Lonnie Davis has been a general partner in the Highland Partnership for many years and is also a sole proprietor in a separate business. To spend more time focusing on his sole proprietorship, he plans to leave Highland and will receive a liquidating distribution of $50,000 in cash and land with a fair market value of $100,000 (tax basis of $120,000). Immediately before the distribution, Lonnie’s basis in his partnership interest is $350,000, which includes his $50,000 share of partnership debt. The Highland Partnership does not hold any hot assets. a. What is the amount and character of any gain or loss to Lonnie? b. What is Lonnie’s basis in the land? c. What is the amount and character of Lonnie’s gain or loss if he holds the land for 13 months as investment property and then sells it for $100,000? d. What is the amount and character of Lonnie’s gain or loss if he places the land into service in his sole proprietorship and then sells it 13 months later for $100,000? e. Do your answers to parts (c) and (d) above suggest a course of action that would help Lonnie to achieve a more favorable tax outcome?
> Barry Potter and Winnie Weasley are considering making an S election on March 1, 2017, for their C corporation, Omniocular. However, first they want to consider the implications of the following information: • Winnie is a U.S. citizen and resident. • Bar
> Knowshon, sole owner of Moreno Inc., is contemplating electing S status for the corporation (Moreno, Inc. is currently taxed as a C corporation). Provide recommendations related to Knowshon’s election under the following alternative scenarios: a. At the
> How do S corporations report dividends they receive? Are they entitled to a dividends received deduction? Why or why not?
> Until the end of year 0, Magic Carpets (MC) was a C corporation with a calendar year. At the beginning of year 1 it elected to be taxed as an S corporation. MC uses the LIFO method to value its inventory. At the end of year 0, under the LIFO method, its
> If a partner’s outside basis is less than the partnership’s inside basis in distributed assets, how does the partner determine his basis of the distributed assets in an operating distribution?
> Farve Inc. recently elected S corporation status. At the time of the election, the company had $10,000 of accumulated earnings and profits, and a net unrealized gain of $1,000,000 associated with land it had invested in (although some parcels had an unre
> Why must an S corporation report separately stated items to its shareholders? How is the character of a separately stated item determined? How does the S corporation report this information to each shareholder?
> Can a partnership have unrealized receivables if it has no accounts receivable?
> On June 1, year 1, Jasper Corporation’s Selection was involuntarily terminated. What is the earliest Jasper may be taxed as an S corporation again? Are there any exceptions to the general rule? Explain.
> Compare and contrast S corporations, C corporations, and partnerships in terms of tax consequences at formation, shareholder restrictions, income allocation, basis calculations, compensation to owners, taxation of distributions, and accounting periods.
> On what form does an S corporation report its income to the IRS? When is the tax return due? What information does the S corporation provide to shareholders to allow them to complete their tax returns?
> Is the LIFO recapture tax a C corporation tax or an S corporation tax? Explain.
> When is an S corporation required to pay the excess net passive income tax?
> How are the tax consequences of a cash distribution different from those of a non-cash property distribution to both the corporation and the shareholders?
> When is an S corporation required to pay a built-in gains tax?
> How do the tax consequences of S corporation liquidating distributions differ from the tax consequences of S corporation operating distributions at both the corporate and shareholder levels?
> Compare and contrast the method of allocating income or loss to owners for partnerships and for S corporations.
> Under what circumstances could a corporation with earnings and profits make a tax-free distribution to its shareholders after the S election termination?
> If an S corporation with accumulated E&P makes a distribution, from what accounts (and in what order) is the distribution deemed to be paid from?
> What does the accumulated adjustments account represent? How is it adjusted year by year? Can it have a negative balance?
> Karen is the sole shareholder of a calendar year-end C corporation she formed last year. If she elects S corporation status this year on February 20, when will the election become effective and why? What if she had made the election on March 20?
> How does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?
> When considering C corporations, the IRS checks to see whether salaries paid are too large. In S corporations, however, it usually must verify that salaries are large enough. Account for this difference.
> How does a shareholder create debt basis in an S corporation? How is debt basis similar and dissimilar to stock basis?
> What restrictions might prevent a partner from selling his partnership interest to a third party?
> Is a shareholder allowed to increase her basis in her S corporation stock by her share of the corporation’s liabilities, as partners are able to increase the basis of their ownership interest by their share of partnership liabilities? Explain.
> Describe the three hurdles a taxpayer must pass if he wants to deduct a loss from his share in an S corporation.
> Can a shareholder’s basis in S corporation stock ever be adjusted to a negative number? Why or why not?
> Describe a situation in which a former C corporation that elected to be taxed as an S corporation may have its Selection automatically terminated, but a similarly situated corporation that has always been taxed as an S corporation would not.
> What adjustments are made annually to a shareholder’s basis in S corporate stock and in what order? What impact do these adjustments have on a subsequent sale of stock?
> Shawn receives stock in an S corporation when it is formed by contributing land with a tax basis of $50,000 and encumbered by a $20,000 mortgage. What is Shawn’s initial basis in his S corporation stock?
> Carrie D’Lake, Reed A. Green, and Doug A. Divot share a passion for golf and decide to go into the golf club manufacturing business together. On January 2, 2016, D’Lake, Green, and Divot form the Slicenhook Partnership
> Paolo is a 50% partner in the Capri Partnership and has decided to terminate his partnership interest. Paolo is considering two options as potential exit strategies. The first is to sell his partnership interest to the two remaining 25% partners, Giusepp
> What are “hot assets” and why are they important in the sale of a partnership interest?
> Simon is a 30% partner in the SBD Partnership, a calendar-year-end entity. As of the end of this year, Simon has an outside basis in his interest in SBD of $188,000, which includes his share of the $60,000 of partnership liabilities. On December 31, SBD
> Are special basis adjustments mandatory? If so, when?
> Helen’s basis in Haywood Partnership is $270,000. Haywood distributes all the land to Helen in complete liquidation of her partnership interest. The partnership reports the following balance sheet just before the distribution: a. What i
> Erin’s basis in her Kiybron Partnership interest is $3,300. Erin receives a distribution of $2,200 cash from Kiybron in complete liquidation of her interest. Kiybron is an equal partnership with the following balance sheet: a. What is t
> Cliff’s basis in his Aero Partnership interest is $11,000. Cliff receives a distribution of $22,000 cash from Aero in complete liquidation of his interest. Aero is an equal partnership with the following balance sheet: a. What is the am
> Michelle pays $120,000 cash for Brittany’s one-third interest in the Westlake Partnership. Just prior to the sale, Brittany’s basis in Westlake is $96,000. Westlake reports the following balance sheet: a. What is the a
> Under what circumstances will a partner recognize a gain from an operating distribution?
> Bella Partnership is an equal partnership in which each of the partners has a basis in his partnership interest of $10,000. Bella reports the following balance sheet: a. Identify the “hot assets” if Toby decides to sel
> Danner Inc. has a $395,000 capital loss carryover that will expire at the end of the current tax year if it is not used. Also, Danner Inc. has been a general partner in the Talisman Partnership for three years and plans to end its involvement with the pa
> Bryce’s basis in the Markit Partnership is $58,000. In a proportionate liquidating distribution, Bryce receives the following assets: a. How much gain or loss will Bryce recognize on the distribution? What is the character of any recogn
> Megan and Matthew are equal partners in the J & J Partnership (calendar-year-end entity). On January 1 of the current year, they decide to liquidate the partnership. Megan’s basis in her partnership interest is $100,000 and Matthew’s is $35,000. The two
> David’s basis in the Jimsoo Partnership is $53,000. In a proportionate liquidating distribution, David receives cash of $7,000 and two capital assets: (1) land 1 with a fair market value of $20,000 and a basis to Jimsoo of $16,000 and (2) land 2 with a f
> When might a new partner have an upward basis adjustment following the acquisition of a partnership interest?
> Super Corp. was organized under the laws of the state of Montana. It issued common voting stock and common nonvoting stock to its two shareholders. Is Super Corp. eligible to elect S corporation status? Why or why not?
> AJ is a 30% partner in the Trane Partnership, a calendar-year-end entity. On January 1, AJ has an outside basis in his interest in Trane of $73,000, which includes his share of the $50,000 of partnership liabilities. Trane generates $42,000 of income dur
> Melissa, Nicole, and Ben are equal partners in the Opto Partnership (calendar year-end). Melissa decides she wants to exit the partnership and receives a proportionate distribution to liquidate her partnership interest on January 1. The partnership has n
> The Taurin Partnership (calendar-year-end) has the following assets as of December 31 of the current year: On December 31, Taurin distributes $15,000 of cash, $10,000 (FMV) of accounts receivable, and $40,000 (FMV) of inventory to Emma (a 1/3 partner) in
> When a corporation’s Selection is terminated mid-year, what options does the corporation have for allocating the annual income between the S corporation short year and the C corporation short year?
> Rufus is a one-quarter partner in the Adventure Partnership. On January 1 of the current year, Adventure distributes $13,000 cash to Rufus in complete liquidation of his interest. Adventure has only capital assets and no liabilities at the date of the di
> Two years ago, Kimberly became a 30 percent partner in the KST Partnership with a contribution of investment land with a $10,000 basis and $16,000 fair market value. On January 2 of this year, Kimberly has a $15,000 basis in her partnership interest and
> Pam has a $27,000 basis (including her share of debt) in her 50% partnership interest in the Meddoc partnership before receiving any distributions. This year Meddoc makes a current distribution to Pam of a parcel of land with a $40,000 fair market value
> Karen has a $68,000 basis in her 50% partnership interest in the KD Partnership before receiving a current distribution of $6,000 cash and land with a fair market value of $35,000 and a basis to the partnership of $18,000. a. What is the amount and char
> Describe the circumstances in which an S election may be involuntarily terminated.
> Adam and Alyssa are equal partners in the PartiPilo Partnership. The partners formed the partnership three years ago by contributing cash. Prior to any distributions, the partners have the following bases in their partnership interests: Partner …………………
> Justin and Lauren are equal partners in the PJenn Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners have the following bases in their partnership interests: Partner...........
> Explain how a partner’s debt relief affects his amount realized in a sale of partnership interest.
> Coy and Matt are equal partners in the Matcoy Partnership. Each partner has a basis in his partnership interest of $28,000 at the end of the current year, prior to any distribution. On December 31, they each receive an operating distribution. Coy receive
> Newton is a one-third owner of ProRite Partnership. Newton has decided to sell his interest in the business to Betty for $50,000 cash plus the assumption of his share of ProRite’s liabilities. Assume Newton’s inside an
> Travis and Alix Weber are equal partners in the Tralix Partnership, which does not have a §754 election in place. Alix sells one-half of her interest (25%) to Michael Tomei for $30,000 cash. Just before the sale, Alix’s basi
> Generally, a selling partner’s capital account carries over to the purchaser of the partnership interest. Under what circumstances will this not be the case?
> Franklin, Jefferson, and Washington formed the Independence Partnership (a calendar-year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership. Franklin, Jefferson, and Washington each have an outside basis
> Marco, Jaclyn, and Carrie formed Daxing Partnership (a calendar year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership. Marco, Jaclyn, and Carrie each have an outside basis in his/her partnership intere
> At the end of last year, Lisa, a 35% partner in the five-person LAMEC Partnership, has an outside basis of $60,000 including her $30,000 share of LAMEC debt. On January 1 of the current year, Lisa sells her partnership interest to MaryLynn for a cash pay
> Explain why a partnership might not want to make a §754 election to allow special basis adjustments.
> In general terms, how are C corporations different from and similar to S corporations?
> Rex and Felix are the sole shareholders of the Dogs and Cats Corporation (DCC). After several years of operations using the accrual method, they decided to liquidate the corporation and operate the business as a partnership. Rex and Felix hired a lawyer
> This year Sooner Company reports current E&P of negative $300,000. Its accumulated E&P at the beginning of the year was $200,000. Sooner distributed $400,000 to its sole shareholder, Boomer Wells, on June 30 of this year. Boomer’s tax basis in his Sooner
> Jayhawk Company reports current E&P of $300,000 and accumulated E&P of negative $200,000. Jayhawk distributed $400,000 to its sole shareholder, Christine Rock, on the last day of the year. Christine’s tax basis in her Jayhawk stock is $75,000. a. How mu
> Aggie Corporation made a distribution of $500,000 to Rusty Cedar in partial liquidation of the company on December 31 of this year. Rusty, an individual, owns 100% of Aggie Corporation. The distribution was in exchange for 50% of Rusty’s stock in the com
> Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $3,000, and Clyde owns the remaining 40 shares with a basis of $12,000. At year end, Getaway is considering different alternatives for redeeming
> Cadillac Square Corporation determined that $1,000,000 of its domestic production activities deduction on its current year tax return was uncertain, but that it was more likely than not to be sustained on audit. Management made the following assessment o
> Spartan Corporation redeemed 25% of its shares for $2,000 on July 1 of this year, in a transaction that qualified as an exchange under §302(a). Spartan’s accumulated E&P at the beginning of the year was $2,000. Its current E&P is $12,000. Spartan made di
> EG Corporation redeemed 200 shares of stock from one of its shareholders in exchange for $200,000. The redemption represented 20% of the corporation’s outstanding stock. The redemption was treated as an exchange by the shareholder. By what amount does EG
> Shaw Corporation reported pretax book income of $1,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $50,000, and favorable permanent differences of $100,000. Assuming a tax rate o
> Oriole Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: Larry Byrd…………………………………………………………………………………………..400 Paul Byrd (Larry’s so
> Your client, Midwest Products, Inc. (MPI), is a closely-held, calendar-year, accrual-basis corporation located in Fowlerville, Michigan. MPI has two operating divisions. One division manufactures lawn and garden furniture and decorative objects (furnitur
> Cougar Company is owned equally by Cat Stevens and a partnership that is owned equally by his father and two unrelated individuals. Cat and the partnership each own 3,000 shares in the company. Cat wants to reduce his ownership in the company, and it is
> 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
