CONCEPTS IN FED.TAX.,2020-W/ACCESS
20th Edition
ISBN: 9780357110362
Author: Murphy
Publisher: CENGAGE L
expand_more
expand_more
format_list_bulleted
Question
Chapter 2, Problem 65IIP
To determine
Identify the tax issue posed by the facts presented and ascertain the possible tax consequence of each issue identified.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Premium Blinds Ltd. specializes in the manufacture of custom and pre-finished blinds and drapes for
windows and doors. The firm was founded by Bill Khadim, who retired 10 years ago and now lives in
Orlando, Florida. When he retired, Bill assigned 60% of the shares of the corporation to Sara Khadim, his
daughter. Much of Bill's retirement income comes from the dividends he receives on his remaining
Premium Blinds shares. Premium Blinds is now run by Sara. There are no other shareholders.
Cynthia is a successful sculptor who created a work that is now worth $400,000 and has
no tax basis. Cynthia forms a corporation and contributes the sculpture to it in exchange
for the corporation's shares. Fourteen months later, she sells all the stock for $400,000.
She wants to treat the sale of the stock as a long-term capital gain. Evaluate the propriety
of Cynthia's actions.
Energo Electronics, an incorporated business, has a highly paid electrical and
computer specialist, Seng, on the payroll whose services are essential to the success
of the business. The company is concerned that should Seng die or become disabled
the business would suffer serious financial setbacks. In order to partially protect its
interests, the company plans to purchase $500,000 worth of term insurance on
Seng's life. Earning over $300,000 a year Seng's primary concern is to shelter as
much of his income as possible from taxes. He has little personal need for life
insurance.
Suggest a solution using universal life insurance that would meet both Seng's and the
company's needs.
A) The company could buy a $500,000 UL policy on Seng's life with the level
plus account value death benefit. The company would own the basic death
benefit and Seng would own the cash value and the portion of the death
benefit equal to the account value. The company would pay a premium equal
to the policy NCPI…
Chapter 2 Solutions
CONCEPTS IN FED.TAX.,2020-W/ACCESS
Ch. 2 - Prob. 1DQCh. 2 - Prob. 2DQCh. 2 - What is an arms-length transaction? What is its...Ch. 2 - Prob. 4DQCh. 2 - Prob. 5DQCh. 2 - Prob. 6DQCh. 2 - Prob. 7DQCh. 2 - Prob. 8DQCh. 2 - Prob. 9DQCh. 2 - Prob. 10DQ
Ch. 2 - Prob. 11DQCh. 2 - Prob. 12DQCh. 2 - Prob. 13DQCh. 2 - Prob. 14DQCh. 2 - Prob. 15DQCh. 2 - Prob. 16DQCh. 2 - Prob. 17DQCh. 2 - Prob. 18PCh. 2 - Prob. 19PCh. 2 - Sheila, a single taxpayer, is a retired computer...Ch. 2 - Prob. 21PCh. 2 - Prob. 22PCh. 2 - Prob. 23PCh. 2 - Prob. 24PCh. 2 - Prob. 25PCh. 2 - Prob. 26PCh. 2 - Prob. 27PCh. 2 - Prob. 28PCh. 2 - Prob. 29PCh. 2 - Prob. 30PCh. 2 - Prob. 31PCh. 2 - Prob. 32PCh. 2 - Prob. 33PCh. 2 - Prob. 34PCh. 2 - Prob. 35PCh. 2 - Prob. 36PCh. 2 - Prob. 37PCh. 2 - Prob. 38PCh. 2 - Prob. 39PCh. 2 - Prob. 40PCh. 2 - Chelsea, who is single, purchases land for...Ch. 2 - Prob. 42PCh. 2 - Prob. 43PCh. 2 - Prob. 44PCh. 2 - Prob. 45PCh. 2 - Prob. 46PCh. 2 - Prob. 47PCh. 2 - Prob. 48PCh. 2 - Prob. 49PCh. 2 - Prob. 50PCh. 2 - Prob. 51PCh. 2 - Prob. 52PCh. 2 - Prob. 53PCh. 2 - Prob. 54PCh. 2 - Prob. 55PCh. 2 - Prob. 56PCh. 2 - Prob. 57PCh. 2 - Prob. 58PCh. 2 - Prob. 59PCh. 2 - Prob. 60PCh. 2 - Determine the taxpayers adjusted basis in each of...Ch. 2 - Prob. 62PCh. 2 - Prob. 63IIPCh. 2 - Prob. 64IIPCh. 2 - Prob. 65IIPCh. 2 - Jerry and his wife, Joanie, own a successful...Ch. 2 - Prob. 67IIPCh. 2 - Prob. 68IIPCh. 2 - Prob. 69IIPCh. 2 - Prob. 70IIPCh. 2 - Prob. 71IIPCh. 2 - Prob. 79DCCh. 2 - Prob. 80DCCh. 2 - Prob. 81TPC
Knowledge Booster
Similar questions
- Jerry and his wife, Joanie, own a successful concrete company that is organized as a corporation. Jerry spends all his time running the company, whereas Joanie has a full-time job as a legal secretary. The corporation pays Joanie a salary of 45,000 a year as vice president.arrow_forwardTom and Davidson go into business together as a partnership selling computer software through the Internet. On January 1 they each put $6,000 as capital and this goes into their local bank account for the company. They bought computer equipment for $10,000 in which they paid by check and set up for business in Davidson's dad's basement. The cost of computer equipment will be amortized over the next three years with a disposable value of $1000. Davidson's dad has agreed to let them operate out of his basement if they pay him a rent of 10% of their annual profit or $1,200 per year whichever is greater. At the end of the first month of business, they have made no sales and incurred no expenses other than the amortization rate of the computer equipment and the rent which is owed to Davidson's dad. At the end of January, what is the accounting equation (assets, liabilities and equity)arrow_forwardMr. Young operates a photography studio as a sole proprietorship. His average annual income from the business is $100,000. Because Mr. Young does not need the entire cash flow for personal consumption, he is considering incorporating the business. He will work as a corporate employee for a $40,000 annual salary, and the corporation will accumulate its after-tax income to fund future business expansion. For purposes of this case, assume that Mr. Young’s marginal income tax rate is 32 percent and ignore any employment tax consequences. Required: Assuming Mr. Young's sole proprietorship does not qualify for the QBI deduction, by how much would Mr. Young's annual tax burden increase or decrease by incorporating? Assuming Mr. Young's sole proprietorship qualifies for the 20% QBI deduction, by how much would Mr. Young's annual tax burden increase or decrease by incorporating? Mr. Young's tax burden decrease or increase by ( ) NOTE: 25,400 is NOT the right answer.arrow_forward
- Mr. Young operates a photography studio as a sole proprietorship. His average annual income from the business is $100,000. Because Mr. Young does not need the entire cash flow for personal consumption, he is considering incorporating the business. He will work as a corporate employee for a $40,000 annual salary, and the corporation will accumulate its after-tax income to fund future business expansion. For purposes of this case, assume that Mr. Young's marginal income tax rate is 32 percent and ignore any employment tax consequences. a. Assuming Mr. Young's sole proprietorship does not qualify for the QBI deduction, by how much would Mr. Young's annual tax burden increase or decrease by incorporating? b. Assuming Mr. Young's sole proprietorship qualifies for the 20% QBI deduction, by how much would Mr. Young's annual tax burden increase or decrease by incorporating? Complete this question by entering your answers in the tabs below. Required A Required B Assuming Mr. Young's sole…arrow_forwardWhile James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2022, and each contributed $60,000 in exchange for a 50 percent ownership interest. GTE also borrowed $240,000 from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE's 2022 activities: GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis. GTE received $500,000 of sales revenue and reported $230,000 of cost of goods sold (it did not have any ending inventory). GTE paid $35,000 compensation to James, $35,000 compensation to Paul, and $45,000 of compensation to other employees…arrow_forwardWhile James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2022, and each contributed $60,000 in exchange for a 50 percent ownership interest. GTE also borrowed $240,000 from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE's 2022 activities: GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis. GTE received $500,000 of sales revenue and reported $230,000 of cost of goods sold (it did not have any ending inventory). GTE paid $35,000 compensation to James, $35,000 compensation to Paul, and $45,000 of compensation to other employees…arrow_forward
- While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2022, and each contributed $180,000 in exchange for a 50 percent ownership interest. GTE also borrowed $720,000 from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE's 2022 activities: GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis. GTE received $1,100,000 of sales revenue and reported $510,000 of cost of goods sold (it did not have any ending inventory). GTE paid $95,000 compensation to James, $95,000 compensation to Paul, and $105,000 of compensation to other employees…arrow_forwardWhile James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2022, and each contributed $180,000 in exchange for a 50 percent ownership interest. GTE also borrowed $720,000 from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE's 2022 activities: GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis. GTE received $1,100,000 of sales revenue and reported $510,000 of cost of goods sold (it did not have any ending inventory). GTE paid $95,000 compensation to James, $95,000 compensation to Paul, and $105,000 of compensation to other employees…arrow_forwardWhile James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2022, and each contributed $180,000 in exchange for a 50 percent ownership interest. GTE also borrowed $720,000 from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE's 2022 activities: GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis. GTE received $1,100,000 of sales revenue and reported $510,000 of cost of goods sold (it did not have any ending inventory). GTE paid $95,000 compensation to James, $95,000 compensation to Paul, and $105,000 of compensation to other employees…arrow_forward
- George, an individual, is an architect and general contractor. Gracie is a wealthy individual. Newco’s Certificate of Incorporation states that it is authorized to issue 200 shares, no par value of common stock. Gracie transfers $500,000 of cash to Newco in exchange for 50 shares of Newco's stock. George signs a contract with Newco in which George will perform services designing a housing project and then acting as general contractor on the construction of that housing project. In exchange, George will receive 50 shares of Newco's stock. a. How will A be treated in this transaction? b. Suppose instead that George and Newco do not enter into a written contract. George transfers $500 in cash for 50 shares of Newco's stock while Gracie transfers $500,000 for 50 shares of Newco's stock. George then performs the architectural and contracting services for no further charge. Would this change your answerarrow_forwardBob Jones has a small repair shop that he has run for several years as a sole proprietor-ship. The proprietorship uses the cash method of accounting and the calendar year as its tax year. Bob needs additional capital for expansion and knows two people who might be interested in investing in the business. One would like to work for the business. The other would only invest. Bob wants to know the tax consequences of incorporating the business. His 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. Required: Write a memorandum to Bob explaining the tax consequences of the incor-poration. As part of your memorandum examine the possibility of having the corporation issue common and preferred stock and debt for the shareholders’ property and moneyarrow_forwardKate and Mark, a married couple, own a limited liability company. Although Kate and Mark are not yet ready to retire, they would like to begin involving their three children in the business since they are now all responsible adults. Their primary concern is ensuring that the business will remain in their family for future generations. It is also important to Kate and Mark that their children learn the value of a dollar, so they would like them to purchase their interests in the company. Kate and Mark have been successful in their business and have a modest estate, but they do not predict they will owe any estate tax. Which one of the following is the most appropriate form of business transfer technique for Kate and Mark to use to achieve their objectives? A)A preferred stock recapitalization of the business B)A gift of the business interests from Kate and Mark to each child C)A cross-purchase buy-sell agreement between Kate, Mark, and the children D)An entity…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT
Individual Income Taxes
Accounting
ISBN:9780357109731
Author:Hoffman
Publisher:CENGAGE LEARNING - CONSIGNMENT