Reference no: EM132538599

ACCT616 Advanced Federal Taxation - American Public University System

Question No 1:
Grand Corporation reported pretax book income of $720,000. Tax depreciation exceeded book depreciation by $440,000. In addition, the company received $350,000 of tax-exempt municipal bond interest. The company's prior-year tax return showed taxable income of $58,000. Compute the company's current or deferred income tax expense or benefit.

Deferred Income tax benefits $----------------------?

Question No. 2:
Saginaw Inc. completed its first year of operations with a pretax loss of $742,500. The tax return showed a net operating loss of $896,500, which the company will carry forward. The $154,000 book-tax difference results from excess tax depreciation over book depreciation. Management has determined that it should record a valuation allowance equal to the net deferred tax asset. Assuming the current tax expense is zero, prepare the journal entries to record the deferred tax provision and the valuation allowance. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

a. Prepare the journal entry to record the deferred tax consequences for recognition of the current year NOL before considering the valuation allowance.

No	Transaction	General Journal	Debit	Credit
1	1	Deferred tax asset	----------?
		Deferred tax benefit		--------------?

b. Prepare the journal entry to record the deferred tax consequences of the depreciation book-tax difference.

No	Transaction	General Journal	Debit	Credit
1	1	Deferred tax expensese	--------------?
		Deferred tax liability		-------------?

c. Prepare the journal entry to record the deferred tax consequences of the valuation allowance.

No	Transaction	General Journal	Debit	Credit
1	1	Deferred tax benefit	--------------?
		Valuation allowance		--------------?

Question No. 3

Barry Potter and Winnie Weasley are considering making an S election on March 1, 2019, for their C corporation, Omniocular. However, first they want to consider the implications of the following information:
• Winnie is a U.S. citizen and resident.
• Barry is a citizen of the United Kingdom, but a resident of the United States.
• Barry and Winnie each own 50 percent of the voting power in Omniocular. However, Barry's stock provides him with a claim on 60 percent of the Omniocular assets in liquidation.
• Omniocular was formed under Arizona state law, but it plans on eventually conducting some business in Mexico.

a. Is Omniocular eligible to elect S corporation status?

For the remainder of the problem, assume Omniocular made a valid S election effective January 1, 2019. Barry and Winnie each own 50 percent of the voting power and have equal claim on Omniocular's assets in liquidation. In addition, consider the following information:
• Omniocular reports on a calendar tax year.
• Omniocular's earnings and profits as of December 31, 2018, were $55,000.
• Omniocular's 2018 taxable income was $15,000.
• Omniocular's assets at the end of 2018 are as follows:

Omniocular Assets
December 31, 2018
Asset	Adjusted Basis				FMV
Cash	$	50,000			$	50,000
Accounts receivable		20,000				20,000
Investments in stocks and bonds		700,000				700,000
Investment in land		90,000				100,000
Inventory (LIFO)		80,000	*			125,000
Equipment		40,000				35,000
Totals	$	980,000			$	1,030,000

*$110,000 under FIFO accounting.
• On March 31, 2019, Omniocular sold the land for $42,000.
• In 2019, Omniocular sold all the inventory it had on hand at the beginning of the year. This was the only inventory it sold during the year.

Other Income/Expense Items for 2019
Sales revenue	$	155,000
Salary to owners		(50,000	)
Employee wages		(10,000	)
Depreciation expense		(5,000	)
Miscellaneous expenses		(1,000	)
Interest income		40,000
Qualified dividend income		65,000

• Assume that if Omniocular were a C corporation for 2019, its taxable income would have been $88,500.
b. How much LIFO recapture tax (in total) is Omniocular required to pay and when is the first installment due?
c. How much built-in gains tax, if any, is Omniocular required to pay?
d. How much excess net passive income tax, if any, is Omniocular required to pay?
e. Assume Barry's basis in his Omniocular stock was $40,000 on January 1, 2019. What is his stock basis on December 31, 2019?
For the following questions, assume that after electing S corporation status Barry and Winnie had a change of heart and filed an election to terminate Omniocular'sS election, effective August 1, 2020.

• In 2020, Omniocular reported the following income/expense items:

	January 1-July 31, 2020 (213 days)				August 1-December 31, 2020 (153 days)				January 1-December 31, 2020
Sales revenue	$	80,000			$	185,000			$	265,000
Cost of goods sold		(40,000	)			(20,000	)			(60,000	)
Salaries to Barry and Winnie		(60,000	)			(40,000	)			(100,000	)
Depreciation expense		(7,000	)			(2,000	)			(9,000	)
Miscellaneous expenses		(4,000	)			(3,000	)			(7,000	)
Interest income		6,000				5,250				11,250
Overall net income (loss)	$	(25,000	)		$	125,250			$	100,250

f. For tax purposes, how would you recommend Barry and Winnie allocate income between the short S corporation year and the short C corporation year if they would like to minimize double taxation of Omniocular's income?

g. Assume in part (f) that Omniocular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income. If Barry's stock basis in his Omniocular stock on January 1, 2020, is $50,000, what is his stock basis on December 31, 2020?

h. When is the earliest tax year in which Omniocular can be taxed as an S corporation again?

Complete this question by entering your answers in the tabs below.

a) How much LIFO recapture tax (in total) is Omniocular required to pay and when is the first installment due? As per new tax rule, the corporate tax rate is 21% .

b)
c. How much built-in gains tax, if any, is Omniocular required to pay?
d. How much excess net passive income tax, if any, is Omniocular required to pay?
e. Assume Barry's basis in his Omniocular stock was $40,000 on January 1, 2019. What is his stock basis on December 31, 2019? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
g. Assume in part (f) that Omniocular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income. If Barry's stock basis in his Omniocular stock on January 1, 2020, is $50,000, what is his stock basis on December 31, 2020? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
c Built in gains tax ?
d Excess net passive income tax ?
e Stock basis ?
g Stock basis ?

Question No. 4
Several years ago, your client, Brooks Robinson, started an office cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, "The Human Vacuum Cleaner." Brooks operated his business as a sole proprietorship and used the cash method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the company's common stock. The corporation would also assume the company's liabilities (payables and mortgage).

Balance Sheet
		Adjusted Basis			FMV
Assets
Accounts receivable	$	0		$	5,000
Cleaning equipment (net)		25,000			20,000
Building		50,000			75,000
Land		25,000			50,000
Total assets	$	100,000		$	150,000
Liabilities
Accounts payable	$	0		$	10,000
Salaries payable		0			5,000
Mortgage on land and building		35,000			35,000
Total liabilities	$	35,000		$	50,000

Required:

1. a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation?
2. b. How much, if any, gain or loss (on a per asset basis) does Brooks recognize?
3. c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporation's stock?
4. d. What tax basis does Brooks have in the corporation's stock?
5. e. What is the corporation's tax basis in each asset it receives from Brooks?
6. f. How much, if any, gain or loss (on a per asset basis) will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption?
7. g. Will Brooks be able to transfer the accounts receivable to the corporation and have the corporation recognize the income when the receivable is collected?
8. h. Brooks was depreciating the equipment (200 percent declining balance) and building (straight-line) using MACRS when it was held inside the proprietorship. How will the corporation depreciate the equipment and building? Assume Brooks owned the equipment for four years (seven-year property) and the building for six years.
9. i-1. In consideration of whether or not the corporation can deduct liabilities when paid, will it matter which accounting method is used?
10. i-2. Which accounting method should the corporation use?

How much, if any, gain or loss (on a per asset basis) will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption? (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

	Recognized gain/Loss
Accounts Receivble
Equipment
Building
Land
Total

What is the corporation's tax basis in each asset it receives from Brooks? (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

	Tax Basis
Accounts Receivble	0
Equipment
Building
Land
Total

c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporation's stock?

d. What tax basis does Brooks have in the corporation's stock?
(Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

c                    Gain/ Loss Recognized	0
D                    Tax basis

How much gain or loss does Brooks realize on the transfer of each asset to the corporation? (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

Attachment:- Advanced Federal Taxation.rar