- Built-in gains tax. Theta Corporation formed 15 years ago. In its first year, it elected to use the cash method of accounting and adopted a calendar year as its tax year. It made an S election on August 15 of last year, effective for Theta’s current tax year. At the beginning of the current year, Theta had assets with a $600,000 FMV and a $180,000 adjusted basis. During the current year, Theta reports taxable income of $400,000.
a) In the current year, Theta collects all $200,000 of accounts receivable outstanding on January 1 of the current year. The receivables had a zero adjusted basis.
b) On February 1, Theta sells automobile for $3,500. The automobile had a $2,000 adjusted basis and a $3,000 FMV on January 1 of the current year. Theta claimed $800 of MACRS depreciation on the automobile in the current year.
c) On March 1, Theta sells land (a Sec. 1231 asset) that it held three years in anticipation of building its own office building for a $35,000 gain. The land had a $45,000 FMV and a $25,000 adjusted basis on January 1 of the current year.
d) In the current year, Theta paid $125,000 of accounts payable outstanding on January 1 of the current year. All the payables are deductible expenses. What is the amount of theta’s built-in gains tax liability?
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2) Mike and Nancy are equal shareholders in MN Corporation, an S corporation. The corporation, Mike
and Nancy are calendar-year taxpayers. The corporation has been an S corporation during its entire
existence and thus has no accumulated E&P. The Shareholders have no loans to the corporation. The
corporation incurred the following items in the current year:
Sales: $300,000
Cost of goods sold 140,000
Dividends on corp. investments
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Taxexempt
3,000
Section 1245 gain (recapture) on
22,000
equiptment sale
Section 1231 gain on equipt. sale
12,000
Longterm capital gain on stock sale 8,000
Longterm capital loss on stock sale
7,000
Shortterm capital loss on stock sale
6,000
Depreciation 18,000
Salary to Nancy
20,000
Meals & entertainment expenses
7,800
Interest expense on loans allocable to:
Business debt
32,000
Stock investments
6,400
Taxexempt bonds
1,800
Principle payment on business loan
9,000
Charitable contributions
2,000
Distributions to shareholders 30,000
($15,000 ea.)
a. Compute the S corporation’s ordinary income and separately stated items.
b. Then show Mikes’s and Nancy’s shares of the items in part a.
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