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655 Final Exam Solution 100% Correct Answers
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TAX 655 Final Exam Solution 100%
Correct Answers
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
TAX available 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:
- Sec 385
- Rudolph A. Hardman, 60 AFTR 2d 87-5651, 82-7 USTC ¶9523 (9th, 1987)
- Tomlinson v. The 1661 Corporation, 19 AFTR 2d 1413, 67-1 USTC ¶9438 (5th, 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?
- Mark owns 90% of the single classes of stock of Hot and Ice Corporations.
- 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%
|
||
- 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.
- 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
¼ 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
|
- What is Linda’s total optional basis adjustment?
- 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?
- 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.
- What income and deductions will Monte and Allie report from Raider’s current year activities?
- What is Monte’s stock basis on December 31?
- What are Allie’s stock basis and debt basis on December 31?
- What loss carryovers are available for Monte and Allie?
- 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?
