Tax II - Exam #2

What section is "organizational expenditures" located in?

248

carried back 5 years

CARES allows NOLs from 2018-20 to be ________ _______ ______ _______ with no limit

- Nonbusiness income, gain, deduction or loss - Business interest or business interest income - NOL deduction - Deduction for QBI - Deduction allowable for depreciation, amortization, or depletion

Computation relative to "adjusted taxable income" (ATI) except (5):

nonshareholders

Contributions by _________________ are included in the corporation's gross income

tangible personal property

Corporation may only deduct basis if _______ ________ _______ is contributed and not used by charity in its exempt function

dividends; not deductible

Corporation pays __________ which are ______ _________

True

Section 351 deals with transfers to controlled corporations. (T/F)

False

Section 351 is elective if a transaction satisfies the provision's requirements. (T/F)

True

Section 351 provides that gain or loss is not recognized upon the transfer of property to a corporation when certain conditions are met. (T/F)

Includes holding period of property transferred to corporation (tack on concept) *all other property begins on day after exchange

The holding period for stock received for 1231 property or capital assets... *All other property?

10%

Transferors who provide service and property can be included in the control group. However, the IRS states that the contributed value of property must be ____ or more of the value of the services

Emily transfers her $2,000,000 of property to Transformation, Inc., and receives 200 shares of stock, and Ethan transfers $48,000,000 of cash for 4,800 shares of stock. In the same transaction, Marco transfers property worth $800,000 (basis of $260,000) and agrees to serve as manager of the corporation for one year (services worth $200,000) for 100 shares of the stock. Emily's, Ethan's, and Marco's transfers qualify under § 351. None of them is taxed on their property transfers. However, Marco has income of $200,000, the value of the stock received for the services he will render to Transformation, Inc. What is Marco's stock basis?

Transformation has a basis of $260,000 in the property it acquired from Marco, and it may claim a compensation expense deduction under § 162 for $200,000. Marco's stock basis is $460,000 [$260,000 (basis of property transferred) + $200,000 (income recognized for services rendered)].

How is "control" defined in the IRC Section 368?

ownership of stock possessing at least 80% of the total combined voting power and at least 80% control of the total number of shares of all other classes of stock of the corporation

Thinly capitalized

when a corporation has too much debt and too little equity

- Cash - Secret processes and formulas - Unrealized A/R (for cash basis) - Installment obligations

Property includes the following (4):

Boot

An exception to IRC Section 351 that would cause an transferor to recognize gain is when ________ is received

Ruby Corporation donates a sculpture held as an investment and worth $130,000 to a local museum (a qualified organization), which exhibits the sculpture. Ruby acquired the sculpture four years ago for $55,000. Compute the charitable contribution deduction.

$130,000 *Tangible personal property (TPP) which is sold and used in its intended function, by default, will have FMV as its basis

Amber Corporation donated inventory of clothing (basis of $24,000, fair market value of $30,000) to a qualified charitable organization that operates homeless shelters. Compute the charitable contribution deduction.

$27,000 *$30,000 FMV - $24,000 Basis = $6,000 appreciation $24,000 Basis + ($6,000 * 50%) = $27,000 $24,000 Basis * 2 = $48,000 Since $27,000 is lesser than $48,000, it will be deemed the charitable contribution deduction

Brass Corporation donated stock held as an investment to Western College (a qualified organization). Brass acquired the stock three years ago for $18,000, and the fair market value on the date of the contribution is $32,000. Western College plans on selling the stock. Compute the charitable contribution deduction.

$32,000 *The basis of LTCG property, by default, will be its FMV

Kesha and Ned form Brown Corporation. Kesha transfers land (basis of $30,000 and fair market value of $70,000); Ned invests cash ($60,000). They each receive 50 shares in Brown Corporation worth $60,000, but Kesha also receives $10,000 in cash from Brown. Calculate the shareholder's and corporation's basis.

- Boot: Amt. Realized: $70,000 Less: Basis (30,000) Realized gain: $40,000 Boot received: $10,000 *Recognized gain is $10,000 (Lesser b/t boot received and realized gain) - Shareholder's basis: Adj. Basis of property transferred: $30,000 Add: Gain recognized: $10,000 Less: Boot received (10,000) Equal: Basis in stock $30,000 *Shareholder's basis is $30,000 (Kesha) - Corp's basis: Adj. Basis of property transferred: $30,000 Add: Gain recognized by S/H: $10,000 Equal: Basis in property $40,000 * Corp's basis is $40,000

Goyo Corporation, a calendar year taxpayer, incurs a long-term net capital loss of $12,000 for 2021. It has ordinary income of $10,000 in 2021. Goyo had long-term capital gains of $2,500 in 2018 and $5,000 in 2020. As a result, Goyo may deduct $____ of the net long-term capital loss in 2021. Goyo may carryback and use $______ of the losses. In addition, Goyo has a ______-______ carryover of $________ to 2022.

0; 7500; short-term; 4500

Wren Corp incurs $53,000 of organizational costs on April 1, 2021. What is the total deduction for 2021?

1) (5000 - (53000 - 50000)) = 2000 * Wren can expense $2000 of this amount 2) 53000 - 2000 = 51000 * The $51000 balance is amortized over 180-month period, then multiplied by the number of months remaining in the year in order to compute the current year's deduction 3) 51000 * (9/180) = 2550 4) Total deduction for 2021: 2550 + 2000 = 4550

Gull Corporation, a cash method, calendar year C corporation, was formed and began business on November 1, 2019. Gull incurred the following expenses during its first year of operations (November 1, 2019-December 31, 2019): Expenses of temporary directors and organizational meetings $21,000 Fee paid to state of incorporation 3,000 Expenses for printing & sale of stock certificates 11,000 Legal services for drafting the corporate charter and bylaws (not paid until January 2020) 19,000 1) Assuming that Gull Corporation elects under § 248 to expense and amortize organizational expenditures, what amount may be deducted in 2019? 2) Assume the same facts as above, except that the amount paid for the legal services was $28,000 (instead of $19,000). What amount may be deducted as organizational expenditures in 2019?

1) Qualifying expenses:21,000 + 3,000+ 19,000= 43,000 5,000 can be taken immediately, the other 38,000 can be deducted over 180 months. 2 months apply for the current year. 38,000 x (2/180) = 422 Total Deduction 2019 = 5,422 2) Qualifying expenses = 52,000 Amount over 50,000 reduces immediate deduction by that amount. 5,000 - 2,000 = 3,000 immediate deduction 52,000 - 3,000 = 49,000 over 180 months and 2 months qualify for the current year. 49,000 x (2/180) = 544 3,544 total deduction for 2019.

What section is "startup expenditures" located in?

195

During the current year, Owl Corporation (a C corporation), a retailer of children's apparel, made the following donations to qualified charitable organizations: a. Children's clothing held as inventory, to Haven for Hope ~ Basis: $10,000; FMV: $15,000 b. Stock in Exxon Corporation acquired two years ago and held as an investment, to City University ~ Basis: $5,000; FMV: $3,000 c. Land acquired four years ago and held as an investment, to Humane Society ~ Basis: $50,000; FMV: $75,000 How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation)?

Answer: $90,500 a. $15,000 FMV - $10,000 Basis = $5,000 appreciation $10,000 + $2,500 = $12,500 $10,000 * 2 = $20,000 *$12,500 is the amount deducted as it is lesser than $20,000 b. The stock (depreciated) is ordinary income property. So, the lesser of the FMV or basis is the deduction. *$3,000 is the deduction c. Land is LTCG property so the FMV is deducted which would be $75,000 $75,000 + $12,500 + $3,000 = $90,500

Shareholder's basis of stock received in exchange for property

Adjusted basis of property transferred Add: Gain recognized (NOT service income) Less: Boot received (including any liabilities transferred) Less: Liabilities transferred Equal: Basis of stock received

Corporation's basis in property received

Adjusted basis of property transferred Add: Gain recognized by transferor-shareholder (NOT service income) Equals: Basis of property to corporation

In the current year, Red Corporation (a calendar year C corporation), which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $20,000. Which of the following statements is correct? a. Red owns 20% or more, but less than 80% of Blue Corporation. b. Red owns less than 20% of Blue Corporation. c. Red owns 80% or more of Blue Corporation. d. Red owns 80% of Blue Corporation.

Answer: B; Red owns less than 20% of Blue Corporation. * Red Corporation's dividends received deduction is ($20000 / $40000) = 50% of the dividend received from Blue Corporation. The 50% dividends received deduction applies, if the percentage of ownership in distributing corporation is less than 20% (as per federal income tax law ).Therefore, Red owns less than 20% of Blue Corporation is correct.

Recapture *Prevents taxpayers from converting ordinary income into 1231 gain

Any ____________ potential associated with the property carries over to the corporation

Skylark Bakery Inc cannot claim a deduction for the $10,000 until 2020 when Sam actually receives the bonus.

Assume that Sam incorporates her business as Skylark Bakery, Inc., a calendar year, accrual method C Corp. Sam, a cash method taxpayer, owns 100% of the corp's stock at the end of 2019. On December 31, 2019, Skylark Bakery has accrued a $10,000 bonus to Sam. Sam receives the bonus in 2020. and reports it on her 2020 tax return. When can Skylark Bakery claim this as a deduction?

Liabilities

Basis of stock received is reduced by amount of ___________ assumed by the corporation

Black Corporation (an accrual method, calendar year C corporation) was formed and began operations on April 1, 2021. The following expenses were incurred during its first year of operations (April 1 through December 31, 2021): - Expenses of temporary directors and of organizational meetings: $15,500 - Fee paid to the state of incorporation: $2,000 - Accounting services incident to organization: $18,000 - Legal services for drafting the corporate charter and bylaws: $32,000 - Expenses incident to the printing and sale of stock certificates: $48,000

Because of the dollar cap (i.e., dollar-for-dollar reduction for amounts in excess of $50,000), none of the $5,000 expensing allowance is available. The monthly amortization is $375 [($15,500 + $2,000 + $18,000 + $32,000) ÷ 180months], and $3,375 ($375 × 9 months) is deductible for tax year 2021.

Ava and Rick form Grouse Corporation. Ava transfers land worth $100,000 with a basis of $20,000. Rick transfers equipment worth $50,000 with an adjusted basis of $10,000 and provides services worth $50,000. Ava and Rick each receive 50% of the Grouse stock. In reference to Section 351, what are the implications?

Because the value of the property Rick transfers is not small relative to the value of the services he renders, his stock in Grouse Corporation is counted in determining control under § 351; thus, Ava and Rick jointly own 100% of the stock in Grouse. In addition, all of Rick's stock, not just the shares received for the equipment, counts in determining control. As a result, Ava does not recognize gain on the transfer of the land. Rick similarly does not recognize the gain on his equipment; however, he must recognize income of $50,000 on the transfer of services. Even though the transfer of the equipment qualifies Rick as a property contributor under § 351, his transfer of services for stock is still taxable compensation income.

Basis in property

Deduction for property contribution to certain private nonoperating foundations is limited to _________ ___ ________

No; no special tax rates apply. The entire gain is subject to the flat 21% corp tax rate

Do corporate taxpayers receive a benefit for capital gains?

- NOL deduction - The dividends received deduction - Any capital loss carryback to the current tax year

Due to the dividend received deduction, taxable income is computed without regard to:

Accounting fees incurred in initial organization. Is this a "organization expenditure;" "startup expenditure?"

Organizational expenditure

Assume that the proposed transaction involving Emily and Ethan qualifies under § 351, but Emily decides to receive some corporate debt along with the stock. She receives the following: - Value consideration received: $2,000,000 (Stock worth $1,900,000; Transformation debt of $100,000) - Basis in the transferred property: $400,000 What are the tax implications?

Emily realizes gain of $1,600,000 *$2,000,000 - $400,000 However, because the transaction qualifies under Section 351, only $100,000 of gain is recognized (the transformation debt is treated as boot). The remaining gain of $1,500,000 is deferred

- Authorized by the BOD by the end of that year - Paid on or before the due date of the corp's tax return (15th day of the 4th month following the close of its taxable year)

Exceptions for accrual basis corp's allows deduction in year preceding payment if *Accrual of charitable contributions* (2):

- Service providers recognize compensation income for services rendered - Someone who contributes only services (don't count toward the 80%)

Exceptions of property excludes services such as (2):

3; 5; permanently lost

For corporate taxpayers, NCLs cannot be deducted. They are carried back ___ years and then carried forward ___ years. Thereafter, any excess losses are _________ ________.

short-term

For corporate taxpayers, all carried over losses are treated as _______-_______

$3,000

For individual taxpayers, NCLs are deductible up to ______ with the remainder carried over to future years indefinitely.

15%; 20%

For individual taxpayers, NLTCG are taxed at a maximum rate of _____ or _____

5 years; 20 years

From 2017 and prior, NOLs were carried back _____ years and carried forward _______ years with no limit

Corporate tax formula

Gross Income: Less: Deductions (Except Charitable, DRD, NOL Carryback, STCL Carryback) =Taxable Income for Charitable Deduction Less: Charitable Deduction =Taxable Income for DRD Less: DRD =Taxable income before Carrybacks Less: NOL Carryback and STCL Carryback =Taxable Income

50%

If a corporate shareholder has less than 20% ownership, how much dividends may be deducted from income?

65%

If a corporate shareholder has more than 20% but less than 80% ownership, how much dividends may be deducted from income?

100%

If a corporate shareholder has more than 80% ownership, how much dividends may be deducted from income?

True

If a loan is made in some capacity that qualifies as a trade or business, nonbusiness bad debt treatment is avoided. (T/F)

True

If a long period of time elapses between the transfers of property by different shareholders to the corporation, the control requirement may be lost regarding the later transfers because no documentation exists making multiple transfers part of an integrated plan. (T/F)

True

If a shareholder renders only services to the corporation for stock, the transfer cannot qualify under § 351 because services rendered are not "property." (T/F)

False

If a shareholder renders services and transfers property to the corporation for stock, the shareholder will never be treated as a member of the transferring group. (T/F)

- Deemed ordinary loss deduction - Deduction allowed for partial worthlessness

If corporation is a lender, loss is a business bad debt. Implications?

- Deemed a short-term capital loss - Only deductible when fully worthless

If noncorporate person lends as investment, loss is nonbusiness bad debt. Implications?

capital losses *Loss is treated as occurring on the last day of tax year in which they became worthless; no deduction is allowed for mere decline in value

If stocks and bonds are capital assets, losses from worthlessness are ________ _________

- Does not require simultaneous transfers if there's more than one transferor - Rights of parties should be outlined before first transfer - Transfers should occur as close together as possible

Immediately after transfer (3):

False

In a § 351 transfer where no gain is recognized, the depreciation recapture rules apply. (T/F)

True

In a § 351 transfer, a transfer of stock for services is not a taxable transaction to a corporation. (T/F)

Expenses of temporary board of directors' organizational meetings. Is this a "organization expenditure;" "startup expenditure?"

Organizational expenditure

Legal expenses incurred for drafting the corporate charter and bylaws. Is this a "organization expenditure;" "startup expenditure?"

Organizational expenditure

Assume the same facts mentioned previously, except that the value of Rick's property is $2,000 and the value of his services is $98,000.

In this situation, the value of the property is small relative to the value of the services (and well below the 10% IRS threshold); therefore, Rick does not qualify as a property transferor. Consequently, the transaction is fully taxable to both Ava and Rick. In this situation, Ava, the sole property transferor, lacks at least 80% control of Grouse Corporation following the transfer. As a result, she will fully recognize her realized gain. Further, because the control test ignores Rick's shares, the § 351 deferral is not available to him. He will recognize income of $98,000 relating to the services provided along with any realized gain or loss on the transfer of the additional $2,000 of property.

ordinary income

Interest paid is taxable as ___________ __________ to individual or corporate recipients

Yvonne and Simon form Ion Corporation. Yvonne transfers equipment (basis of $110,000 and fair market value of $165,000). Simon invests $130,000 of cash. They each receive 100 shares in Ion Corporation, worth $130,000, but Yvonne also receives $35,000 in cash from Ion. Calculate Ion Corporation's basis in the equipment and determine Yvonne and Simon's basis in the Ion stock.

Ion Corporation has a basis of $145,000 in the equipment. Yvonne has a basis of $110,000 for her stock and Simon has a basis of $130,000 for his stock. *$110,000 basis + recognized gain of $35,000= $145,000 (Ion Corp) *$110,000 basis - $35,000 boot received + $35,000 (lesser of realized or recognized gain)** = $110,000 basis. **$130,000 FMV + $35,000 boot received - $110,000 basis = $55,000 realized, but only $35,000 is recognized.

Fair market value

LTCG property is equal to the ________ ________ ________ of property

- Liabilities incurred for no business purpose or as tax avoidance mechanism (Boot = ENTIRE amount of liability) - Liabilities are greater than basis in assets transferred (Gain recognized = excess amount) *See page 13 of notes for examples

Liabilities are not treated as boot for gain recognition unless (2):

Section 162(m) limitation

Limits the deductible amount of a publicly held corp's compensation to any covered employee to $1M annually; applies to commissions and any performance-based compensation; does not apply to retirement plan contributions or employer-provided benefits

Assume the same facts as in the prior example, except that Marco provides legal services (instead of management services) in organizing the corporation. The value of Marco's legal services is $200,000.

Marco has no gain on the transfer of the property but has income of $200,000 for the value of the stock received for the services rendered. Transformation, Inc., has a basis of $260,000 in the property it acquired from Marco and must capitalize the $200,000 as an organizational expenditure (apply the "goofy" rule). Marco's stock basis is $460,000 [$260,000 (basis of property transferred) + $200,000 (income recognized for services rendered)].

Marie and Ethan form Roundtree Corporation with the transfer of the following. Marie performs personal services for the corporation with a fair market value of $80,000 in exchange for 400 shares of stock. Ethan contributes an installment note receivable (basis $25,000; fair market value $30,000), land (basis $50,000; fair market value $170,000) and inventory (basis $100,000; fair market value $120,000) in exchange for 1,600 shares. Determine Marie and Ethan's current income, gain, or loss and calculate the basis that each takes in the Roundtree stock.

Marie has income of $80,000 and $80,000 basis in her 400 shares of stock and Ethan has income of $0 and $175,000 basis in his 1,600 shares of stock. *$25,000 + $50,000 + $100,000= 175,000

Martin transfers real estate with an adjusted basis of $260,000 and fair market value of $350,000 to a newly formed corporation in exchange for 100% of the stock. The corporation assumes the liability on the transferred real estate in the amount of $300,000. Determine Diego's recognized gain on the transfer and the basis for his stock.

Martin has a recognized gain on the transfer of $40,000 and a basis of $0 for his stock. $300,000 liability assumed - $260,000 basis = $40,000 $260,000 basis + $40,000 gain recognized - $0 boot received - $300,000 liability assumed = $0 basis

80%

NOL deduction for any carryover year is limited to _____ of taxable income

forward indefinitely (2021 and later)

NOLs for corps and individuals may be carried _________ __________ to offset taxable income for those future years

gain or loss

No _______ or _______ is recognized by corporation on receipt of money or property in exchange for its stock

IRC Section 351

No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation

False

Nonbusiness bad debts are deducted as ordinary losses, while business bad debts are treated as short-term capital losses. (T/F)

True

Nonrecognition of gain occurs only when the shareholder receives stock. (T/F)

original holder *Ex. $20,000 proceeds - $100,000 basis = Loss of $80,000 $50,000 ordinary loss $30,000 capital loss

Only ________ ________ of 1244 stock qualifies for ordinary loss treatment

Samantha Johnson owns Skylark Bakery. Currently, the bakery is operated as a sole proprietorship and generates an annual operating profit of $100,000. In addition, the bakery earns annual dividends of $5,000 from investing excess working capital in the stock of publicly traded corporations. These stock investments typically are held for a minimum of three to four months before funds are required for the business. As a result of earning income from other business ventures and investments, Samantha is in the 37 percent marginal tax bracket before considering bakery operations. In the past, Samantha has withdrawn $50,000 annually from the bakery, which she regards as reasonable payment for her services. Compute the business' taxable income. What would be the tax consequences if Sam conducts her current business as a C Corp?

Skylark Bakery has taxable income of $52,500 [$100,000 operating profit + $5,000 dividends − $50,000 salary deduction − $2,500 dividends received deduction ($5,000 × 50%)]. Its income tax liability is $11,025 ($52,500 × 21%).

Assuming the facts mentioned previously, what would be the total income tax for the bakery which is operating as a C corp

Skylark Barkery has a total income tax of $29,525 [Tax on income (52500 x 21%) $11,025 + Tax on Samantha's salary (50000 x 37%) $18,500]

Employee salaries incurred during the training period before opening for business. Is this a "organization expenditure;" "startup expenditure?"

Startup expenditure

False

Stock under momentary control counts in determining control if the plan for the sale or other disposition of the stock existed before the exchange. (T/F)

interest; deductible

The Corporation pays _____________ to debt holders which is ____________ by the corporation

lesser of FMV or adjusted basis *Corp. exception to add 50% appreciation; cannot exceeed x2 cost (basis)

The basis for ordinary income property is:

- The taxpayer's business interest income - 30% of the taxpayer's ATI *For 2019-20, CARES modified to 50% - Amounts disallowed may be carried forward and used in the future

The deduction for business interest expense is deducted from the sum of:

Assume that you learn that Marco is not interested in becoming a stockholder in Transformation, Inc., and that Emily and Ethan will transfer their property for 100% of the stock. In addition, you learn that Emily's building is subject to a liability of $70,000 that Transformation assumes. Consequently, Emily receives her Transformation stock, is relieved of the $70,000 liability, and contributes property with an adjusted basis of $400,000 and fair market value of $2,000,000. What are the tax implications?

The exchange is tax-free to Emily under § 351 because § 357(a) precludes treating the debt relief as boot for determining recognized gain. However, the basis to Emily of the Transformation stock is $330,000 [$400,000 (basis of property transferred) − $70,000 (amount of the liability Transformation assumes)]. This basis reduction reflects the economic benefit that Emily enjoys by transferring her mortgage to the corporation.

Jocelyn contributes land with a basis of $60,000 and fair market value of $90,000 and inventory with a basis of $5,000 and fair market value of $8,000 in exchange for 100% of Zion Corporation stock. The land is subject to a $15,000 mortgage. Determine Jocelyn's recognized gain or loss and the basis in the Zion stock received.

The exchange is tax-free under § 351 because the release of a liability is not treated as boot under § 357(a). As a result, Jocelyn has income of $0 and a basis $50,000 in her stock. *$65,000 basis - $15,000 (liability assumed by Zion) = $50,000

Tyrone and Andrew formed Blue Corporation three years ago. Both Tyrone and Andrew transferred appreciated property to Blue in exchange for 50 shares each in the corporation. The original transfers qualified under § 351, and neither Tyrone nor Andrew recognizes gain or loss on the exchange. In the current year, Tyrone transfers property (worth $90,000, adjusted basis of $5,000) for 50 additional Blue shares. What are the implications?

Tyrone has a taxable gain of $85,000 on the transfer. The exchange does not qualify under § 351 because Tyrone does not have 80% control of Blue Corporation immediately after the transfer—he owns 100 shares of the 150 shares outstanding, or a 66.67% interest. *However, if Andrew decides to contribute cash (boot) to provide additional shares, then Tyrone may potentially meet the 80% control threshold, qualify for Section 351 and defer the gain.

The lesser b/t the realized gain and boot received

When boot is received, the recognized gain is...

Loan repayments; basis

____________ ___________ are not taxable to investors unless repayments exceed the __________

In the current year, Tanager Corporation (a C corporation) had operating income of $480,000 and operating expenses of $390,000. In addition, Tanager had a long-term capital gain of $55,000 and a short-term capital loss of $40,000. a. Tanager's taxable income for the year is _____ and the tax is ______. b. Assume the same facts except that Tanager's long-term capital gain was $15,000. Tanager's taxable income for the year is $_____ and income tax is $______.

a. $105,000; $22,050 *$480,000 - $390,000 = $90,000 $55,000 - $40,000 = $15,000 $90,000 + $15,000 = $105,000 $105,000 is the taxable income for the year $105,000 * 21% = $22,050 $22,050 is the tax b. $90,000; $18,900 *$480, 000 - $390,000 = $90,000 $15,000 - $40,000 = ($25,000) *capital loss would be carried back 3 years, forward 5* $90,000 is the taxable income for the year $90,000 * 21% = $18,900 $18,900 is the tax

Marmot Corporation pays a dividend of $100,000 in the current year. Otter Corporation, a calendar year C corporation, owns 15% of Marmot's stock. Gerald, an individual taxpayer in the 24% marginal bracket, also owns 15% of Marmot's stock. Compare and contrast the treatment of the dividend by Otter Corporation and Gerald. a. Otter Corporation will be allowed a __________ ___________ ____________ equal to _____% of the dividends it received. It will pay tax of ______% on the remaining portion of the dividends. b. Gerald must include in _____ of the dividends. He will pay tax at ___% rate.

a. dividends received deduction; 50; 21 b. all; 15

Adam transfers property with an adjusted basis of $50,000 (fair market value of $400,000) to Swift Corporation for 90% of the stock. The property is subject to a liability of $60,000, which Swift assumes. a. What is the basis of the Swift stock to Adam? b. What is the basis of the property to Swift Corporation?

a. Adam has a basis of $0 1. Adam recognizes a gain of $10,000 $60,000 liability - $50,000 basis 2. $50,000 (basis in the property transferred to Swift Corporation) + $10,000 (gain recognized by Adam) - $60,000 (liability assumed by Swift treated as Boot Received for purposes of Shareholder's Basis in Stock Received) b. Swift Corp's basis is $60,000 * $50,000 basis + $10,000 gain recognized by S/H

In the current year, Nighthawk Corporation, a calendar year C corporation, has $3,700,000 of adjusted taxable income and $125,000 of business interest income. Nighthawk has no floor plan financing interest. The business interest expense is $1,400,000 for the year. a. Assume that Nighthawk has average gross receipts for the prior three-year period of $33,000,000. Determine Nighthawk's current-year deduction for business interest. b. Assume that Nighthawk has average gross receipts for the prior three-year period of $23,000,000. Determine Nighthawk's current-year deduction for business interest.

a. Business InterestExpense deduction is limited to the taxpayer corporation's business interest income $125,000 + ($3,700,000 ATI *.3)= $1,235,000. Therefore, $1,235,000 of the business interest income is deductible in the current year. *The disallowed amount ($1,400,000 - $1,235,000) = $165,000 is carried forward indefinitely. b. $1,400,000; Nighthawk qualifies for the small business exception (i.e., average gross receipts for the prior three-year period of $26,000,000 or less); thus, the limitation on the deduction of business interest does not apply in the current year.

Kim is an employee of Azure Corporation. In the current year, she receives a cash salary of $30,000 and also is given 10 shares of Azure stock for services she renders to the corporation. The shares in Azure Corporation are worth $1,000 each. a. How will the transfer of the 10 shares to Kim be handled for tax purposes? b. What is Azure Corporation's total compensation deduction for Kim's services?

a. Kim has $10,000 of ordinary income. Kim's basis in the stock is $10,000. b. $40,000 *$30,000 cash salary + $10,000 stock

María and Bob form Robin Corporation. María 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 the corporation. a. What gain or income, if any, will the parties recognize on the transfer? b. What basis do María and Bob have in the Robin Corporation stock? c. What is Robin Corporation's basis in the property and services it received from María and Bob?

a. Maria does not recognize a gain. Bob recognizes ordinary income of $15,000, the value of the services he rendered to the corporation. Bob does not recognize gain on the transfer of property to the corporation. b. Maria has a basis of $150,000 in her stock, while Bob has a basis of $45,000 in his stock [$30,000 (basis in property transferred) + $15,000 (income recognized)]. c. Robin Corporation has a basis of $150,000 in the property Ann transferred and a basis of $30,000 in property Bob transferred. Robin Corporation capitalizes $15,000 as organizational expenditures.

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 (basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares. a. Ron's basis in his stock is $27,000. b. Ron's basis in his stock is $6,000. c. Brad's basis in his stock is $20,000. d. These transfers are fully taxable and not subject to § 351.

a. Ron's basis in his stock is $27,000.

During the current year, Swallow Corporation, a calendar year C corporation, has the following transactions: Income from operations: $660,000 Expenses from operations: 760,000 Dividends received from Brown Corporation: 240,000 a. Swallow Corporation owns 12% of Brown Corporation's stock. Swallow's _________ after deducting the dividends received deduction is _____. b. Assume instead that Swallow Corporation owns 26% of Brown Corporation's stock. Swallow's ______ after deducting the dividends received deduction is ______.

a. taxable income; $70,000 b. NOL; ($16,000)

Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000) executed by Green Corporation and made payable to Jane. As a result of the transfer: a. Jane recognizes no gain. b. Jane recognizes a gain of $75,000. c. Jane recognizes a gain of $320,000. d. Jane recognizes a gain of $270,000.

b. Jane recognizes a gain of $75,000.

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation. After the transfer, Leah owns 80% of Crow's stock. Associated with the equipment is § 1245 depreciation recapture potential of $70,000. As a result of the transfer: a. Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000 b. The § 1245 depreciation recapture potential carries over to Crow Corporation. c. The § 1245 depreciation recapture potential disappears. d. Leah recognizes ordinary income of $70,000.

b. The § 1245 depreciation recapture potential carries over to Crow Corporation.

Mitchell and Powell form Green Corporation. Mitchell transfers property (basis of $105,000 and fair market value of $90,000) while Powell transfers land (basis of $8,000 and fair market value of $75,000) and $15,000 of cash. Each receives 50% of Green Corporation's stock (total value of $180,000). As a result of these transfers: a. Mitchell has no recognized loss, but Powell has a recognized gain of $15,000. b. Mitchell has a recognized loss of $15,000, and Powell has a recognized gain of $67,000. c. Neither Mitchell nor Powell has any recognized gain or loss. d. Green Corporation will have a basis in the land of $23,000.

c. Neither Mitchell nor Powell has any recognized gain or loss.