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Tax problem 8 ques answered




Question;NOTE;Complete;the problems as presented in this document. You may create a new document;and/or spreadsheet as needed. Any memo should be no more than 3 pages in;length. Please state any assumptions used if problems are not clear.;Problem 1;Your;client, a physician, recently purchased a yacht on which he flies a pennant;with a medical emblem on it. He recently informed you that he purchased the;yacht and flies the pennant to advertise his occupation and thus attract new;patients. He has asked you if he may deduct as ordinary and necessary business;expenses the costs of insuring and maintaining the yacht. In search of an;answer, consult RIA?s CHECKPOINT TAXavailable;on-line through the SNHU Shapiro Library. Explain the steps taken to find your;answer.;Problem;2;Stacey Small has a small salon that she has run for a few;years as a sole proprietorship. The proprietorship uses the cash method of;accounting and the calendar year as its tax year. Stacey needs additional;capital for expansion and knows two people who might be interested in;investing. One would like to practice hairdressing in the salon. The other;would only invest.;Stacey wants to know the tax consequences of incorporating;the business. Her business assets include a building, equipment, accounts;receivable and cash. Liabilities include a mortgage on the building and a few;accounts payable, which are deductible when paid.;Write a memo to Stacey explaining the tax consequences of;the incorporation. As part of your memo examine the possibility of having the;corporation issue common and preferred stock and debt for the shareholders?;property and money.;Problem;3;Five years ago, Lacey, Kaylee, and Doug organized a software;corporation, DLK, which develops;and sells Online Meetings software for businesses. DLK;is a C corporation. Each individual contributed $10,000 to the company in;exchange for 1,000 shares of DLK;stock (for a total of 3,000 shares). The corporation also borrowed $250,000;from ACME Venture Capital to;finance operating costs and capital expenditures.;Because of intense competition, DLK;struggled for the first few years of operation and the corporation sustained;chronic losses. This year, Lacey, DLK?s;president, decided to seek additional funds to finance DLK?s;working capital.;CME declined;to extend additional funds because of the money already invested in DLK. High Tech Venture Capital Inc. proposed to;lend DLK $100,000, but at a 10%;premium over the prime rate. (Other software manufacturers in the same market;can borrow at a 3% premium.) First Round Capital proposed to invest $50,000 of;equity capital into DLK, but on;the condition that the investment firm be granted the right to elect five;members to DLK?s board of;directors. Discouraged by the ?high cost? of external borrowing, Lacey decides;to approach Kaylee and Doug.;Lacey suggests to Kaylee and Doug that each of the three;original investors contribute an additional $25,000 to DLK;in exchange for five 20-year debentures. The debentures will be unsecured and;subordinate to ACME?s debt. Annual;interest on the debentures will accrue at a floating 5% premium over the prime;rate. The right to receive interest payments will be cumulative, that is each;debenture holder is entitled to past and current interest payments before DLK?s board can declare a common stock dividend.;The debentures would be both nontransferable and noncallable. Lacey, Kaylee and;Doug have asked you, their tax accountant, to advise them on the tax;implications of the proposed financing agreement. After researching the issue;issue your advice in a tax research memo. At a minimum, you should consult the;following authorities;?;IRC. Sec 385;?;Rudolph;A. Hardman, 60 AFTR 2d 87-5651, 82-7 USTC?9523;(9th Cir., 1987);?;Tomlinson;v. The 1661 Corporation, 19 AFTR 2d 1413, 67-1 USTC?9438;(5th Cir., 1967);Problem;4;Which of the following;groups constitute a controlled group? (Any stock not listed below is held by;unrelated individuals each owning less than 1% of the outstanding stock.) For;brother-sister corporations, which definition applies?;a.;Mark owns 90% of the single classes of stock of Hot and Ice;Corporations.;b.;Johnson and Carey Corporations each have only a single class;of stock outstanding. The two controlling individual shareholders own the stock;as follows;Stock Ownership;Percentages;Shareholder;Johnson Corp.;Carey Corp;David;60%;80%;Kelly;30%;0%;c.;Red, Blue and ABC;Corporations each have a single class of stock outstanding. The stock is owned;as follows;Stock Ownership;Percentages;Shareholder;Blue Corp.;ABC Corp;Red;80%;50%;Blue;40%;Red Corporation?s stock is;widely held by over 1,000 shareholders, none of whom owns directly or;indirectly more than 1% of Red?s stock.;d.;Helm, Oak, Walnut and Zinnia Corporations each have a single;class of stock outstanding. The stock is owned as follows;Stock Ownership;Percentages;Shareholder;Helm Corp.;Oak Corp;Walnut Corp;Zinnia Corp;James;100%;90%;Helm;80%;30%;Walnut;60%;Problem;5;Eric and Denise are;partners in ED Partnership. Eric owns a 60% capital, profits and loss interest.;Denise owns the remaining interest. Both materially participate in the;partnership activities. At the beginning of the current year, ED?s only;liabilities are $50,000 in accounts payable, which remain outstanding at;year-end. In August, ED borrowed $120,000 on a nonrecourse basis from Delta;Bank. The loan is secured by property with a $230,000 FMV. These are ED?s only;liabilities at year-end. Basis for the partnership interest at the beginning of;the year is $40,000 for Denise and $60,000 for Eric before considering the;impact of liabilities and operations. ED has a $200,000 ordinary loss during;the current year. How much loss can Eric and Denise recognize?;Problem;6;Linda pays $100,000 cash;for Jerry?s ? interest in the JILL;Partnership. The partnership has a Sec. 754 election effect. Just before the;sale of Jerry?s interest, JILL?s;balance sheet appears as follows;Partnership?s;Basis;FMV;Assets;Cash;$75,000;$75,000;Land;$225,000;$325,000;Total;$300,000;$400,000;Partners' capital;Jerry;$75,000;$100,000;Instrument Corp;$75,000;$100,000;Logo Corp;$75,000;$100,000;Lighthouse Corp;$75,000;$100,000;Total;$300,000;$400,000;a.;What is Linda?s total optional basis adjustment?;b.;If JILL;Partnership sells the land for its $325,000 FMV immediately after Linda;purchases her interest, how much gain or loss will the partnership recognize?;c.;How much gain will Linda report as a result of the sale?;Problem;7;Monte and Allie each own;50% of Raider Corporation, an S corporation. Both individuals actively;participate in Raider?s business. On January 1, Monte and Allie have adjusted;bases for their Raider stock of $80,000 and $90,000 respectively. During the;current year, Raider reports the following results;Ordinary loss;$175,000;Tax-exempt interest;income;20,000;Long-term capital loss;32,000;Raider?s balance sheet at;year-end shows the following liabilities: accounts payable, $90,000, mortgage;payable, $30,000, and note payable to Allie, $10,000.;a.;What income and deductions will Monte and Allie report from;Raider?s current year activities?;b.;What is Monte?s stock basis on December 31?;c.;What are Allie?s stock basis and debt basis on December 31?;d.;What loss carryovers are available for Monte and Allie?;e.;Explain how the use of the losses in Part a would change if;instead Raider were a partnership and Monte and Allie were partners who shared;profits, losses and liabilities equally.;Problem;8;Tom Hughes died in 2009;with a gross estate of $3.9 million and debt of $30,000. He made post-1976;taxable gifts of $100,000, valued at $80,000 when he died. His estate paid;state death taxes of $110,200. What is his estate tax base?


Paper#48512 | Written in 18-Jul-2015

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