hansen who held himself out to the public as an investment adviser and securities broker. John contributed$200,000 to the account in 2007.
LO.3 On November 1 of the current year, Sam dropped off to sleep while driving home from a business trip. Luckily, he was only slightly injured in the resulting accident, but the company car that he
LO.4 Mary, a single taxpayer with two dependent children, has the following items of income and expense during 2010:Gross receipts from business $144,000 Business expenses 180,000 Alimony received
LO.6 In 2009, Fred invested $50,000 in a general partnership. Fred’s interest is not considered to be a passive activity. If his share of the partnership losses is $35,000 in 2009 and $25,000 in
LO.6 In the current year, Bill Parker (54 Oak Drive, St. Paul, MN 55162) is considering making an investment of $60,000 in Best Choice Partnership. The prospectus provided by Bill’s broker
LO.6, 7, 8 In the current year, George and Susie Melvin, both successful CPAs, made a cash investment in a limited partnership interest in a California orange grove. In addition to the cash generated
LO.6 In 2005, Russell acquired an interest in a partnership in which he is not a material participant. The partnership was profitable through 2008, and Russell’s basis in this partnership interest
LO.5, 6 Hazel has investments in two nonrental passive activities. Activity A, acquired seven years ago, was extremely profitable until the current year. Activity B was acquired this year. Currently,
LO.6 Sarah has investments in four passive activity partnerships purchased several years ago. Last year, the income and losses were as follows:Activity Income (Loss)A $ 10,000 B (5,000)C (25,000)D
LO.6 In the current year, White, Inc., earns $400,000 from operations and receives$36,000 in dividends and interest on various portfolio investments. White also pays$150,000 to acquire a 20% interest
LO.6 Brown Corporation, a personal service corporation, earns active income of$200,000 and receives $60,000 in dividends during the year. In addition, Brown incurs a loss of $45,000 from an
LO.6, 7 Greg Horne (431 Maple Avenue, Cincinnati, OH 45229), a syndicated radio talk show host, earns an annual salary of $400,000. He works approximately 30 hours per week in this job, which leaves
LO.7 Suzanne owns interests in a bagel shop, a lawn and garden store, and a convenience store. Several full-time employees work at each of the enterprises. As of the end of November of the current
LO.7 Rene retired from public accounting after a long and successful career of 45 years. As part of her retirement package, she continues to share in the profits and losses of the firm, albeit at a
LO.7 Last year, Juan, a real estate developer, purchased 25 acres of farmland on the outskirts of town for $100,000. He expects that the land’s value will appreciate rapidly as the town expands in
LO.8 The end of the year is approaching, and Maxine has begun to focus on ways of minimizing her income tax liability. Several years ago, she purchased an investment in Teal Limited Partnership,
LO.8 A number of years ago, Lee acquired a 20% interest in the BlueSky Partnership for$60,000. The partnership was profitable through 2009, and Lee’s amount at risk in the partnership interest was
LO.8 Last year, Fran invested $40,000 for an interest in a partnership in which she is a material participant. Her share of the partnership loss for last year was $50,000. In the current year,
LO.5, 6, 8 Jonathan, a physician, earns $200,000 from his practice. He also receives $18,000 in dividends and interest on various portfolio investments. During the year, he pays $45,000 to acquire a
LO.5, 6, 8 Five years ago, Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2009, his amount at risk in the activity was $30,000. His shares of the income
LO.9 Several years ago, Rachel acquired an apartment building that currently generates a loss of $35,000. She has AGI of $120,000 before considering the loss. If Rachel is not an active participant
LO.5, 6, 7 You have just met with Scott Myers (603 Pittsfield Dr., Champaign, IL 61821), a successful full-time real estate developer and investor. During your meeting you discussed his tax
LO.6, 8 Bonnie and Adam are married with no dependents and live in New Hampshire DE C I S ION MAKING(not a community property state). Since Adam has large medical expenses, they seek your advice
LO.8 During the current year, Maria works 1,200 hours as a computer consultant, 320 hours in her real estate development business, and 400 hours in her real estate rental activities. Larry, her
LO.8 Ida, who has AGI of $80,000 before considering rental activities, is active in three separate real estate rental activities. Ida has a marginal tax rate of 28%. She has $12,000 of losses from
LO.8 Ella has $105,000 of losses from a real estate rental activity in which she actively participates. She has other rent income of $25,000 and other passive income of $32,000.How much rental loss
LO.5, 6, 9 In the current year, Abe gives an interest in a passive activity to his daughter, Andrea. The value of the interest at the date of the gift is $25,000, and its adjusted basis to Abe is
LO.1 If a taxpayer sells property for cash, the amount realized consists of the net proceeds from the sale. For each of the following, indicate the effect on the amount realized:a. The property is
LO.3 Martha sells her house to Sachin on November 1, 2010, for $480,000. On December 5, the property tax due date, Sachin pays property taxes of $800. Even though the property tax bill from the
LO.1, 2 Melanie owns a personal-use boat that has a fair market value of $32,500 and an adjusted basis of $45,000. Melanie’s AGI is $90,000. Calculate the realized and recognized loss if:a. Melanie
LO.1, 2 Hubert’s personal residence is condemned as part of an urban renewal project.His adjusted basis for the residence is $325,000. He receives condemnation proceeds of$300,000 and invests the
LO.1, 2, 3 Finch, Inc., purchases 1,000 shares of Bluebird Corporation stock on October 3, 2010, for $200,000. On December 12, 2010, Finch purchases an additional 500 shares of Bluebird stock for

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