Question: Compare how a shareholder computes her tax

> Limited Brands recently repurchased 68,965,000 of its shares, paying $29 per share. The total number of shares outstanding before the redemption was 473,223,066. The total number of shares outstanding after the redemption was 404,258,066. Assume your cli

> In the previous problem, Nancy would like to have Frank stay on as a consultant after all of his shares are redeemed. She would pay him a modest amount of $500 per month. Nancy wants to know if there is any de minimis rule such that Frank would not be tr

> Boots, Inc. is owned equally by Frank Albert and his daughter Nancy, each of whom held 1,000 shares in the company. Frank wants to retire from the company, and it was decided that the company will redeem all 1,000 of his shares for $25,000 per share on D

> Assume in problem 53 that Betty and Barney are not getting along and have separated due to marital discord (although they are not legally separated). In fact, they cannot even stand to talk to each other anymore and communicate only through their account

> Bedrock, Inc. is owned equally by Barney Rubble and his wife Betty, each of whom held 1,000 shares in the company. Betty wants to reduce her ownership in the company, and it was decided that the company will redeem 500 of her shares for $25,000 per share

> Access Ford Motor Company’s Annual Report for 2011 from the company’s website. What amount of valuation allowance against its deferred tax assets did the company release in 2011? What reasons did management give for releasing the valuation allowance? (Hi

> Acme Corporation has 1,000 shares outstanding. Joan and Bill are married, and they each own 20 shares of Acme. Joan’s daughter, Shirley also owns 20 shares of Acme. Joan is an equal partner with Jeri in the J&J partnership, and this partnership owns 60 s

> Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold 1,000 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 250 of her shares for $25,000 per s

> Wildcat Company is owned equally by Evan Stone and his sister Sara, each of whom held 1,000 shares in the company. Sara wants to reduce her ownership in the company, and it was decided that the company will redeem 500 of her shares for $25,000 per share

> How would your answer to problem 66 change if management determined that there was only a “50/50” chance any portion of the $1,000,000 DPAD would be sustained on audit?

> Randolph Company reported pretax net income from continuing operations of $800,000 and taxable income of $500,000. The book-tax difference of $300,000 was due to a $200,000 favorable temporary difference relating to depreciation, an unfavorable temporary

> Badger Corporation declared a stock dividend to all shareholders of record on March 25 of this year. Shareholders will receive one share of Badger stock for each ten shares of stock they already own. Madison Cheese man owns 1,000 shares of Badger stock w

> Hoosier Corporation declared a 2-for-1 stock split to all shareholders of record on March 25 of this year. Hoosier reported current E&P of $600,000 and accumulated E&P of $3,000,000. The total fair market value of the stock distributed was $1,500,000. Ba

> Nittany Company pays its sole shareholder, Tammy Lion, a salary of $100,000. At the end of each year, the company pays Tammy a “bonus” equal to the difference between the corporation’s taxable income for the year (before the bonus) and $75,000. In this w

> The TimpRiders LP has operated a motorcycle dealership for a number of years. Lance is the limited partner, Francesca is the general partner, and they share capital and profits equally. Francesca works full-time managing the partnership. Both the partner

> Sam and Devon agree to go into business together selling college-licensed clothing. According to the agreement, Sam will contribute inventory valued at $100,000 in return for 80 percent of the stock in the corporation. Sam’s tax basis in the inventory is

> Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair marke

> True or False. A calendar-year corporation has a deficit (negative) current E&P of $100 and accumulated E&P of $100. A cash distribution of $100 to the corporation’s sole shareholder on June 30 will not be treated as a dividend because total E&P at Dece

> Ivan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market

> Carla incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair marke

> Beaver Corporation reported taxable income of $500,000 from operations this year. The company paid federal income taxes of $170,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Eugenia Van Dam.

> Ramon incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair marke

> Jones Mills, Inc. (JMI) decided to liquidate its wholly owned subsidiary, Most Help, Inc. (MH). MH had the following tax accounting balance sheet. a. What amount of gain or loss does MH recognize in the complete liquidation? b. What amount of gain or los

> Jefferson Millinery, Inc. (JMI) decided to liquidate its wholly-owned subsidiary, 8 Miles High, Inc. (8MH). 8MH had the following tax accounting balance sheet. a. What amount of gain or loss does 8MH recognize in the complete liquidation? b. What amount

> Tiffany and Carlos decided to liquidate their jointly owned corporation, Royal Oak Furniture (ROF). After liquidating its remaining inventory and paying off its remaining liabilities, ROF had the following tax accounting balance sheet. Under the terms of

> Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions, Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet. Under the t

> Will the shareholder’s tax basis in noncash property received equal the amount included in gross income as a dividend? Under what circumstances will the amounts be different, if any?

> Robert and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU, Inc., in a stock-for-stock Type B acquisition. The sole shareholder of EMU, Edie Eagle, will receive $400,000 of WU voting stock in the trans

> Robert and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU, Inc., in a tax-deferred triangular Type A merger using an acquisition subsidiary of WU. The sole shareholder of EMU, Edie Eagle, will receive

> How does current earnings and profits differ from accumulated earnings and profits? Is there any congressional logic for keeping the two accounts separate?

> Rather than purchase BLI directly (as in problems 47 and 48), Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BL

> Shaw, Inc. reported pretax book income of $10,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $200,000. Shaw, Inc. sold a fixed asset and reported book gain of

> Using the same facts in problem 47, assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $400,000. a. What amount of gain or loss does BLI recognize if the transaction is structured as a stock sale to Amy and Brian? What amount of corporat

> Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line, Inc. (BLI). As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company’s tax accounting

> On March 1, 2013, Leucadia National Corporation acquired Jefferies Group LLC. in a tax-deferred acquisition. The Form 8-K for Jefferies (ticker JEF, cik 1084580) describes the transaction and was filed with the SEC on November 13, 2012. You can access th

> On February 4, 2013, Verint Systems Inc. acquired Comverse Technology Inc. in a tax-deferred acquisition. The Form 8-K for Comverse (ticker CMVT, cik 803014) describes the transaction and was filed with the SEC on August 13, 2012. You can access the Form

> This year Jack O. Lantern incurred a $60,000 loss on the worthlessness of his stock in the Creepy Corporation (CC). The stock, which Jack purchased in 2005, met all of the §1244 stock requirements at the time of issue. Jack’s wife, Jill, also incurred a

> Ron and Hermione formed Wizard Corporation on January 2. Ron contributed cash of $200,000 in return for 50 percent of the corporation’s stock. Hermione contributed a building and land with the following fair market value and adjusted ba

> Jekyll and Hyde formed a corporation (Halloween Inc.) on October 31 to develop a drug to address split personalities. Jekyll will contribute a patented formula valued at $200,000 in return for 50 percent of the stock in the corporation. Hyde will contrib

> Lanco Corporation, an accrual-method corporation, reported taxable income of $1,460,000 this year. Included in the computation of taxable income were the following items: • MACRS depreciation of $200,000. Straight line depreciation would have been $120,0

> What is a substituted basis as it relates to stock received in exchange for property in a §351 transaction? What is the purpose of attaching a substituted basis to stock received in a §351 transaction?

> What are the three potential tax treatments of a cash distribution to a shareholder? Are these potential tax treatments elective by the shareholder?

> Illini Corporation reported taxable income of $500,000 from operations for this year. The company paid federal income taxes of $170,000 on this taxable income. During the year, the company made a distribution of an automobile to its sole shareholder, Car

> What is the definition of control for purposes of §351? Why does Congress require the shareholders to control a corporation to receive tax deferral?

> What information must a taxpayer gather to determine the adjusted basis of property exchanged in a property transaction?

> What information must a taxpayer gather to determine the amount realized in a property transaction?

> Discuss the difference between gain realization and gain recognition in a property transaction.

> Compare and contrast the built-in loss duplication rule as it relates to §351 with the built-in loss disallowance rule as it applies to a complete liquidation.

> Explain whether a corporate shareholder recognizes gains and losses on the receipt of distributions of property from the complete liquidation of a subsidiary corporation.

> W Corporation will acquire all of the assets and liabilities of Z Corporation in a Type A merger, after which W Corporation will sell off all of its assets and liabilities and focus solely on Z Corporation’s business. Explain whether the transaction will

> What is the presumption behind the continuity of ownership interest (COI) requirement in a tax-deferred acquisition? How do the target shareholders determine if COI is met in a Type A reorganization?

> Thriller Corporation has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: Thriller Corporation has current E&P of $300,000 for this year and accumulated E&P at January 1 of this year o

> Tiger Corporation reported taxable income of $500,000 from operations for this year. The company paid federal income taxes of $170,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Mike Woods. T

> How does the issue of double taxation arise when a corporation decides between making a distribution to a shareholder employee as a dividend or compensation?

> In a stock acquisition, why is there a difference between the tax basis of assets held by an acquired corporation and the tax basis of the shares held by a corporate acquirer? Why is this difference important?

> What tax benefits does the buyer hope to obtain by making a §338 or §338(h)(10) election?

> How does the form of a regular §338 election compare and contrast to a §338(h)(10) election?

> What are the key differences in the tax law requirements that apply to a Type A stock-for-assets acquisition versus a Type B stock-for-stock acquisition?

> What are the key differences in the tax law requirements that apply to forward versus reverse triangular mergers?

> Why do publicly-traded corporations use a triangular form of Type A reorganization in acquiring other corporations?

> What is the congressional purpose for allowing tax deferral on transactions that meet the definition of a corporate reorganization?

> Why does the acquiring corporation usually prefer to buy the target corporation’s assets directly in an acquisition?

> Under what conditions is it advantageous for a shareholder to hold §1244 stock? Why did Congress bestow these tax benefits on holders of such stock?

> Volunteer Corporation reported taxable income of $500,000 from operations for this year. The company paid federal income taxes of $170,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Rocky Top

> Why might a corporation prefer to characterize an instrument as debt rather than equity for tax purposes? Are the holders of the instrument indifferent as to its characterization for tax purposes?

> Beacon Corporation recorded the following deferred tax assets and liabilities: All of the deferred tax accounts relate to temporary differences that arose as a result of the company’s U.S. operations. Which of the following statements describes how Beaco

> Petoskey Stone Quarry, Inc. (PSQ), a calendar year, accrual basis C Corporation, provides landscaping supplies to local builders in northern Michigan. PSQ has always been a family owned business and has a single class of voting common stock outstanding.

> How does a corporation depreciate an asset received in a §351 transaction in which no gain or loss is recognized by the transferor of the property?

> Under what circumstances does property received by a corporation in a §351 transaction not receive a carryover basis? What is the reason for this rule?

> What is a carryover basis as it relates to property received by a corporation in a §351 transaction? What is the purpose of attaching a carryover basis to property received in a §351 transaction?

> How does the tax treatment differ in cases where liabilities are assumed with a tax avoidance purpose versus where liabilities assumed exceed basis? When would this distinction cause a difference in the tax consequences of the transactions?

> Explain whether a corporation’s assumption of shareholder liabilities will always constitute boot in a §351 transaction.

> Several years ago, your client, Brooks Robinson, started an office cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, “The Human

> Cartman Corporation owns 90 shares of SP Corporation. The remaining 10 shares are owned by Kenny (an individual). After several years of operations, Cartman decided to liquidate SP Corporation by distributing the assets to Cartman and Kenny. SP reported

> Blackhawk Company reports current E&P of negative $300,000. Its accumulated E&P at the beginning of the year was a negative $200,000. Blackhawk distributed $400,000 to its sole shareholder, Melanie Rushmore, on June 30 of this year. Melanie’s tax basis i

> Tiny and Tim each own half of the 100 outstanding shares of Flower Corporation. This year Flower reported taxable income of $6,000 and was subject to a 25 percent tax rate. In addition, Flower received $20,000 of life insurance proceeds due to the death

> What income tax issues must a corporation consider before it makes a noncash distribution to a shareholder?

> List the four basic adjustments that a corporation makes to taxable income or net loss to compute current E&P. What is the rationale for making these adjustments?

> Bevo Corporation experienced a complete loss of its mill as the result of a fire. The company received $2 million from the insurance company. Rather than rebuild, Bevo decided to distribute the $2 million to its two shareholders. No stock was exchanged i

> Adams Corporation has total deferred tax assets of $3,000,000 at year-end. Management is assessing whether a valuation allowance must be recorded against some or all of the deferred tax assets. What level of assurance must management have, based on the w

> Identify the following items as creating a temporary difference, permanent difference, or no difference.

> Harrison Corporation reported pretax book income of $600,000. Tax depreciation exceeded book depreciation by $400,000. In addition, the company received $300,000 of tax-exempt municipal bond interest. The company’s prior year tax return showed taxable in

> What is an unrecognized tax benefit and how does it affect a company’s current income tax expense?

> In addition to the current year tax return taxes payable or refundable, what other transactions can affect a company’s current income tax provision?

> Why are cumulatively unfavorable temporary differences referred to as deductible temporary differences?

> Why are cumulatively favorable temporary differences referred to as taxable temporary differences?

> Briefly describe what is meant by the asset and liability or balance sheet approach taken by ASC 740 with respect to computing a corporation’s deferred tax provision.

> When does a temporary difference resulting from income create a taxable temporary difference? A deductible temporary difference?

> When does a temporary difference resulting from an expense (deduction) create a taxable temporary difference? A deductible temporary difference?

> How does a corporation’s computation of earnings and profits differ based on the tax treatment of a stock redemption to the shareholder (that is, as either a dividend or exchange)?

> True or False: All differences between book and taxable income, both permanent and temporary, affect a company’s effective tax rate. Explain.

> Georgio owns a 20 percent profits and capital interest in Rain Tree LLC. For the current year, Rain Tree had the following revenues, expenses, gains, and losses: Sales revenue………………………………………………………………………………………….$70,000 Gain on sale of land (§1231)…………………

> Turtle Creek Partnership had the following revenues, expenses, gains, losses, and distributions: Sales revenue……………………………………………………………………………………………$40,000 Long-term capital gains………………………………………………………………………………$2,000 Cost of goods sold……………………………………………………………

> Ashlee, Hiroki, Kate, and Albee LLC each own a 25 percent interest in Tally Industries LLC, which generates annual gross receipts of over $10 million. Ashlee, Hiroki, and Kate manage the business, but Albee LLC is a non-managing member. Although Tally In

> Ryan, Dahir, and Bill have operated Broken Feather LLC for the last four years using a calendar year-end. Each has a one-third interest. Since they began operating, their busy season has run from June through August, with 35 percent of their gross receip

> Rock Creek LLC was recently formed with the following members: What is the required taxable year-end for Rock Creek LLC? Name Tax Year End Capital/Profits % Mark Banks December 31 35% Highball Properties March 31 25% LLC Chavez Builders Inc. November

> Tall Tree LLC was recently formed with the following members: What is the required taxable year-end for Tall Tree LLC? Name Tax Year End Capital/Profits % Eddie Robinson December 31 40% Pitcher Lenders LLC June 30 25% Perry Homes Inc. October 31 35%

> Granite Slab LLC was recently formed with the following members: What is the required taxable year-end for Granite Slab LLC? Name Tax Year End Capital/Profits % Nelson Black December 31 22.0% Brittany Jones December 31 24.0% Lone Pine LLC June 30 4.5

> Last December 31, Ramon sold the 10 percent interest in the Del Sol Partnership that he had held for two years to Garrett for $400,000. Prior to selling his interest, Ramon’s basis in Del Sol was $200,000 which included a $100,000 share of nonrecourse de

> Dave LaCroix recently received a 10 percent capital and profits interest in Cirque Capital LLC in exchange for consulting services he provided. If Cirque Capital had paid an outsider to provide the advice, it would have deducted the payment as compensati