either use an excel spreadsheet (each question answered on a separate worksheet tab) or submit a Word doc.
Note: I only want one document submitted. You can embed the excel calculations in a word doc.—I don’t want to go back and forth between two documents to determine your answer.
Here are the points for the four problems:
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Problem 1 20 points
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Problem 2 20 points (optional 5 extra credit problem)
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Problem 3 15 points
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Problem 4 5 points
Problem #1: 20 points
In 2022, BROOME, INC. Corporation (a C corporation) had net operating income of $18,000,000 (this net operating income does not include any capital transactions). Besides the operating income, BROOME, INC. had a $(250,000) NLTCL from the sale of a variety of capital assets in 2022.
On June 30, 2022, Broome received a $150,000 dividend from Dustpan, Inc. (Broome, Inc. owns 22% of the stock in Dustpan, Inc.)
BROOME, INC. had a NLTCL of $(400,000) in 2021. In preceding years, BROOME, INC. had the following NLTCG:
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2018 NLTCG $ 100,000
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2019 NTLCG $ 200,000
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2020 NTLCG $ 150,000
BROOME, INC. used the capital loss carryback provisions in 2021.
a.
What is Broome, Inc.’s taxable income for 2022?
b.
What is Broome’s Inc., tax liability for 2022?
c.
You are BROOME, INC.’s tax accountant. Explain the tax owed in 2022 and any other tax ramifications from their operations and capital transactions. Be specific.
Problem #2 (20 points)
Oak, Maple, and Birch decide to pool the resources from their respective sole proprietorships and form Tree, Corporation. These three individuals contribute the following items to form this corporation:
Asset Adj. Basis Fair Mkt Value Shares of Stock
Oak. Cash 30,000 30,000 1,000 shares
Services 75,000*
Maple Delivery Van 3,000 110,000** 1,000 shares
Birch Building/Land 80,000 275,000***
Mortgage (100,000) (100,000) 2,000 shares
*Oak, a computer engineer, set up the underlying computer infrastructure in exchange for $75,000 stock. Oak also contributed $30,000 of cash.
**Maple received $10,000 of cash in addition to the 1,000 shares of stock.
***The corporation assumed the mortgage associated with Birch’s building.
Required:
Part 1:
Oak:
a.
Does Oak recognize gain, loss or income from this transaction? If so, what is the amount and character of this gain, income or loss?
b.
What is Oak’s basis in Tree Corporation stock?
Maple:
a.
Does Maple recognize gain, loss or income from this transaction? If so, what is the amount and character of this gain, income or loss?
b.
What is Maple’s basis in Tree Corporation’s stock?
c.
What is Tree Corporation’s basis in the delivery van?
Birch:
a.
Does Birch recognize gain, loss or income from this transaction? If so, what is the amount and character of this gain, income or loss?
b.
What is Birch’s’ basis in Tree Corporation stock?
c.
What is Tree Corporation’s basis in the building/land?
Part 2: (Optional—5 extra credit points)
Five years after Oak, Maple and Birch form Tree Corporation, Spruce would like to contribute property in exchange for stock. Spruce will contribute property with fair market value of $200,000 and an adjusted basis of $80,000 in exchange for 2,500 shares of stock in Tree. At the time of this transaction, stock ownership is as follows:
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Oak 1,000 shares
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Maple 1,000 shares
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Birch 2,000 shares
If this transaction goes forward as proposed,
1.
How much gain, loss or income (if any) will Spruce recognize?
2.
What is Spruce’s basis in Tree stock?
3.
What basis does Tree have in the property contributed by Spruce?
4.
Do you have an advice for Spruce regarding this transaction?
Problem #3: 20 points
On January 1, 2023, Joan, a shareholder of Carleton, Inc., received a distribution of property from the corporation. The property had a fair market value of $100,000 and an adjusted basis of $80,000. On January 1, 2023, Carleton (a calendar-year corporation) had no current earnings and profits (E&P) and a $(300,000) deficit in accumulated earnings and profits (AEP).
Joan has a basis in Carleton stock of $30,000. Joan has substantial income from other sources; therefore, she will be in the 37% marginal tax bracket in 2023.
a.
Determine the tax consequences to Joan from receiving this distribution of property.
b.
After the distribution, what is Joan’s basis in Carleton, Inc. stock?
c.
What impact (if any) will this distribution have on the taxable income of Carleton, Inc. in 2021?
d.
What is the ending balance in Carleton, Inc.’s Accumulated E&P after this distribution of property?
Problem # 4: 5 Points
Arthur Hamline, a wealthy individual, is a new client for your firm. In reviewing his tax returns for previous years, you discover an error was made in the calculation of last year’s income (by the previous accountant). This error resulted in a significant understatement of taxable income, and; therefore, a substantial underpayment of taxes.
What is your ethical responsibility regarding the underpayment of tax from last year? Be specific in terms of the ethical guidelines