(1) X, an individual, not a dealer, owns land and a building. X sold the property to Y for $50,000. X basis was $17,500, and the property was encumbered by a mortgage of $25,000. Y assumed the mortgage. X incurred $2,500 of selling expenses, and received a payment of $10,000 in cash. The remainder ($15,000) is to be paid over 5 years at $3,000 per year plus interest. Assume that there is no depreciation recapture.
(a) Calculate:
(1) the "Contract Price"
(2) the Gross Profit Ratio
(3) the amount of gain to be reported in the year of sale.
(b) What are the consequences if Y was X's wholly owned corporation?
(c) Suppose Y is X's brother in law. X waives a $3,000 payment as a wedding gift. What are the income tax consequences?
(2) FFC Properties, Inc.is a subsidiary of FFC International, the Fast Fried Chicken people. CYC Properties acquires land and builds stores for FFC's retail outlets. On September 30, 2016, an appropriate building site is acquired in Summit, New Jersey. The land cost $500,000. Properties pays 20% down ($100,000) and obtains an interest only mortgage of 3% on a mortgage of $600,000. The mortgage is used to pay the remaining $400,000 for the purchase price of the land and an additional $200,000 to construct the building. Interest must be paid monthly and the principal is payable in 3 years. Thus, interest accrues at $1,500 per month. After some soil testing and other pre-construction activities, construction begins on December 1, 2016. The building is completed and is occupied on April 1, 2017, and FFC begins retail operations on that date. When do interest and taxes need to be capitalized?
(3) Barbie's Bridal is engaged in the bridal business. Its sells several lines of crystal, china and silver. It also provides a "Total Bridal Service." For the Total Bridal Service, Barbie's Bridal arranges and decorates the place where the ceremony is going to take, including flowers, music, programs, photographs, etc. There are several options on the Bridal Service.
(a) Regarding the crystal, china and silver, since people's taste change, patterns go out of demand and are not replaced. However, an inventory of stock is maintained for people who might want another setting, or to replace a broken item. Because of the decline in demand, Barbie's Bridal has excess inventory. If Barbie's Bridal uses Lower Cost or Market, what must Barbie's Bridal do to write down its inventory if it uses lower of cost or market?
(b) Barbie's Bridal contracts with several wholesale florists to provide flowers for its Bridal Service. The IRS wants Barbie's Bridal to use inventories for the flowers to clearly reflect income. Barbie's Bridal asks you if it needs to use inventories for its flowers.
(4) The Glass Corporation incurs a $50,000 net operating loss for the year ending December 31, 2016.
(a) It carries back the loss to 2014. For 2014, Glass showed taxable income of $25,000 and paid a tax of $7,500 (assume a 30% rate). Upon audit of the claim for refund in 2018, it is discovered that Glass had unreported gross income for 2014 of $30,000. 2014 is now a closed year. Can Glass receive a refund for 2014?
(b) If you were advising Glass, and you knew about the omission of income for 2014, what would you advise regarding the 2016 net operating loss?
(5) A Corporation owns a building with a basis of $50,000 that it uses in its business. In 2016, it sells the building to B for $250,000 and receives a promissory note of $225,000 and cash of $25,000. In order to utilize an expiring capital loss carryforward it elects to report the income ($200,000) in the year of sale. The gain is §1231 gain, and since A has no other §1231 gains for the year, it is reported as a capital gain.
It is determined in 2017 that A did not make certain improvements that it was obligated to make before the sale. A pays B $20,000 in settlement of its obligation. How should this be treated?
(6) Fleet Electric Corp.supplies electric to the residents of Montana. In January 2017, Fleet applies for a 2% rate increase. Under the rules of the Montana Board of Public Utilities, Fleet is permitted to charge the higher rates while its application is pending. Once approved, the rate increase is effective as of the time of the application for the rate increase. In January 2018, the Board of Public Utilities grants Fleet a 1% rate increase. Fleet must refund the additional charges back to the customers.
(a) If Fleet refunds all of the money during the remainder of 2018, can Fleet use §1341 to mitigate the taxes on the amounts collected in 2017 and refunded in 2018?
(b) Assuming §1341 applies, would §1341 mitigate the tax impact under the following:
2017
Reported Taxable Income $6,000,000
Correct Taxable Income $4,000,000
Tax on $6,000,000 $1,500,000
Tax on $4,000,000 $800,000
2018
Taxable Income Before Repayment $8,000,000
Taxable Income After Repayment $6,000,000
Tax on $8,000,000 $2,400,000
Tax on $6,000,000 $1,500,000
(c) If the Board of Public Utilities ruled in November 2017 and Fleet refunded all of the excess amounts in 2017, how should Fleet report the income and the payment?
Just computations is not enough, need full explanation of answer so that I can properly understand and study this problem.