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Ted, who is single, owns a personal residence in the city.
Ted, who is single, owns a personal residence in the city. He also owns a condo near the ocean. He uses the condo as a vacation home. In March 2009, he borrowed $50,000 on a home equity loan and used the proceeds to acquire a luxury automobile. During 2009, he paid the following amounts of interest: • on his personal residence $15,500 • on the condo 6,200 • on the home equity loan 4,800 • on credit card obligations 1,700 What amount, if any, must Ted recognize as an AMT adjustment in 2009? a. $0. b. $4,800. c. $6,200. d. $11,000. e. None of the above. ____ 2. Erin owns a mineral property that had a basis of $10,000 at the beginning of the year. The property qualifies for a 15% depletion rate. Gross income from the property was $120,000 and net income before the percentage depletion deduction was $50,000. What is Erin’s tax preference for excess depletion? a. $8,000 b. $10,000. c. $18,000. d. $0. e. None of the above. ____ 3. Carl is single, has no dependents, and does not itemize his deductions. In 2009, he had taxable income of $80,000, positive AMT adjustments of $23,000, and tax preferences of $75,000. What is Carl’s alternative minimum tax base for 2009? a. $178,000. b. $150,025. c. $148,175. d. $147,675. e. None of the above. ____ 4. Gold Corporation, Silver Corporation, and Copper Corporation are equal partners in the GSC Partnership. The partners’ tax year-ends are as follows: Gold December 31st Silver June 30th Copper September 30th a. The partnership is free to elect any tax year. b. The partnership may use any of the 3 year-end dates that its partners use. c. The partnership must use a September 30th year-end. d. The partnership must use a June 30th year-end. e. None of the above. ____ 5. Purple Corporation, a personal service corporation (PSC), adopted a fiscal year ending September 30th. The sole shareholder of the corporation is a calendar year taxpayer. During the fiscal year ending September 30, 2009, the shareholder-employee received $120,000 salary. The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1, 2009 through December 31, 2009. a. The corporation salary expense for the fiscal year ending September 30, 2010 is limited to $120,000. b. The corporation salary expense for the fiscal year ending September 30, 2010 is limited to $135,000. c. The corporation salary expense for the fiscal year ending September 30, 2010 is limited to $60,000. d. The corporation must switch to a calendar year. e. None of the above. ____ 6. Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years. For 2010, the corporation’s income subject to state income tax was $400,000 and the state corporate tax rate was 6%. During 2010, the corporation paid $18,000 on its estimated state income tax liability for that year. The remaining $6,000 of 2010 state income tax was paid in April 2011. In June 2010, the corporation paid $9,000 on its year 2009 state income tax liability, as a result of an audit of the 2009 return that was conducted in 2010. As a result of the above: a. Pink should deduct $33,000 as state income taxes for 2010. b. Pink should deduct $27,000 as state income taxes for 2010. c. Pink should deduct $24,000 as state income taxes for 2010 and amend its 2009 return to claim an additional $9,000 state income tax expense. d. Pink should deduct $18,000 as state income taxes for 2010, amend its 2009 return to claim an additional $9,000 state income tax expense, and deduct $6,000 in 2011. e. None of the above. ____ 7. Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase. In 2009, the company refunded $400,000 for claims involving sales. The $400,000 consisted of $350,000 in refunds from 2009 sales and $50,000 in refunds from 2008 sales. All of the refunds from 2008 sales were for claims filed in 2008 and were paid in January and February 2009. At the end of 2009, the company had $12,000 in refund claims for sales in 2009 for which payment had been approved. These claims were paid in January 2010. Also in January 2010, the company received an additional $30,000 in claims for sales in 2009. This $30,000 was paid by Gray in February 2010. With respect to the above, Gray can deduct: a. $350,000 in 2009. b. $362,000 in 2009. c. $392,000 in 2009. d. $442,000 in 2009. e. None of the above. ____ 8. Pedro, not a dealer, sold real property that he owned with an adjusted basis of $60,000 and encumbered by a mortgage for $28,000 to Pat in 2008. The terms of the sale required Pat to pay $14,000 cash, assume the $28,000 mortgage, and give Pedro eleven notes for $6,000 each (plus interest at the Federal rate). The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals. Pedro did not "elect out" of the installment method for reporting the transaction. If Pat pays the 2011 note as promised, what is the recognized gain to Pedro in 2010 (exclusive of interest)? a. $6,000. b. $3,600. c. $2,400. d. $0. e. None of the above. ____ 9. Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2009, the company entered into a contract to construct a building for $960,000. Camelia estimated that the cost of constructing the building would be $720,000. In 2009, the company incurred $240,000 in costs under the contract. In 2010, the company incurred an additional $450,000 in costs to complete the contract. The company’s marginal tax rate in all years was 35%. a. Camelia is not required to report any income from the contract until 2010 when the contract is completed. b. Camelia must report $80,000 gross profit on the contract in 2009, but must pay interest in 2010 under the lookback rules. c. Camelia does not recognize any profit from the contract in 2010 and the company will receive interest from the overpayment of tax on 2009 reported profit from the contract. d. Camelia should amend its 2009 tax return to decrease the profit on the contract for that year. e. None of the above. ____ 10. Bjorn owns a 35% interest in an S corporation that earned $200,000 in 2009. He also owns 10% of the stock in a C corporation that earned $200,000 during the year. The S corporation distributed $10,000 to Bjorn and the C corporation paid dividends of $10,000 to Bjorn. How much income must Bjorn report from these businesses? a. $10,000 income from the S corporation and $10,000 income from the C corporation. b. $70,000 income from the S corporation and $10,000 of dividend income from the C corporation. c. $70,000 income from the S corporation and $0 income from the C corporation. d. $0 income from the S corporation and $0 income from the C corporation. e. None of the above. ____ 11. Bear Corporation has a net short-term capital gain of $25,000 and a net long-term capital loss of $170,000 during 2009. Bear Corporation has taxable income from other sources of $700,000. Prior years’ transactions included the following: 2005 Net short-term capital gain $55,000 2006 Net long-term capital gain 30,000 2007 Net short-term capital gain 25,000 2008 Net long-term capital gain 5,000 Compute the amount of Bear’s capital loss carryover to 2010. a. $0. b. $30,000. c. $85,000. d. $145,000. e. None of the above. ____ 12. Grocer Services Corporation (a calendar year taxpayer), a wholesale distributor of food, made the following donations to qualified charitable organizations during the year: Adjusted Basis Fair Market Value Food (held as inventory) donated to the Ohio Children’s Shelter $6,500 $7,800 Passenger van to Ohio Children’s Shelter, to be used to transport children to school 8,500 6,100 Stock in Acme Corporation acquired two years ago and held as an investment, donated to Southwest University 5,000 9,200 How much qualifies for the charitable contribution deduction? a. $21,800. b. $24,840. c. $24,100. d. $22,450. e. None of the above. ____ 13. Rhino, Inc., a calendar year C corporation, had the following income and expenses in 2009: Income from operations $450,000 Expenses from operations 210,000 Dividends received (less than 20% ownership) 20,000 Domestic production activities deduction 4,000 Charitable contribution 34,000 How much is Rhino’s charitable contribution deduction for 2009? a. $24,200. b. $24,600. c. $26,000. d. $34,000. e. None of the above. ____ 14. George Judson is the sole shareholder and employee of Black Corporation, a C corporation that is engaged exclusively in engineering services. During the year, Black has gross revenues of $300,000 and operating expenses (excluding salary) of $100,000. Further, Black Corporation pays George a salary of $150,000. The salary is reasonable in amount and George is in the 35% marginal tax bracket irrespective of any income from Black. Assuming that Black Corporation distributes all after-tax income as dividends, how much total combined income tax do Black and George pay in the current year? (Ignore any employment tax considerations.) a. $64,875. b. $70,000. c. $74,875. d. $81,375. e. None of the above. Problem 15. Use the following data to calculate Melba’s AMTI. Taxable income $152,000 AMT adjustments Positive 45,000 Negative (15,000) Tax preferences 20,000 16. Gunter, who is divorced, has the following items for 2009. Salary $60,000 Gain on sale of land held nine months (regular income tax basis is $4,000 less than AMT basis) 10,000 Traditional IRA contribution 5,000 Alimony paid 9,000 Itemized deductions: Charitable contributions $3,000 Home mortgage interest on his principal residence 4,000 State income taxes 2,000 9,000 Tax preferences 15,000 Calculate Gunter’s AMTI for 2009. 17. In 2009, Olive incurs circulation expenses of $150,000 which she deducts in calculating taxable income. a. Calculate Olive’s AMT adjustment for circulation expenses for 2009, 2010, 2011, and 2012. b. Advise Olive on how she could reduce or eliminate the AMT adjustment in 2009. 18. In September, Dorothy purchases a building for $900,000 to use in her business as a warehouse. Dorothy uses the depreciation method which will provide her with the greatest deduction for regular income tax purposes. a. Calculate the AMT adjustment for depreciation in 2009 if Dorothy purchased the building in 2009. b. Calculate the AMT preference for depreciation in 2009 if Dorothy purchased the building in 1986. 19. In May 2008, Egret, Inc. issues options to Andrea, a corporate officer, to purchase 100 shares of Egret stock under an ISO plan. At the date the stock options are issued, the fair market value of the stock is $900 per share and the option price is $1,200. The stock becomes freely transferable in 2009. Andrea exercises the options in November 2008 when the stock is selling for $1,600 per share. She sells the stock in December 2010 for $1,800 per share. a. Determine the amount of the AMT adjustment for 2008. b. Determine the amount of the AMT adjustment for 2009. c. Determine Andrea’s recognized gain for regular income tax purposes and for AMT purposes in 2010 on the sale of the stock. d. Determine the amount of the AMT adjustment for 2010. 20. Dr. Stone incorporated her medical practice and elected to use a fiscal year ending September 30th. For the fiscal year ending September 30, 2009, the corporation earned $20,000 profits each month, before Dr. Stone’s salary and income tax. Dr. Stone received a salary that averaged $15,000 per month. Next year (fiscal year ending September 30, 2010), Dr. Stone expects the average monthly profits before salary and taxes to be $24,000. What is the minimum salary Dr. Stone can receive for the last three months of calendar year 2009 to ensure that the corporation can deduct salary equal to the corporation’s before salary income for the fiscal year ending September 30, 2010? 21. Brown Corporation had consistently reported its income by the cash method. The corporation should have used the accrual method because inventories are material to the business. In 2009, Brown timely filed a request to change to the accrual method. At the beginning of 2009, Brown had accounts receivable of $60,000. Also, Brown had merchandise on hand with a cost of $80,000 and accounts payable for merchandise of $25,000. The accounts receivable, inventory, and accounts payable balance per books were zero. Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2009. 22. John sold an apartment building for $600,000. His basis in the building was $360,000 and it was subject to $30,000 of depreciation recapture. John received $150,000 in the year of sale, the buyer assumed John’s mortgage payable of $240,000, and the buyer gave John an 8% (the current Federal rate) note of $210,000 due in 5 years. The interest on the note was payable each June 30th, beginning in the year following the year of the sale. John incurred $30,000 of selling expenses which he paid in the year of sale. Compute John’s installment sales gain that should be reported in the year of sale. 23. Beige Company has approximately $400,000 in net income in 2009 before deducting any compensation or other payment to its sole owner, Janet (who is single). Assume that Janet is in the 35% marginal tax bracket. Discuss the tax aspects of each of the following arrangements. (Ignore any employment tax considerations.) a. Janet operates Beige Company as a proprietorship. b. Janet incorporates Beige Company and pays herself a salary of $100,000 and no dividend. c. Janet incorporates the company and pays herself a $100,000 salary and a dividend of $199,750 ($300,000 – $100,250 corporate income tax). d. Janet incorporates the company and pays herself a salary of $400,000. 24. During the current year, Quartz Corporation (a calendar year C corporation) has the following transactions: Income from operations $600,000 Expenses from operations 700,000 Dividends received from ABC Corporation 200,000 Quartz owns 25% of ABC Corporation’s stock. How much is Quartz Corporation’s taxable income (loss) for the year? 25. In each of the following independent situations, determine the corporation’s income tax liability. Assume that all corporations use a calendar year and that the year involved is 2009. Taxable Income Violet Corporation $ 73,000 Indigo Corporation 195,000 Orange Corporation 335,000 Blue Corporation 6,710,000 Green Corporation 22,500,000 26. Heron Corporation, a calendar year, accrual basis taxpayer, provides the following information for this year and asks you to prepare Schedule M-1: Net income per books (after-tax) $539,950 Taxable income 220,000 Federal income tax liability 69,050 Interest income from tax-exempt bonds 9,000 Interest paid on loan incurred to purchase tax-exempt bonds 3,000 Life insurance proceeds received as a result of death of Heron’s president 400,000 Premiums paid on policy on life of Heron’s president 12,000 Excess of capital losses over capital gains 5,000 Retained earnings at beginning of year 675,000 Cash dividends paid 90,000
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