Problem 1
Patrick Zimbric:k and his son, Dan, own all of the outstanding stock of Osprey Corporation. Both Dan and Patrick are officers in the corporation and, together with their uncle, John, comprise the entire board of directors. Osprey uses the cash method of accounting and has a calendar year-end. In late 2006, the board of directors adopted the following legally enforceable resolution (agreed to in writing by each of the officers):
Salary payments made to an officer of the corporation that shall be disallowed in whole or in
part as a deductible expense for Federal income tax purposes shall be reimbursed by such officer to the corporation to the full extent of the disallowance. It shall be the duty of the board of directors to enforce payment in each such amount.
In 2007, Osprey paid Patrick $560,000 in compensation. Dan received $400,000. On an audit in late 2010, the IRS found the compensation of both officers to be excessive. It disallowed deductions for $200,000 of the payment to Patrick and $150,000 of the payment to Dan. The IRS recharacterized the disallowed payments as constructive dividends. Complying with the resolution by the board of directors, both Patrick and Dan repaid the disallowed compensation to Osprey Corporation in early 2011
Dan and Patrick have asked you, their accountant, to determine how their repayments should be treated for tax purposes. Dan is still working as a highly compensated executive for Osprey while Patrick is retired and living off his savings.
Prepare 3-4 double-spaced pages describing the results of your research and making recommendations to your client.
Use the online access code for the Checkpoint Student Edition to locate, cite, and discuss at least one source (e.g., tax law, case, and/or ruling) to support your conclusion.
Problem 2
The accrual basis Four Winds Partnership owned and operated three storage facilities in Milwaukee, Wisconsin. The partnership did not have a section 754 election in effect when partner Suzanne sold her 25% interest to Paul for $250,000. The partnership has no debt. There are no section 197 assets, and no depreciation recapture potential exists on the storage facility buildings.
At the time of the transfer, the partnership's assets bases and fair market values were as follows
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Basis
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Fair Market Value
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Cash
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$50,000
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$50,000
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Accounts Receivable
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$150,000
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$150,000
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Storage facility #1
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$500,000
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$200,000
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Storage facility #2
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$400,000
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$500,000
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Storage facility #3
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$300,000
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$100,000
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Total assets
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$1,400,000
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$1,000,000
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The value of two of the properties is less than the partnership's basis because of downturns in the real estate market in the area. Paul's share of the inside basis of partnership assets is $350,000, and his share of the fair market value of partnership assets is $250,000.
Write 3-4 double-spaced pages that address each of the following requirements.
a. What adjustment is required regarding Paul's purchase of the partnership interest? Must a section 754 election be made?
b. Using the basis allocation rules of section 755 and the Regulations thereunder, calculate the amount of the total adjustment to be allocated to each of the partnership's assets.
c. Would an adjustment be required if the partnership was a venture capital firm and, instead of storage facilities, its three primary assets were equity interests owned in target firms? What requirements would have to be satisfied in order to avoid making a basis adjustment?
Use the online access code for the Checkpoint Student Edition to locate, cite, and discuss at least one source to support your conclusion.
Problem 3
The tax treatment of fringe benefits for more-than-2% shareholder-employees of S corporations is less favorable than that for non-owners or employees of some other entities. What fringe benefits are subject to this limitation? What fringe benefits escape this limitation?
Write 1-2 double-spaced pages that address these two questions. Use the online access code for the Checkpoint Student Edition to locate, cite, and discuss at least one source to support your conclusion.
In summary: the Portfolio Project that compiles all 3 problems should be submitted as a Word document that includes 3-4 double-spaced pages on Problem 1, 3-4 double-spaced pages on Problem 2 and 1-2 double-spaced pages on Problem plus a reference list that cites at least three sources from the Checkpoint Student Edition research software with citations formatted according to CSU-Global Guidelines.