OBJECTIVE  The objective of this exercise is to perform appropriate research and analysis and to prepare reports with the answers to the questions in at least two research problems from the list below. -The report should appropriately reference any sources used. Primary sources are, of course, preferable. RESEARCH PROBLEMS 1. Crest Corporation, a calendar-year taxpayer, was formed in 2015 and incurred $60,000 in organizational expenditures. Had the corporation made a proper election under Code Sec. 248, it would have been entitled to a $7,000 deduction in 2015. However, on its 2015 tax return it erroneously claimed a $60,000 current deduction (i.e., it expensed the full amount in the year it was organized). Upon audit in 2018, the IRS disallowed Crest a $7,000 deduction. Crest Corporation seeks your advise on this issue.  2 Shoots and Ladders Inc. has had taxable income the last three years, but is breaking even this year. Elsa, the sole shareholder, has a $25,000 basis in her stock. After consulting with a local CPA, the corporation does the following: a. Sets up an Employee Stock Ownership Plan (ESOP). b. Contributes $40,000 to the ESOP, borrowed for the occasion from a local bank. c. Deducts the $40,000 as a contribution to a qualified plan, thus creating a net operating loss of $40,000. d. Permits the ESOP to purchase 49 percent of Elsa’s stock; she reports a long-term capital gain of $27,750. Can all of these transactions be executed under the rules applicable to employee stock ownership plans.  3. What formula is used in Pennsylvania for apportionment of multistate income and what are the corporate income tax rates? Compare Pennsylvania’s formula to the formulae used by each the surrounding states. Indicate when and why each state’s formula might be preferable. 4. Alice White, Bertha Smith, and Carol Jones each has her own computer equipment and service retail store. In an effort to potentially reduce their costs and increase their control over supply channels, they buy a plant which manufactures selected computer supplies and equipment. Each makes an equal cash contribution toward the purchase of the plant, each has an equal capital and profits interest in the plant, and they agree to share all losses equally. They own the plant as tenants in common. The co-owners have a written operating agreement specifying that each has an equal interest in the plant’s production, each is responsible for her equal share of expenses, and each owns a proportionate, undivided part of the plant’s equipment. The agreement also provides that the plant, as such, does not have the right to market the manufactured computer supplies and equipment. In lieu of the plant’s selling the manufactured comp-0uter supplies and equipment to other purchases, Alice, Bertha, and Carol agree that each will take one-third of the plant’s annual output. Each takes her share of the output, commingles it with other computer equipment and supplies in their respe.

1. OBJECTIVE
The objective of this exercise is to perform appropriate
research and analysis and to prepare reports with the answers to
the questions in at least two research problems from the list
below.
-The report should appropriately reference any sources used.
Primary sources are, of course, preferable.
RESEARCH PROBLEMS
1. Crest Corporation, a calendar-year taxpayer, was formed in
2015 and incurred $60,000 in organizational expenditures. Had
the corporation made a proper election under Code Sec. 248, it
would have been entitled to a $7,000 deduction in 2015.
However, on its 2015 tax return it erroneously claimed a
$60,000 current deduction (i.e., it expensed the full amount in
the year it was organized). Upon audit in 2018, the IRS
disallowed Crest a $7,000 deduction. Crest Corporation seeks
your advise on this issue.
2 Shoots and Ladders Inc. has had taxable income the last three
years, but is breaking even this year. Elsa, the sole shareholder,
has a $25,000 basis in her stock. After consulting with a local
CPA, the corporation does the following: a. Sets up an

2. Employee Stock Ownership Plan (ESOP). b. Contributes
$40,000 to the ESOP, borrowed for the occasion from a local
bank. c. Deducts the $40,000 as a contribution to a qualified
plan, thus creating a net operating loss of $40,000. d. Permits
the ESOP to purchase 49 percent of Elsa’s stock; she reports a
long-term capital gain of $27,750. Can all of these transactions
be executed under the rules applicable to employee stock
ownership plans.
3. What formula is used in Pennsylvania for apportionment of
multistate income and what are the corporate income tax rates?
Compare Pennsylvania’s formula to the formulae used by each
the surrounding states. Indicate when and why each state’s
formula might be preferable.
4. Alice White, Bertha Smith, and Carol Jones each has her own
computer equipment and service retail store. In an effort to
potentially reduce their costs and increase their control over
supply channels, they buy a plant which manufactures selected
computer supplies and equipment. Each makes an equal cash
contribution toward the purchase of the plant, each has an equal
capital and profits interest in the plant, and they agree to share
all losses equally. They own the plant as tenants in common.
The co-owners have a written operating agreement specifying
that each has an equal interest in the plant’s production, each is
responsible for her equal share of expenses, and each owns a
proportionate, undivided part of the plant’s equipment. The
agreement also provides that the plant, as such, does not have
the right to market the manufactured computer supplies and
equipment. In lieu of the plant’s selling the manufactured comp-
0uter supplies and equipment to other purchases, Alice, Bertha,
and Carol agree that each will take one-third of the plant’s
annual output. Each takes her share of the output, commingles it
with other computer equipment and supplies in their respective

3. computer equipment an service retail stores, and sells it to
customers.
With regard to the plant, research and answer the following
questions.
1. Is the plant a partnership for Federal tax purposes?
2. If the plant is a partnership for Federal tax purposes, may it
make an election not to be subject to the partnership provisions
of Subchapter K of the Internal Revenue Code?
3. Without regard to your answer to question 2, assume that the
plant may elect out of Subchapter K. Are Alice, Bertha, and
Carol subject to the self-employment tax on their distributive
shares of the plant’s earnings, assuming the output was
purchased by Alice, Bertha, and Carol, rather than being
distributed to each?
5. To what extent may a corporation accumulate earnings for the
reasonable needs of a related corporation? To what extent does
it matter that the following conditions prevail? a. A parent-
subsidiary relationship exists. b. A brother-sister controlled
group exists. c. The two corporations are in different
businesses. d. The degree of common ownership or control is
less than 80 percent.
6. In practice, the number of shares paid for an acquired
corporation may be contingent on its future performance (e.g.,
sales and/or earnings). Perhaps 500,000 shares are “paid” up
front, while another 250,000 shares are placed in escrow,
pending certain future events. If such contingent consideration
is used in a purported reorganization:
a. Is it still possible to have a tax-free reorganization?

4. b. Does it matter whether negotiable “certificates of contingent
interest” are issued?
c. Does it matter what the motivation is for the deferred
arrangement?
7. Python Ltd. has substantial earnings and profits and
appreciated assets. It adopts a plan of complete liquidation and
distributes its assets to its shareholders. Soon thereafter, the
shareholders transfer the assets to a new corporation,
Constrictor, Inc., in return for Constrictor stock, but retain cash
and marketable securities. What are the shareholders trying to
accomplish? How will the IRS most likely treat the transaction?
8. Mr. Dorney owns all the stock in Hats, Inc., which owns 85
percent of Caps Inc. Ms Silverstone, the manager of Caps,
wishes to share in the profits of the prosperous firm by buying 5
percent of its stock. Hats, Inc. then distributes its stock interest
in Caps to Mr. Dorney, who then sells a 5 percent interest in
Caps to Ms Silverstone for $15,000. Assume the sale of the
stock to a key employee has a valid business and corporate
purpose. How would the IRS view the above transaction?
9. Mr. and Mrs. Sands set up an Limited Liability Company of
which they are the only members. Are they required to file Form
1065 as a partnership or Form 1120 or 1120S as a corporation,
or can they be treated as a qualified joint venture and just report
on their joint return?
10. Arthur Mills has been a partner in a large accounting
partnership for twenty-five years. This year he decided to retire.
Although Arthur’s share of partnership capital is only $100,000,
the partnership agreed to pay Arthur a total of $500,000 to
liquidate his interest in the partnership. The payments will be
made over ten years; $50,000 per year. The partnership
agreement also requires the partnership to pay Arthur his

5. $100,000 share of partnership capital, so the terms agreed to by
Arthur and the remaining partners represent a very generous
severance package. The remaining partners are comfortable with
the payments, however, because Arthur brought in a large
percentage of the firm’s clients over the years, and thus is
responsible for a large part of the firm’s revenues, even after he
retires. How will the payments be treated for tax purposes by
both Arthur and the partnership?
11. A C corporation acquired a machine for $200,000 and
placed it in service on August 15, 2014. The corporation elected
S corporation status at the beginning of 2018. On February 13,
2019, the property was sold for $80,000, payable in four yearly
installments of $20,000 plus interest. What is the amount of
ordinary income to be reported from the sale?
12. An S corporation’s election terminated because a
shareholder transferred stock to a trust not qualifying as an
eligible shareholder, Is it possible for the corporation to retain
its S corporation status through the “inadvertent termination”
procedures?
13. Jack and Jill Miller purchased a joint and survivorship
annuity from the You Only Live Once Insurance Company. Jack
paid for the annuity and died 11 years later, at which time Jill’s
survivorship interest had a value of $100,000. Jill was killed in
an automobile accident four months later, having collected
$4,000 since her husband’s death. a. Must the date of death
value be used, even though it is known that the asset is
worthless prior to the due date of the return? b. Does it make a
difference that the alternate valuation date is elected?
14, Garnet Corporation, a closely held corporation, is owned by
Allen Alda with 12,000 shares, Bill Bartlett with 5,000 shares,
and Connie Creveling with 3,000 shares. In the current year,
Connie passed away. As a result of Connie’s death, her executor

6. contacts you about valuing Connie’s closely held stock. In your
analysis, you discover that Garnet Corporation has average
earnings of $80 per share. Also over the same period, it has paid
$20 of dividends per share. The book value of Garnet
Corporation is $50 per share. Since the stock is not very
marketable and Connie had a minority interest, you have
concluded that a discount of 25 percent is appropriate for lack
of marketability and minority interest. Value Connie’s closely
held stock interest for estate tax purposes. In your research, find
the applicable weights to be assigned to the valuation factors of
earnings, dividends, and book value.
15. Which of the following taxes are imposed by Pennsylvania?
Corporate income tax Individual income tax Real property tax
Personal property tax Sales tax Use tax Excise tax Gift tax
Estate or death tax Compare the Pennsylvania tax rates to the
respective tax rates in each of the surrounding states.
16. In 2019, William Wellman transferred a $250,000 savings
account to his wife in trust. The terms of the trust are that
income is to be distributed annually to his wife, Greta, the
remainder to his two children, George and Martha, in equal
shares or to their estate. The value of Greta’s income interest is
$125,000. a. Is this a taxable gift to Greta? b. Have taxable gifts
been made for George and Martha? c. How many annual
exclusions are available?
17. Locate a copy of IRS Publication 590 either on the internet
or in a tax or government documents library. Prepare a chart
comparing distributions from various individual retirement
arrangements.
18. When a trust terminates, there are, in most instances,
terminating commissions that are charged by the fiduciary.
These commissions may generate excess deductions that can be
passed out to beneficiaries as itemized deductions subject to the

7. two percent of adjusted gross income rule. Nonetheless, the
allocation of such expenses with respect to character of the
income has spawned litigation as to the proper allocation base.
Read the following cases and prepare a brief written summary
of the allowable allocation method for terminating commissions
. a. C.L. Whittemore, Jr. v. U.S., 67-2 USTC ¶9670, 383 F2d
824 (CA-8 1967).
b. A.J. Fabens, 75-2 USTC ¶9572, 519 F.2d 1310 (CA-1 1975).
19. The following court cases have helped to clarify the rightful
recipient of depreciation of property held by an estate or trust.
Read the following judicial decisions and prepare a brief written
summary for each case. a. Sue Carol, 30 BTA 443, Dec. 8520
(1934), Acq. XIII-2 CB 4. b. R.J. Dusek, 67-1 USTC ¶9418, 376
F.2d 410 (CA-10 1967). c. W.H. Lamkin, Executor, 76-2 USTC
¶9485, 533 F.2d 303 (CA-5 1976).