Question
24. LO.1, 2 In the current year, Riflebird Company had operating income of $220,000, operating expenses of $175,000, and a long-term capital loss of $10,000. How do Riflebird
Company and Roger, the sole owner of Riflebird, report this information on their respective Federal income tax returns for the current year under the following assumptions?
a. Riflebird Company is a proprietorship (Roger did not make any withdrawals from the business).
b. Riflebird Company is a C corporation (no dividends were paid during the year).
25. LO.1, 2 Ellie and Linda are equal owners in Otter Enterprises, a calendar year business.
During the current year, Otter Enterprises has $320,000 of gross income and $210,000 of operating expenses. In addition, Otter has a long-term capital gain of $15,000 and makes distributions to Ellie and Linda of $25,000 each. Discuss the impact of this information on the taxable income of Otter, Ellie, and Linda if Otter is:
a. A partnership.
b. An S corporation.
c. A C corporation.
26. LO.1, 2 In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payment to its sole owner, Sasha. In addition,
Azure has interest on municipal bonds of $25,000. Sasha has significant income from other sources and is in the 39.6% marginal tax bracket. Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations.
a. Azure is a C corporation and pays no dividends or salary to Sasha.
b. Azure is a C corporation and distributes $75,000 of dividends to Sasha.
c. Azure is a C corporation and pays $75,000 of salary to Sasha.
d. Azure is a sole proprietorship, and Sasha withdraws $0.
e. Azure is a sole proprietorship, and Sasha withdraws $75,000.
27. LO.2 In 2013, Wilson Enterprises, a calendar year taxpayer, suffers a casualty loss of $90,000. How much of the casualty loss will be deductible by Wilson under the following circumstances?
a. Wilson is an individual proprietor and has AGI of $225,000. The casualty loss was a personal loss, and the insurance recovered was $50,000.
b. Wilson is a corporation, and the insurance recovered was $50,000.
28. LO.1, 4, 8 Benton Company (BC) has one owner, who is in the 33% Federal income tax bracket. BC’s gross income is $395,000, and its ordinary trade or business deductions are $245,000. Compute the Federal income tax liability on BC’s income for 2013 under the following assumptions:
a. BC is operated as a proprietorship, and the owner withdraws $100,000 for personal use.
b. BC is operated as a corporation, pays out $100,000 as salary, and pays no dividends to its shareholder.
c. BC is operated as a corporation and pays out no salary or dividends to its shareholder.
d. BC is operated as a corporation, pays out $100,000 as salary to its shareholder, and pays out the remainder of its earnings as dividends.
e. Assume that Robert Benton of 1121 Monroe Street, Ironton, OH 45638 is the owner of BC, which was operated as a proprietorship in 2013. Robert is thinking about incorporating the business in 2014 and asks your advice. He expects about the same amounts of income and expenses in 2014 and plans to take $100,000 per year out of the company whether he incorporates or not. Write a letter to Robert [based on your analysis in (a) and (b)] containing your recommendations.
29. LO.2, 4 In the current year, Tanager Corporation (a C corporation) had operating income of $480,000 and operating expenses of $390,000. In addition, Tanager had a long-term capital gain of $55,000 and a short-term capital loss of $40,000.
a. Compute Tanager’s taxable income and tax for the year.
b. Assume, instead, that Tanager’s long-term capital gain was $15,000 (not $55,000).
Compute Tanager’s taxable income and tax for the year.
30. LO.2 Virgina owns 100% of Goshawk Company. In 2013, Goshawk Company sells a capital asset (held for three years) at a loss of $40,000. In addition, Goshawk has a shortterm capital gain of $18,000 and net operating income of $90,000 during the year.
Virgina has no recognized capital gain (or loss) before considering her ownership in
Goshawk. How much of the capital loss may be deducted in 2013 and how much is carried back or forward if Goshawk is:
a. A proprietorship?
b. A C corporation?
31. LO.2 During 2013, Gorilla Corporation has net short-term capital gains of $15,000, net long-term capital losses of $105,000, and taxable income from other sources of $460,000. Prior years’ transactions included the following: 2009 net short-term capital gains $40,000 2010 net long-term capital gains 18,000 2011 net short-term capital gains 25,000 2012 net long-term capital gains 20,000
a. How are the capital gains and losses treated on Gorilla’s 2013 tax return?
b. Determine the amount of the 2013 capital loss that is carried back to each of the previous years.
c. Compute the amount of capital loss carryforward, if any, and indicate the years to which the loss may be carried.
d. If Gorilla is a sole proprietorship, rather than a corporation, how would the owner report these transactions on her 2013 tax return?
32. LO.2 Heron Company purchases commercial realty on November 13, 1995, for $650,000. Straight-line depreciation of $287,492 is claimed before the property is sold on February 22, 2013, for $850,000. What are the tax consequences of the sale of realty if Heron is:
a. A C corporation?
b. A sole proprietorship?
33. LO.2 In the current year, Plum, Inc., a closely held C corporation, has $410,000 of net active income, $20,000 of portfolio income, and a $75,000 passive activity loss. What is
Plum’s taxable income for the current year under the following circumstances?
a. Plum is a personal service corporation.
b. Plum is not a personal service corporation.
34. LO.2, 8 Joseph Thompson is president and sole shareholder of Jay Corporation. In
December 2013, Joe asks your advice regarding a charitable contribution he plans to have the corporation make to the University of Maine, a qualified public charity. Joe is considering the following alternatives as charitable contributions in December 2013:
Fair Market
Value (1) Cash donation $200,000 (2) Unimproved land held for six years ($110,000 basis) 200,000 (3) Maize Corporation stock held for eight months ($140,000 basis) 200,000 (4) Brown Corporation stock held for nine years ($360,000 basis) 200,000
Joe has asked you to help him decide which of these potential contributions will be most advantageous taxwise. Jay’s taxable income is $3.5 million before considering the contribution.
Rank the four alternatives, and write a letter to Joe communicating your advice.
The corporation’s address is 1442 Main Street, Freeport, ME 04032.
35. LO.2, 8 In 2013, Gray Corporation, a calendar year C corporation, has a $75,000 charitable contribution carryover from a gift made in 2008. Gray is contemplating a gift of land to a qualified charity in either 2013 or 2014. Gray purchased the land as an investment five years ago for $100,000 (current fair market value is $250,000). Before considering any charitable deduction, Gray projects taxable income of $1 million for 2013 and $1.2 million for 2014. Should Gray make the gift of the land to charity in 2013 or in 2014? Provide support for your answer.
36. LO.2, 8 Dan Simms is the president and sole shareholder of Simms Corporation, 1121
Madison Street, Seattle, WA 98121. Dan plans for the corporation to make a charitable contribution to the University of Washington, a qualified public charity. He will have the corporation donate Jaybird Corporation stock, held for five years, with a basis of $11,000 and a fair market value of $25,000. Dan projects a $310,000 net profit for Simms Corporation in 2013 and a $100,000 net profit in 2014. Dan calls you on December 13, 2013, and asks whether he should make the contribution in 2013 or 2014. Write a letter advising
Dan about the timing of the contribution.
37. LO.2 White Corporation, a calendar year C corporation, manufactures plumbing fixtures.
For the current year, White has taxable income [before the domestic production activities deduction (DPAD)] of $900,000, qualified production activities income (QPAI) of $1.2 million, and W–2 wages attributable to QPAI of $200,000.
a. How much is White Corporation’s DPAD?
b. Assume instead that W–2 wages attributable to QPAI are $150,000. How much is
White’s DPAD?
