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ACC 547 Week 3 - DQ I6-23 Problems: I8-40, C3-38, C3-58, & C3-59 ,I10-52 Tax Strategy I13-65

ACC 547 Week 3 - DQ I6-23  Problems: I8-40, C3-38, C3-58, & C3-59 ,I10-52 Tax Strategy I13-65
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ACC/547 ACC 547 Week 3 - DQ I6-23 * Problems: I8-40 * C3-38 * C3-58, & C3-59 * I10-52 * Tax Strategy I13-65

Week 3

Complete the following in Federal Taxation Comprehensive:

o    Discussion Question I6-23
o    Problems I8-40, C3-38, C3-58, & C3-59
o    Case Study I10-52
o    Tax Strategy Problem I13-65


Discussion Question I6-23

Under the related party rules of Sec. 267, why has Congress imposed the concept of constructive

Problem I8-40

Amount and Character of Loss Transactions. On September 30 of the current year Silver
Fox Corporation files for bankruptcy. At the time, it estimates that the total FMV of its
assets is $725,000, whereas the total amount of its outstanding debt amounts to
$950,000. Silver Fox Corporation has been engaged in the resale of tax preparation and
tax research-related books and software for several years.
a. At the time of the bankruptcy, Silver Fox is owned by Randall, who purchased the
stock from an investor for $250,000 several years ago. Randall is single. What are the
amount and character of the loss sustained by Randall upon Silver Fox’s bankruptcy?
b. How would your answer to part a change if Randall originally organized Silver Fox
Corporation, capitalizing it with $250,000 of cash and assuming Silver Fox qualifies as
a small business corporation?
c. How would your answer to Part a change if Randall were a corporation instead of an
d. How would your answer to Part b change if Randall were a corporation instead of an

Problem C3-38

Charitable Contribution Deduction Limitation. Zeta Corporation reports the following
results for 2006 and 2007:
Adjusted taxable income $180,000 $125,000
Charitable contributions (cash) 20,000 12,000
The adjusted taxable income is before Zeta claims any charitable contributions deduction,
NOL or capital loss carryback, dividends-received deduction, or U.S. production
activities deduction. 

a. How much is Zeta’s charitable contributions deduction in 2006? In 2007?
b. What is Zeta’s contribution carryover to 2008, if any?

Problem C3-58

Converting Book Income to Taxable Income. The following income and expense
accounts appeared in the accounting records of Rocket Corporation, an accrual basis taxpayer,
for the current calendar year.

... .... .... ... (details in the pdf file)

The following additional information applies.
1. Dividends were from Star Corporation, a 30%-owned domestic corporation.
2. Interest revenue consists of interest on corporate bonds, $15,000; and municipal
bonds, $3,000.
3. The stock is a capital asset held for three years prior to sale.
4. Rocket uses the specific writeoff method of accounting for bad debts.
5. Interest expense consists of $11,000 interest incurred on funds borrowed for working
capital and $1,000 interest on funds borrowed to purchase municipal bonds.
6. Rocket paid all contributions in cash during the current year to State University.
7. Rocket calculated depreciation per books using the straight-line method. For income
tax purposes, depreciation amounted to $85,000.
8. Other expenses include premiums of $5,000 on the key-person life insurance policy
covering Rocket’s president, who died in December.
9. Qualified production activities income is $250,000.
Required: Prepare a worksheet reconciling Rocket’s book income with its taxable
income (before special deductions). Six columns should be used—two (one debit and one
credit) for each of the following three major headings: book income, Schedule
M-1 adjustments, and taxable income. (See the sample worksheet with Form 1120 in
Appendix B if you need assistance).

Problem C3-59

Reconciling Book Income and Taxable Income. Zero Corporation reports the following
results for the current year:
Net income per books (after taxes) $33,000
Federal income tax per books 12,000
Tax-exempt interest income 6,000
Interest on loan to purchase tax-exempt bonds 8,000
MACRS depreciation exceeding book depreciation 3,000
Net capital loss 5,000
Insurance premium on life of corporate officer where Zero is the beneficiary 10,000
Excess charitable contributions carried over to next year 2,500
U.S. production activities deduction 1,000
Prepare a reconciliation of Zero’s taxable income before special deductions with its book


Case Study I10-52

Able Corporation is a manufacturer of electrical lighting fixtures. Able is currently negotiating
with Ralph Johnson, the owner of an unincorporated business, to acquire his
retail electrical lighting sales business. Johnson’s assets that are to be acquired include the

Inventory of electrical fixtures $ 30,000 $ 50,000
Store buildings 80,000 100,000
Land 40,000 100,000
Equipment: 7-year recovery period 30,000 50,000
Equipment: 5-year recovery period

Mr. Johnson indicates that a total purchase price of $1,000,000 in cash is warranted for
the business because of its high profitability and strategic locations and Able has agreed
that the business is worth $1,000,000. Despite the fact that both parties attribute the
excess payment to be for goodwill, Able would prefer that the $600,000 excess amount
be designated as a 5-year covenant not to compete so that he can amortize the excess over
a 5-year period.
You are a tax consultant for Able who has been asked to make recommendations as to
the structuring of the purchase agreement and the amounts to be assigned to individual
assets. Prepare a client memo to reflect your recommendations.

Tax Strategy Problem I13-65

Russ has never recognized any Sec. 1231 gains or losses. In December 2006, Russ is considering
the sale of two Sec. 1231 assets. The sale of one asset will result in a $20,000 Sec.
1231 gain while the sale of the other asset will result in a $20,000 Sec. 1231 loss. Russ has
no other capital or Sec. 1231 gains and losses in 2006 and does not expect to have any
other capital or Sec. 1231 gains and losses in 2006. He is aware that it might be advantageous
to recognize the Sec. 1231 gain and the Sec. 1231 loss in different tax years.
However, he does not know whether he should recognize the Sec. 1231 gain in 2006 and
the Sec. 1231 loss in 2007 or vice versa. His marginal tax rate for each year is expected to
be 33%. Advise the taxpayer with respect to these two alternatives:
a. Recognize the $20,000 Sec. 1231 loss in 2006 and the $20,000 Sec. 1231 gain in 2007.
b. Recognize the $20,000 Sec. 1231 gain in 2006 and the $20,000 Sec. 1231 loss in 2007.

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