Name

Ashford

ACC 610

12th Dec 2022

ACC 610 Week 4 Assignment Exercises Chapter 12 – Problem 25

Maul, Inc., a calendar year S corporation, incurred the following items.

Tax­exempt interest income $ 7,000, Sales 140,000, Depreciation recapture income 12,000, Long­term capital gain 20,000, §1231 gain 7,000, Cost of goods sold (42,000), Administrative expenses (15,000), Depreciation expense (MACRS) (17,000), Charitable contributions (7,000)

a. Calculate Maul’s no separately computed income or loss.

Sales $140,000

Add: Depreciation recapture income 12,000

Less: $152,000

Cost of goods sold $42,000

Administrative expenses 15,000

Depreciation expense 17,000 (74,000)

No separately computed income $ 78,000

b. If Carl is a 40% owner of Maul, Inc., what is his share of the long­term capital gain?

20,000 * 40% *100% = $ 8,000

Chapter 12 – Problem 28

On January 1, 2015, Kinney, Inc., an S corporation, reports $4,000 of accumulated E&P and a balance of $10,000 in AAA. Kinney has two shareholders, Erin and Frank, each of whom owns

500 shares of Kinney’s stock. Kinney’s nonseparately stated ordinary income for the year is

$5,000. Kinney distributes $6,000 to each shareholder on July 1, and it distributes another $3,000 to each shareholder on December 21. How are the shareholders taxed on the distributions?

AEP $ 4,000 *50% = 2000 AAA $10,000 *50% = 5000

nonseparately stated ordinary income $5,000 *50% = 2500

Erin and Frank will have to pay taxes on the nonseparately stated ordinary income of $2,500 and $2,000 AEP they received but not the $5,000 AAA.

Chapter 12 – Problem 33

Spence, Inc., a calendar year S corporation, generates an ordinary loss of $110,000 and makes a distribution of $140,000 to its sole shareholder, Storm Nelson. Nelson’s stock basis and AAA at the beginning of the year are $200,000. Write a memo to your senior manager, Aaron McMullin, discussing the tax treatment of Spence’s activities.

S corporation tax laws now provides that distributions can be taken as deduction before any loss.

Hence Storm Nelson should consider loss and distribution as follows;

Beginning stock basis 200,000

Less: Current year distributions­140000

Basis before loss $60,000

Less: partial loss ­60000 Ending stock basis 0 suspended loss 50,000

Chapter 15 – Problem 22

Pigeon, Inc., a § 501(c)(3) organization, received support from the following sources.

Governmental unit A for services rendered $ 6,300, Governmental unit B for services rendered 4,500, Fees from the general public for services rendered (Each payment was of $100) 75,000.

Gross investment income 39,000, Contributions from disqualified persons 26,000, Contributions from other than disqualified persons (Each gift was of $50) 160,000, Total support $310,800.

a. Does Pigeon satisfy the test for receiving broad public support? Why or why not?

To satisfy the test of broad public support, the external and internal support test must be met.

The total support received would be $310,800 but for the purpose of the external test, the following amount is included.

External Support Test

Governmental unit A for services rendered (minimum) $ 5,000

Governmental unit B for services rendered $4,500

Fees from the general public for services rendered $75,000

Contributions from other than disqualified persons $160,000

Qualifying support $ 244,500

So, the external support test is satisfied (244,500/310,800=78.67%)

Internal Support Test

Since solely gross investment income is being used to meet the internal support test’s requirements, this means that the applicant has met the minimum threshold by a 12.55 percent margin (39 thousand dollars divided by three hundred and sixteen thousand dollars is 12.55 percent). This would suggest that Pigeon pass the condition for garnering broad popular approval.

b. Is Pigeon a private foundation? Be specific in your answer.

The fact that Pigeon passed the criteria for being a wide public support organization on both the external support and the internal support fronts indicates that the organization is not a private foundation.

c. Arnold Horn, Pigeon’s treasurer, has asked you to advise him on whether Pigeon is a private foundation. Write a letter to him in which you address the issue. His address is 250 Bristol Road, Charlottesville, VA 22903

Arnold Horn, Treasurer

250 Bristol Road

Charlottesville, VA 22903

Dear Mr. Horn,

To follow up on our discussion on the philanthropic status of Pigeon, I am writing this letter. In my assessment, Pigeon is not a private foundation. Pigeon must pass the external and internal support tests in order to avoid being labeled a private foundation. In order to fulfill the external support criteria, more than one third of Pigeon’s support must come from external sources such as the calculation below;

External Support Test

Governmental unit A for services rendered (minimum) $ 5,000

Governmental unit B for services rendered $4,500

Fees from the general public for services rendered $75,000

Contributions from other than disqualified persons $160,000

Qualifying support $ 244,500

So, the external support test is satisfied (244,500/310,800=78.67%)

Internal Support Test

Since solely gross investment income is being used to meet the internal support test’s requirements, this means that the applicant has met the minimum threshold by a 12.55 percent margin (39 thousand dollars divided by three hundred and sixteen thousand dollars is 12.55 percent). This would suggest that Pigeon pass the condition for garnering broad popular approval.

If you have any other questions or need my advice, please do hesitate to ask.

Sincerely,

Johnnie Sims

Accountant

Chapter 15 – Problem 24

Salmon, Inc., a private foundation, has existed for 8 years. During this period, Salmon has been unable to satisfy the requirements for classification as a private operating foundation. At the end of 2013, it had undistributed income of $350,000. Of this amount, $185,000 was distributed in 2014, and $165,000 was distributed during the first quarter of 2015. The IRS mailed a deficiency notice to Salmon on August 1, 2016.

a. Calculate the initial tax for 2013, 2014, and 2015.

Untimely distribution of foundation profits is subject to a 30% excise tax under section 4942. The tax is assessed for entire year or part of the year for which insufficiency remains uncorrected.

Undistributed Income = $350000

Hence Tax for 2013 = 0.3*350000 = $105000 Tax for 2014:

Income Distributed in 2014 = $185000

Undistributed Income = $350000 ­ $185000 = $165000

Hence Tax for 2014 = 0.3*165000 = $49500 Tax for 2015:

Income Distributed in first quarter of 2015 = $165000

Undistributed Income = $165000 ­ $185000 = $0

Hence, there is no undistributed income for the year. As it was distributed in first quarter itself, hence no tax will be paid for 2015.Hence, tax paid for 2015 is $0 (zero)

b. Calculate the additional tax for 2016.

As the foundation did not have any revenue that was not already dispersed, there will be no new tax liability for 2016. Thus, there is no additional tax of any kind (zero).