Sal Monella, Tao Mane and Carne Asco each own one-third of the common stock of Tofu Tacos Inc. (TT). TT was incorporated on February 4, 2008. It has only one class of stock outstanding and operates as a C corporation for tax purposes. TT caters all types of social events throughout southern California.

TT is located at 1541 Dumpster Way, Huntington Beach, CA 92647

TT's Employer Identification Number is 38-7562491

TT's business activity is catering food and services. Its business activity code is 722300.

The shareholders also work as officers for the corporation as follows:

Sal is the chief executive officer and president (Social Security number 231-54-8976).

Tao is the executive vice president and chief operating officer (Social Security number 798-56-3241).

Carne is the vice president of finance (Social Security number 879-21-4536).

All officers devote 100 percent of their time to the business and all officers are U.S. citizens.

TT uses the accrual method of accounting and has a calendar year-end.

TT made four equal estimated tax payments of $20,000 each. Its tax liability last year was $70,000. If it has overpaid its federal tax liability, TT would like to receive a refund.

TT paid a dividend of $30,000 to its shareholders on November 1 of the Current Tax Year . TT had ample earnings and profits (E&P) to absorb the distribution.

The following is TT's audited income statement for Current Tax Year:

Tofu Tacos
Income Statement
Current Tax Year
Revenue from sales	$2,000,000
Cost of goods sold (Food)	-400,000
Gross profit from operations	$1,600,000
Other income:
Capital loss	-20,000
Dividend income	30,000
Interest income	15,000
Gross income	$1,625,000
Expenses:
Compensation	-950,000
Depreciation	-10,000
Bad debt expense	-15,000
Meals and entertainment	-3,000
Maintenance	-6,000
Property taxes	-11,000
State income taxes	-45,000
Other taxes	-44,000
Rent	-60,000
Interest	-5,000
Advertising	-52,000
Professional services	-16,000
Employee benefits	-32,000
Supplies	-5,000
Other expenses	-27,000
Total expenses	-1,281,000
Income before taxes	344,000
Federal income tax expense	-103,000
Net income after taxes	$ 241,000

Notes:

TTs inventory-related purchases during Current Tax Year were $410,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of 263A do not apply to BCS

.

Of the $15,000 interest income, $2,000 was from a City of Huntington Beach bond that was used to fund public activities (issued in 2005), $1,000 was from a Costa Mesa city bond used to fund private activities (issued in 2004), $1,000 was from a U.S. Treasury bond, and the remaining $11,000 was from a money market account at Madoff Investments.

TTs dividend income came from Malo Menudo. (MM). TT owned 20,000 shares of the stock in Malo Menudo at the beginning of the year. This represented 10 percent of MM outstanding stock.

On October 1 of the Current Tax Year, TT sold 2,000 shares of its MM stock for $25,000. It had originally purchased these shares on April 18, 2008, for $40,000. After the sale, TT owned 9 percent of MM.

TTs compensation is as follows:

Sal $150,000

Tao $150,000

Carne $150,000

Other $500,000

TT wrote off $25,000 in accounts receivable as uncollectible during the Current Tax Year.

TT used straight line depreciation to determine book income and accelerated depreciation for tax determination purposes. The tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A.

The $5,000 interest expense was from a business loan.

Other expenses include $6,000 for premiums paid on term life insurance policies for which TTis the beneficiary. The policies cover the lives of Sal, Tao, and Carne.

The following are TTs audited balance sheets as of January 1st, and December 31^st of the Current Tax Year

Tofu Tacos
Balance Sheets
January 1st and December 31, 20XX
	20XX
	1-Jan	31-Dec
Assets
Cash	$180,000	$ 324,000
Accounts receivable	560,000	580,000
Allowance for doubtful accounts	-60,000	-50,000
Inventory	140,000	150,000
U.S. government bonds	20,000	20,000
State and local bonds	120,000	120,000
Investments in stock	400,000	360,000
Fixed assets	140,000	160,000
Accumulated depreciation	-50,000	-60,000
Other assets	20,000	21,000
Total assets	$1,470,000	$1,625,000
Liabilities and Shareholders' Equity
Accounts payable	$ 280,000	$ 240,000
Other current liabilities	20,000	18,000
Other liabilities	40,000	26,000
Capital stock	400,000	400,000
Retained earnings	730,000	941,000
Total liabilities and shareholders' equity	$1,470,000	$1,625,000