Corporate TAX homework problems. Need help with solving. email is [email protected] Notes Ch1 corporations 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. Lac.

1. Corporate TAX homework problems. Need help with solving.
email is
[email protected]
Notes
Ch1 corporations
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.

2. 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.

3. 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:

4. • 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 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?
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 Percentages
Shareholder Johnson Corp. Carey Corp
David 60% 80%
Kelly 30% 0%

5. c. 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.
d. 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%

6. 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:

7. 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
a. 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 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

8. 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.
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 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

9. $100,000, valued at $80,000 when he died. His estate paid state
death taxes of $110,200. What is his estate tax base?