Category: Writing

Ajax Corporation is a young high-growth company engaged in
the manufacture and distribution of automotive parts. Its common stock has
doubled in value since the company was listed on the NASDAQ exchange about two
years ago. Ajax currently has a high debt/ equity ratio due to the issuance of
debt to finance its capital expansion needs. Despite rapid growth in assets and
profitability, Ajax has severe cash flow problems and a poor working capital
ratio. The company urgently needs co attract new executives to the organization
and to provide financial incentives to existing top management because of
recent turnover and high growth. Approximately 55 % of the common stock is
owned by Andrew Ajax, who is the CEO, and his immediate family. None of the
other officers own stock in the company.
You are a tax consultant for the company who has been asked
to prepare suggestions after reviewing the compensation system. Your
discussions with several top management individuals reveal the following
aspects of corporate strategy and philosophy:
• The company needs to expand the equity capital base
because of its concern for the high risk caused by large amounts of debt.
• Improvement in cash flow and liquidity would enhance its
stock price and enable the company co continue its high growth rate.
• Top management feels that employee loyalty and
productivity would be improved if all employees owned some stock in the
company. The company currently offers a qualified pension plan to its employees
and executives chat provides only minimal pension benefits. No other deferred
compensation or bonus arrangements are currently being offered.
• Andrew Ajax feels chat the top management group should own
a substantial amount of Ajax stock to ensure that the interests of management
correspond with the share – holder interests (i.e., the maximization of
shareholder wealth). The following four types of executive compensation
arrangements have been discussed:
• Sec. 401(k) and ESOP plans for employees.
• Encourage all employees and executives co independently
fund their retirement needs beyond any Social Security benefits by establishing
IRA plans.
• Provide restricted property arrangements (using Ajax
stock) co attract new top level executives and co retain existing executives.
• Offer nonqualified or incentive stock options to existing
and new executives.
Required: Prepare a client memo chat recommends revisions to
Ajax Corporation ‘s existing compensation system for both its employee and
executive groups. Your recommendations should discuss the pros and cons of
different deferred compensation arrangements and should consider both tax and
nontax factors.
Steve is part owner and manager of a small manufacturing
company that makes keypads for alarm systems. The keypads are sold to several
different alarm companies throughout the country. Steve must travel to several
cities each year to meet with current customers and to attract new business.
When you meet with Steve to obtain information to prepare his current year tax
return, he tells you that he has spent about $5,000 during the current year on
airfare and taking his customers out to dinner to discuss business. Because he
took most of his trips in the summer and fall, and it is now April of the
following year, Steve cannot remember the exact time and places of the business
dinners and did not retain any receipts for the cash used to pay the bills.
However, he remembers the names of the customers he went to see, the business
topics that were discussed, and the restaurants where he had his meals. As
Steve’s tax consultant, what is your responsibility regarding the treatment of
the travel and entertainment expenses under the mandates of the AICPA’s
Statements on Standards for Tax Services? Prepare a client letter explaining to
Steve the requirements under Sec. 274(d) for sufficient substantiation of
travel and entertainment expenses. (See the Statements on Standards for Tax
Services section in Chapter 1:15 for a discussion of these issues and Appendix
£.)

1. Using the information in Problem 1:7-62 for Dan and
Cheryl, prepare a Form 1040, including Schedule 1 and 4, Schedule A, C, D, and
SE, and Form 8829 for 2018.

Dan and Cheryl are married, file a joint return, and have no
children. Dan, age 45, is an independent contractor working in pharmaceutica l
sales and Cheryl, age 42, is a nurse at a local hospital. Dan’s SSN is 400
-20-1000 and Cheryl’s SSN is 200-40-8000 and they reside at 2033 Palmetto
Drive, Atlanta, GA 30304. Dan is paid according to commissions from sales, and
he has no income tax or payroll tax withholdings. Dan operates his business
from his home office. During 2018, Dan earned tota l commissions in his
business of $125,000. Cheryl earned a salary during 2018 of $45,400, with the
following withhold – ings: $6,000 federal taxes, $1,800 state taxes, $2,815
OASDI, and $658 Medicare taxes.
During 2018, Dan and Cheryl had interest income from
corporate bonds and bank accounts of $1,450 and qualified dividends from stocks
of $5,950. Dan also actively trades stocks and had the following results for
2018:
He had no capita l loss carryovers from previous years. Dan
does a considerable amount of travel in connection with his business and uses
his own car. During 2018, Dan drove his car a total of 38,000 miles, of which
32,000 were business related. He also had business-related parking fees and
tolls during the year of $280. Dan uses the mileage method for deducting auto
expenses. Dan also had the following travel expenses while away from home
during the year:
Dan uses the simplified method to deduct expenses for his
office-in-home. His office measures 15 feet by 12 feet in size. Cheryl incurred
several expenses in connection with her nursing job. She paid $450 in professional
dues, $200 in professional journals, and $350 for uniforms. Dan and Cheryl had
the following other expenditures during the year:
During 2018, Dan and Cheryl paid federal and state estimated
tax payments on a quarterly basis. Federal payments for the year amounted to
$24,000. State estimated payments for the year amounted to $2,200. Compute Dan
and Cheryl’s income tax liability for 2018. Disregard the alternative minimum
tax.

Stock Options . Bender Corpo ration grants a nonqualified
stock option to Penny, an employee, on January 1, 2019, that entitled Penny to
acquire 1,000 shares of Bender stock at $80 per share. On this date, the stock
has a $100 FMV and the option has a readily ascertainable FMV of $20 per share.
Penny exercises the option on January 1, 2020 (when the FMV of the stock is
$150 ), and acquires 1,000 shares of the stock for $80 per share. Penny later
sells the Bender stock on January 1, 2022, for $200 per share.
sa. What are the tax consequences to Penny and Bender
Corporation on the following dates: January 1, 2019; January 1, 2020; and
January 1, 2022?
b. How would your answer to Part a change if the Bender
stock were instead closely-held and the option had no readily ascertainable
FMV?

H.R. 10 Plans. Paula is a self-employed doctor and is
considering whether to establish a defined contribution H.R. 10 plan. Paula’s
only employee is a full-time nurse who has been employed by Paula for seven
years. Paula ‘s net earnings from self-employment (before the H.R. 10 plan
contribution but after the deduction for one-half of self- employment taxes
paid) is expected to be $200,000 during the current year and increase slightly
in future years.
a. If the H.R. 10 plan is established, what is the maximum
amount Paula can contribute for the nurse’s benefit?
b. What is the maximum amount Paula can contribute for
herself? ls the amount reported as a for AGI or from AGI deduction?
c. ls Paula’s nurse required to be included in the plan?
d. What are the tax consequences if Paula makes a premature
withdrawal from the plan before reaching age 59 ½?

Coverdell Education Savings Accounts . Jack and Katie have
five grandchildren, ages 19, 16, 15, 12, and 10. They have established
Coverdell Education Savings Accounts (CESA) for each of the grandchildren and
would like to contribute the maximum amount allowable to each CESA for the 2019
taxable year. Jack and Katie’s AGI for 2019 is $196,000.
a. How much can Jack and Katie contribute to each
grandchild’s CESA in 2019?
b. Assume that the 19-year-old granddaughter is a freshman
in college and makes a withdrawal of $7,000 from her CESA during the year 2019.
Her college expenses for 2019 were as follows:
The extra amount withdrawn was used as a down payment on a
car that the granddaugh – ter purchased during the year. She needed the car in
order to drive to school rather than having to either ride the bus or ride with
a friend. What are the tax consequences of the $7,000 distribution to the
granddaughter?

Roth IRA. Chatham Mae is single, age 35, and wants to make a
contribution to an IRA for the year ended December 31, 2019. She is an active
participant in a qualified retire – ment plan sponsored by her employer. Her
AGI for 2019 is $128,000 before considering any IRA contribution.
a. What type of IRA, if any, is Chatham Mae eligible to make
a contribution to for 2019? If she is eligible to contribute to an IRA, what is
the maximum amount that she can contribute to the IRA?
b. Assume Chatham Mae contributes a total of $12,000 over
six years to a Roth IRA. In 2025, she withdraws $15,000 to pay off her car
loan. Her financial advisor suggested she withdraw the money from the IRA for
two major reasons: (1) to eliminate her debt and (2) no tax would be due on
distributions from a Roth IRA after five years. Chatham Mae wants to verify the
accuracy of her advisor’s advice. What would be the tax consequences of this
withdrawal? Alternatively, what if Chatham Mae withdrew the $15,000 to purchase
a house (she is a first-time homebu yer)?
c. Alternatively to Part b above, assume Chatham Mae has a
traditional deductible IRA that has a balance of $50,000. She has been able to
deduct all of her contributions to the IRA in prior years. Her financial
advisor has recommended that she rollover the funds from her traditional IRA to
a Roth IRA in 2019. What are the tax consequences of this rollover in 2019?