Question: Explain the purpose of the attribution rules

> John died on March 3, 2017. His gross estate of $8.25 million includes First Corporation stock (400 of the 1,000 outstanding shares) worth $5 million or $12,500 per share ($5,000,000/400). This FMV amount also is the estate’s basis in the stock (see Chap

> Unrelated parties Amy, Beth, Carla, and Delta Corporation each own 25 of the 100 outstanding shares of Axle Corporation stock. In a transaction that qualifies as a partial liquidation, Axle distributes $20,000 cash to each shareholder in exchange for fiv

> Of the 9,500 shares of Favor Corporation stock outstanding, Olsen owns 6,100 shares. Unrelated parties own the remaining shares. To bolster its stock price, Favor plans to reduce the total number of shares outstanding by redeeming some of the shares held

> Four unrelated shareholders own Benton Corporation’s 400 shares of outstanding stock. As indicated below, Benton redeems a total of 100 shares for $500 per share from three of its shareholders. Each shareholder has a $230 per share basi

> Paul owns all 100 shares of Presto Corporation stock. His basis in the stock is $10,000. Presto has $100,000 of E&P. Presto redeems 25 of Paul’s shares for $30,000. What are the tax consequences of the redemption to Paul and to Presto?

> Moose Corporation’s 400 shares of outstanding stock are owned as follows: Name ……………….……………….……………….…… Shares Lara (an individual) ……………….………………….….………60 LMN Partnership (Lara is a 20% partner)………………..50 LST Partnership (Lara is a 70% partner).……

> Trusty Corporation has a single class of common stock outstanding. Jim owns 200 shares, which he purchased for $50 per share two years ago. On April 10 of the current year, Trusty distributes to its common shareholders one right to purchase for $60 one c

> Moss Corporation has a single class of common stock outstanding. Tillie owns 1,000 shares, which she purchased five years ago for $100,000. Moss declares a stock dividend payable in 8% preferred stock having a $100 par value. Each shareholder receives on

> Wilton Corporation has a single class of common stock outstanding. Robert owns 100 shares, which he purchased six years ago for $100,000. In the current year, when the stock is worth $1,200 per share, Wilton declares a 10% dividend payable in common stoc

> Forward Corporation is owned by a group of 15 shareholders. During the current year, Forward pays $550,000 in salary and bonuses to Alvin, its president and controlling shareholder. The corporation’s marginal tax rate is 34%, and Alvin’s marginal tax rat

> What factors did Congress mandate to be considered in determining whether indebtedness is classified as debt or equity for tax purposes?

> King Corporation is a profitable manufacturing concern with $800,000 of E&P. It is owned in equal shares by Harry and Wilma, husband and wife. Both individuals are actively involved in the business. Determine the tax consequences of the following indepen

> During the current year, Zeta Corporation distributes the assets listed below to its sole shareholder, Susan. For each asset listed, determine the gross income recognized by Susan, her basis in the asset, the amount of gain or loss recognized by Zeta, an

> On May 15 of the current year, Quick Corporation distributes to its shareholder Calvin a building having a $250,000 FMV and used in Quick’s business. The building originally cost $180,000. Quick claimed $30,000 of straight-line depreciation, so that the

> On May 10 of the current year, Stowe Corporation distributes to its shareholder Arlene $20,000 in cash and land (a capital asset) having a $50,000 FMV. The land has a $15,000 adjusted basis (for both taxable income and E&P purposes) and is subject to a $

> In the current year, Sedgwick Corporation has $100,000 of current and accumulated E&P. On March 3, Sedgwick distributes to its shareholder Dina a parcel of land (a capital asset) having a $56,000 FMV. The land has a $40,000 adjusted basis (for both taxab

> At the beginning of the current (non-leap) year, Charles owns all of Pearl Corporation’s outstanding stock. His basis in the stock is $80,000. On July 1, he sells all his stock to Donald for $125,000. During the year, Pearl, a calendar year taxpayer, mak

> Pink Corporation is a calendar year taxpayer. Pete owns one-third (100 shares) of Pink stock. His basis in the stock is $25,000. Cheryl owns two-thirds (200 shares) of Pink stock. Her basis in the stock is $40,000. On June 10 of the current year, Pink di

> Clover Corporation is a calendar year taxpayer. Connie owns all of its stock. Her basis in the stock is $10,000. On April 1 of the current (non-leap) year Clover distributes $52,000 to Connie. Determine the tax consequences of the cash distribution in ea

> Investors formed Peach Corporation in Year 1. Its current E&P (or current E&P deficit) and distributions for Years 1 through 4 are as follows: What is Peach’s accumulated E&P at the beginning of Years 1 through 4? Curre

> Water Corporation reports $500,000 of taxable income for the current year. The following additional information is available: • For the current year, Water reports an $80,000 long-term capital loss and no capital gains. • Taxable income includes $80,0

> How does the assignment of income doctrine apply to a Sec. 351 exchange?

> Beach Corporation, an accrual basis taxpayer, reports the following results for the current year: a. What is Beach’s taxable income? b. What is Beach’s current E&P? Income: Gross profit from manufacturing ope

> Alabre Corporation has 150,000 shares of common stock outstanding and pays quarterly dividends of $0.15 per share. At the beginning of the current year, the balance in its accumulated E&P account is $23,000. Alabre would like to have sufficient E&P to pa

> Jana owns all 100 shares of Stone Corporation stock having a $1 million FMV. Her basis in the stock is $400,000. Stone’s E&P balance is $600,000. Michael would like to purchase the stock but wants only the corporation’s non-cash assets valued at $750,000

> George owns 100 of the 1,000 outstanding shares of Polar Corporation common stock. Under the Sec. 318 family attribution rules, to which of the following individuals will ownership of George’s stock be attributed? In other words, who is deemed to constru

> Marsha receives a $10,000 cash distribution from Dye Corporation in April of the current year. At the beginning of the year, Dye has $4,000 of accumulated E&P and $8,000 of current E&P. Dye also distributed $10,000 in cash to Barbara, who purchased all 2

> George owns all 100 shares of Gumby’s Pizza Corporation. The shares are worth $200,000, while George’s basis is only $70,000. Mary and George have reached a tentative agreement under which George will sell all his shares to Mary. However, Mary is unwilli

> Price Corporation has 100 shares of common stock outstanding. Price repurchased all of Penny’s 30 shares for $35,000 cash during the current year. Three years ago, Penny received the shares as a gift from her mother. Her basis in the shares is $16,000. P

> Neil purchased land from Spring Harbor, his 100%-owned corporation, for $275,000. The corporation purchased the land three years ago for $300,000. Similar tracts of land located nearby have sold for $400,000 in recent months. What tax issues should be co

> Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?

> What is a constructive dividend? Under what circumstances is the IRS likely to argue that a constructive dividend has been paid?

> Mark transfers all the property of his sole proprietorship to newly formed Utah Corporation in exchange for all the Utah stock. Mark has claimed depreciation on some of the property. Under what circumstances is Mark required to recapture previously claim

> Walnut Corporation owns a building with a $120,000 adjusted basis and a $160,000 FMV. Walnut’s E&P is $200,000. Should the corporation sell the building and distribute the sales proceeds to its shareholders or distribute the building to its shareholders

> Hickory Corporation owns a building with a $160,000 adjusted basis and a $120,000 FMV. Hickory’s E&P is $200,000. Should the corporation sell the building and distribute the sales proceeds to its shareholders or distribute the property to its shareholder

> Does the timing of a distribution matter as to whether it is taxed as a dividend or treated as a return of capital? Explain.

> Badger Corporation was incorporated in the current year. It reports an $8,000 NOL on its initial tax return. Badger distributes $2,500 to its shareholders. Is it possible for this distribution to be taxed as a dividend to Badger’s shareholders? Explain.

> What effect do the following transactions have on the calculation of Young Corporation’s current E&P? Assume that the starting point for the calculation is Young’s taxable income for the current year. a. The corporation earns tax-exempt interest income

> Pecan Corporation distributes land to a noncorporate shareholder. Explain how the following items are determined: a. The amount of the distribution b. The amount of the dividend c. The shareholder’s basis in the land d. When the holding period for th

> Describe the effect of a $100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has a. $100,000 of current E&P and $100,000 of accumulated E&P b. A $50,000 a

> Why is it necessary to distinguish between current and accumulated E&P?

> Explain how a corporation computes its current and accumulated E&P balances.

> What is a bootstrap acquisition? What are the tax consequences of such a transaction?

> What factor(s) would the IRS likely consider to determine whether the transfer of a liability to a corporation in a Sec. 351 exchange was motivated by a business purpose?

> Explain the tax consequences, to both the corporation and a shareholder-employee, of an IRS determination that a portion of the compensation paid in a prior tax year is unreasonable. What steps can the corporation and shareholder- employee take to avoid

> What is a preferred stock bailout? How does Sec. 306 operate to prevent a shareholder from realizing the otherwise available tax benefits of a preferred stock bailout?

> Under what circumstances does a corporation recognize gain or loss when it distributes noncash property in redemption of its stock? What effect does a redemption distribution have on the distributing corporation’s E&P?

> Why does a redemption that qualifies for sale treatment under Sec. 303 usually result in the shareholder’s recognizing little or no gain or loss?

> Abel, the sole shareholder of Ace Corporation, has an opportunity to purchase the assets of a sole proprietorship for $50,000 in cash. Ace has a substantial E&P balance. Abel does not have sufficient cash to personally make the purchase. If Abel obtains

> What conditions must be met for a redemption to be treated as a sale by the redeeming shareholder?

> Field Corporation redeems 100 shares of its stock from Andrew for $10,000. Andrew’s basis in the shares is $8,000. Explain possible alternative tax treatments of Andrew’s receiving the $10,000.

> What is a stock redemption? What are some reasons for redeeming stock? Why are some redemptions treated as sales and others as dividends?

> Several years ago, Brian formed Sigma Corporation, a retail company ineligible for the U.S. production activities deduction. Sigma uses the accrual method of accounting. In 2017, the corporation reported the following items: Gross profit…………………………………………

> Under what circumstances is a corporation’s assumption of liabilities considered boot in a Sec. 351 exchange?

> Maria Garcia is a CPA whose firm has prepared the tax returns of Stanley Corporation for many years. A review of Stanley’s last three tax returns by a new staff accountant, who has been assigned to the client for the first time, reveals that the corporat

> Amy, Beth, and Meg each own 100 of the 300 outstanding shares of Theta Corporation stock. Amy wants to sell her shares, which have a $40,000 basis and a $100,000 FMV. Either Beth and/or Meg can purchase Amy’s shares (50 shares each) or Theta can redeem a

> Mike Barton owns Barton Products, Inc. The corporation has 30 employees. Barton Corporation expects $800,000 of net income before taxes in 2017. Mike is married and files a joint return with his wife, Elaine, who has no earnings of her own. They have one

> Production Corporation owns 70% of Manufacturing Corporation’s common stock and Rita Howard owns the remaining 30%. Each corporation operates and sells its product within the United States, and the corporations engaged in no intercompan

> James Bowen owns 100% of Bowen Corporation stock. Bowen is a calendar year, accrual method taxpayer. During the current year, Bowen made three charitable contributions: Bowen purchased the Bates stock three years ago for $30,000. Bowen holds a 28% inter

> Alice, Bill, and Charles each received an equal number of shares when they formed King Corporation a number of years ago. King has used the cash method of accounting since its inception. Alice, Bill, and Charles, the shareholder-employees, operate King a

> Wicker Corporation made estimated tax payments of $6,000 in Year 1. On March 12 of Year 2, it filed its Year 1 tax return showing a $20,000 tax liability, and it paid the $14,000 balance at that time. On April 20 of Year 2, it discovers an error and file

> In the current year, Alpha Corporation generated $500,000 of ordinary operating income and incurred a $20,000 capital loss on the sale of marketable securities from its investment portfolio. Alpha expects to generate $500,000 of ordinary operating income

> Omega Corporation, a regular C corporation, presents you with the following partial book income statement for the current year: Omega also provides the following partial balance sheet information: You have gathered the following additional information:

> White Corporation’s financial accounting records disclose the following results for the period ending December 31 of the current year: Retained earnings balance on January 1……………………………$246,500 Net income for year…………………………………………………………….259,574 Contingen

> How are a transferor’s basis and holding period determined for stock and other property (boot) received in a Sec. 351 exchange? How does the transferee corporation’s assumption of liabilities affect the transferor’s basis in the stock?

> Omega Corporation reports the following results for the current year: Net income per books (before federal income taxes)……………………………………..$738,000 Federal income tax expense per books…………………………………………………………….(231,540) Net income per books (after federal in

> The following income and expense accounts appeared in the book accounting records of Rocket Corporation, an accrual basis taxpayer, for the current calendar year. The following additional information applies. 1. Dividends were from Star Corporation, a

> Wright Corporation’s taxable income for calendar years 2014, 2015, and 2016 was $120,000, $150,000, and $100,000, respectively. Its total tax liability for 2016 was $22,250. Wright estimates that its 2017 taxable income will be $500,000, on which it will

> Zeta Corporation’s taxable income for 2016 was $1.5 million, on which Zeta paid federal income taxes of $510,000. Zeta estimates calendar year 2017’s taxable income to be $2 million, on which it will owe $680,000 in federal income taxes. a. What are Zet

> Refer to the facts in Problem C:3-54. Marilyn has read an article explaining the advantages of paying nontaxable fringe benefits (premiums on group term life insurance, accident and health insurance, etc.) and having deferred compensation plans (e.g., qu

> Marilyn owns all of Bell Corporation’s stock. Bell is a C corporation and employs 40 people. Marilyn is married, has two dependent children, and files a joint tax return with her husband. She projects that Bell will report $300,000 of

> Sally owns 100% of the outstanding stock of Eta, Theta, Phi, and Gamma Corporations, each of which files a separate return for the current year. During the current year, the corporations report taxable income as follows: Corporation……………………………..Taxable

> Which of the following groups constitute controlled groups? (Any stock not listed below is held by unrelated individuals each owning less than 1% of the outstanding stock.) For brother-sister corporations, which definition applies? a. Judy owns 100% of

> Roper Corporation reports the following results for the current year: Gross profits on sales…………………………………………………..$80,000 Short-term capital gain………………………………………………….40,000 Long-term capital gain………………………………………………….25,000 Dividends from 25%-owned domestic

> Pace Corporation reports the following results for the current year: Gross profit on sales……………………………………………………..$120,000 Long-term capital loss……………………………………………………..10,000 Short-term capital loss……………………………………………………...5,000 Dividends from 40%-owned dome

> Does Sec. 351 apply to property transfers to an existing corporation? Suppose Carl and Lynn each own 50 shares of North Corporation stock. Carl transfers property worth $50,000 to North for an additional 25 shares. Does Sec. 351 apply? Explain why or why

> Alpha Corporation has been in business for two years. It incurred the following items last year (Year 1): Gross profits on sales……………….$240,000 Operating expenses…………………..,100,000 Long-term capital gain………………….8,000 Short-term capital loss…………………12,000

> Western Corporation reports the following results for the current year: Gross profits on sales…………………………………………$150,000 Long-term capital gain…………………………………………..8,000 Long-term capital loss………………………………………….15,000 Short-term capital gain………………………………………..10

> Union Corporation sells a truck for $18,000 to Jane, who owns 70% of its stock. The truck has a $24,000 adjusted basis on the sale date. Jane sells the truck to an unrelated party, Mike, for $28,000 two years later after claiming $5,000 in depreciation.

> Beta Corporation reports the following results for the current year: Gross income from operations……………………………………………………$180,000 Dividends from less-than-20%-owned domestic corporations………100,000 Operating expenses…………………………………………………………………….150,000 Charita

> In 2017, Ace Corporation reports gross income of $200,000 (including $150,000 of profit from its operations and $50,000 in dividends from less-than-20%-owned domestic corporations) and $220,000 of operating expenses. Ace’s 2015 taxable income (all ordina

> Cheers Corporation purchased for $500,000 5,000 shares of Beer Corporation common stock (less than 5% of the outstanding Beer stock) at the beginning of the current year. It used $400,000 of borrowed money and $100,000 of its own cash to make this purcha

> Theta Corporation reports the following results for the current year: Gross profits on sales…………………………………………………………………….$220,000 Dividends from less-than-20%-owned domestic corporations…………..100,000 Operating expenses………………………………………………………………………..218,000

> Omega Corporation reports the following results for the current year: Gross profits on sales……………………………………………………………………$120,000 Dividends from less-than-20%-owned domestic corporations…………..40,000 Operating expenses……………………………………………………………………….100,000 Cha

> Zeta Corporation reports the following results for Year 1 and Year 2: The adjusted taxable income is before Zeta claims any charitable contributions deduction, NOL or capital loss carryback, dividends-received deduction, or U.S. production activities de

> Blue Corporation donates the following property to Johnson Elementary School: XYZ Corporation stock purchased two years ago for $25,000. The stock has a $19,000 FMV on the contribution date. ABC Corporation stock purchased three years ago for $2,000.

> Does Sec. 351 require shareholders to receive stock equal in value to the property transferred? Suppose Fred and Susan each transfer property worth $50,000 to Spade Corporation. In exchange, Fred receives 25 shares of Spade stock and Susan receives 75 sh

> Yellow Corporation donates the following property to the State University: ABC Corporation stock purchased two years ago for $18,000. The stock, which trades on a regional stock exchange, has a $25,000 FMV on the contribution date. Inventory with a $1

> Delta Corporation incorporates on January 7, begins business on July 10, and elects to have its initial tax year end on October 31. Delta incurs the following expenses between January and October related to its organization during the current year: a. W

> Gamma Corporation sold the following property on March 3 of the current year: The corporation used the equipment, building, and land in its business and has held all the property for more than one year. Aside from these transactions, Gamma had $720,000

> Young Corporation purchased residential real estate several years ago for $225,000, of which $25,000 was allocated to the land and $200,000 was allocated to the building. Young took straight-line MACRS deductions of $30,000 during the years it held the p

> In the current year, Kappa Corporation earned $1 million of net income before federal income taxes. This amount of book income includes a $100,000 expense for what the company considers an ordinary and necessary business expense. Kappa also deducted the

> Beta Corporation purchased 100 shares of Gamma Corporation common stock (less than 5% of the outstanding stock) two days before the ex-dividend date for $200,000. Beta receives a $10,000 cash dividend from Gamma. Beta sells the Gamma stock one week after

> Fawn Corporation, a C corporation, paid no dividends and recognized no capital gains or losses in the current year. What is its income tax liability assuming its taxable income for the year is a. $50,000 b. $14,000,000 c. $18,000,000 d. $34,000,000

> What is Beta Corporation’s income tax liability assuming its taxable income is (a) $94,000, (b) $300,000, and (c) $600,000. How would your answers change if Beta were a personal service corporation?

> Value Corporation is a calendar year taxpayer that uses the accrual method of accounting. On December 10 of the current year, Value accrues a bonus payment of $100,000 to Brett, its president and sole shareholder. Brett is a calendar year taxpayer who us

> X-Ray Corporation received a $100,000 dividend from Yancey Corporation this year. X-Ray owns 10% of the Yancey’s single class of stock. What tax issues should X-Ray consider with respect to its dividend income?

> John and Mary each exchange property worth $50,000 for 100 shares of New Corporation stock. Peter exchanges services for 98 shares of New stock and $1,000 in cash for two shares of New stock. Are the Sec. 351 requirements met? Explain why or why not. Wha

> Alice and Bill plan to go into business together. For the first two or three years of operations, they anticipate losses, which they would like to use to offset income from other sources. They also are concerned about exposing their personal assets to bu

> Susan Williams runs a small Flagstaff job shop where garments are made. The job shop employs eight workers. Each worker is paid $10 per hour. During the first week of March, each worker worked 45 hours. Together, they produced a batch of 132 garments. Of