## A. Keith Thomas and Thomas Brooks began a new consulting

a. Keith Thomas and Thomas Brooks began a new consulting business on January 1, 2019. They organized the business as a C KT, Inc. During 2019, the was successful and generated revenues of \$2,000,000. KT had operat-ing expenses of \$800,000 before any payments to Keith or Thomas. During 2019, KT paid dividends to Keith and Thomas in the amount of \$450,000 each. Assume that Keith’s wife earned \$120,000 from her job, they file a joint return, have item-ized deductions of \$40,000, and have no children. Compute the total tax liability of KT and Keith and his wife for 2019.

b. Instead of organizing the consulting business as a C assume Keith and Thomas organized the business as a limited liability company, KT, LLC. KT made a of \$450,000 each to Keith and Thomas during 2019. Compute the total tax liability of KT and Keith for 2019. Ignore any additional tax on net investment income.

## Clay, who was single, died in 2019 and has a

Clay, who was single, died in 2019 and has a gross estate valued at \$8,500,000. Six months after his death, the gross assets are valued at \$9,000,000. The estate incurs funeral and administration expenses of \$125,000. Clay had debts amount-ing to \$150,000 and bequeathed all of his estate to his children. During his life, Clay made no taxable gifts.

a. What is the amount of Clay’s taxable estate?

b. What is the tax base for computing Clay’s estate tax?

c. What is the amount of estate tax owed if the tentative estate tax (before credits) is \$3,235,800?

d. Alternatively, if, six months after his death, the gross assets in Clay’s estate declined in value to \$7,500,000, can the administrator of Clay’s estate elect the alternate valua-tion date? What are the important factors that the administrator should consider as to whether the alternate valuation date should be elected?

e. How would your answer change in parts a, b, and c if Clay’s gross estate was S18,500,000 rather than \$8,500,000 and the tentative estate tax before credits was \$7,235,800?

## Howard Gartman is a 40% partner in the Honon &

Howard Gartman is a 40% partner in the Honon & Gartman Parmership. During 2019, the parmership reponed the roral irems below (100%) on irs Form 1065:

Ordinary income ……………. \$180,000

Qualified dividends ……………. 10,000

Long-term capital loss ……….. (12,000)

Long-term capital gain …..……. 28,000

Charitable contributions ………… 4,000

Cash distributions to partners … 150,000

Howard and his wife Dawn, who file a joint return, also had the following income and deductions from sources nor connected with the partnership:

 Income Dawn’s salary \$400,000 Qualified dividends 3,000 Deductions Mongage interest 12,000 Real estate taxes 5,800 Charitable contributions 3,000

Howard and Dawn have two children. During 2019, Dawn had \$4,500 in federal income taxes withheld from her salary and Howard made four estimated tax pay-ments of \$2,500 each (\$10,000 total). Compute Howard and Dawn’s Federal income tax liability for 2019 and whether they have a balance due or a tax refund. Ignore the child tax credits.

## Organizational Forms Available. Lucia, a single taxpayer, operates a florist

Organizational Forms Available. Lucia, a single taxpayer, operates a florist business. She is considering either continuing the business as a sole proprietorship or reorganizing it as either a C or an S Her goal is to withdraw \$20,000 of profits from the business annually while minimizing her total tax liability. She expects the business to generate annually \$50,000 of taxable income, all of which qualifies as pass-through income, before considering a deductible salary expense (see below). Which business form(s) can best achieve Lucia’s goals? Remember that a shareholder is taxed on S income whether withdrawn or not and is not taxed on the actual withdrawals or distributions. Assume the C is taxed at 21%, Lucia is in the 22% individual tax bracket for ordinary income, and Lucia is taxed at 15% on income. When considering either corporate option, perform the analysis first by treating any withdrawals as deductible salary payments of the Then do the analysis by treating them as nondeductible dividends or distributions. Ignore employment taxes.

## In the current year, Sedgwick Corporation has \$100,000 of current

In the current year, Sedgwick has \$100,000 of current and accumulated E&P. On March 3, Sedgwick distributes to its shareholder Dina a parcel of land (a capital asset) having a \$56,000 FMV. The land has a \$40,000 adjusted basis (for both taxable income and E&P purposes) to Sedgwick and is subject to an \$8,000 mortgage, which Dina assumes. Assume a 21% corporate tax rate.

a. What are the amount and character of the income Dina recognizes as a result of the distribution?

b. What is Dina’s basis in the land?

c. What are the amount and character of Sedgwick’s gain or loss as a result of the distribution?

d. What effect does the have on Sedgwick’s E&P?

## On May 15 of the current year, Quick Corporation distributes

On May 15 of the current year, Quick distributes to its shareholder Calvin a building having a \$250,000 FMV and used in Quick’s business. The building originally cost \$180,000. Quick claimed \$30,000 of straight-line depreciation, so that the adjusted basis of the building on the date of for taxable income purposes is \$150,000. The adjusted basis of the building for E&P purposes is \$160,000. The build ing is subject to an \$80,000 mortgage, which Calvin assumes. Quick has an E&P balance exceeding the amount distributed and is subject to a 21% tax rate.

a. What are the amount and character of the income Calvin recognizes as a result of the distribution?

b. What is Calvin’s basis in the building?

c. What are the amount and character of Quick’s gain or loss as a result of the distribution?

d. What effect does the have on Quick’s E&P?

## On May 10 of the current year, Stowe Corporation distributes

On May 10 of the current year, Stowe distributes to its shareholder Arlene \$20,000 in cash and land (a capital asset) having a \$50,000 FMV. The land has a \$15,000 adjusted basis (for both taxable income and E&P purposes) and is subject to a \$60,000 mortgage, which Arlene assumes. Stowe has an E&P balance exceeding the amount distributed and is subject to a 21% corporate tax rate.

a. What are the amount and character of the income Arlene recognizes as a result of the distribution?

b. What is Arlene’s basis in the land?

c. What are the amount and character of Stowe’s gain or loss as a result of the distribution?

## During the current year, Zeta Corporation distributes the assets listed

During the current year, Zeta distributes the assets listed below to its sole shareholder, Susan. For each asset listed, determine the gross income recognized by Susan, her basis in the asset, the amount of gain or loss recognized by Zeta, and the effect of the on Zeta’s E&P. Assume that Zeta has an E&P balance exceeding the amount distributed and is subject to a 21% tax rate. Unless stated otherwise, adjusted bases for taxable income and E&P purposes are the same.

a. A parcel of land used in Zeta’s business that has a \$200,000 FMV and a \$125,000 adjusted basis.

b. Assume the same facts as in Part a except that the land is subject to a \$140,000 mortgage.

c. FIFO inventory having a \$25,000 FMV and an \$18,000 adjusted basis.

d. A building used in Zeta’s business having an original cost of \$225,000, a \$450,000 FMV, and a \$150,000 adjusted basis for taxable income purposes. Zeta has claimed \$75,000 of depreciation for taxable income purposes under the straight-line method. Depreciation for E&P purposes is \$60,000.

e. An automobile used in Zeta’s business having an original cost of \$12,000, an \$8,000 FMV, and a \$5,760 adjusted basis. For taxable income purposes, Zeta has claimed \$6,240 of MACRS depreciation on the automobile. For E&P purposes, depreciation is \$5,200.

f. Installment obligations having a \$35,000 face amount (and FMV) and a \$24,500 adjusted basis. The obligations were created when Zeta sold a Sec. 1231 asset.

## Len Wallace contributed assets with a \$100,000 adjusted basis and

Len Wallace contributed assets with a \$100,000 adjusted basis and a \$400,000 FMV to Ace in exchange for all of its single class of stock. The conducted operations for five years and was liquidated. Len received a liquidating of \$500,000 cash (less federal income taxes owed on the by the and the assets that he had contributed, which now have a \$100,000 adjusted basis and a \$500,000 FMV. Assume a 21% corporate tax rate.

a. What are the tax consequences of the corporate formation transaction?

b. What are the tax consequences of the corporate transaction?