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south western federal taxation

Questions and Answers of South Western Federal Taxation

LO.4 Tan, Inc., a C corporation, has been in existence for five years and has accumulated E & P of $990,000. It projects future earnings to continue at about $200,000 per year. David, Tan’s sole
LO.4 “A favorably taxed fringe benefit is deductible by the employer and is excludible from the gross income of the employee.” To what extent is this statement correct?
LO.3 Is an S corporation subject to the ACE adjustment in calculating the AMT? If so, how is the ACE adjustment calculated for an S corporation? How does it affect the shareholders?
LO.3, 4, 7 Sam is trying to decide whether he should operate his business as a C corporation or as an S corporation. Due to potential environmental hazard problems, it is imperative that the business
LO.2 Several taxpayers would like to conduct a business in partnership form with all of the owners having limited liability. Can a partnership, other than a limited liability partnership, be
LO.2, 3 All of the Big 4 accounting firms changed their ownership form from a general partnership to a limited liability partnership. Discuss the legal and tax ramifications of this modification of
LO.3 The maximum corporate tax rate of 35% is the same as the maximum rate applicable to individuals. Consequently, for any additional taxable income, the corporate tax liability will be the same as
LO.1 What are the advantages of a limited liability company compared to an S corporation?
LO.1, 3 Compare C and S corporations as to the taxation of the entity and its owners.
LO.1 What are the principal legal forms for conducting a business entity? What are the principal Federal income tax forms for doing so?
LO.1, 6, 8, 9, 11 Orange, Inc., a calendar year corporation in Clemson, South Carolina, elects S corporation status for 2012. The company generated a $74,000 NOL in 2011 and another NOL of $43,000 in
LO.10 Blue Corporation elects S status effective for calendar year 2011. As of January 1, 2011, Blue holds two assets.Adjusted Basis Fair Market Value Land $50,000 $110,000 IBM Stock 55,000 40,000
LO.11 Ruby is the owner of all of the shares of an S corporation. Ruby 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, 10 Ray Crockett sold 1,000 shares of his stock in Yellow, Inc., an S corporation.He sold the stock for $13,240, after he had owned it for five years. Ray had paid$137,400 for the stock, which
LO.5, 6, 11 Bonnie and Clyde each own one-third of a fast-food restaurant, and their 13-year-old daughter owns the other shares. Both parents work full-time in the restaurant, but the daughter works
LO.4, 10, 11 Sweetwater, Inc., is an S corporation in Sour Lake, Texas.a. In 2012, Sweetwater’s excess net passive income is $42,000. Sweetwater holds $31,000 of accumulated earnings and profits
LO.10 Rodeo, Inc., a cash basis S corporation in College Station, Texas, formerly was a C corporation. Rodeo records the following assets and liabilities on January 1, 2012, the date its S election
LO.5, 6, 8 Emeline, Inc., of Auburn, Alabama, is an accrual basis S corporation with three equal shareholders. The three cash basis shareholders have the following stock basis at the beginning of the
LO.5, 6, 8, 9 A calendar year S corporation has an ordinary loss of $80,000 and a capital loss of $20,000. Ms. Freiberg owns 30% of the corporate stock and has a $24,000 basis in her stock. Determine
LO.6, 9 In Problem 44, how much of the Whitman loss belongs to Ann and Becky?Becky’s stock basis is $41,300.
LO.5, 6, 11 Red Lion, Inc., is an S corporation with a sizable amount of AEP from a C corporation year. The S corporation has $400,000 investment income and $400,000 investment expense in 2012. The
LO.8 Assume the same facts as in Problem 40, 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.8 Assume the same facts as in Problem 40, except that there is no $15,000 distribution, but the corporation repays the loan principal to Jeff. Discuss the tax effects.
LO.8, 9 Assume the same facts as in Problem 38, except that a Reg. § 1.1367–1(g) election is made. How does your answer change?
LO.8, 9 At the beginning of 2011, Christine Wheat has a basis of $5,000 in her stock of a calendar year S corporation, Zhou, Inc. She holds no debt of the S corporation. During 2011, Wheat’s total
LO.6, 7, 8 Assume the same facts as in Problem 36, except that the two shareholders consent to an AAA bypass election.
LO.6, 7, 8 Money, Inc., a calendar year S corporation in Denton, Texas, has two unrelated shareholders, each owning 50% of the stock. Both shareholders have a $400,000 stock basis as of January 1,
LO.6 Peres, Inc., a calendar year S corporation, holds an AAA balance of $767,050 at the beginning of 2012. During the year, the following items are recorded. Calculate Peres’s ending AAA
LO.6 If the beginning balance in Strauder, Inc.’s OAA is $5,700 and the following transactions occur, what is Strauder’s ending OAA balance?Depreciation recapture income $22,700 Payroll tax
LO.6 Lonergan, Inc., a calendar year S corporation in Athens, Georgia, had a balance in AAA of $200,000 and AEP of $110,000 on December 31, 2012. During 2013, Lonergan, Inc., distributes $140,000 to
LO.6, 8, 9, 11 In 2012, Spence, Inc., a calendar year S corporation, generates an ordinary loss of $110,000 and makes a distribution of $140,000 to its sole shareholder, Storm Nelson. Nelson’s
LO.6, 7, 8 Tiger, Inc., a calendar year S corporation, is owned equally by four shareholders:Ann, Becky, Chris, and David. Tiger owns a piece of investment land that was purchased for $160,000 four
LO.5, 6 McLin, Inc., is a calendar year S corporation. Its AAA balance is zero.a. McLin holds $90,000 of AEP. Tobias, the sole shareholder, has an adjusted basis of$80,000 in his stock. Determine the
LO.6 Noon, Inc., a calendar year S corporation, is equally owned by Ralph and Thomas. Thomas dies on April 1 (not a leap year), and his estate selects a March 31 fiscal year. Noon has $400,000 of
LO.6, 8, 9 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 the AAA is $2,000, and her share of corporate AEP is $6,000.
LO.5, 6 Who, Inc., is a calendar year S corporation. Who’s book income this year totals$172,000. Who is owned equally by four shareholders. From supplemental data, you obtain the following
LO.5, 6 Saul, Inc., a calendar year S corporation, incurred the following items.Tax-exempt interest income $ 7,000 Sales 130,000 Depreciation recapture income 12,000 Short-term capital gain
LO.5, 6 A calendar year S corporation’s profit and loss statement shows net profits of$90,000 (book income). The corporation is owned equally by three shareholders. From supplemental data, you
LO.11 How does the alternative minimum tax affect an S corporation? Its shareholders?
LO.11 How can an S corporation avoid the passive investment income tax?
LO.1, 11 One of your clients is considering electing S status. Texas, Inc., is a six-yearold company with two equal shareholders, both of whom paid $30,000 for their stock.Going into 2012, Texas has
LO.8 For each of the following independent statements, indicate whether the transaction will increase (+), decrease (−), or have no effect (NE) on the adjusted basis of a shareholder’s stock in
LO.6, 8 Scott Tyrney owns 21% of an S corporation. He is confused with respect to the amounts of the corporate AAA and his stock basis. Write a brief memo to Scott identifying the key differences
LO.6, 11 Collette’s S corporation has a small amount of accumulated earnings and profits (AEP), requiring the use of the more complex distribution rules. Collette’s accountant tells her that this
LO.4 Caleb Samford calls you and says that his two-person S corporation was involuntarily terminated in February 2011. He asks you if they can make a new S election now, in November 2012. Draft a
LO.2, 3 On March 2, 2012, the two 50% shareholders of a calendar year corporation decide to elect S status. One of the shareholders, Terry, purchased her stock from a previous shareholder (a
LO.2 Which of the following can be a shareholder of an S corporation?a. Resident alien.b. Partnership.c. Charitable remainder trust.d. IRA.e. Estate.f. One-person LLC (disregarded entity).
LO.2 Would any of these items be considered a second class of stock for an S corporation?a. Short-term unwritten advances from a shareholder that do not exceed $10,000 in the aggregate at any time
LO.2 Outline the characteristics of an S corporation’s straight debt.
LO.2 Would any of these items be considered a second class of stock for an S corporation?a. Voting preferred stock (with a preference on dividends).b. Treasury stock of another class.c. Phantom
LO.2 What requirements must an entity meet to elect S corporation status?
LO.2 What is a qualified S corporation subsidiary (QSSS)? Elaborate.
LO.2 Which of the following are requirements to be an S corporation?a. Only one class of stock.b. Cannot have an estate as a shareholder.c. Cannot use a phantom stock plan.d. Cannot be a foreign
LO.1 How can a C corporation mitigate its double taxation potential?
LO.1 Explain how the net operating loss rules apply to a new S corporation. To a new C corporation?
LO.1 The alternative minimum tax applies to an S corporation. Discuss the validity of this statement.
LO.1 Which of these characteristics are found with an S corporation?a. Limited liability to shareholder.b. Personal holding company.c. Liabilities affect the owner’s basis.d. Distributions of
LO.10, 12 Jasmine Gregory is a 20% member in Sparrow Properties, LLC, which is a lessor of residential rental property. Her share of the LLC’s losses for the current year is$100,000. Immediately
LO.3, 9, 10 Paul and Anna plan to form the PA General Partnership by the end of the current year. The partners will each contribute $80,000 cash, and in addition, the partnership will borrow $240,000
LO.10 The MGP General Partnership was created on January 1 of the current year by having Melinda, Gabe, and Pat each contribute $10,000 cash to the partnership in exchange for a one-third interest in
LO.7, 9 Chris and Lauren each contributed $90,000 cash to the cash basis CL Partnership.The partnership uses all $180,000 of the cash to purchase a depreciable asset. The partnership agreement
LO.7, 9, 12 Continue with the facts presented in Problem 50.On the first day of the third tax year, the partnership sold the equipment for $150,000 and distributed the cash in accordance with the
LO.3, 7, 9, 10 Continue with the facts presented in Problem 47, except that Suz-Anna was formed as an LLC instead of a general partnership.a. How would Suz-Anna’s ending liabilities be treated?b.
LO.11 Continue with the facts in Problem 47, and assume that Suz-Anna prepares the capital account rollforward on the partners’ Schedules K–1 on a tax basis.a. What is Suzy’s capital account
LO.3, 7, 9, 10 Suzy contributed business-related assets valued at $360,000 (basis of$200,000) in exchange for her 40% interest in the Suz-Anna Partnership. Anna contributed land and a building valued
LO.7, 9, 12, 13 How would the answers in Problem 45 change if partnership revenues were $100,000 instead of $150,000?
LO.7, 9, 10 Andrea and Michael are equal partners in the accrual basis AM Partnership.At the beginning of the current tax year, Andrea’s capital account has a balance of$200,000, and the
LO.7, 8 Assume the same facts as in Problem 42, with the following exceptions:• Reece purchased the land five years ago for $120,000. Its fair market value was$90,000 when it was contributed to the
LO.3, 7, 8 Phoebe and Parker are equal members of Phoenix Investors, LLC. They are real estate investors who formed the LLC several years ago with equal cash contributions.Phoenix then purchased a
LO.6 AzureCo, AuburnCo, and AquamarineCo formed the AAA Partnership on January 1 of the current year. AzureCo is a 50% partner, and AuburnCo and AquamarineCo are each 25% partners. All of the
LO.3, 4, 5 The Pelican Partnership was formed on August 1 of the current year and admitted Morlan and Merriman as equal partners on that date. The partners both contributed$300,000 of cash to
LO.5 Browne and Red, both C corporations, formed the BR Partnership on January 1, 2010. Neither Browne nor Red is a personal service corporation, and BR is not a tax shelter. BR’s gross receipts
LO.3, 4, 5, 6, 7 Finch, Inc., a calendar year general contractor, and Cardinal, Inc., a development corporation with a July 31 year-end, formed the equal FC, LLC, on January 1 of the current year.
LO.4 In 2012, Tim and Molly form TM Partnership, Ltd. (an LLLP), to own and operate certain real estate. Tim contributed land, and Molly contributed cash to be used for setting up the entity and
LO.3 The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2012, Jessica contributed land valued at $600,000 to the partnership in exchange for a 50%
LO.3, 14 Continue with the facts presented in Problem 32.At the end of the first year, the LLC distributes $100,000 cash to Sam. No distribution is made to Drew.a. Under general tax rules, how would
LO.3, 14 Continue with the facts presented in Problem 32.a. Construct a balance sheet for SD, LLC, assuming that Drew’s services are completed immediately after forming SD. The balance sheet should
LO.3 Assume the same facts as in Problem 30, except that Chelsea sells her assets to a third party for $100,000 and then contributes that cash to the partnership. The partnership locates equivalent
LO.3 Jared and Chelsea form the equal JC Partnership. Jared contributes cash of$20,000 and land (fair market value of $80,000, adjusted basis of $65,000), and Chelsea contributes the assets of her
LO.3, 14 Scott and Amber form the equal Toucan, LLC, with a cash contribution of$100,000 from Scott and a property contribution (adjusted basis of $110,000, fair market value of $100,000) from
LO.10, 12, 14 Discuss situations in which the partnership entity form might be more advantageous (or disadvantageous) than operating as a Subchapter C or S corporation.
LO.13 When is partnership income subject to self-employment tax for an individual partner?
LO.13 What is a guaranteed payment? When is it deducted by the partnership? When is it reported in the recipient partners’ income?
LO.12 Describe the three limitations that apply to the deductibility of a loss from a partnership. In what order are these limitations applied?
LO.11 What is a partner’s capital account? Describe how a partner’s ending capital account balance is determined. In addition to the material in the chapter, refer to Schedule K–1 in Appendix B.
LO.10 Describe, in general terms, how a partnership’s liabilities affect a partner’s basis in the partnership interest.
LO.9, 10 Discuss the adjustments that must be made to a partner’s basis in the partnership interest. When are such adjustments made?
LO.8 What is the purpose of the three rules that implement the economic effect test?
LO.7 What types of information are reported on the partnership’s Schedule K? How does Schedule K relate to the partnership’s Schedule M–1 (or M–3) and Schedule M–2?
LO.6 How is the taxable year of a newly formed partnership determined?
LO.5 When can a partnership use the cash method of accounting?
LO.3 Kelsey and Christopher are forming the KC Partnership, in which Kelsey will own a 40% interest and Christopher will own a 60% interest. Kelsey will contribute appreciated land, and Christopher
LO.3 When can the formation of a partnership result in a taxable gain to one or more of the new partners?
LO.2, 8, 13 Orange, LLC, was formed when Green, Inc., contributed $400,000 of cash and Rose contributed nondepreciable assets valued at $200,000 with a basis of $10,000. In addition, Rose will
LO.2 Describe how a partnership reports its income for tax purposes. Who makes most elections related to partnership income and deductions? What theory underlies this treatment?
LO.2 What is “inside” basis? “Outside” basis?
LO.2 What are separately stated items? Why are they important?
LO.2 Describe the differences and similarities between the entity concept and the aggregate or conduit concept of partnership taxation.
LO.1 Name the five types of partnerships discussed in this chapter. What factors are considered in determining the type of partnership entity to utilize?
LO.1 What is a partnership agreement? What types of provisions does it include?

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