Tim is a real estate broker who specializes in commercial real estate. Although he usually buys and sells on behalf of others, he also maintains a portfolio of property of his own. He holds this property, mainly unimproved land, either as an investment or for sale to others. In early 2015, Irene and Al contact Tim regarding a tract of land located just outside the city limits. Tim bought the property, which is known as the Moore farm, several years ago for $600,000. At that time, no one knew that it was located on a geological fault line. Irene, a well-known architect, and Al, a building contractor, want Tim to join them in developing the property for residential use. They are aware of the fault line but believe that they can circumvent the problem by using newly developed design and construction technology. Because of the geological flaw, however, they regard the Moore farm as being worth only $450,000. Their intent is to organize a corporation to build the housing project, and each party will receive stock commensurate to the property or services contributed. After consulting his tax adviser, Tim agrees to join the venture if certain modifications to the proposed arrangement are made. The transfer of the land would be structured as a sale to the corporation. Instead of receiving stock, Tim would receive a note from the corporation. The note would be interest-bearing and be due in five years. The maturity value of the note would be $450,000—the amount that even Tim concedes is the fair market value of the Moore farm. What income tax consequences ensue from Tim’s suggested approach? Compare this result with what would happen if Tim merely transferred the Moore farm in return for stock in the new corporation.
> If a redemption is treated as a dividend (“nonqualified stock redemption”), what happens to the basis of the stock redeemed?
> A calendar year corporation has substantial accumulated E & P, but it expects to incur a deficit in current E & P for the year due to significant losses in the last half of the year. A cash distribution to its shareholders on January 1 should result in a
> Sheila sells land to Elane, her sister, for the fair market value of $40,000. Six months later when the land is worth $45,000, Elane gives it to Jacob, her son. (No gift tax resulted.) Shortly thereafter, Jacob sells the land for $48,000. a. Assuming tha
> Describe the effect of a distribution in a year when the distributing corporation has any of the following: a. A deficit in accumulated E & P and a positive amount in current E & P. b. A positive amount in accumulated E & P and a deficit in current E & P
> Jimmy Limited added elevators, access ramps, and several technological improvements to the 1923 building in which it operates a consulting business. Jimmy is an LLC with five full-time employees and about $3 million in gross receipts. The improvements we
> Joanne is in the 28% tax bracket and owns depreciable business equipment that she purchased several years ago for $135,000. She has taken $100,000 of depreciation on the equipment, and it is worth $55,000. Joanne’s niece, Susan, is starting a new busines
> In determining Blue Corporation’s current E & P for 2017, how should taxable income be adjusted as a result of the following transactions? a. A capital loss carryover from 2016, fully used in 2017. b. Nondeductible meal expenses in 2017. c. Interest on m
> Angie and her daughter, Ann, who are the only shareholders of Bluebird Corporation, each paid $100,000 four years ago for their shares in Bluebird. Angie also owns 20% of the stock in Redbird Corporation. The Redbird stock is worth $500,000, and Angie’s
> Explain the requirements for a redemption to pay death taxes. What are the tax consequences of a redemption to pay death taxes for the shareholder and the corporation?
> Tammy and Barry formed Pheasant Corporation several years ago in a transaction that qualified under § 351. Both shareholders serve as officers and on the board of directors of Pheasant. In the current year, Pheasant Corporation redeemed all of Barry’s sh
> Briefly discuss the requirements for a redemption to qualify as a not essentially equivalent redemption.
> Do the stock attribution rules apply to all stock redemptions? Explain.
> What is the significance of the term material participation? Why is the extent of a taxpayer’s participation in an activity important in determining whether a loss from the activity is deductible or nondeductible?
> Chao, Louis, and Mari, unrelated individuals, own all of the shares of Cerise Corporation. All three shareholders have been active in the management of Cerise since its inception. In the current year, Chao wants to retire and sell all of her shares in th
> Helene and Pauline are twin sisters who live in Louisiana and Mississippi, respectively. Helene is married to Frank, and Pauline is married to Richard. Frank and Richard are killed in an auto accident in 2017 while returning from a sporting event. Helene
> Pink Corporation has several employees. Their names and salaries are listed below. Judy…………………………………………………$470,000 Holly (Judy’s daughter)……………………….100,000 Terry (Judy’s son)……………………………….100,000 John (an unrelated third party)……………320,000 Holly and Ter
> On January 1, 2008, Stephanie Bridges acquired depreciable real property for $50,000. She used straight-line depreciation to compute the asset’s cost recovery. The asset was sold for $96,000 on January 3, 2017, when its adjusted basis was $38,000. a. Wha
> Whether compensation paid to a corporate employee is reasonable is a question of fact to be determined from the surrounding circumstances. How would the resolution of this problem be affected by each of the following factors? a. The employee owns no stoc
> Cooper National is incorporated in Alabama. It generated a $5 million profit on its overseas operations this year. Cooper paid the following to various other countries. • $1 million in income taxes. • $1.5 million in value added taxes. What are Cooper’s
> Samantha is the president and sole shareholder of Toucan Corporation. She is paid an annual salary of $500,000, while her son, Aaron, the company’s chief financial officer, is paid a salary of $290,000. Aaron works for Toucan on a part-time basis and spe
> Tangerine Corporation is considering a property distribution to its shareholders. \If appreciated property is to be used, does it matter to Tangerine whether \the property distributed is a long-term capital asset or property subject to depreciation \reca
> Raven Corporation owns three machines that it uses in its business. It no longer needs two of these machines and is considering distributing them to its two shareholders as a property dividend. All three machines have a fair market value of $20,000 each.
> Ochre Corporation’s board of directors decides to distribute property to its shareholders rather than pay a cash dividend. Why might Ochre’s board make this decision?
> Assume the same facts as in Question 5, except that noncash property is distributed. What factors must be considered when determining how the distribution is treated for tax purposes by Orange Corporation?
> Orange Corporation distributes $200,000 in cash to each of its three shareholders: Sandy, Byron, and Fuchsia Corporation. What factors must be considered when determining how the distribution is treated for tax purposes by the shareholders?
> Discuss the rationale for the reduced tax rates on dividends paid to individuals.
> Dan bought a hotel for $2,600,000 in January 2013. In May 2017, he died and left the hotel to Ed. While Dan owned the hotel, he deducted $289,000 of cost recovery. The fair market value in May 2017 was $2,800,000. The fair market value six months later w
> Larry is the sole proprietor of a trampoline shop. During 2017, the following transactions occurred: • Unimproved land adjacent to the store was condemned by the city on February 1. The condemnation proceeds were $15,000. The land, acquired in 1986, had
> Review Examples 49 and 51 in the text. In both examples, the taxpayer’s AGI is $129,400 even though in Example 51 there is $700 of nonrecaptured § 1231 loss from 2016. Explain why the two AGI amounts are the same.
> Lucy sells her partnership interest, a passive activity, with an adjusted basis of $305,000 for $330,000. In addition, she has current and suspended losses of $28,000 associated with the partnership and has no other passive activities. Calculate Lucy’s t
> Derk owns 250 shares of stock in Rose Corporation. The remaining 750 shares of Rose are owned as follows: 150 by Derk’s daughter, 200 by Derk’s aunt, and 400 by a partnership in which Derk has an 80% interest. Determine the number of shares Derk owns (di
> Caramel Corporation has 5,000 shares of stock outstanding. In a qualifying stock redemption, Caramel distributes $145,000 in exchange for 1,000 of its shares. At the time of the redemption, Caramel has paid-in capital of $800,000 and E & P of $300,000. C
> Which of the following individuals qualify for the earned income credit? a. Thomas is single, 21 years old, with no qualifying children. His income consists of $9,000 in wages. b. Shannon, who is 27 years old, maintains a household for a dependent 11-yea
> Robin Corporation would like to transfer excess cash to its sole shareholder, Adam, who is also an employee. Adam is in the 28% tax bracket, and Robin is in the 34% bracket. Because Adam’s contribution to the business is substantial, Robin believes that
> On January 1 of the current year, Rhondell Corporation has accumulated E & P of $13,000. Current E & P for the year is $84,000, earned evenly throughout the year. Elizabeth and Jonathan are sole equal shareholders of Rhondell from January 1 to Ap
> At the beginning of the year, Myrna Corporation (a calendar year taxpayer) has E & P of $32,000. The corporation generates no additional E & P during the year. On December 31, the corporation distributes $50,000 to its sole shareholder, Abby, whose stock
> Rosalie owns 50% of the outstanding stock of Salmon Corporation. In a qualifying stock redemption, Salmon distributes $80,000 to Rosalie in exchange for one-half of her shares, which have a basis of $100,000. Compute Rosalie’s recognized loss, if any, on
> During the current year, Gnatcatcher, Inc., (E & P of $1 million) distributed $200,000 each to Brandi and Yuen in redemption of some of their Gnatcatcher stock. The two shareholders acquired their shares five years ago. Each shareholder is in the 33% tax
> What are the tax consequences to Euclid from the following independent events? a. Euclid bought 500 shares of common stock five years ago for $50,000. This year, Euclid receives 20 shares of common stock as a nontaxable stock dividend. What is Euclid’s b
> Beth R. Jordan lives at 2322 Skyview Road, Mesa, AZ 85201. She is a tax accountant with Mesa Manufacturing Company, 1203 Western Avenue, Mesa, AZ 85201 (employer identification number 11-1111111). She also writes computer software programs for tax practi
> In late 2016, Randy and Rachel Erwin paid $7,000 in legal fees, adoption fees, and other expenses directly related to the adoption of an infant son, Jameson. The adoption becomes final in 2017, and the Erwins then pay an additional $8,000 in adoption fee
> Deerwood Corporation lends its principal shareholder, Lafayette, $500,000 on July 1 of the current year. The loan is interest-free and payable on demand. On December 31, the imputed interest rules are applied. Assume that the Federal rate is 3%, compound
> Quinlan has ample E & P to cover any distributions made during the year. One distribution made to a shareholder consists of a property with an adjusted basis of $150,000 and a fair market value of $90,000. What are the tax consequences of this distributi
> In the current year, Ed invests $30,000 in an oil partnership. He has taxable income for the current year of $2,000 from the oil partnership and withdraws $10,000. What is Ed’s at-risk amount at the end of the year?
> Global Corporation distributed property with an $850,000 fair market value and a $415,000 adjusted basis to one of its shareholders. The property was subject to a $230,000 mortgage, which the shareholder assumed. Global has ample E & P to cover any distr
> Ahmed Zinna (16 Southside Drive, Charlotte, NC 28204), one of your clients, owns two retail establishments in downtown Charlotte and has come to you seeking advice concerning the tax consequences of complying with the Americans with Disabilities Act. He
> Ash, Inc., a closely held personal service corporation, has $100,000 of passive activity losses. In addition, Ash has $80,000 of active business income and $20,000 of portfolio income. How much of the passive activity loss may Ash use to offset the other
> Lynn Jones, Shawn, Walt, and Donna are trying to decide whether they should organize a corporation and transfer their shares of stock in several corporations to this new corporation. All of their shares are listed on the New York Stock Exchange and are r
> Sarah is the sole owner of Bluegrass Corporation. The basis and value of her stock investment in Bluegrass are approximately $100,000. In addition, she manages Bluegrass’s operations on a full-time basis and pays herself an annual salary of $40,000. Beca
> On May 2, 1987, Hannah Weather (Social Security Number: 111-22-3333) acquired residential real estate for $450,000. Of the cost, $100,000 was allocated to the land and $350,000 to the building. On August 20, 2016, the building, which then had an adjusted
> Assume in Problem 36 that Jane receives the 50 shares of Osprey Corporation stock in consideration for the appreciated property and for the provision of accounting services in organizing the corporation. The value of Jane’s services is $35,000. a. What g
> As sole heir, Dazie receives all of Mary’s property (adjusted basis of $1,400,000 and fair market value of $3,820,000). Six months after Mary’s death in 2017, the fair market value is $3,835,000. a. Can the executor of Mary’s estate elect the alternate v
> Rhonda owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel, have decided that additional contributions of capital are needed if Peach is to remain successful in its competitive industry. The two shareholders have agreed
> Ann and Bob form Robin Corporation. Ann transfers property worth $420,000 (basis of $150,000) for 70 shares in Robin Corporation. Bob receives 30 shares for property worth $165,000 (basis of $30,000) and for legal services (worth $15,000) in organizing t
> John organized Toucan Corporation 10 years ago. He contributed property worth $1 million (basis of $200,000) for 2,000 shares of stock in Toucan (representing 100% ownership). John later gave each of his children, Julie and Rachel, 500 shares of the stoc
> Michael Kennedy (1635 Maple Street, Syracuse, NY 13201) exchanges property (basis of $200,000 and fair market value of $850,000) for 75% of the stock of Red Corporation. The other 25% is owned by Sarah Mitchell, who acquired her stock several years ago.
> Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exch
> Troy’s financial records for the year reflect the following: Interest income from bank savings account………………..$ 900 Taxable annuity receipts……………………………………………….1,800 City ad valorem property tax on investments…………………125 Investment interest expense…………………
> Tom, a calendar year taxpayer, informs you that during the year, he incurs expenditures of $40,000 that qualify for the incremental research activities credit. In addition, Tom’s research-credit base amount for the year is $32,800. a. Determine Tom’s inc
> Tom and Gail form Owl Corporation with the following consideration: The installment note has a face amount of $350,000 and was acquired last year from the sale of land held for investment purposes (adjusted basis of $240,000). As to these transactions,
> On June 1, 2013, Skylark Enterprises (not a corporation) acquired a retail store building for $500,000 (with $100,000 being allocated to the land). The store building was 39-year real property, and the straight-line cost recovery method was used. The pro
> Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration: Assume that the value of each share of Kingfisher stock is $3,000. As to these transactions, provide the following information: a. Seth’s recogniz
> Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The corporation’s assets have a tax basis of $50,000 and a fair market value of $600,000. In the current year, Frank and Cora each loan Purple Corporation $150,000. The notes to Frank a
> Ira Cook is planning to make a charitable contribution to the Boy Scouts of Crystal, Inc. stock worth $20,000. The stock has an adjusted basis of $15,000. A friend has suggested that Ira sell the stock and contribute the $20,000 in proceeds rather than c
> Gigi transfers real estate (basis of $60,000 and fair market value of $40,000) to Monarch Corporation in exchange for shares of § 1244 stock. (Assume that the transfer qualifies under § 351.) a. What is the basis of the stock to Gigi? (Gigi and Monarch d
> Three years ago and at a cost of $40,000, Paul Sanders acquired stock in a corporation that qualified as a small business corporation under § 1244. A few months after he acquired the stock, when it was still worth $40,000, he gave it to his brother, Mike
> Sam Upchurch, a single taxpayer, acquired stock in Hummer Corporation that qualified as a small business corporation under § 1244 at a cost of $100,000 three years ago. He sells the stock for $10,000 in the current tax year. a. How will the loss be treat
> Stock in Jaybird Corporation (555 Industry Lane, Pueblo, CO 81001) is held equally by Vera, Wade, and Wes. Jaybird seeks additional capital in the amount of $900,000 to construct a building. Vera, Wade, and Wes each propose to lend Jaybird Corporation $3
> Emily Patrick (36 Paradise Road, Northampton, MA 01060) formed Teal Corporation a number of years ago with an investment of $200,000 cash, for which she received $20,000 in stock and $180,000 in bonds bearing interest of 8% and maturing in nine years. Se
> Red Corporation wants to set up a manufacturing facility in a midwestern state. After considerable negotiations with a small town in Ohio, Red accepts the following offer: land (fair market value of $3 million) and cash of $1 million. a. How much gain or
> Alice and Jane form Osprey Corporation. Alice transfers property, basis of $25,000 and value of $200,000, for 50 shares in Osprey Corporation. Jane transfers property, basis of $50,000 and value of $165,000, and agrees to serve as manager of Osprey for o
> On December 1, 2015, Lavender Manufacturing Company (a corporation) purchased another company’s assets, including a patent. The patent was used in Lavender’s manufacturing operations; $49,500 was allocated to the patent, and it was amortized at the rate
> Green Corporation hires six individuals on January 4, 2017, all of whom qualify for the work opportunity credit. Three of these individuals receive wages of $8,500 during 2017, and each individual works more than 400 hours during the year. The other thre
> Rose dies with passive activity property having an adjusted basis of $65,000, suspended losses of $13,000, and a fair market value at the date of her death of $90,000. Of the $13,000 suspended loss existing at the time of Rose’s death, how much is deduct
> Rafael transfers the following assets to Crane Corporation in exchange for all of its stock. (Assume that neither Rafael nor Crane plans to make any special tax elections at the time of incorporation.) a. What is Rafael’s recognized g
> On September 18, 2017, Gerald received land and a building from Frank as a gift. Frank’s adjusted basis and the fair market value at the date of the gift are as follows: No gift tax was paid on the transfer. a. Determine Geraldâ
> Allie forms Broadbill Corporation by transferring land (basis of $125,000, fair market value of $775,000), which is subject to a mortgage of $375,000. One month prior to incorporating Broadbill, Allie borrows $100,000 for personal reasons and gives the l
> Cynthia, a sole proprietor, was engaged in a service business and reported her income on the cash basis. In February of the current year, she incorporates her business as Dove Corporation and transfers the assets of the business to the corporation in ret
> What does “property” include for purposes of § 351?
> Katie, a single taxpayer, invested $75,000 in the stock of Penguin Corporation, which recently declared bankruptcy. Although distressed over the loss of her investment, Katie is relieved that she can claim a $75,000 ordinary (rather than capital) loss de
> In a § 351 transfer, Grebe Corporation receives property in exchange for stock. Will Grebe’s holding period for the property be the same as the shareholder’s holding period for the stock? Explain.
> How does the transfer of mortgaged property to a controlled corporation affect the transferor-shareholder’s basis in stock received? Assume that no gain is recognized on the transfer.
> Copper Industries (a sole proprietorship) sold three § 1231 assets during 2017. Data on these property dispositions are as follows: a. Determine the amount and the character of the recognized gain or loss from the disposition of each asset.
> Four friends plan to form a corporation for purposes of constructing a shopping center. Charlie will be contributing the land for the project and wants more security than shareholder status provides. He is contemplating two possibilities: receive corpora
> Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.” Nancy formed the business several years ago as a sole proprietorship, and it has been very successful. Assets currently have a fair market value of $450,0
> Paul Chaing (4522 Fargo Street, Geneva, IL 60134) acquires a qualifying historic structure for $350,000 (excluding the cost of the land) and plans to substantially rehabilitate the structure. He is planning to spend either $320,000 or $380,000 on rehabil
> What is the control requirement of § 351? Describe the effect of the following in satisfying this requirement: a. A shareholder renders only services to the corporation for stock. b. A shareholder renders services and transfers property to the corporatio
> Margo receives a gift of real estate with an adjusted basis of $175,000 and a fair market value of $100,000. The donor paid gift tax of $15,000 on the transfer. If Margo later sells the property for $110,000, what is her recognized gain or loss?
> Noah, who has $62,000 of AGI before considering rental activities, has $70,000 of losses from a real estate rental activity in which he actively participates. He also actively participates in another real estate rental activity from which he has $33,000
> Does the receipt of securities in exchange for the transfer of appreciated property to a controlled corporation cause recognition of gain? Explain.
> Can gain ever be recognized in a § 351 transfer if boot is not received? Explain.
> Under what circumstances will gain and/or loss be recognized on a § 351 transfer?
> In terms of justification and effect, § 351 (transfers to a controlled corporation) and § 1031 (like-kind exchanges) are much alike. Explain.
> Albert owns 100 acres of land on which he grows spruce Christmas trees. His \adjusted basis for the land is $100,000. He receives condemnation proceeds \of $10,000 when the city’s new beltway takes 5 acres along the eastern boundary of \his property. He
> Sarah incorporates her small business but does not transfer the machinery and equipment the business uses to the corporation. Subsequently, the machinery and equipment are leased to the corporation for an annual rent. What tax reasons might Sarah have fo
> Keith’s sole proprietorship holds assets that, if sold, would yield a gain of $100,000. It also owns assets that would yield a loss of $30,000. Keith incorporates his business using only the gain assets. Two days later, Keith sells the loss assets to the
> Under what circumstances, if any, may a shareholder deduct a business bad debt on a loan made to the corporation?
> In structuring the capitalization of a corporation, what are the advantages and disadvantages of utilizing debt rather than equity?
> Barbara incurred the following expenses during the year: $840 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $240 for multiple vitamins and antioxidant vitamins, $500 for a smoking cessation
> The Wilmoths plan to purchase a house but want to determine the after-tax cost of financing its purchase. Given their projected taxable income, the Wilmoths are in the 28% Federal income tax bracket and the 8% state income tax bracket (i.e., an aggregate
