Tax Return Problem 8: C corporation
Instructions:
Please complete the required federal corporation income tax return forms for Fun Fair of Ventura, Inc. for the 2012 tax year, unless instructed otherwise, based upon the facts presented below. Also, if required information is missing, use reasonable assumptions to fill in the gaps.
Fun Fair of Ventura, Inc. (FF) is organized as a corporation and is taxed as a “C” corporation with a calendar year-end. FF owns and operates an amusement park in Oxnard, California. Oxnard’s weather allows FF to operate year-round. FF’s address, employer identification number (EIN), and date of incorporation are as follows:
Fun Fair of Ventura, Inc.
50 Boardwalk
Oxnard, California 93030
EIN- 36-4385943
Date Incorporated- July 23, 1997
FF has been at the same address and has not changed its same since inception.
FF has only common shares issued (no preferred stock).
FF is owned by 86 shareholders. The majority owner of FF is large private equity firm based in San Jose, California called Amusement Ventures, LLC (AV). AV’s address, employer identification, and other information areas follows:
Amusement Ventures, LLC
675 Shady Wood Boulevard
San Jose, California 95101
EIN- 54-8293213
AV is taxed as a partnership for federal tax purposes. AV is organized in California. It owns 30% of the voting stock of FF directly. No other person or entity owns directly or indirectly owns more than 5% of the voting stock of FF.
FF uses the accrual method of accounting. FF is not a subsidiary nor is it in an affiliated group with any other entity. FF is not audited by a CPA firm. It does, however, use GAAP-based financial statements. FF has never had a restatement of its income statement.
In addition, FF reported the following information for the current year:
- FF did not pay dividends in excess of its current and accumulated earnings and profits.
- None of the stock of FF is owned by non U.S. persons
- FF has never issued publicly offered debt instruments.
- FF is not required to file a Form UTP
- FF made payments that required it to file federal Form(s) 1099. These Forms 1099 were filed timely by FF.
- During the year, none of the shareholders of FF changed.
- FF has never disposed of more than 65% (by value) of its assets in a taxable, non-taxable, or tax deferred transaction.
- FF did not receive any assets in a Section 351 transfer during the year.
- All of the questions on Schedule B, Form 1120 should be answered with “no” for the year.
Additional information:
On August 1, FF was notified by its legal counsel that FF was being sued by a former employee regarding her termination of employment from FF. As of December 31, CY (current year), no legal settlement had been reached. However, legal counsel has advised FF that the settlement amount of $190,000 is probable (although the number could be slightly more or less) and the law firm believes a confidential settlement will be executed by both parties sometime in February of next year. FF accrued this expenseon its financial statements.
FF maintains a portfolio of tax-exempt securities (none of which are private activity bonds) and publicly-traded stocks as a measure to provide immediate liquidity if needed (none of these investments is debt financed). All of these securities originate from less than 20% owned domestic corporations.
During the year, FF upgraded its main attraction. From inception until this year the Rapid Coaster had been the main attraction. However due to safety, crowd appeal, and other factors, FF disposed of the Rapid Coaster on March 1 and purchased a new attraction known as the Vomitnator. The Rapid Coaster cost $2,000,000 and was put in service on September 1, 2001. The Rapid Coaster was fully depreciated for book, regular tax, and AMT tax depreciation purposes.
The Vomitnator was installed and rendered operational on March 1. The Vomitnator cost $6,000,000.
FF’s regular tax depreciation for the year is correctly calculated as $1,112,499before considering the 2012 addition of the Vomitnator.FF’s AMT depreciation for the year is correctly calculated as $744,977 before considering the 2012 addition of the Vomitnator. FF does not want to claim any current year bonus depreciation. Further, FF wants to depreciate the Vomitnator using the general depreciation method system “GDS” for regular tax purposes.
FF officer information for the year is as follows (compensation amounts included in total wages on the income statement for all employees):
Name / Social security number / Percent of time devoted to business / Percent of stock owned / Amount of compensationMarissa Hunt / 435-54-2342 / 100% / .05% / $235,000
Dakon Williams / 243-98-3242 / 100% / .03% / $195,000
Deon Johnson / 194-23-7435 / 100% / 0% / $165,000
Jennifer Conley / 623-53-3920 / 100% / 0% / $150,000
Near the end of the year,FFswitchedits property and casualty insurance company. As a result, the plan year for its insurance contract was altered. On December 31, 2012 FF prepaid insurance premiums of $25,000 representing coverage through February 15 of 2013as a condition of being accepted by the new company. FF did not expense any of the prepayment for financial accounting purposes
FF rents from vendors several pieces of equipmentto use in its business. As of December 31, 2011 and December 31, 2012, respectively, FF had prepaid vendors for equipment rental of $30,000 forJanuary of the current year and $35,000 for January of next year,respectively.
On December 26, 2012 FFprepaid a contractor $17,500 to repair several pieces of maintenance shop equipment in January of 2013. FF fully expects that the contractor will have completed the projectby January 31 of next year.
All of the accrued wages and bonus amounts on the financial statements as of December 31, 2012 were paid on February 28, 2013.
As of December 31, 2011 and 2012, respectively, FF hadvacation accruals on its books of $29,000 and $35,000. As of March 15, 2012and 2013, respectively, FF had paid $5,000 and $8,000 of those accrued amounts.
On December 2, 2012, the millionth customer entered the park. To recognize the accomplishment and to promote the amusement park through print and radio mediaadvertisements, FF held a give-away contest wherein the lucky customer deemed to be themillionth customer would be given $100,000. The check was presented to the lucky winner on January 15, 2013.
The land on which FF resides is owned by the county. FF has a very favorable lease with the county that allows FF the ability to sublease any portion of the ground to another tenant. The board of directors of FF made the decision in the fall of the 2012to seek out a tenant for unimproved land that would not be utilized in any potential expansion plans. FF identified the potential renter and entered into a contract with the renter on December 1, 2012. The rent period is to begin on January 1, 2013; however, as part of the contract, the renter was required to pay a full six-month rental amount ($50,000) to FF by December 31, 2012. FF received a check of $50,000 on December 27, 2012 from the renter. This rental payment is not refundable to the renter under any circumstances.
FF maintains an inventory of several items that it uses in its amusement park. Inventory is valued at cost. FF has never has never changed it inventory method. FF uses specific identification for its inventory. FF has never written down any subnormal goods. The rules of Section 263A (Unicap) apply to FF. The Unicap calculated costs related to ending inventory at December 31, 2011and 2012 respectively were $15,000 and $19,000.
On December 1, 2012, FF paid a dividend to all common stockholders of $400,000.
During the current year, FF made federal estimated income tax payments of $72,500each on April 15, June 15, September 15 and December 15 of the current year ($290,000 in total). If FF has overpaid itscurrent year estimated taxes, FF would like to apply the excess to its estimated tax payments for next year. FF is NOT a “large corporation.” FF’s 2011 tax liability was $200,000.
FF made California state estimated income tax payments of $15,000 each on April 15, June 15, September 15 and December 15 of 2012 ($60,000 in total).
FF does not have a minimum tax credit carryforward from 2011.
Financial Statements (kept on a GAAP basis):
FUN FAIR OF VENTURA, INC.
Balance Sheet
Assets:12/31/1112/31/12
Cash$ 165,000$ 119,000
Accounts Receivable 128,000 75,000
Less: Allowance for Bad Debts (43,000) (49,000)
Inventory 422,000 390,000
Tax-exempt Securities 150,000 150,000
Publicly Traded Stocks 200,000 200,000
Fixed Assets 24,000,000 28,000,000
Less: Acc. Depreciation (13,542,000)(12,892,000)
Prepaid Insurance 0 25,000
Prepaid Rent 30,000 35,000
Prepaid Installation Contract 0 17,500
Other Assets 150,000 250,000
Total Assets:$11,660,000$16,320,500
Liabilities and Capital:
Accounts Payable 48,000 62,000
Accrued Wages 123,000 118,000
Accrued Bonuses 68,500 39,000
Accrued Vacation 29,000 35,000
Legal Settlement Accrual 0 190,000
Prize Accrual 0 100,000
Unearned Rental Income 0 50,000
Note Payable-First Bank of CA (Credit Line) 1,540,000 1, 084,000
Note Payable-Equipment Leasing, Inc. 7,112,000 11,728,000
Capital Stock 100,000 100,000
Additional paid-in Capital 2,000,000 2,000,000
Retained Earnings-Unappropriated 639,500 814,500
Total Liabilities and Capital:$11,660,000$16,320,500
Income Statement for the period ending December 31, 2012
ItemAmount
Income:
Gross Sales$26,523,275
Less: Returns (113,500)
Net Sales 26,409,775
Cost of Goods Sold (2,052,500)
Dividend Income 4,300
Interest Income 2,650
Municipal Bond Interest Income 2,300
Total Income:24,366,525
Expenses:
Employee Salaries 13,905,600
Repairs and Maintenance 492,350
Bad Debts 58,000
Rent 1,543,000
Payroll Taxes 1,112,400
Licensing Fees 10,750
Property Taxes 277,000
Interest Expense 781,000
Depreciation 1,350,000
Office Supplies 33,950
Employee Training 53,750
Safety Expenses 31,000
Political Contribution 2,500
CA Safety Commission Fine 5,000
Advertising 290,500
Admission Supplies 143,250
Meals and Entertainment 8,500
Travel 13,550
Insurance 215,000
Legal Settlement 190,000
Prize Contest Expense 100,000
Fuel 158,675
Utilities 2,530,500
Telephone 135,250
Total Expensesbefore taxes:$23,441,525
CA state income tax expense 60,000
Federal tax expense 290,000
Net Income: $ 575,000