Tax Accounting Due Midnight May 6

Info

Pirates Properties was formed on June 1st by Peedee and Tuffy to operate as a calendar-year, accrual basis company that develops and markets land to customers. Peedee contributed land with a fair market value of $2,000,000, an adjusted tax basis of $1,300,000 and a $800,000 nonrecourse bank loan incurred to purchase the land, for an interest in the company. The land was purchased by Peedee four years ago and has been held as an investment. Tuffy contributed shares of stock in Explorer Corporation with a fair market value of $415,000 and an adjusted tax basis of $340,000, and shares of stock in Seahawk Corporation with a fair market value of $385,000 and an adjusted tax basis of $420,000, for an interest in the company. Tuffy purchased both blocks of stock 18 months ago as an investment. If Pirates Properties was organized as a corporation, then Peedee receives 60 percent of the shares of stock for his interest and Tuffy receives 40 percent of the shares of stock for his interest. Alternatively, if organized as a limited liability company taxed as a partnership, then Peedee receives a 60 percent interest and Tuffy a 40 percent interest in Pirates Properties. Pirates Properties (Pirates) then proceeded to sell 15 percent of the land for $400,000 on September 15th, all of the shares of stock in Explorer Company for $430,000 on November 30th, and incurred selling and administrative expenses of $100,000 (all related to land sale), which was paid in cash before the end of the year. Pirates Properties also distributed a total of $90,000 in cash to Peedee and Tuffy based on their proportional ownership on December 25th. Both Peedee and Tuffy are in their 40s, using Single filing status with no dependents. They each earn salaries of $115,000 from other employers and they do not claim itemized deductions. Assume the 2019 corporate and individual tax rates and refer to Schedule SE (F1040), Qualified Dividends and Capital Tax Worksheet, Form 8960 (Net Investment Income Tax) and Form 8959 (Additional Medicare Tax) for the calculation of individual taxes.

Corporation

NOTE:

All numbers in your answers should be using cell reference or formula (except for holding period, tax rate, threshold)

You can add rows/columns, but please keep the segments unchanged.

Corporation Information

Peedee

Tuffy

Land

Explorer Stock

Seahawk Stock

FMV

2,000,000

415,000

385,000

Adjusted basis

1,300,000

340,000

420,000

Nonrecourse Loan

800,000

Business Interest%

60%

40%

Proceeds

Selling Exp

Sale of assets

15-Sep

Land

15%

400,000

100,000

30-Nov

Explorer Stock

430,000

Distributions

25-Dec

90,000.00

C1

PeeDee

Tuffy

Stock Basis

Gain realized

Holding Period

PeeDee

Tuffy

C2

Gain Rrecognized

C3

GAAP Basis

It will be helpful if you complete this section in this order: JEs → TB → I/S → Equity → B/S, do not jump directly into B/S or other statements.

Trial Balance (Optional)

Journal Entries (Optional)

Acct

Dr./(Cr.)

Income Statement

6/1

Income/(Loss) before taxes

6/1

Net Income/(Loss)

Beg. R/E

9/15

End R/E

Excess Distri - Decrease Stock Basis

Balance Sheet

11/30

6/1

12/31

Cash

- 0

Investment

800,000

Land

2,000,000

12/25

Total Asset

2,800,000

Loan

800,000

12/31

Capital Stock

2,000,000

R/E

- 0

Total Liab and S/H Equity

2,800,000

Tax Basis

It will be helpful if you complete this section in this order: JEs → TB → I/S → Equity → B/S, do not jump directly into B/S or other statements.

Journal Entries (Optional)

Trial Balance (Optional)

Income Statement

6/1

Acct

Dr./(Cr.)

(Income)/Loss before taxes

6/1

Net Income

Beg. R/E

9/15

End R/E

Balance Sheet

6/1

12/31

Cash

11/30

Investment

Land

Total Asset

12/25

Loan

Capital Stock

R/E

Total Liab and S/H Equity

12/31

C4

Type of Taxes for Corp:

Calculation:

Corporate Tax

Individual Level

Peedee

Tuffy

Income:

Calculations:

List each type of tax separately (name them properly), show the process of your calculations, step by step, add more rows if necessary (delete this line when you are done).

Total Tax

Any change to shareholder’s stock basis?

C1 - Prepare a schedule calculating the initial tax basis (stock basis) for Peedee and Tuffy for the ownership interest in Pirates Properties assuming that it was formed as a corporation. What is the holding period for Peedee and Tuffy? Tip: Check IRC §1223(1).

C3 - Assuming Pirates Properties was formed as a corporation, prepare 1) the year-end U.S. GAAP balance sheet (initial balance sheet is provided in the Excel template); 2) the initial  and year-end tax balance sheets; and 3) the U.S. GAAP and tax income statements for the corporation (ignore Deferred Tax Assets or Liabilities). Note: Assume all tax liabilities are paid with cash by the year end. The stock ownership is 60 percent for Peedee and 40 percent for Tuffy. (Show all your work.)  Provide it to students Tips: - Under ASC 805, the FMV is used to establish the initial U.S. GAAP balance sheet (Ignore the deferred tax liability attributable to the difference in the fair market value and the tax basis on the date of the contribution under ASC 805-740-25-3 & 740-10-25). - For U.S. GAAP purposes, any distributions in excess of Retained Earnings should not be treated as dividends. - If the distribution for tax purposes is distributed out of current earnings and profits (see IRC §312 & Revenue Ruling 79-69, 1979-1 CB 134), then check IRC §316 and §301(c)(1) to find out how the distribution is treated for the shareholder.

C4 - If Pirates Properties was organized as a corporation, then identify the different types of taxes that apply and analyze the tax implications for the entity and stockholders (Peedee and Tuffy). More specifically, calculate the federal tax liability that would apply at the entity level (ignore accumulated earnings tax and personal holding company tax) and individual level (this includes income tax and net investment income tax). Is there any change in the shareholder’s stock basis? (Show all your work.)

C2 - Will Peedee or Tuffy be required to recognize any gain on the exchange of their property for stock in the corporation? If so, how much? Tip: Check IRC §351.

Partnership

NOTE:

All numbers in your answers should be using cell reference or formula (except for holding period, tax rate, threshold)

You can add rows/columns, but please keep the segments unchanged.

LLC Information

Peedee

Tuffy

Land

Explorer Stock

Seahawk Stock

FMV

2,000,000

415,000

385,000

Adjusted basis

1,300,000

340,000

420,000

Nonrecourse Loan

800,000

Business Interest%

60%

40%

Proceeds

Selling Exp

Sale of assets

15-Sep

Land

15%

400,000

100,000

30-Nov

Explorer Stock

430,000

Distributions

25-Dec

90,000.00

Beginning Partner's tax basis in LLC Interest:

P1

Peedee

Tuffy

Beginning Tax Basis

Holding Period

P2

Gain recognized

P3

GAAP Basis

It will be helpful if you complete this section in this order: JEs → TB → I/S → Capital → B/S, do not jump directly into B/S or other statements.

Journal Entries (Optional)

Income Statement

Sch. K Distributive Items:

9/15

Net Income/(Loss)

Partner's Capital Account

11/30

Peedee

Tuffy

Beginning capital

12/25

Year-end capital

Balance Sheet

Trial Balance (Optional)

6/1

12/31

Acct

Dr./(Cr.)

Cash

- 0

Investment

800,000

Land

2,000,000

Total Asset

2,800,000

Loan

800,000

Partner's Capital - Peedee

1,200,000

Partner's Capital - Tuffy

800,000

Total Liab and S/H Equity

2,800,000

Tax Basis

It will be helpful if you complete this section in this order: JEs → TB → I/S → Capital → B/S, do not jump directly into B/S or other statements.

Journal Entries (Optional)

Income Statement

Built-in Gain (Optional)

9/15

PeeDee

Tuffy

Net Income/(Loss)

Built-in Gain

Partner's Capital Account

11/30

Peedee

Tuffy

Beginning capital

12/25

Ending Capital Account

Trial Balance (Optional)

Balance Sheet

Acct

Dr./(Cr.)

6/1

12/31

Cash

Investment

Land

Total Asset

Loan

Partner's Capital - Peedee

Partner's Capital - Tuffy

Total Liab and S/H Equity

P4

Tax at LLC level:

Ending Partner's tax basis in LLC Interest:

Peedee

Tuffy

Beginning Tax Basis

Tax at Individual Level:

Peedee

Tuffy

Income

Ending Tax Basis

AGI

Taxable Income

List each type of tax separately (name them properly), show the process of your calculations, step by step, add more rows if necessary (delete this line when you are done).

Total Tax

P1 - Prepare a schedule calculating the initial tax basis for Peedee and Tuffy for the ownership interest in Pirates Properties assuming that it was formed as a limited liability company (hereafter, LLC) taxed as a partnership. What is the holding period for Peedee and Tuffy? Tips: - Check IRC § 722 for basis, IRC § 752 (a-c) for treatment of liabilities, and IRC § § 733 for distribution. - Use the partner’s interest percentage to allocate the nonrecourse debt.

P3 - Assuming that Pirates Properties was formed as an LLC, prepare 1) the year-end U.S. GAAP balance sheet (initial balance sheet is provided in the Excel template); 2) the initial and year-end tax balance sheets; and 3) the U.S. GAAP and tax income statements (pay attention to the character of income variable) for the partnership. Note: It would be helpful to prepare a reconciliation of the partners’ capital accounts to arrive at the year-end U.S. GAAP and tax balance sheets (a partner’s capital Account is not the same as his tax Basis in this case). (Show all your work.) Tips: - Under ASC 805, the FMV is used to establish the initial U.S. GAAP balance sheet (a partner’s capital account is not the same as his tax basis of partnership interest in this case, the initial GAAP balance sheet should be helpful to figure out what goes into a partner’s capital account). - For the partners’ capital account for tax purposes, check IRS Regs § 1.704-1(b)(2)(iv)(d)(1) for the general rule and Regs § 1.704-1(b)(2)(iv)(d)(3)for the special rule concerning contributed property. - Neither partner assumes the nonrecourse debt (not personally liable for). Only liabilities being assumed by a partner can be included in the partner’s capital account based on IRS Regs § 1.704-1(b)(2)(iv)(c).

P4 - Assuming that Pirates Properties was organized as an LLC, identify the different types of taxes that apply and analyze the tax implications for the entity and partners (Peedee and Tuffy. More specifically, calculate the federal tax liability that would apply at the entity level and individual level (this includes income tax, net investment income tax, self-employment tax [SE], and additional Medicare tax). Include a schedule updating the partners’ tax basis for their partnership interests. (Show all your work.) Tips: - Check IRC §704(c) and § 1.704-3 (b) (1) & (2) to find out if the entire tax gain on the disposition of a property is a pre-contribution gain, then how it should be allocated between the two partners. - Check IRC §1221 to determine what assets qualify for the capital gain treatment.

P2 - Will Peedee or Tuffy be required to recognize any gain on the exchange of their property for their partnership interest? If so, how much? Tip: Check IRC § 721.

Entity Choice - Conclusion

NOTE:	All numbers in your answers should be using cell reference or formula (except for holding period, tax rate, threshold)
	You can add rows/columns, but please keep the segments unchanged.
				PeeDee	Tuffy	Corporation	LLC	Total
	Total Tax if Corporation
	Total Tax if LLC
	Additional tax if choose XXX (change to your choice of entity)

1 - Please tabulate which organizational form, corporation or LLC (taxed as partnership), will result in: the lowest overall tax liability; the lowest entity tax liability; and the lowest shareholder/partner tax liability?

2 - What advice would you provide to Peedee and Tuffy, from a tax perspective, regarding the most advantageous organizational form? What factors are responsible for the overall tax difference between the two alternatives? What other non-tax factors should also be considered in organizational formation? (between 100-500 words)

Type your answers here:

1

2

3

4

5

6

7

8

9

A

B

C

NOTE:

All numbers in your answers should be using cell reference or formula (except for holding period, tax rate, threshold)

You can add rows/columns, but please keep the segments unchanged.

LLC Information

Land

FMV

2,000,000

Adjusted basis

1,300,000

Peedee