Question 79. [LO 6] Calculate Anaheim Corporation’s excess net passive income tax in

79. [LO 6] Calculate Anaheim Corporation’s excess net passive income tax in each of the following alternative scenarios.

a. Passive investment income, $100,000; expenses associated with passive investment income, $40,000; gross receipts, $120,000; taxable income if C corporation, $40,000; corporate E&P, $30,000.

b. Passive investment income, $100,000; expenses associated with passive investment income, $70,000; gross receipts, $120,000; taxable income if C corporation, $1,200; corporate E&P, $30,000.

c. Passive investment income, $100,000; expenses associated with passive investment income, $40,000; gross receipts, $120,000; taxable income if C corporation, $40,000; corporate E&P, $0.

80. [LO 5, 6] {Planning; Research} Mark is the sole shareholder of Tex Corporation. Mark first formed Tex as a C corporation. However, in an attempt to avoid having Tex’s income double taxed, Mark elected S corporation status for Tex several years ago. On December 31, 2014, Tex reports $5,000 of earnings and profits from its years as a C corporation and $50,000 in its accumulated adjustments account from its activities as an S corporation (including its 2014 activities). Mark discovered that for the first time Tex was going to have to pay the excess net passive income tax. Mark wanted to avoid having to pay the tax but he determined the only way to avoid the tax was to eliminate Tex’s E&P by the end of 2014. He determined that, because of the distribution ordering rules (AAA first), he would need to have Tex immediately (in 2014) distribute $55,000 to him. This would clear out Tex’s accumulated adjustments account first and then eliminate Tex’s C corporation earnings and profits in time to avoid the excess net passive income tax. Mark was not sure Tex could come up with $55,000 of cash or property in time to accomplish his objective. Does Mark have any other options to eliminate Tex’s earnings and profits without first distributing the balance in Tex’s accumulated adjustments account?

81. [LO 6] {Planning} Farve Inc. recently elected S corporation status. At the time of the election, the company had $10,000 of accumulated earnings and profits, and a net unrealized gain of $1,000,000 associated with land it had invested in (although some parcels had an unrealized loss). In the next couple of years, most of the income the company expects to generate will be in the form of interest and dividends (approximately $200,000 per year). However, in the future, the company will want to liquidate some of its current holdings in land and possibly reinvest in other parcels. What strategies can you recommend for Farve Inc. to help reduce its potential tax liability as an S corporation?

82. [LO 6] Until the end of year 0, Magic Carpets (MC) was a C corporation with a calendar year. At the beginning of year 1 it elected to be taxed as an S corporation. MC uses the LIFO method to value its inventory. At the end of year 0, under the LIFO method, its inventory of rugs was valued at $150,000. Under the FIFO method, the rugs would have been valued at $170,000. How much LIFO recapture tax must MC pay, and what is the due date of the first payment under the following alternative scenarios?

a. Magic Carpets’ regular taxable income in year 0 was $65,000.

b. Magic Carpets’ regular taxable income in year 0 was $200,000.

Comprehensive Problems

83. {Planning} Knowshon, sole owner of Moreno Inc., is contemplating electing S status for the corporation. Provide recommendations related to Knowshon’s election under the following alternative scenarios:

a. At the end of the current year, Moreno Inc. has a net operating loss of $800,000 carryover. Beginning next year, the company expects to return to profitability. Knowshon projects that Moreno will report profits of $400,000, $500,000, and $600,000 over the next three years. What suggestions do you have regarding the timing of the S election? Explain.

b. How would you answer (a) if Moreno Inc. had been operating profitably for several years, and thus had no net operating loss?

c. While several of Moreno Inc.’s assets have appreciated in value (to the tune of $2,000,000), the corporation has one property–some land in a newly identified flood zone—that has depreciated by $1,500,000. Knowshon plans on selling the loss property in the next year or two. Assume that Moreno does not have a net operating loss. What suggestions do you have for timing the sale of the flood zone property and why?

84. {Planning} Barry Potter and Winnie Weasley are considering making an S election on March 1, 2014, for their C corporation, Omniocular. However, first they want to consider the implications of the following information:

· Winnie is a U.S. citizen and resident.

· Barry is a citizen of the United Kingdom, but a resident of the United States.

· Barry and Winnie each own 50 percent of the voting power in Omniocular. However, Barry’s stock provides him with a claim on 60 percent of the Omniocular assets in liquidation.

· Omniocular was formed under Arizona state law, but it plans on eventually conducting some business in Mexico.

a) Is Omniocular eligible to elect S corporation status? If so, when is the election effective?

b. How much LIFO recapture tax is Omniocular required to pay and when is it due?

c. How much built-in gains tax, if any, is Omniocular required to pay?

d. How much excess net passive income tax, if any, is Omniocular required to pay?

e. Assume Barry’s basis in his Omniocular stock was $40,000 on January 1, 2014. What is his stock basis on December 31, 2014?

f. For tax purposes, how would you recommend Barry and Winnie allocate income between the short S corporation year and the short C corporation year if they would like to minimize double taxation of Omniocular’s income?

g. Assume in part (f) that Omniocular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income. If Barry’s stock basis in his Omniocular stock on January 1, 2015, is $50,000, what is his stock basis on December 31, 2015?

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