Part A -
1. Alan Meer inherits a hotel from his grandmother, Mary, on February 11 of the current year. Mary bought the hotel for $730,000 three years ago. Mary deducted $27,000 of cost recovery on the hotel before her death. The fair market of the hotel in February is $725,000. (Assume that the alternative valuation date is not used.)
a. What is Alan's adjusted basis in the hotel?
b. If the fair market value of the hotel at the time of Mary's death was $500,000, what is Alan's basis?
2. On September 30 of last year, Rex received some investment land from Holly as a gift. Holly's adjusted basis was $50,000 and the land was valued at $40,000 at the time of the gift. Holly acquired the land five years ago. What is the amount and character of Rex's recognized gain (loss) if he sells the land on May 12 this year at the following prices?
a. $32,000
b. $70,000
c. $45,000
3. In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated the machine by $32,000.
a. What is the amount and character of the gain Canon will recognize on the sale, assuming that it is a partnership?
b. What is the amount and character of the gain Canon will recognize on the sale, assuming that it is a corporation?
c. What is the amount and character of the gain Canon will recognize on the sale, assuming that it is a corporation and the sale proceeds were increased to $60,000?
d. What is the amount and character of the gain Canon will recognize on the sale, assuming that it is a corporation and the sale proceeds were decreased to $20,000?
4. Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. This year, she sells the following long-term assets used in her business:
|
Asset
|
Sales Price
|
Cost
|
Accumulated Depreciation
|
|
Building
|
$ 230,000
|
$200,000
|
$52,000
|
|
Equipment
|
80,000
|
148,000
|
23,000
|
Lily's taxable income before these transactions is $160,500. What is Lily's taxable income and tax liability for the year?
Part B -
1. Evon would like to organize SHO as either an LLC or as a C corporation generating an 11 percent annual before-tax return on a $200,000 investment. Assume individual and corporate tax rates are both 35 percent and individual capital gains and dividend tax rates are 15 percent. SHO will pay out its after-tax earnings every year as a dividend if it is formed as a C corporation. Assume Evon is the sole owner of the entity. Ignore self-employment taxes and the net investment income tax.
a. How much would Evon keep after taxes if SHO is organized as either an LLC or as a C corporation?
b. What are the overall tax rates if SHO is organized as either an LLC or a C corporation?
2. Sandy Corp. projects that it will have taxable income of $150,000 for the year before paying any fringe benefits. Assume Karen, Sandy's sole shareholder, has a marginal tax rate of 35 percent on ordinary income and 15 percent on dividend income. Assume Sandy's tax rate is 35 percent.
a. What is the amount of the overall tax (corporate level + shareholder level) on Sandy's $150,000 of pre-benefit income if Sandy Corp. does not pay out any fringe benefits and distributes all of its after-tax earnings to Karen (ignore the net investment income tax)?
b. What is the amount of the overall tax on Sandy's $150,000 of pre-benefit income if Sandy Corp. pays Karen's adoption expenses of $10,000 and the payment is considered to be a nontaxable fringe benefit (ignore the net investment income tax)? Sandy Corp. distributes all of its after-tax earnings to Karen.
c. What is the amount of the overall tax on Sandy's $150,000 of pre-benefit income if Sandy Corp. pays Karen's adoption expenses of $10,000 and the payment is considered to be a taxable fringe benefit (ignore the net investment income tax)? Sandy Corp. distributes all of its after-tax earnings to Karen.