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Taxation/Corporation Tax

Problem 1.
When Keith created a new corporation as the sole shareholder, he was advise by his accountant to treat 50% of the amount invested as a loan and 50% as a purchase of stock. What are the advantages and disadvantages of this structure as compared with treating the entire investment as a purchase of stock?

Problem 2.
Kevin deliberately omitted $40,000 of gross income from the restaurant that he owned from his 2012 tax return. The return indicates gross income of $200,000 when he files it on April 14, 2013. As of what date can the IRS no longer pursue Kevin with the threat of collection of the related tax, interest, and penalties?

Problem 3
Realty Corporation, an accrual-basis, calender-year corporation, agrees to rent office space to Tenant Company for $3,000 per month beginning on January 1, year 2. On December 15,year 1, Tenant Company gives Realty Corporation a $3,000 deposit in addition to rent for the months of January and February. In year 2, Tenant pays rent for the months of March and April. On May 15 Tenant closes its business and vacates the office. Realty withholds $1,500 from the deposit for unpaid rent and $1,000 for damages. Realty Corporation refunds the balance of the deposit to Tenant on May 20, year 2.
A) How much income should Realty Corporation report in year 1 from the above transactions for tax and financial accounting?
B) How much income should Realty Corporation report in year 2?

Problem 4.
Markum Corporation owes a creditor $60,000. Markum transfers property to the creditor to satisfy the debt. Markum purchased the property four years ago for $45,000 and it is currently worth $60,000. Does Markum have any gross income as a result of this transaction?

Problem 5.
In year 1, Highrise Company contracts to manufacture a piece of customized equipment for a customer. The contract will take two years to complete. The contract price is $250,000 and the company estimates its total costs at $220,000. Actual costs incurred are as follows:
Year 1.........................$121,000
Year 2.........................$105,000
What amount of gross income and deductions does the company recognize in each of the two years, assuming the company uses
(1) the complete contract method and
(2) the percentage-of-completion method of accounting for long-term contracts?

Problem 6.
Fred Fisher is a licensed scuba driver who lives in Key Largo, He is employed full-time as an engineer, Five years ago he had been employed as a professional driver for a salvage company. While working for the salvage company, he became interested in marine archaeology and treasure hunting. Until last year he gave diving lessons on weekends and trained individuals in the sport of treasure hunting under the name "Freed's Diving School." Three of the diving students he taught subsequently found shipwrecks. Fred generally did not engage in recreational diving.
Last year Fred began a treasure-hunting business named "Treasure Seekers Company." He bought a boat specifically designed for treasure hunting and did extensive research on potential locations of shipwrecks. Fred located several shipwrecks, but none were of substantial value. He did retrieve several artifacts but has not sold any yet. Although these artifacts may have some historical significance, they have a limited marketability. Thus, Fred has not yet had any gross income from his treasure hunting activities.
Other than retaining check stubs and receipts for his expenses and an encoded log, Fred did not maintain formal records for Treasure Seekers Company. Fred maintains as few written records as possible because he fears for his safety. Fred incurred $5,000 of expenses relating to his treasure-hunting activities last year. Can Fred deduct the expenses of his treasure-hunting business, or will IRS claim it is a hobby and disallow the expenses?

Solution Preview

Problem 1.
If Keith invests the 50% as debt, this means that the corporation which he is the sole shareholder will be paying him interest on this debt and therefore can deduct such interest in the corporation's gross income. In contrast to investing all the money as stock, whenever the corporation pays him dividends, the corporation will not be able to deduct the dividends from its gross income.

Problem 2.
Any deliberate omission in the tax return is generally considered a fraud specifically for tax evasion. Tax evasion has no statute of limitation which means that IRS has NO deadline on when they can pursue the threat of collection - they can do so anytime. Moreover, Kevin can also be subjected to additional taxes, fines and surcharges for this omission.

Problem 3
A) How much income should ...

Solution Summary

The structures compared with treating the entire investment as a purchase is determined.