Practice Corporate Tax Return

Prepare a comprehensive tax return for the current tax year using the information provided below. Additionally, prepare a statement of position and excel file with calculations. The statement of position must identify all tax items, whether it is reportable for the tax year, and an explanation of why the tax item is or is not reportable and include references to IRC provisions and tax theories that support your position. The excel file needs to show financial statements and depreciation schedules, as well as any calculations made.

Reporting Position: determined whether or not to report a tax item.

Reporting: if determined reporting was proper, then properly reported the tax item on the 1120 or related schedule

Supporting schedules: student prepared all schedules which support reported information (this does not include IRS forms and schedules)

1. On January 1, 2015, Burt Fonzerelli and Agnu Pickles formed the MGI, Inc. a sports media company. MGI is located at 1840 South 1300 East, SLC, UT, 84105. MGI's tax identification number is 11-1111111.

2. Upon formation Fonzerelli and Agnu each received 50% of MGI's common stock. Upon formation, Fonzerelli contributed and office building with a fair market value of $300,000 and an adjusted basis of $225,000 and Agnu contributed $180,000 in cash and $120,000 in services. MGI also assumed a $50,000 mortgage from Fonzerelli that encumber the office building. Immediately, after the transfer Agnu gifted 20% of his stock to his wife. Fonzerelli and Agnu both receive $300,000 in MGI common stock in exchange for their property and services.

Fonzerello's SSN: 321-54-9876

Agnu's SSN: 432-67-9876

3. MGI is an accrual method calendar year taxpayer. Inventories are determined using FIFO and the lower of cost or market method. MGI uses the straight-line method of depreciation, but the useful life provided by MACRS. For tax purposes, MGI uses MACRS accelerated depreciation, but does not use any special depreciation, including 179. Assume that MGI did not take special deductions in earlier years other than accelerated depreciation.

4. In 2017, MGI executed 2 distributions to shareholders. The first distribution occurred on June 30, 2017 in the amount of $250,000 and the second distribution occurred on December 31, 2017 in the amount of $280,000.

5. In 2017, MGI had $3,560,000 in gross sales. One of MGI's largest clients requested a refund in the amount of $201,000 which Agnu approved on December 28, 2017 but the refund did not get paid until January 21, 2018.

6. In 2017, MGI's total cost of goods sold was $1,050,000 leaving an ending inventory as of December 31, 2017 of $1,256,678.

7. On January 2, 2017, MGI purchased 9% (90,000 shares) of IBX, Inc. common stock, a US based company. MGI purchased its stock for $118,000. On March 18, 2017, IBX issued dividends to its shareholders. MGI received a $50,000.On July 1, 2017, MGI purchased another 5% (27,000 shares) of IBX for $55,000.On July 31, 2017, MGI sold its initial 90,000 shares of IBX stock for $86,980.On August 8, 2017, Ole, Inc, US based corporation issued its shareholders a dividend. MGI owns 23% of Ole. MGI received $45,070 dividend from Ole. MGI paid $98,000 for Ole's stock in 2016. On November 2, 2017, MGI received a dividend in the amount of $19,678 from Piggly-Wiggly. MGI purchased their Piggly-Wiggly stock $350,000. As of December 31, 2017, MGI's additional stock investments have a book value in the amount of $976,000.

8. On January 31, 2017, MGI heard that Salt lake county was planning to issue some bonds to raise money. MGI purchased $300,000 in bonds with money it borrowed from Fifth Third Bank in NY, NY. MGI received $26,000 in interest payment in 2017 on the bonds. MGI also purchased two 3-year CDs totaling $50,000 with part of the money it borrowed from Fifth Third Bank. In 2017, MGI receive $11,659 in interest on the CDs. MGI paid Fifth Third Bank $16,679 in 2017 for loan interest. The Fifth Third Bank loan principal payments do not commence until 2018.

9. Fonzerelli is the president of MGI and received $326,679 in wages. Agnu oversees all financial and operating matters for MGI and received $310,000 in wages. In 2017, Fonzerelli and Agnu each received two distributions. The first distribution occurred on June 30, 2017 in the amount of $125,000 each and the second distribution occurred on December 31, 2017 in the amount of $140,000 each.

10. MGI incurred the following expenses: salaries and wages for employees in the amount of $370,550, mortgage payments for the office in the amount of $12,000 and $5,000 of mortgage interest, taxes and licenses in the amount of 212,900, loan payments to Bank of Playmerica in the amount of $87,000 and another $22,000 in interest on a $3,000,000 loan for a media studio purchased on June 1, 2015, funded the MGI pension with $459,800, health insurance for all MGI employees in the amount of $97,765, lease payments for 5 company cars in the amount of $32,300, advertising in the amount of $74,000, and donated $131,000 to United Way, a 501(c)(3). MGI also incurred $54,670 for property repairs and maintenance.

11. On June 1, 2016 MGI purchased another media company as a growth strategy. MGI borrowed $2,300,000 of which $1,900,000 was used to purchase the assets of the target business. The remaining $400,000 was borrowed as operating capital for the business. In 2017, MGI paid $230,000 in loan payments to Wells Cargo Bank and $76,000 in interest. The purchase price of media studio was allocated to assets as follows:

Assets:
Non-compete
Patent
Goodwill
Land $
Buildings
M&E / $300,000
$400,000
$250,000
$100,000
$650,000
$200,000

The M&E cost is allocated as follow:

Assets:
Computers & Printers / $100,000
Printer / $29,343
Lighting / $19,562
Cameras / $51,095

12. MGI made 4 quarterly payments to the IRS as follows: 3-pmts in the amount of $16,922 and 1-pmt in the amount of $16,920.

13. MGI paid $52,000 for life insurance premiums for key-man policies on Fonzerelli and Agnu. MGI is the beneficiary of both policies.

14. Below are a few of MGI's balances as of December 31,2017:

ASSETS / January 1, 2017 / December 31, 2017
Cash / $2,492,951 / TO BE COMPUTED
Trade Notes & Receivables / $789,000 / $956,789
Inventories / $980,032 / $1,256,678
Muni-bonds / $0 / $50,000
Prepaid Federal Taxes / $0 / $67,686
CDs / $0 / $300,000
Stock Investments / $1,542,000 / $1,510,020
Depreciable Assets / $4,250,000 / $4,250,000
Acc. Depreciation* / ($211,923) / ($351,284)
Amortizable Assets / $950,000 / $950,000
Acc. Amortization / ($95,000) / ($158,333)
TOTAL ASSETS: / TO BE COMPUTED / TO BE COMPUTED
LIABILITIES & EQUITY
Accounts Payable / $467,000 / $440,000
Current Liabilities / $329,000 / $329,000
L-T Liabilities / $5,066,500 / $5,075,500
Capital Stock / $600,000 / $600,000
Retained Earnings / $4,234,560 / TO BE COMPUTED
TOTAL LIAB & EQUITY: / TO BE COMPUTED / TO BE COMPUTED

*Depreciation must be computed manually for tax purposes.

15. Below are the tax depreciation rates for the first three years for non-residential property.

39 SL Property

YR-1: 1.389%

YR-2: 2.6%

YR-3: 2.67%

The convention is incorporated into the rates. All other rates must be computed manually.

16. Any information regarding the business must be located using your resources.