US Income Tax Accounting Worksheet

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ACC 316 – Corporate Income Tax Accounting Tax Research Project 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. SUBMISSION The research report is due no later than May 1, 2019. The report should appropriately reference any sources used. Primary sources are, of course, preferable. Any electronic submissions in Word 97-2003 format should be sent to Remember to include your name and course identification in the document as well as in the file name of any electronic submissions. 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? ACC 316 – Corporate Income Tax Accounting Tax Research Project 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 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? b. Does it matter whether negotiable “certificates of contingent interest” are issued? ACC 316 – Corporate Income Tax Accounting Tax Research Project 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 $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, ACC 316 – Corporate Income Tax Accounting Tax Research Project 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 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? ACC 316 – Corporate Income Tax Accounting Tax Research Project 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 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). ACC 316 - Corporate Income Tax Accounting Excel Project - Income Tax Projections OBJECTIVE The objective of this exercise is to develop an Excel Workbook that will assist in projecting a corporate taxpayer's Federal and state (Pennsylvania) tax liabilities, as well as the taxes due/refund amount. In addition, the Excel workbook should estimate the working capital requirements of a business using the Bardahl formula. CAPABILITIES The spreadsheet should be capable of Determining the adjustments to book income to arrive at taxable income for Federal and Pennsylvania corporate tax purposes Calculating the regular tax for Federal tax purposes Calculating the Corporate Net Income Tax for a manufacturing company operating in multiple states The spreadsheet should present or indicate The gross amount of each item of income or adjustment The amount of the tax liabilities and tax/refund due Any safe harbor amounts for estimated payments for each of the taxes for the next period The amount of any carryovers You should use tax year 2018 tax rates. The spreadsheet output should generally follow the formats for the relevant sections of Form 1120 and Form RCT-101 SUBMISSION The workbook is due no later than May 1, 2010, Earlier submission is encouraged. The workbook in Excel 97-2003 format should be sent to Remember to include your name and course identification in the workbook as well as in the workbook's file name.
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