Question

Corporate Tax Return Problem 1
Required:
Complete Alvin’s Music Inc.’s (AMI) 2016 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below.
Neither Form 4562 for depreciation nor Form 4797 for the sale of the equipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given in the problem) on the appropriate lines on the first page of Form 1120.Page C-14
Assume that AMI does not owe any alternative minimum tax.
If any information is missing, use reasonable assumptions to fill in the gaps.
The forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms.
Facts:
Alvin’s Music Inc. (AMI) was formed in 2007 by Alvin Jones and Theona Smith. Alvin and Theona officially incorporated their store on June 12, 2008. AMI sells (retail) all kinds of music-related products including musical instruments, sheet music, CDs, and DVDs. Alvin owns 60 percent of the outstanding common stock of AMI and Theona owns the remaining 40 percent.
2007	6	2008
AMI is located at 355 Music Way, East Palo Alto, California 94303.
AMI’s Employer Identification Number is 29-5748859.
AMI’s business activity is retail sales of music-related products. Its business activity code is 451140.
Officers of the corporation are as follows:
Alvin is the chief executive officer and president (Social Security number 123-45-6789).
Theona is the executive vice president (Social Security number 978-65-4321).
Gwen Givens is the vice president over operations (Social Security number 789-12-3456).
Carlson Bannister is the secretary (Social Security number 321-54-6789).
All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
Neither Gwen nor Carlson owns any stock in AMI.
AMI uses the accrual method of accounting and has a calendar year-end.
AMI made four equal estimated tax payments of $70,000 each. Its tax liability last year was $175,000. If it has overpaid its federal tax liability, AMI would like to receive a refund.
70000	175000
AMI paid a dividend of $80,000 to its shareholders on December 1. AMI had ample earnings and profits (E&P) to absorb the distribution.
The following is AMI’s audited income statement for 2016:
AMI Income Statement
For year ending December 31, 2016
Revenue from sales	$        3,420,000
Sales returns and allowances	$            (40,000)
Cost of goods sold	$          (834,000)
Gross profit from operations	$        2,546,000
Other income:
Capital gains	$                 8,000
Gain from disposition of fixed assets	$                 2,000
Dividend income	$              12,000
Interest income	$              15,000
Gross income	$        2,583,000
Expenses:
Compensation	$      (1,300,000)
Depreciation	$            (20,000)
Bad debt expense	$            (15,000)
Meals and entertainment	$              (5,000)
Maintenance	$              (5,000)
Charitable donations	$            (27,000)
Property taxes	$            (45,000)
State income taxes	$            (60,000)
Other taxes	$            (56,000)
Interest	$            (62,000)
Advertising	$            (44,000)
Professional services	$            (32,000)
Pension expense	$            (40,000)
Supplies	$              (6,000)
Other expenses	$            (38,000)
Total expenses	$      (1,755,000)
Income before taxes	$            828,000
Federal income tax expense	$          (260,000)
Net income after taxes	$            568,000
Page C-15
Notes:
AMI has a capital loss carryover to this year from last year in the amount of $5,000.
AMI’s inventory-related purchases during the year were $1,134,000. AMI values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of §263A do not apply to AMI.
Of the $15,000 interest income, $2,500 was from a City of Fremont bond that was used to fund public activities (issued in 2015), $3,500 was from a Pleasanton city bond used to fund private activities (issued in 2016), $3,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.
CITY OF FREEMONT BOND	PLEASANT CITY BOND	US TREASURY BOND
2500	3500	3000
AMI sold equipment for $10,000. It originally purchased the equipment for $12,000 and, through the date of the sale, had recorded a cu mulative total of $4,000 of book depreciation on the asset and a cu mulative total of $6,000 of tax depreciation. For tax purposes, the entire gain was recaptured as ordinary income under §1245.
PURCHASE PRICE	CU M BOOK DEPRECIATION	CU M TAX DEPRECIATION
12000	4000	6000
AMI’s dividend income came from Simon’s Sheet Music. AMI owned 15,000 shares of the stock in Simon’s Sheet Music (SSM) at the beginning of the year. This represented 15 percent of the SSM outstanding stock.
This represented 15 percent of the SSM outstanding stock.
15%
On July 22, 2016, AMI sold 2,500 shares of its Simon’s Sheet Music Stock for $33,000. It had originally purchased these shares on April 24, 2012, for $25,000. After the sale, AMI owned 12.5 percent of Simon’s Sheet Music.
It had originally purchased these shares on April 24, 2012, for $25,000.	AMI owned 12.5 percent of Simon’s Sheet Music
25000	12.5%
AMI’s compensation is as follows:
Alvin $210,000
Theona $190,000
Gwen $110,000
Carlson $90,000
Other $700,000
AMI wrote off $10,000 in accounts receivable as uncollectible during the year.
Regular tax depreciation was $31,000. None of the depreciation should be claimed on Form 1125A.Page C-16
Of the $62,000 of interest expense, $56,000 was from the mortgage on AMI’s building and the remaining $6,000 of interest is from business-related loans.
56000	6000
The pension expense is the same for both book and tax purposes.
Other expenses include $3,000 for premiums paid on term life insurance policies for which AMI is the beneficiary. The policies cover the lives of Alvin and Theona.
The following are AMI’s audited balance sheets as of January 1, 2016, and December 31, 2016.
	2016
	1-Jan	31-Dec
Assets
Cash	$            240,000	$        171,000
Accounts receivable	$            600,000	$        700,000
Allowance for doubtful accounts	$            (35,000)	$        (40,000)
Inventory	$        1,400,000	$     1,700,000
U.S. government bonds	$              50,000	$           50,000
State and local bonds	$            140,000	$        140,000
Investments in stock	$            300,000	$        275,000
Building and other depreciable assets	$        1,500,000	$     1,600,000
Accu mulated depreciation	$          (200,000)	$      (216,000)
Land	$            900,000	$        900,000
Other assets	$            250,000	$        270,000
Total assets	$        5,145,000	$     5,550,000
Liabilities and Shareholders’ Equity
Accounts payable	$            250,000	$        220,000
Other current liabilities	$            125,000	$        120,000
Mortgage	$            800,000	$        790,000
Other liabilities	$            200,000	$        162,000
Capital stock	$            600,000	$        600,000
Retained earnings	$        3,170,000	$     3,658,000
Total liabilities and shareholders’ equity	$        5,145,000	$     5,550,000

Answer 1