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ACC 547 Week 3 DQ I6 .pdf

Original filename: ACC 547 Week 3 DQ I6.pdf
Title: ACC 547 Week 3 DQ I6-23 Problems: I8-40, C3-38, C3-58, C3-59 ,I10-52 Tax Strategy I13-65
Author: Dheerender

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ACC 547 Week 3 DQ I6-23 Problems: I8-40, C3-38, C3-58,
C3-59 ,I10-52 Tax Strategy I13-65
Complete the following in Federal Taxation

Discussion Question I6-23
Problems I8-40, C3-38, C3-58, & C3-59
Case Study I10-52
Tax Strategy Problem I13-65

Discussion Question I6-23
Under the related party rules of Sec. 267, why has
Congress imposed the concept of constructive ownership?
Problem I8-40
Amount and Character of Loss Transactions. On September
30 of the current year Silver Fox Corporation files for
bankruptcy. At the time, it estimates that the total FMV of
its assets is $725,000, whereas the total amount of its
outstanding debt amounts to $950,000. Silver Fox
Corporation has been engaged in the resale of tax
preparation and tax research-related books and software
for several years.
a. At the time of the bankruptcy, Silver Fox is owned by
Randall, who purchased the stock from an investor for
$250,000 several years ago. Randall is single. What are
the amount and character of the loss sustained by Randall
upon Silver Fox’s bankruptcy?
b. How would your answer to part a change if Randall
originally organized Silver Fox Corporation, capitalizing it

with $250,000 of cash and assuming Silver Fox qualifies
as a small business corporation?
c. How would your answer to Part a change if Randall were
a corporation instead of an individual?
d. How would your answer to Part b change if Randall
were a corporation instead of an individual?
Problem C3-38
Charitable Contribution Deduction Limitation. Zeta
Corporation reports the following results for 2006 and
Adjusted taxable income $180,000 $125,000
Charitable contributions (cash) 20,000 12,000
The adjusted taxable income is before Zeta claims any
charitable contributions deduction, NOL or capital loss
carryback, dividends-received deduction, or U.S.
production activities deduction.
a. How much is Zeta’s charitable contributions deduction
in 2006? In 2007?
b. What is Zeta’s contribution carryover to 2008, if any?
Problem C3-58
Converting Book Income to Taxable Income. The following
income and expense accounts appeared in the accounting
records of Rocket Corporation, an accrual basis

taxpayer, for the current calendar year. ... .... .... ... (details
in the pdf file)
The following additional information applies.
1. Dividends were from Star Corporation, a 30%-owned
domestic corporation.
2. Interest revenue consists of interest on corporate
bonds, $15,000; and municipal bonds, $3,000.
3. The stock is a capital asset held for three years prior to
4. Rocket uses the specific writeoff method of accounting
for bad debts.
5. Interest expense consists of $11,000 interest incurred
on funds borrowed for working capital and $1,000 interest
on funds borrowed to purchase municipal bonds.
6. Rocket paid all contributions in cash during the current
year to State University.
7. Rocket calculated depreciation per books using the
straight-line method. For income tax purposes,
depreciation amounted to $85,000.
8. Other expenses include premiums of $5,000 on the keyperson life insurance policy covering Rocket’s president,
who died in December.
9. Qualified production activities income is $250,000.
Required: Prepare a worksheet reconciling Rocket’s book
income with its taxable income (before special
deductions). Six columns should be used—two (one debit
and one credit) for each of the following three major

headings: book income, Schedule M-1 adjustments, and
taxable income. (See the sample worksheet with Form
1120 in Appendix B if you need assistance).
Problem C3-59
Reconciling Book Income and Taxable Income. Zero
Corporation reports the following results for the current
Net income per books (after taxes) $33,000
Federal income tax per books 12,000
Tax-exempt interest income 6,000
Interest on loan to purchase tax-exempt bonds 8,000
MACRS depreciation exceeding book depreciation 3,000
Net capital loss 5,000
Insurance premium on life of corporate officer where Zero
is the beneficiary 10,000
Excess charitable contributions carried over to next year
U.S. production activities deduction 1,000
Prepare a reconciliation of Zero’s taxable income before
special deductions with its book income.
Case Study I10-52
Able Corporation is a manufacturer of electrical lighting
fixtures. Able is currently negotiating with Ralph Johnson,

the owner of an unincorporated business, to acquire
his retail electrical lighting sales business. Johnson’s
assets that are to be acquired include the following:
Inventory of electrical fixtures $ 30,000 $ 50,000
Store buildings 80,000 100,000
Land 40,000 100,000
Equipment: 7-year recovery period 30,000 50,000
Equipment: 5-year recovery period
Mr. Johnson indicates that a total purchase price of
$1,000,000 in cash is warranted for the business because
of its high profitability and strategic locations and Able has
agreed that the business is worth $1,000,000. Despite the
fact that both parties attribute the excess payment to be
for goodwill, Able would prefer that the $600,000 excess
amount be designated as a 5-year covenant not to compete
so that he can amortize the excess over
a 5-year period. You are a tax consultant for Able who has
been asked to make recommendations as to the
structuring of the purchase agreement and the amounts to
be assigned to individual assets. Prepare a client memo to
reflect your recommendations.

Tax Strategy Problem I13-65
Russ has never recognized any Sec. 1231 gains or losses. In
December 2006, Russ is considering the sale of two Sec.
1231 assets. The sale of one asset will result in a $20,000
Sec. 1231 gain while the sale of the other asset will result
in a $20,000 Sec. 1231 loss. Russ has no other capital or

Sec. 1231 gains and losses in 2006 and does not expect to
have any other capital or Sec. 1231 gains and losses in
2006. He is aware that it might be advantageous
to recognize the Sec. 1231 gain and the Sec. 1231 loss in
different tax years. However, he does not know whether he
should recognize the Sec. 1231 gain in 2006 and the Sec.
1231 loss in 2007 or vice versa. His marginal tax rate for
each year is expected to be 33%. Advise the taxpayer with
respect to these two alternatives:
a. Recognize the $20,000 Sec. 1231 loss in 2006 and the
$20,000 Sec. 1231 gain in 2007.
b. Recognize the $20,000 Sec. 1231 gain in 2006 and the
$20,000 Sec. 1231 loss in 2007.
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