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TAX 655 Final Exam




Question;NOTEComplete;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 1Your;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 3Five;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 4Which;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 PercentagesShareholderJohnson Corp.Carey CorpDavid60%80%Kelly30%0%c. Red, Blue and ABC Corporations each have a single class of stock outstanding. The stock is owned as follows:Stock Ownership PercentagesShareholderBlue Corp.ABC CorpRed80%50%Blue40%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 PercentagesShareholderHelm Corp.Oak CorpWalnut CorpZinnia CorpJames100%90%Helm80%30%Walnut60%Problem 5Eric;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 6Linda;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 BasisFMVAssets:Cash$75,000$75,000Land$225,000$325,000Total$300,000$400,000Partners' capitalJerry$75,000$100,000Instrument Corp$75,000$100,000Logo Corp$75,000$100,000Lighthouse Corp$75,000$100,000Total$300,000$400,000a. 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 7Monte;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$175,000Tax-exempt interest income20,000Long-term capital loss32,000Raider?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 8Tom;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?


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