Question 1: Zack conducted his professional practice through Zack, Inc. The corporation uses a fiscal year ending September 30 even though the business purpose test for a fiscal year cannot be satisfied. For the year ending September 30, 2006, the corporation paid Zack a salary of $180,000, and during the period January through September 2006, the corporation paid him a salary of $150,000.
a. How much salary should Zack receive during the period October 1 through December 31, 2006?
b. Assume Zack received only $30,000 salary during the period October 1 through December 31, 2006. What would be the consequences to Zack, Inc.?
Question 2: Mauve Corporation began operations as a farm supplies business and used a fiscal year ending September 30. The company gradually went out of the farm supplies business and into the mail-order Christmas gifts business. The company has received permission from the IRS to change to a fiscal year ending January 31, effective for the year ending January 31, 2006. For the short period October 1, 2005, through January 31, 2006, Mauve earned $25,000. Calculate Mauve's tax liability for the short period October 1, 2005, through January 31, 2006.
Question 3: Turquoise, Inc., is a cash basis consulting firm. In 2006, the company reimbursed a client $15,000 because of an overcharge for services that was collected in 2005. The overcharge related to work done by one of Turquoise's subcontractors. Turquoise had paid the subcontractor the $15,000 in 2005 as part of total payments to the subcontractor of $150,000. The subcontractor felt that he was entitled to his full charges, but settled by refunding $7,000 to Turquoise in 2006. Turquoise was in the 35% marginal tax bracket in 2005 and is in the 15% marginal tax bracket in 2006.
a. What are the tax consequences to Turquoise of these contract adjustments?
b. Did Turquoise receive equitable tax treatment from these adjustments?
Question 4: Gold, Inc., is an accrual basis taxpayer. In 2006, an employee accidentally spilled hazardous chemicals on leased property. The chemicals destroyed trees on neighboring property, resulting in $30,000 of damages. In 2006, the owner of the property sued Gold, Inc., for the $30,000. Gold's attorney feels that it is liable and the only issue is whether the neighbor will also seek punitive damages that could be as much as three times the actual damages. In addition, as a result of the spill, Gold was in violation of its lease and was therefore required to pay the landlord $15,000. However, the amount due for the lease violation is not payable until the termination of the lease in 2009. None of these costs were covered by insurance. Jeff Stuart, the president of Gold, Inc., is generally familiar with the accrual basis tax accounting rules and is concerned about when the company will be allowed to deduct the amounts the company is required to pay as a result of this environmental disaster. Write Mr. Stuart a letter explaining these issues. Gold's address is 200 Elm Avenue, San Jose, CA 95192.
Question 5: On December 30, 2006, Father sold land to Son for $10,000 cash and a 7% installment note with a face amount of $260,000. In 2007, after paying $60,000 on the principal of the note, Son sold the land. In 2008, Son paid Father $40,000 on the note principal. Father's basis in the land was $90,000. Assuming Son sold the land for $350,000, compute Father's taxable gain in 2007.