tax cases

Return #2

Complete the following 1040 with a Schedule D attached.

Nathan and Phoebe Wheeler

Nathan and Phoebe Wheeler are married and live together. Nathan is employed in the health care industry.

During the year, the Wheelers sold some stock that they owned. They brought in these forms and said they had no record of what they paid for the stock they purchased on May 24, 2011.

EvanDawson

Evan James Dawson divorced in 2004 and has a son, Noah, who lived with him all year.

· Evan provided all of the cost of keeping up the home.

· Noah provided less than

5

0% of his own support.

· Evan did not itemize deductions last year.

In 2012, Noah was a third-year student at Brown College. Noah lived at home with Evan while attending classes, and is pursuing a degree in Computer Science. Evan spent $634 on course-related books and paid tuition as reported on Form 1098-T. Noah’s total tuition was $11,800, but he received a $9,000 scholarship and subsidized loans in the amount of $2,800. Noah does not have a felony drug conviction.

Evan wants to know if he has enough deductions to itemize (he did not itemized in the previous year). Assume that Evan will deduct state income tax instead of general sales tax. He gives you receipts, statements, and cancelled checks for the following items he would like to deduct:

· Unreimbursed doctor bills for Evan for $300

· Unreimbursed doctor bills for Noah for $500

· Unreimbursed prescription drugs for $1,400

· Unreimbursed nonprescription herbal supplements for $300

· Cancelled check for a donation to the United Way for $100

· Evan tells you that he also gave $20 to a homeless man

· A statement from his church showing donations of $780

· A receipt from a Goodwill drop-off center for the donation of a table, refrigerator, and stove; they were in good, used condition and had a thrift shop value of $130

· Form 1098 showing qualified mortgage insurance premiums, interest, and real estate taxes paid.

· Evan bought a $2 lottery ticket every week, for a total of $104, but he had no winnings.

· Evan never received any distributions from his 401(k) or any other retirement plan.

5

Tax Return Final Project Sun & Fun Summary

Can be done in small groups (2-3)

Due on the last day of class

On

June 6, 2

0

01

, Joe Mooney and Guy Flick formed Sun and Fun Beach Products to manufacture and sell beach gear, toys, and accessories. For several years prior, Joe had run a smaller shop “Cheap Beach Stuff” which operated as a cash basis sole proprietorship. Cheap Beach Stuff reported the following balance sheet:

6,137

0

24,000

40,000

151,784

325,000

June 6, 2001
Tax Basis	Fair Value
Cash		6,137
Accounts Receivable		0	24,558
Inventory	60,647	129,305
Building	55,250	1 10,000
Land	29,750	5 5,000
	151,784		325,000
Accounts Payable	13,189
Notes Payable		24,000
Mortgage on Land/Building		40,000
Equity	87,784	247,811

Joe transfers all of the assets and liabilities of Cheap Beach Stuff for 70% of the common stock in Sun & Fun.

Guy contributes cash of $40,000, inventory worth $56,205 (basis of $38,013) and provides services to help organize the corporation worth $10,000 for the remaining 30% of the common stock in Sun & Fun.

General Information regarding the corporation is summarized as follows:

· The business address is 350 Main Street, White Sands, Florida

· The employer identification number is 75-3392543; the principal business activity code is 339900.

· Joe is president of the company and Guy is the secretary-treasurer. Both are full-time employess of the corporation. Joe’s compensation is $150,000 (SSN 123-45-6789). Guy’s compensation is $90,000 (SSN 333-22-4444).

· The corporation uses the accrual method of accounting and reports on a calendar year basis. Inventory has been consistently valued at lower of cost or market under the FIFO method. Inventory capitalization rules of IRC section 263A do not apply due to the “small business exception” (average annual gross receipts for the three preceding taxable years do not exceed $10 million).

· The corporation was not a grantor to a foreign trust, nor does the corporation maintain a foreign bank account or foreign security account.

· No net operating loss, capital loss, general business credit, prior year minimum tax credit, or other carryovers to 2012 exist.

Detailed information regarding some of Sun & Fun’s activities and transactions during the year:

1. Sun & Fun purchased some new manufacturing equipment (7-year-property) that cost $13,580. MACRS on all other existing depreciable assets totaled $69,163 for 2012.

2. Sun & Fun purchased at par $50,000 of Seabrook Station Utility bonds. Interest of $1,500 was received on the bonds during the year.

3. Sun & Fun sold a warehouse for $30,000. The consolidated their warehouse activities and chose not to replace the warehouse. The warehouse cost $40,000. Accumulated depreciation for book purposes was $14,000. Cost recovery for tax purposes totaled $7,179.

4. Sun & Fun sold machinery for $6,900. The machine cost $15,350. Accumulated depreciation for book purposes was $7,246. Cost recovery for tax purposes totaled $9,596.

5. Sun & Fun has a qualified retirement plan which covers all of their employees. During 2012 they made total contributions of $23,900 to this plan, of which $10,000 was for Joe and Guy ($5,000 each).

6. Included in employee benefits expense are $532 and $420 premiums for $50,000 (face value) group term life insurance for Joe and Guy, respectively. Family members are named as beneficiaries in the policies.

7. The key-man life insurance provided $500,000 coverage on Joe and Guy. The company is the owner and the beneficiary of the policies.

8. Contributions for the year included:

a. World Wildlife Fund, Inc. ……………………………..29,963

b. American National Red Cross………………………….3,000

c. Woodbury Church Food Pantry……………………….1,969

9. An analysis of the Allowance for Doubtful Accounts reveals:

Balance – December 31, 2011………………………………$15,782

2012 Transactions

Bad Debt Expense ……………………………………….3,105

Recovery of account previously written off……1,200

Accounts written off as uncollectible……………(4,756)

Balance – December 31, 2012………………………………..$15,331

10. Taxes included:

Property Taxes…………………….21,244

Payroll Taxes……………………….51,883

Other Misc. Taxes ……………….…2,168

11. Interest expense was on loans for the following purposes:

Purchase of buildings, machinery and equipment………………….77,779

Purchase of Seabrook Station Utility Bonds…………………………….1,300

Cover shortfall in working capital…………………………………………..3,798

12. Information regarding the sale of investments in common stock during the year:

Asset	Acquired	Sold	Basis	Proceeds
“A” Stock (100 Shares)	2-15-06	8-13-12	5,000	7,085
“B” Stock (200 Shares)	3-2-12	7-7-12	12,295	8,300
“C” Stock (50 Shares)	1-3-07	12-7-12	10,000	8,320

**Note: The “C” stock was sold to Joe Mooney**

13. Dividend income from less than 20% investments is from the following sources:

Plastics Corporation Common Stock…………………………………………………..4,244

International Manufacturing Corporation Common Stock……………………2,731

Stow-n-Go Corporation preferred stock………………………………………………3,798

14. Sun & Fun owns 30% of the outstanding common stock of Hobby Corporation. During 2012 Hobby reported $1,000,000 of income. For book purposes Sun & Fun accounted for its investment in Hobby under the equity method. Hobby Corporation also distributed a $100,000 dividend to Sun & Fun.

15. Sun & Fun distributed cash dividends totaling $160,000.

16. Sun & Fun Corporation made timely estimated federal income tax payments of $130,000 to the U.S. Treasury. (Ignore deferred income taxes for book purposes.)

17. Sun & Fun’s qualified production activities income (QPAI) is $200,000.

18. After taking a physical count of inventory at December 31, 2012, ending inventory was computed as $641,774

19. The accumulated E & P balance at December 31, 2011 was $520,960. Depreciation expense computed under ADS for E&P purposes was $40,000. The increase in the cash surrender value of the life insurance was $374. (Note: Ignore the +/- E&P adjustment for differences in the gain (loss) from the sale of business properties.)

Requirements:

1. Mr. Mooney, Sun & Fun’s President, has asked you to prepare Sun & Fun’s 2012 corporate tax return. Mr. Mooney has asked you to minimize Sun & Fun’s taxable Income (ignore any AMT). Round your computations to the nearest dollar. Clearly state any assumptions made in completing the return. Include any supporting schedules you feel are necessary. When submitting the forms, please place in sequence according to the appropriate order (i.e. ascending sequence number). Place all supporting schedules after the forms to which they directly relate, making sure they are properly referenced.

The following forms (and instructions) are available via the link in Class Content>Final Project. DO NOT prepare the return with commercial tax prep software.

· Form 1120: US Corporate Income Tax Return (and accompanying schedules C, K, L, M-1, and M-2)

· Schedule D (Form 1120): Capital Gains and Losses (ignore Form 8949 – Assume Box “A” is checked for the sale of all investments in common stock)

· Form 4562: Depreciation and Amortization

· Form 4797: Sales of Business Property

Note: For Schedule L – complete the ending balance sheet ONLY

2. Include a memo to the client informing them of the following:

· How much tax they owe or how much is to be refunded to them.

· Instructions for paying estimated taxes for the 2013 tax year.

· Any carryforwards they may have.

3. What amounts will Joe and Guy report on their individual Form 1040’s related to Sun & Fun’s 2012 activities?

GOOD LUCK!!!!!!!!!!

Trial_balance

distributed (cash)

Machinery and equipment

10,209,747

	Sun & Fun Beach Products
Adjusted Trial Balance – GAAP based
as of December 31, 2012
Account:	Debit	Credit
Accounts payable	214,143
Accounts receivable	248,843
Accumulated depreciation: Building	158,924
Accumulated deprecaition:	Machinery and equipment	169,686
Advertising expense	8,352
Allowance for doubtful accounts	15,331
Bad debt expense	3,105
Buildings	1,067,999
Cash and marketable equity securities	443,270
Charitable contributions	34,932
Common stock	354,016
Depreciation expense	67,050
Dividend revenue (less than 20%-owned U.S. corporations)	10,773
	Dividends	160,000
Employee benefits expense	6,321
Estimated Federal income tax payments (income tax expense)	130,000
Gain on sale of warehouse	4,000
Gain on sale “A” common stock	2,085
Insurance premiums paid	21,800
Interest expense	82,877
Interest revenue: Checking	4,438
Interest revenue: Seabrook Station Utility Bonds	1,500
Interest revenue: U.S. Treasury Bonds	2,250
Inventory: December 31,		2011	611,716
Investments: Seabrook Station Utility Bonds	50,000
Investments: Long-term equity investments	287,125
Investments: U.S. Treasury Bonds	75,000
Investment income: Equity method	300,000
Key-man life insurance premiums paid	7,950
Land	77,624
Loss on sale of machinery	1,204
Loss on sale “B” common stock	3,995
Loss on sale “C” common stock	1,680
409,735
Meals & entertainment	27,400
Mortgage: Noncurrent portion	346,735
Mortgage payable: Current portion	21,786
Notes payable	682,662
Office supplies	5,100
Other assets	22,706
Penalties (fines for improper disposal of waste)	2,639
Purchases	5,295,689
Rent expense	32,757
Repairs and maintenance	6,996
Retained earnings: December 31, 2011		967,219
Retirement contributions	23,900
Salary expense (W-2 wages): Employees	478,110
Salary expense (W-2 wages): Officers	240,000
Sales returns and allowances	108,454
Sales revenue	6,954,199
Taxes (property, payroll and other)	75,295
Utilities expense	90,123
	10,209,747
Inventory: December 31, 2012	641,774

Profit_Loss

Sun & Fun Beach Products

-2011

2001

2011

Dividends

(60,000)

967,219

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total

(40,000) (50,000) (60,000) (60,000) (70,000) (280,000)

(38,900)

520,960

Accounting income, loss, dividends paid, and E&P
		2001
	2002		2003		2004		2005		2006		2007		2008		2009		2010		Total
Net income	29,400	58,433	180,175	129,560	191,340	239,209	209,645	345,068	1,382,830
Net loss	(36,600)	(91,444)	(7,567)	(135,611)
	(40,000)		(50,000)				(60,000)		(70,000)		(280,000)
Current E&P		(38,900)	(80,350)	1,675	(38,212)	45,429	130,351	40,483	165,118	211,622	168,553	195,191	800,960
Distributions
AE&P	(119,250)	(117,575)	(155,787)	(110,358)	19,993	20,476	135,594	287,216	395,769		520,960

Sheet1