Questions -

1. In 2012, Osprey Company had operating income of $320,000, operating expenses of $270,000, and a long-term capital gain of $20,000. How does Juanita, the sole owner of Osprey Company, report this information on her individual tax return under the following assumptions?

a. Osprey Company is a proprietorship, and Juanita did not make any withdrawals from the business during the year.

b. Osprey Company is a C corporation and pays no dividends during the year.

2. Ellie and Linda are equal owners in Otter Enterprises, a calendar year business. During the year, Otter Enterprises has $320,000 of gross income and $210,000 of operating expenses. In addition, Otter has a short-term capital loss of $15,000 and makes distributions to Ellie and Linda of $25,000 each. Discuss the impact of this information on the taxable income of Otter, Ellie, and Linda if Otter is:

a. A partnership.

b. An S corporation.

c. A C corporation.

3. In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payment to its sole owner, Sasha. In addition, Azure has interest on municipal bonds of $25,000. Sasha has significant income from other sources and is in the 35% marginal tax bracket. Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations.

a. Azure is a C corporation and pays no dividends or salary to Sasha.

b. Azure is a C corporation and distributes $75,000 of dividends to Sasha.

c. Azure is a C corporation and pays $75,000 of salary to Sasha.

d. Azure is a sole proprietorship, and Sasha withdraws $0.

e. Azure is a sole proprietorship, and Sasha withdraws $75,000.

4. Benton Company (BC) has one owner, who is in the 35% Federal income tax bracket. BC's gross income is $295,000, and its ordinary trade or business deductions are $135,000. Compute the tax liability on BC's income for 2012 under the following assumptions:

Decision Making

Communications

a. BC is operated as a proprietorship, and the owner withdraws $70,000 for personal use.

b. BC is operated as a corporation, pays out $70,000 as salary, and pays no dividends to its shareholder.

c. BC is operated as a corporation and pays out no salary or dividends to its shareholder.

d. BC is operated as a corporation, pays out $70,000 as salary, and pays out the remainder of its earnings as dividends.

e. Assume that Robert Benton of 1121 Monroe Street, Ironton, OH 45638 is the owner of BC, which was operated as a proprietorship in 2012. Robert is thinking about incorporating the business in 2013 and asks your advice. He expects about the same amounts of income and expenses in 2013 and plans to take $70,000 per year out of the company whether he incorporates or not. Write a letter to Robert [based on your analysis in (a) and (b)] containing your recommendations.

5. In 2012, Condor Corporation, a closely held C corporation that is not a PSC, has $225,000 of active business income, $35,000 of portfolio income, and a $300,000 passive loss from a rental activity. How much of the passive loss can Condor deduct in 2012? Would your answer differ if Condor were a PSC? Explain.

(Jr. 2-49)

Jr., William H. Hoffman,, William A. Raabe, James E. Smith, David M. Maloney. South-Western Federal Taxation 2013: Corporations, Partnerships, Estates and Trusts, 36th Edition. South-Western, 2016-04-11.