Corporate Tax Act400

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Portfolio Project ACT400
Corporate Tax-ACT400
September 1st, 2012

Portfolio Project ACT400
I. Problem 1-Osprey Corporation
a. Facts
Dan and Patrick Zimbrick, sole shareholders of Osprey Corporation have been required to repay compensation to Osprey Corporation that was found by the IRS to be excessive. In order to determine how these repayments are to be treated for tax purposes, it is important to note that in 2006 the board of directors made up of Dan, Patrick and their uncle John, adopted a legally enforceable resolution. The resolution stipulated that any overpayment of salary disallowed as a deduction by the IRS would be repaid to the Osprey Corporation. In late 2010 during an audit by the IRS,
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In this case, the taxpayer included the excessive compensation in his return for the year the compensation was received. Section 1341 allows a taxpayer the option to choose the more favorable alternative. As written in the case: “if the taxpayer included an item in gross income in one taxable year, and in a subsequent taxable year he becomes entitled to a deduction because the item or a portion thereof is no longer subject to his unrestricted use, and the amount of the deduction is in excess of $3,000, the tax for the subsequent year is reduced by either the tax attributable to the deduction or the decrease in the tax for the prior year attributable to the removal of the item, whichever is greater” (52 AFTR 2d 83-6071, 718 F2d 193, 83-2 USTC P 9620.). If Dan or Patrick had a higher tax rate in 2007 than in 2011, this credit could result in more tax savings. Because the court had determined that the repayment can be claimed under section 1341 in Van Cleave v. U.S., and the IRS had taken a similar position in Rev. 69-115 1969-1 C.B. 50. Dan and Patrick can claim the repayments to Osprey Corporation as either a credit under Section 1341 or a deduction under section 162(a).
II. Problem 2-Four Winds Partnership
a. What adjustment is required regarding Paul’s purchase of the partnership interest? Must a section 754 election be made? A section 754 election is made by a
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