IRS Investigations Facts

Q1. Review (ch.10)
After an investigation by the IRS, the following facts were discovered from the books and records of the Shady Tree Nursery, which began business on January 1, 2008.
2008 2009 2010 2011
Gross profit on sales $100,000 $210,000 $160,000 $70,000
Net capital gains 5,000
Net capital losses 0 (5,000) 0 (3,000)
Gross income $100,000 $205,000 $165,000 $67,000
Business expenses (130,000) (155,000) (145,000) (87,000)
Net income per books ($30,000) $ 50,000 $20,000 ($20,000)

(a) In computing taxable income for 2009 and 2011, are the net capital losses deductible?
(b) Compute the taxable income for 2009 after taking into account any net operating loss carry backs and carry forwards from 2008 and 2011.

Q2. A personal holding company's taxable income for 2010 is $250,000, computed before taking into account the charitable contributions deduction and the dividends received deduction. Included in the $250,000 is $120,000 of dividends it received from other domestic corporations in which it owns 25 percent of the stock. The PHC makes contributions of $55,000 to a charitable organization during the year. It paid $75,000 of dividends to its shareholders in 2010 and an additional $40,000 of dividends on March 8, 2011. What amount of PHC tax does it owe for 2010?

Review questions (ch.11)
1. Salter Technological Solutions, Inc. incurred $50,000 in qualified research expenses during its tax year. Its base amount is $30,000. How much of its expenses can the company deduct, and how much can it take as a credit?

2. A corporation that uses the calendar year hires a new employee on March 1,2010. The employee works for the corporation full-time and is paid the following amounts during the first two years of employment. The corporation's marginal tax rate is 35 percent.
Time Period Amount Paid
3/1/10-12/31/10 $7,500
1/1/11-2/28/11 2,450
3/1/11-12/31/11 8,000
1/1/12-2/29/12 2,500
Total wages paid $20,450
Compute the tax savings that the corporation would generate for 2010-2012 if the employee qualifies for the work opportunity credit (other than as a long-term family assistance recipient). Determine the amount of the company's out-of-pocket cost for the $20,450 wages that it pays this employee during the first two years of employment. What percentage of the $20,450 gross wages paid is the cash paid by the company (net of tax savings)?

Comprehensive Review Question (ch.11)
Stella Clay, Inc. purchased a manufacturing plant for $1 million and made $500,000 in improvements. A few years later it constructed a child care facility in the plant for $200,000and took an employer-provided child care credit with respect to those expenditures. Over the next five years, it spent $300,000 on operating expenses and took an employer-provide child care credit for those expenditures. In the sixth year after opening the child care facility, Stella sold the manufacturing plant (including the child care facility) and the buyer refused to assume liability for any recapture tax. As the date of the sale, Stella had taken $250,000 in depreciation deductions. If the amount realized from the sale is $1,750,000, compute the amount and character of the corporation's gain or loss on sale.

Chapter14 Problems
P.19
A partner contributes $15,000 in exchange for a 50-percent partnership interest in a partnership. During the tax year, the partnership has $8,000 of oridinary income , of which the partner's allocable share is $4,000. The partnership also distributes $3,000 to the partner. Her share of partnership liabilities is $2,000. What is her tax basis in her partnership interest at the end of the year?

P.25
Janet Miller and Terry Wood form a general partnership. As part of the general agreement, Janet and Terry will share profits equally and losses 75 percent and 25 percent, respectively. Terry has an initial contribution to the capital of the partnership of $20,000 cash and land with a FMV of $80,000 (adjusted tax basis $50,000) and the partnership assumes a mortgage against the land of $50,000 which the lender releases Terry from liability and adds the partnership as mortgagee. After the reduction in FMV of the land by the amount of the mortgage assumed the cash contributions. Terry's contribution has a net FMV of $50,000 for her 50 percent interest ($20,000 + $80,000 - $50,000 mortgage). Janet contributes $50,000 in cash for her 75 percent interest in the partnership.
(a) How much of the $50,000 is allocated to Janet in the determination of her tax basis if the debt is nonrecourse debt to the partners?
(b) How much of the $50,000 is allocated to Janet in the determination of her tax basis if the debt is recourse debt to the partners?