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Mortgage interest paid to Bettie's brother, John - $10,000 This note is related to the purchase of 500 acres of land in a prime deer hunting area located in a developing area of West Texas. Although it is more than 200 miles away, and it is primarily used for hunting, it makes a great weekend retreat. The only structure on the site is a mobile home that they occupied seven weekends during the year. Before taking into account any interest expense, the Stringers' adjusted gross is $30,000 and other itemized deductions total $6,000. Their income is all dividends and interest except for $3,000 from Bill's publishing efforts. The Stringers' home was purchased with cash in three years ago for $110,000 and has a basis of $50,000.
CASE 27 Treatment of Payment to Shareholders Smith Enterprises, Inc., is a small manufacturer of ski equipment with paid-in capital of $4,000,000. It reports on the accrual basis and uses a fiscal year ending April 30. On May 1, 20X1 Smith's records showed an accumulated earnings and profits of $250,000. By September 1, 20X1, in anticipation of an average season, Smith's management had forecasted a $1,000,000 profit for the fiscal year ending April 30, 20X2. Based on this projection, the Board of Directors voted to pay a $200,000 cash dividend to its approximately 100 stockholders of record on October 15, 20X1. None of the stockholders owns over 4% of the corporation's stock. The dividend was thereafter paid on October 31, 20X1. The rosy predictions turned into gloom, however, when the ski resorts were hit by their worst snow season on record. Most ski resorts did not open until after Christmas and then only to mediocre snow depths. Much of the ski equipment sold on consignment was returned to the factory. Rather than reporting positive current earnings and profits, Smith's operations for 20X1-20X2 year produced a final net operating loss of $500,000. The controller's office is beginning work on the program required to run Form 1099 for stockholders of record on October 15, 20X1. They have sought your aid to help them make the appropriate determination as to how to characterize the October 31, 20X1, payment they made. Please advise.
CASE 28 Corporate Liquidation Planning Russell has earned a fortune manufacturing educational toys for children. After 10 years of designing and producing toys, he sold his patents and got out of the business. At the present time, the only non-cash assets left in his wholly-owned corporation are some equipment (basis, $100,000; fair market value, $100,000) and a piece of appreciated land which had been purchased for $50,000 and is now worth $550,000. The balance sheet of the corporation as of this date is: Assets: Liabilities:Cash $105,000 Notes Payable: Equipment 100,000 To Russell $125,000 Land 50,000 To others 15,000 $140,000 Owner's Equity:Common Stock $ 88,000 Retained Earnings 27,000 115,000 $255,000 $255,000 Russell's attorneys have convinced him to liquidate his corporation and suggested he seek our assistance concerning the liquidation. The corporation has been dormant since December 31, 20X1, so it will have no revenues or expenses for the current taxable year ending December 31, 20X2.