TAX PLANNING CASES
Tony and Susan are starting a retail business selling formal wear for men and women. They estimate profits and losses for the next five years to be: ($20,000), ($10,000), ($5,000), $10,000, and $50,000 respectively. Susan will work full time in the store while Tony will be involved in managing the operations. Susan is married to Tom and is in the 28% marginal tax bracket. Tony is single and has other sources of income that put him in the 28% marginal tax bracket. Susan will be paid a salary of $30,000 for the first five years, after which her compensation will be reviewed. Tony and Susan each contribute $50,000 to get the business started.
The remaining question facing Tony and Susan is which business form to use for the business. They believe they should operate as a partnership but have been informed that forming a corporation might be a better option since it would limit their liability. Prepare an analysis to determine whether Tony and Susan should operate their business as a partnership or a corporation.
77. Tory, Becky, Hal, and Jere form TBHJ Partnership as equal owners. TBJH Partnership rents heavy tools and equipment. Becky and Hal are married to each other while Tory and Jere are brothers but are not related to Becky or Hal. Because Becky and Hal have other jobs, Tory and Jere are to be the full-time managers of the business. Although Tory and Jere will run the business full-time, Becky will help in the store on weekends and some evenings. Hal will lend his financial expertise to the firm by doing the bookkeeping and preparing the tax returns. Even though the four have equal ownership interests, it is not clear how each owner is to be compensated so that there is equity among the partners yet rewards for those engaged in specific tasks. Hal has told the others that they cannot receive deductible salaries. However, he suggests that guaranteed payments be made to each partner/ employee for an agreed-upon amount based on the value of the services each provides and/or the time spent at the store. Discuss the ramifications of employing this plan and whether this is an equitable way to allocate compensation among the partners. What are the implications of this arrangement for the partners and the partnership?
ISSUE IDENTIFICATION PROBLEMS
In each of the following problems, identify the tax issue(s) posed by the facts presented.
Determine the possible tax consequences of each issue that you identify.
57. Lydia owns 75% of Flower Farms, a partnership. She also owns land that she leases to Flower Farms for $6,000 per month.
58. Michael buys a piece of property from JFK Partnership for $60,000 that has a $70,000 basis. Michael owns 80% of JFK partnership.
59. Irene contributes land to Micro Development Partnership for a 30% interest. The land's basis is $20,000, and it has a fair market value of $80,000. Micro reports a net operating loss of $100,000 for the year. Irene devotes at least 12 hours a week to managing the partnership operations.
60. Powell owns a 20% interest in Cooke Partnership. At the beginning of 2012, Powell's basis is $22,000. Cooke reports a $90,000 operating loss in 2012, and Powell withdraws $10,000 from the partnership. Cooke's 2013 operating income is $70,000, and Powell withdraws $10,000 from the partnership.
61. Ramrod, Inc., sells a warehouse for $350,000. It purchased the warehouse 10 years ago for $250,000 and had taken $75,000 in depreciation on the building to the date of sale.
62. Myrtle Coast Corporation has a $35,000 operating loss during the current year. Not included in the loss is a $40,000 dividend it received from a corporation in which it owns a 15% interest.
63. LMC, Inc., is equally owned by Larry, Maurice, and Charles. The owners are sports agents. LMC's income consists solely of fees from the owners' clients. During the current year, LMC's net income from operations is $380,000, and it receives $20,000 in interest income. The corporation owns an interest in a limited partnership that generates a $24,000 loss in the current year.
64. Assume the same facts as in problem 63, except that LMC, Inc., is an electing S corporation.
65. Kummell Corporation reports a $200,000 taxable income in the current year. Included in the taxable income calculation are $20,000 in dividends received from less-than-20%-owned corporations, and $30,000 in charitable contributions.
66. Milena owns a 25% interest in Davis Company, an S corporation. Her basis in the Davis stock is $40,000. Davis reports an operating loss of $200,000 in the current year. Davis owes Milena $25,000 on a loan she made to the company several years ago.
67. Charlene owns a 70% interest in Maupin Mopeds, which is organized as a partnership. She wants to open another business and needs office space for it. She has Maupin distribute a building worth $150,000 to her in lieu of her normal cash distribution. Maupin's basis in the building is $55,000. Charlene's basis in Maupin is $80,000.
68. Ballou Corporation distributes $200,000 in cash to its shareholders during the current year. Accumulated earnings and profits at the beginning of the year are $45,000, and current year earnings and profits are $105,000. Buddy owns 80% of Ballou and has a basis of $60,000 at the beginning of the year.