(Added steps and hints for this problem at the bottom)

During 2020, Amy Nelson and Jeffrey Smith decided they would like to start their own gourmet hamburger business. While they recognized it was a tough time to start a new restaurant since so many had closed during COVID, Amy and Jeffrey believed that the public would love the recipes used by Amys mom, Kristen Johnson. They also thought that they had the necessary experience to enter this business, as Jeffrey currently owned a fast-food franchise business while Amy had experience operating a small bakery. After doing their own market research, they established Gourmet Burger, Inc., which was incorporated on March 1, 2021. The companys address is 5432 Partridge Pl., Tulsa, Oklahoma 74105 and its employer identification number is 98-7654321.

The company started modestly. After refurbishing an old gas station that it had purchased, the company opened for business on March 25, 2021. Shortly after business began, however, business boomed. By the close of 2021, the company was planning to open two other locations. Gourmet Burger has three shareholders who own stock as follows:

Shareholder Shares

Amy Nelson 500

Jeffrey Smith 200

Kristen Johnson 300

Total outstanding 1,000

Gourmet Burger was formed on March 1, 2021. On that date, shareholders made contributions as follows

Amy Nelson contributed $50,000 in cash and 200 shares of MND stock, a publicly held company, which had a fair market value of $50,000. Amy had purchased the MND stock on October 3, 2002 for $36,000.

Jeffrey Smith contributed equipment worth $40,000 which he had used in his own business until he contributed it to Gourmet Burger in March 2021 Jeffreys tax basis in the equipment was $96,000 as of the end of 2020 (original cost in February 2019, $200,000; tax depreciation for 2019, 2020 using MACRS percentages for five-year property, $104,000; he did not take bonus depreciation or Section 179 expense on the equipment).

Kristen Johnson contributed $60,000 in cash.

The company is on the accrual basis and has chosen to use the calendar year for tax purposes. The corporations adjusted trial balance for financial accounting purposes reveals the following information:

Cash	322,400
Ending inventory	16,000
Equipment	55,000
Land	40,000
Building	15,000
Improvement to building	55,000
Accumulated depreciation	(19,000)
Notes payable	(93,000)
Accounts payable	(45,000)
Taxes payable	(8,000)
Salaries payable	(20,000)
Capital stock	(200,000)
Sales	(550,000)
Gain on sale of MND stock	(18,000)
Dividend from MND Corporation	(2,000)
Legal expenses	8,500
Accounting expenses	400
Miscellaneous expenses	2,100
Premium on key person life insurance	800
Rent expense	27,600
Advertising	20,000
Cost of goods sold	104,000
State income taxes	9,000
Federal income taxes	42,000
Payroll taxes	14,500
Salary expenses	150,000
Insurance	12,000
Repairs	10,500
Charitable contributions	30,000
Depreciation per books	19,000
Interest expense	1,200

The company has provided additional information below.

The company took a physical count of inventory on December 31, 2021. On that date it was determined that ending inventory was $16,000. Beginning inventory was $0 because this is the first year of the corporations operation, and Purchases were $120,000. Use these figures to complete Form 1125-A.

On March 9, 2021, the corporation purchased an old gas station for $55,000 to house the restaurant. Of the $55,000 purchase price, $40,000 was allocated to the land while $15,000 was allocated to the building. Prior to opening, the old gas station was renovated. Improvements to the structure were made in March at a cost of ................................... $55,000.

The legal costs were for work done by Gourmet Burgers attorney in March for drafting the articles of incorporation and by-laws. Accounting fees that were paid in May were for setting up the books and the accounting system. Miscellaneous expenses included a $100 fee paid in March to the State of Oklahoma to incorporate.

The MND stock was sold for $68,000 on May 3, 2021. Shortly before the sale, MND had declared and paid a dividend. Gourmet Burger received $2,000 on April 1, 2021. MND was incorporated in Delaware. Gourmet Burger owned less than 20% of MND at the time the dividend was received.

The corporation found a good deal on some used refrigeration equipment (7-year property). It purchased the equipment on March 15, 2021 for $15,000, and took advantage of the new bonus depreciation rules.

Gourmet Burger has elected not to use the limited expensing provisions of Code Sec 179. In addition, it claimed the maximum depreciation with respect to all other assets. Any other elections required to minimize the corporations tax liability were made. However, for simplicity in completing this assignment, please ignore any special depreciation rules for qualified restaurant property.

Amy Nelson (SSN 447-52-7943) is president of the corporation and spends 90 percent of her working time in the business. Salary expense includes her salary of $60,000 and an accrued bonus to her as of December 31 of $15,000. No other officers received compensation. The key-person life insurance policy covers Amys life and the corporation is the beneficiary.

The company paid estimated income taxes during the year of $42,000. For simplicitys sake, in completing the tax return do not adjust the books to reflect the actual tax due.

Gourmet Burger and Jeffrey agreed that Jeffrey would step down his stock basis so that Gourmet Burger would not have to step down its basis in the equipment.

Required: Prepare the 2021 Form 1120, Schedule D, Form 4562, and other appropriate forms and schedules for Gourmet Burger, Inc. Show all calculations used to determine all reported amounts. You can obtain tax forms from the internal revenue service website at www.irs.gov.

Step by Step:

Prepare an income statement and balance sheet per books using the trial balance provided. (You do not need to turn this in. This is just to help with calculations).

For each item on the income statement determine whether an adjustment is necessary for income tax purposes. Create a column on the income statement for Schedule M-1 adjustments. Enter all adjustments from book to taxable income in this column. Total the two columns to get the income and expense amounts that go on page one of the tax return. Round all amounts on the tax return to the nearest dollar.

Use the information prepared in steps 1 and 2 to complete Schedules L, M-1 and M-2, and Part 1 of Schedule M-3.

Fill out the required information on Schedule C, J, and K. Prepare Schedule D for the sale of stock, Schedule G for ownership, Form 1125-E for officers compensation, Form 1125-A for cost of goods sold, and Form 4562 for depreciation and any other required forms.

Prepare any necessary supporting schedules.

Hints:

Test whether Section 351 applies to the corporate formation. This will determine the corporations tax basis in the contributed stock and equipment.

The depreciation provided is depreciation per books. You must calculate tax depreciation. The first year a corporation operates is a short tax year if it does not begin operations on January 1. For short years, depreciation is calculated for the proportion of the year the corporation operated. Since Gourmet Burger started business on March 1, depreciation deductions for all purchased personal property is calculated by multiplying the statutory percentage (after applying the half year convention if necessary) by 10/12. However, bonus depreciation is not adjusted for a short year. Depreciation for purchased real property is calculated using the mid-month convention, and no adjustment for the short year is necessary. For property acquired in a Section 351 transaction, the corporation steps into the shoes of the contributing shareholder. Depreciation is allocated to the corporation in proportion to the number of months during the year that the corporation held the property, with the month of the 351 exchange allocated to the corporation.

Amy Nelson and Burger Corporation are related parties. Amy is a cash basis taxpayer. Burger Corporation is an accrual basis taxpayer.

Taxable income before NOL deduction and special deductions (Page 1, Line 28) should be $175,099 (give or take a dollar or two for rounding differences).