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tax problems - questin and answer,.,. ch 17




Question;Ch17DISCUSSION QUESTIONS1. LO.1 Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity.Prepare a list of questions you would ask in helping them decide which type of entity they should choose. Explain your reasons for asking each of the questions.2. LO.1 Barbara owns 40% of the stock of Cassowary Corporation (a C corporation) and40% of the stock of Emu Corporation (an S corporation). During 2013, each corporation has operating income of $120,000 and tax-exempt interest income of $8,000. Neither corporation pays any dividends during the year. Discuss how this information will be reported by the corporations and Barbara for 2013.3. LO.1, 8 Art, an executive with Azure Corporation, plans to start a part-time business selling products on the Internet. He will devote about 15 hours each week to running the business. Art?s salary from Azure places him in the 35% tax bracket. He projects substantial losses from the new business in each of the first three years and expects sizable profits thereafter. Art plans to leave the profits in the business for several years, sell the business, and retire. Would you advise Art to incorporate the business or operate it as a sole proprietorship? Why?4. LO.1, 2 In the current year, Lava Corporation, a C corporation, had operating income of $120,000 and a short-term capital gain of $9,000. Also in the current year, Drab Partnership had operating income of $120,000 and a short-term capital gain of $9,000. NeitherLava nor Drab made any distributions to its owners. Abdul owns 40% of the stock in LavaCorporation and a 40% interest in Drab Partnership. Contrast the current year?s tax treatment of these transactions to the entities and to Abdul.5. LO.1, 2 Janice is the sole owner of Catbird Company. In the current year, Catbird had operating income of $100,000, a long-term capital gain of $15,000, and a charitable contribution of $5,000. Janice withdrew $70,000 of profit from Catbird. How should Janice report this information on her individual tax return if Catbird Company is:a. An LLC?b. An S Corporation?c. A C corporation?6. LO.1, 2 Joel is the sole shareholder of Manatee Corporation, a C corporation. BecauseManatee?s sales have increased significantly over the last several years, Joel has determined that the corporation needs a new distribution warehouse. Joel has asked your advice as to whether (1) Manatee should purchase the warehouse or (2) he should purchase the warehouse and lease it to Manatee. What relevant tax issues will you discuss with Joel?7. LO.1 Explain the concept of double taxation as applicable to C corporations. How might shareholders attempt to reduce the impact of double taxation?8. LO.1 In the current year, Juanita and Joseph form a two-member LLC and do not fileForm 8832 (Entity Classification Election). As a result, the LLC will be treated as a partnership for Federal tax purposes. Assess the validity of this statement.9. LO.2 In 2013, Jeanette, an individual in the 25% marginal tax bracket, recognized a $20,000 long-termcapital gain. Also in 2013, Parrot Corporation, a C corporation in the 25% marginal tax bracket, recognized a $20,000 long-termcapital gain. Neither taxpayer had any other property transactions in the year.What tax rates are applicable to these capital gains?10. LO.2 John (a sole proprietor) and Eagle Corporation (a C corporation) each recognize a long-term capital gain of $10,000 and a short-term capital loss of $18,000 on the sale of capital assets. Neither taxpayer had any other property transactions during the year. Describe the tax consequences of these gains and losses for John and for Eagle.11. LO.2 A taxpayer sells a warehouse for a recognized gain. Depreciation had been properly claimed on the property, based on the straight-line method over a 39-year recovery period. Will the same amount of depreciation recapture result whether the taxpayer is an individual or a C corporation? Explain.12. LO.2 Osprey Corporation, a closely held corporation, has $100,000 of net active income, $25,000 of portfolio income, and a $120,000 loss from a passive activity.a. How much of the passive loss can Osprey deduct in the current year if it is a PSC?b. If it is not a PSC?13. LO.2 On December 24, 2013, the directors of Partridge Corporation, an accrual basis calendar year taxpayer, authorized a cash contribution of $10,000 to the American CancerAssociation. The payment is made on April 14, 2014. Can Partridge deduct the charitable contribution in 2013? Explain.14. LO.2 Briefly describe how the amount of a charitable contribution of property by aC corporation is determined.15. LO.2, 8 The board of directors of Orange Corporation, a calendar year taxpayer, is holding its year-end meeting on December 30, 2013. One topic on the board?s agenda is the approval of a $25,000 gift to a qualified charitable organization. Orange has a $20,000 charitable contribution carryover to 2013 from a prior year. Identify the tax issues the board should consider regarding the proposed contribution.16. LO.2, 3, 8 Gold Corporation, a calendar year C corporation, was formed in 2007 and has been profitable until the current year. In 2013, Gold incurs a net operating loss.Identify the issues that Gold Corporation should consider regarding its NOL carryback and carryover options.17. LO.1, 3 Marmot Corporation pays a dividend of $100,000 in 2013. Otter Corporation, which is in the 25% marginal bracket, owns 15% of Marmot?s stock. Gerald, an individual taxpayer in the 25% marginal bracket, also owns 15% of Marmot?s stock. Compare and contrast the treatment of the dividend by Otter Corporation and Gerald.18. LO.3 Determine whether the following expenditures by Cuckoo Corporation are organizational expenditures, startup expenditures, or neither.a. Legal expenses incurred for drafting the corporate charter and bylaws.b. Accounting fees incurred in organization.c. Expenses of temporary board of directors? organizational meetings.d. Employee salaries incurred during the training period before opening for business.e. Brokerage fees incurred in initial stock sales.19. LO.6 When are C corporations required to make estimated tax payments? How are these payments calculated? 20. LO.6 Schedule M?1 of Form 1120 is used to reconcile financial accounting net income with taxable income reported on the corporation?s income tax return as follows: net income per books + additions? subtractions = taxable income. Classify the following items as additions or subtractions in the Schedule M?1 reconciliation.a. Life insurance proceeds received upon death of covered executive.b. Tax depreciation in excess of book depreciation.c. Federal income tax per books.d. Capital loss in excess of capital gain.e. Charitable contributions in excess of taxable income limitation.f. Premiums paid on life insurance policies covering executives (corporation is beneficiary).g. Domestic production activities deduction.21. LO.6 In 2013, Woodpecker, Inc., a C corporation with $8.5 million in assets, reported amortization of $40,000 on its financial statements and deducted amortization of $55,000 on its Federal tax return. Is Woodpecker required to file Schedule M?3? If a Schedule M?3 is filed by Woodpecker, how is the difference in amortization amounts treated on that schedule?22. LO.7 Marcellus Jackson, the CFO of Mac, Inc., notices that the tax liability reported onMac?s tax return is less than the tax expense reported on Mac?s financial statements.Provide a letter to Jackson outlining why these two tax expense numbers differ. Mac?s address is 482 Linden Road, Paris, KY 40362.23. LO.7 Cramer, a stock analyst, wants to understand how the income tax expense reported in financial statements will affect stock prices. Briefly describe the objective ofASC 740 (SFAS 109) with regard to reporting income tax expense.


Paper#38582 | Written in 18-Jul-2015

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