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Visit Below Link, To Download This Course:nn nEmail us onnSUPPORT@TUTORIALSSERVICE.NETnnTAX 655 Final Exam AnswersnTAX655nTAX 655 Final Exam AnswersnNOTEnComplete the problems as presented in this document. You may create a new document and/or spreadsheet as needed. Any memo should be no more than 3 pages in length. Please state any assumptions used if problems are not clear.n

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tax 655 final exam answers


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TAX 655 Final Exam Answers


TAX 655 Final Exam Answers


Complete the problems as presented in this document. You may create a new document and/or

spreadsheet as needed. Any memo should be no more than 3 pages in length. Please state any

assumptions used if problems are not clear.

Problem 1

Your client, a physician, recently purchased a yacht on which he flies a pennant with a medical emblem

on it. He recently informed you that he purchased the yacht and flies the pennant to advertise his

occupation and thus attract new patients. He has asked you if he may deduct as ordinary and necessary

business expenses the costs of insuring and maintaining the yacht. In search of an answer, consult

RIA’sCHECKPOINT TAX available on-line through the SNHU Shapiro Library. Explain the steps taken to

find your answer.

Problem 2

Stacey Small has a small salon that she has run for a few years as a sole proprietorship. The

proprietorship uses the cash method of accounting and the calendar year as its tax year. Stacey needs

additional capital for expansion and knows two people who might be interested in investing. One would

like to practice hairdressing in the salon. The other would only invest.

stacey wants to know the tax consequences

Stacey wants to know the tax consequences of incorporating the business. Her business assets include a

building, equipment, accounts receivable and cash. Liabilities include a mortgage on the building and a

few accounts payable, which are deductible when paid.

Write a memo to Stacey explaining the tax consequences of the incorporation. As part of your memo

examine the possibility of having the corporation issue common and preferred stock and debt for the

shareholders’ property and money.

Problem 3

Five years ago, Lacey, Kaylee, and Doug organized a software corporation, DLK, which develops and

sells Online Meetings software for businesses. DLK is a C corporation. Each individual contributed

$10,000 to the company in exchange for 1,000 shares of DLK stock (for a total of 3,000 shares). The

corporation also borrowed $250,000 from ACME Venture Capital to finance operating costs and capital


Because of intense competition, DLK struggled for the first few years of operation and the corporation

sustained chronic losses. This year, Lacey, DLK’s president, decided to seek additional funds to finance

DLK’s working capital.

CME declined to extend additional funds because of the money already invested in DLK. High Tech

Venture Capital Inc. proposed to lend DLK $100,000, but at a 10% premium over the prime rate. (Other

software manufacturers in the same market can borrow at a 3% premium.) First Round Capital proposed

to invest $50,000 of equity capital into DLK, but on the condition that the investment firm be granted the

right to elect five members to DLK’s board of directors. Discouraged by the “high cost” of external

borrowing, Lacey decides to approach Kaylee and Doug.

Lacey suggests to Kaylee and Doug that each of the three original investors contribute an additional

$25,000 to DLK in exchange for five 20-year debentures. The debentures will be unsecured and

subordinate to ACME’s debt. Annual interest on the debentures will accrue at a floating 5% premium over

the prime rate. The right to receive interest payments will be cumulative; that is each debenture holder is

entitled to past and current interest payments before DLK’s board can declare a common stock dividend.

The debentures would be both nontransferable and noncallable. Lacey, Kaylee and Doug have asked

you, their tax accountant, to advise them on the tax implications of the proposed financing agreement.

After researching the issue, issue your advice in a tax research memo. At a minimum, you should consult

the following authorities:

Sec 385


Rudolph A. Hardman, 60 AFTR 2d 87-5651, 82-7 USTC ¶9523 (9th, 1987)

Tomlinson v. The 1661 Corporation, 19 AFTR 2d 1413, 67-1 USTC ¶9438 (5th, 1967)

Problem 4

Which of the following groups constitute a controlled group? (Any stock not listed below is held by

unrelated individuals each owning less than 1% of the outstanding stock.) For brother-sister corporations,

which definition applies?

1. Mark owns 90% of the single classes of stock of Hot and Ice Corporations.

2. Johnson and Carey Corporations each have only a single class of stock outstanding. The two

controlling individual shareholders own the stock as follows:




Stock Ownership Percentages

Johnson Corp.



Carey Corp



3. Red, Blue and ABC Corporations each have a single class of stock outstanding. The stock is owned as





Stock Ownership Percentages

Blue Corp.


ABC Corp



Red Corporation’s stock is widely held by over 1,000 shareholders, none of whom owns directly or

indirectly more than 1% of Red’s stock.

4. Helm, Oak, Walnut and Zinnia Corporations each have a single class of stock outstanding. The stock is

owned as follows:





Stock Ownership Percentages

Helm Corp.


Oak Corp


Walnut Corp


Zinnia Corp



Problem 5

Eric and Denise are partners in ED Partnership. Eric owns a 60% capital, profits and loss interest. Denise

owns the remaining interest. Both materially participate in the partnership activities. At the beginning of

the current year, ED’s only liabilities are $50,000 in accounts payable, which remain outstanding at year-

end. In August, ED borrowed $120,000 on a nonrecourse basis from Delta Bank. The loan is secured by

property with a $230,000 FMV. These are ED’s only liabilities at year-end. Basis for the partnership

interest at the beginning of the year is $40,000 for Denise and $60,000 for Eric before considering the

impact of liabilities and operations

impact of liabilities and operations. ED has a $200,000 ordinary loss during the current year. How much

loss can Eric and Denise recognize?

Problem 6

Linda pays $100,000 cash for Jerry’s ¼ interest in the JILL Partnership. The partnership has a Sec. 754

election effect. Just before the sale of Jerry’s interest, JILL’s balance sheet appears as follows:





Partners’ capital


Instrument Corp

Logo Corp

Lighthouse Corp


Partnership’s Basis


















1.What is Linda’s total optional basis adjustment?

2. If JILL Partnership sells the land for its $325,000 FMV immediately after Linda purchases her interest,

how much gain or loss will the partnership recognize?

3. How much gain will Linda report as a result of the sale?

Problem 7

Monte and Allie each own 50% of Raider Corporation, an S corporation. Both individuals actively

participate in Raider’s business. On January 1, Monte and Allie have adjusted bases for their Raider

stock of $80,000 and $90,000 respectively. During the current year, Raider reports the following results:

Ordinary loss

Tax-exempt interest income

Long-term capital loss




Raider’s balance sheet at year-end shows the following liabilities: accounts payable, $90,000; mortgage

payable, $30,000; and note payable to Allie, $10,000.

1. What income and deductions will Monte and Allie report from Raider’s current year activities?

2. What is Monte’s stock basis on December 31?

3. What are Allie’s stock basis and debt basis on December 31?

4. What loss carryovers are available for Monte and Allie?

5. Explain how the use of the losses in Part a would change if instead Raider were a partnership

and Monte and Allie were partners who shared profits, losses and liabilities equally.

Problem 8

tom hughes died in 2009 with a gross estate

Tom Hughes died in 2009 with a gross estate of $3.9 million and debt of $30,000. He made post-1976

taxable gifts of $100,000, valued at $80,000 when he died. His estate paid state death taxes of $110,200.

What is his estate tax base?

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