Ch 3 &4 hw and becker

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.

yvonne's basis in the stock is $110,000, computed as follows: Step 1: Compute realized gain$130,000 fair market value of stock received + $35,000 boot received - $110,000 basis in equipment = $55,000 realized gain. Step 2: Compute recognized gainOf the $55,000 gain, only $35,000 is recognized which is the amount of boot (cash) received. Step 3: Determine basis in stockYvonne's basis in the stock is $110,000 basis [$110,000 (basis in equipment) - $35,000 (boot received) + $35,000 (the lesser of realized or recognized gain)]. Simon's basis is equal to the cash contributed, $130,000. Ion Corporation has a basis of $145,000 in the equipment (Yvonne's basis of $110,000 plus her recognized gain of $35,000).

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.

The value of each share in Roundtree Corporation is $200 ($80,000/400 shares = $200 and $320,000/1,600 shares = $200) Ethan has a substituted basis of $175,000 ($25,000 + $50,000 + $100,000) in the Roundtree stock. Ethan has a realized gain of $145,000 ($320,000 - $25,000 - $50,000 - $100,000), he has no recognized gain on the receipt of stock because all of the consideration he transfers to Roundtree qualifies as "property" and he has "control" of Roundtree after the transfer (1,600 shares/2,000 shares = 80%).

a gain can ever be recognized in a § 351 transfer if boot is not received.

Under general tax rules, if a taxpayer transfers a liability to a corporation, the taxpayer normally is treated as having received boot. In a § 351 transaction, the normal rule of § 357(a) provides that the release of a liability is not treated as money or other property received. Section 357(b) does treat the liability release as money received by the taxpayer. In § 357(c), gain is recognized to the extent of the excess of the liability over the basis of the property transferred. Section 357(c) creates gain and applies regardless of whether boot is received or realized gain is present.

In the current year, Woodpecker, Inc., a C corporation with $8,500,000 in assets, deducted amortization of $40,000 on its financial statements and $55,000 on its Federal tax return. Is Woodpecker required to file a Schedule M-3? No If Woodpecker is required to file a Schedule M-3, the difference in amortization amounts treated on that schedule is reported on line 28, Part III as follows:

$40,000 in column a book amortization $15,000 (40-55) in column b temporary difference $55,000 in column d tax amortization

Tapper Corp., an accrual basis calendar year corporation, was organized on January 2, year 1. During year 1, revenue was exclusively from sales proceeds and interest income. The following information pertains to Tapper: Taxable income before charitable contributions for the year ended December 31, year 1 $500,000 Tapper's matching contribution to employee-designated qualified universities made during year 1 , 10,000 Board of Directors' authorized contribution to a qualified charity (authorized December 1, year 1, made February 1, year 2) 30,000 What is the maximum allowable deduction that Tapper may take as a charitable contribution on its tax return for the year ended December 31, year 1?

1) it was authorized to a qualified charity by Board resolution before the end of the taxable year and 2) it was paid by the 15th day of the 3rd month after the end of the taxable year of accrual. 10+30=40

In year 6, Garland Corp. contributed $40,000 to a qualified charitable organization. Garland's year 6 taxable income before the deduction for charitable contributions was $410,000. Included in that amount is a $20,000 dividends received deduction. Garland also had carryover contributions of $5,000 from the prior year. In year 6, what amount can Garland deduct as charitable contributions?

(410,000+20,000)*10=43,000

Sales $500,000 Cost of sales 250,000 Dividends received 25,000 The dividends were received from a corporation of which Acorn owns 30%. In Acorn's current-year corporate income tax return, what amount should be reported as income before special deductions?

275000

Before the provision for Federal income tax, Karas Corporation had book income of $400,000 for the current year. The book income included $100,000 of dividends received from a 15% owned domestic corporation. What was Karas Corporation's taxable income for the current year?

50 % of the dividend bc of the deduction 400,000-50,000 (100,000*.5)=350,000

Parent Corp. owns 15% of Sub Corp. Parent has gross income of $43,000 and allowable deductions of $40,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 in dividends from Sub. What is the maximum DRD available to Parent?

50% of the dividend 8000*.5=4000

Gearty and Olinto organized The Worthington Corp., which issued voting common stock with a fair market value of $240,000. They each transferred property in exchange for stock as follows: The building was subject to a $20,000 mortgage that was assumed by The Worthington Corp. What was The Worthington Corp.'s basis in the building?

80,000 building adjusted basis

Campbell Corporation, an accrual basis calendar year corporation, had income of $450,000 for financial statement purposes in year 7. This amount included book depreciation of $50,000. The related tax depreciation was $65,000. Further, the financial statements reported $100,000 of municipal bond interest income, an expense of $2,000 for life insurance premiums on the corporation's president, charitable contributions of $5,000, excess capital losses over capital gains of $3,000, income tax penalties of $10,000, state income tax of $40,000, and Federal income tax expense of $175,000. What is the amount of Campbell's taxable income for year 7?

Accrual basis income$450,000 Less: Excess depreciation as per tax purpose (65000-50000) = -15000 Less: Interest income($100,000) Federal income tax expense$175,000 Excess capital loss over capital gain$3,000 LIC on corporation president$2,000 Add: Income tax penalties (not allowed)10000 Taxable Income$525,000

How does the transfer of mortgaged property to a controlled corporation affect the transferor-shareholder's basis in stock received?

Assume no gain is recognized on the transfer. The shareholder's basis in the stock received is reduced by the amount of the liabilities assumed by the corporation.

Dove Corporation, a calendar year C corporation, had the following information for 2020: Net income per books (after-tax)$386,250 Taxable income120,000 Federal income tax per books25,200 Cash dividend distributions150,000 Unappropriated retained earnings, as of January 1, 2020 =796,010

Balance at beginning of year $796,010 Plus: Net income (loss) per books 386,250 Subtotal =$1,182,260 Minus: Cash dividend distributions (150,000) Balance at end of year $1,032,260

Grady exchanges qualified property, basis of $12,000 and fair market value of $18,000, for 60% of the stock of Eadie Corporation. The other 40% of the stock is owned by Pedro, who acquired it five years ago. Calculate Grady's current income, gain, or loss and the basis he takes in his shares of Eadie stock as a result of this transaction.

Because this transaction does not meet the control of the corporation requirement, Grady has a gain of $6,000 and $18,000 basis in his shares of stock. a taxable gain $6,000= ($18,000 - $12,000) does not have more than 80% = 18000

pproach can be justified under the wherewithal to pay concept.

Both § 351 and § 1031 provide for nonrecognition of gain or loss for certain transfers that otherwise would be taxable.

Angie and Brad form Cats Are Us, Inc. Angie contributes $120,000 cash for 60% of the stock. Brad contributes an asset with an FMV of $90,000 and an adjusted basis of $30,000 for 40% of the stock. Brad also receives $10,000 cash from the corporation. ' What is the corporation's basis in the asset received from Brad?

Brad = $ 30000 +10000 = 40,000

The dividends received deduction (DRD) is a tax deduction that may be taken by which of the following?

C corporation

Lupe, a cash basis taxpayer, owns 55% of the stock of Jasper Corporation, a calendar year accrual basis C corporation. On December 31, 2020, Jasper accrues a performance bonus of $100,000 to Lupe that it pays to him on January 15, 2021. In which year can Jasper deduct the bonus? In which year must Lupe include the bonus in gross income?

Jasper can deduct the bonus in 2021 , and Lupe must report the bonus income in 2021 .

Gold Corporation, a calendar year C corporation, was formed in 2012 and has been profitable until the current year. In 2020, Gold incurs a net operating loss.

NOLs arising in a tax year ending after 2017 are carried forward indefinitely . However, the NOL deduction for any carryover year is limited to 80% of taxable income determined without regard to the NOL deduction.

Schedule M-1 reconciliation.

Net income per books + Additions - Subtractions = Taxable income. Subtractions: Life insurance proceeds tax depreciation everything else is additions

Parent Corp. owns 40% of Sub Corp. In the current year, Parent has gross income of $43,000 and allowable deductions of $30,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 of dividends from Sub. What is the maximum DRD available to Parent?

P owns more than 20% so the DRD is 65% taxable income (43,000-30,000)=13,000 DRD limitation 13,000*.65=8,450 .65*8,000=5200

Grouse Corporation, a calendar year C corporation, had taxable income of $1,400,000, $1,200,000, and $700,000 for 2018, 2019, and 2020, respectively. Grouse has taxable income of $1,600,000 for 2021. What are Grouse Corporation's minimum required estimated tax payments for 2021?

Payment Amount April 15, 2021 $36,750* ($700,000 taxable income × 21%) = $147,000 ÷ 4 = $36,750. June 17, 2021 131,250 ($1,600,000 taxable income × 21%) = $336,000 ÷ 4 = $84,000 [$84,000 + ($84,000 - $36,750)] = $131,250. September 16, 2021 84,000 December 16, 2021 84,000 Total $336,000

In general, what is the limitation on the deductibility of executive compensation that applies to publicly traded corporations?

Section 162(m) limits the deductible amount of a publicly traded corporation's compensation to any covered employee to $1,000,000 annually. A covered employee includes the principal executive officer, the principal financial officer, and the three other most highly compensated officers.

Florence is the newly hired Chief Financial Officer of Hazel Corporation, a publicly traded, calendar year C corporation. For the current year, her compensation package consists of: Cash compensation$1,500,000 Bonus tied to company performance700,000 Taxable fringe benefits250,000Nontaxable fringe benefits 75,000 How much of Florence's compensation is deductible by Hazel Corporation?

Since Florence is a covered employee (i.e., principal financial officer), the $1 million deduction limitation on executive compensation applies. Hazel Corporation can deduct $1,075,000 of Florence's compensation package: 1,000,000(applicable to the $1,500,000 cash compensation + $700,000 bonus + $250,000 taxable fringe benefits) + $75,000 nontaxable fringe benefits. =1,075,000

John (a sole proprietor) and Eagle Corporation (a C corporation) each recognize a long-term capital gain of $10,000 and a short-term capital loss of $18,000 on the sale of capital assets. Neither taxpayer had any other property transactions during the year.

Tax consequences: John reports the capital transactions on his individual tax return but is limited to a $3,000 net capital loss deduction in the current year. John nets the $10,000 LTCG against the $18,000 STCL.

At a point when Robin Corporation has been in existence for six years, shareholder Ted transfers real estate (with an adjusted basis of $20,000 and fair market value of $100,000) to the corporation for additional stock. At the same time, Peggy, the other shareholder, acquires one share of stock for cash. After the two transfers, the percentages of stock ownership are as follows: 79% is owned by Ted and 21% by Peggy.

Ted is attempting to meet the control requirement of § 351. In order to qualify as a nontaxable exchange under § 351, Peggy must join Ted in the transaction. If the requirements are not met, $80000 on the transfer will be recognized as a gain to Ted. fair market value-adjusted basis

what is the control requirement of § 351".

The control requirement specifies that the person or persons transferring property to the corporation must own, immediately after the transfer, stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote, and at least 80% of the total number of shares of all other classes of the corporation's stock.

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 $50000 in her stock adjusted basis of $65,000 =($60,000 + $5,000) fair market value of $98,000= ($90,000 + $8,000) $50,000 =[$65,000 (basis of property transferred) - $15,000 (amount of the liability assumed by Zion)]

Aquamarine Corporation, a calendar year C corporation, makes the following donations to qualified charitable organizations during the current year: AdjustedBasis Fair MarketValue A painting held four years as an investment, to a church, which sold it immediately $15,000 $25,000 Apple stock held two years as an investment, to United Way, which sold it immediately 40,000 90,000' Canned groceries held one month as inventory, to Catholic Meals for the Poor 10,000 17,000 Determine the amount of Aquamarine Corporation's charitable deduction for the current year. (Ignore the taxable income limitation.)

Thus, the amount of the contribution of the canned groceries is $13,500 [$10,000 (basis) + 50%($17,000 - $10,000)]. Total deduction: $15,000 + $90,000 + $13,500 = $118,500.

Goose Corporation, a C corporation, incurs a net capital loss of $12,000 for 2020. It also has ordinary income of $10,000 in 2020. Goose had net capital gains of $2,500 in 2016 and $5,000 in 2019. a. Determine the amount, if any, of the net capital loss of $12,000 that is deductible in 2020. b. Determine the amount, if any, of the net capital loss of $12,000 that is carried forward to 2021.

a. $0 b. ($12,000 - $5,000)=7000

Aqua Corporation purchases nonresidential real property on May 8, 2017, for $1,000,000. Straight-line cost recovery is taken in the amount of $89,765 before the property is sold on November 27, 2020, for $1,500,000. a. Compute the amount of Aqua's recognized gain on the sale of the realty. b. Determine the amount of the recognized gain that is treated as § 1231 gain and the amount that is treated as § 1250 recapture (ordinary income due to due to § 291).

a. $1,500,000 amount realized - $910,235 adjusted basis ($1,000,000 - $89,765 accumulated depreciation) = 589,765 recognized gain b. determine the § 1245 recapture potential: This is the lesser of $589,765 (recognized gain) or $89,765 (cost recovery claimed) then determine the § 1250 recapture amount: Cost recovery $89,765 - straight-line cost recovery ($89,765) = § 1250 ordinary income $0. § 1245 recapture potential:$89,765 Less § 1250 recapture amount:$0 Excess § 1245 recapture potential:$89,765 Apply § 291 percentage: x 20% Additional ordinary income under §291=$17,953 finally: 571,812= ($589,765 - $0 - $17,953)

Osprey Corporation, a closely held corporation, has $100,000 of net active income, $25,000 of portfolio income, and a $120,000 loss from a passive activity. a. How much of the passive activity loss can Osprey deduct in the current year if Osprey is a personal service corporation? b. How much of the passive activity loss can Osprey deduct in the current year if it is not a personal service corporation?

a. A personal service corporation cannot offset a passive activity loss against either active or portfolio income . As a result, Osprey can deduct $0 of the passive activity loss in the current year. b. A closely held corporation that is not a personal service corporation can offset a passive activity loss against active income . As a result, Osprey can deduct $100,000 of the passive activity loss in the current year.

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 and Cora bear interest of 8% per annum. Mitch leases equipment to Purple Corporation for an annual rental of $12,000. a. Will the shareholder loans from Frank and Cora might be reclassified as equity? b. Does Purple Corporation have an acceptable debt-equity ratio?

a. Because the loans are not pro rata , the IRS may have difficulty in reclassifying the debt as equity. b. If the tax basis of Purple Corporation's assets is used, the ratio is 6:1 . However, if fair market value of its assets is used, the ratio is 0.5:1 . Thus, Purple appears to have an acceptable debt-equity ratio.

Benton Company (BC), a calendar year entity, has one owner, who is in the 37% Federal income tax bracket (any net capital gains or dividends would be taxed at a 20% rate). BC's gross income is $395,000, and its ordinary trade or business deductions are $245,000. Compute the Federal income tax liability on BC's income for the current year under the following assumptions. Ignore the standard deduction (or itemized deductions) and the deduction for qualified business income. a) sole proprietorship b) b. BC is operated as a C corporation, pays out $100,000 as salary but no dividends to its shareholder. c) BC is operated as a C corporation and pays out no salary or dividends to its shareholder. BC's taxable d) BC is operated as a C corporation, pays out $100,000 as salary, and pays out the remainder of its earnings as dividends to its shareholder

a. Gross income$395,000 Less: ordinary deductions(245,000) Taxable income (to owner of proprietorship) = =$150,000 Tax (37% x $150,000) $55,500 b. Tax paid by corporation: Gross income of corporation$395,000 Less: ordinary deductions(245,000) Less: salary(100,000) Taxable income=$50,000 Corporate tax (21% x $50,000) =$10,500 Tax paid by shareholder: Salary$100,000 Tax (37% x $100,000) 37,000 Total tax (37000+10500) $47,500 C. Gross income of corporation$395,000 Less: ordinary deductions(245,000) Taxable income$150,000 Corporate tax (21% x $150,000) =$31,500 D Gross income of corporation$395,000 Less: ordinary deductions(245,000) Taxable income$150,000 Corporate tax (21% x $150,000) =$31,500 d)Tax paid by corporation: Gross income of corporation$395,000 Less: ordinary deductions(245,000) Less: salary(100,000) Taxable income=$50,000 Corporate tax (21% x $50,000)= $10,500 Tax paid by shareholder: On salary ($100,000 × 37%)=$37,000 On dividend [($50,000 - $10,500) × 20%]=7,900 =44,900 Total tax (10500+44900)=$55,400

Cash method for 2020 allowed ?

a. Jade Corporation, which had gross receipts of $26,300,000 in 2017, $25,100,000 in 2018, and $26,000,000 in 2019. Yes , because Jade Corporation satisfies the gross receipts exception . b. Lime Corporation, a personal service corporation (PSC), which had gross receipts of $26,800,000 in 2017, $26,200,000 in 2018, and $25,400,000 in 2019. Yes , because Lime Corporation may use the cash method of accounting without regard to its gross receipts

for § 351

a. Services -Not property b. Plant and equipment -Property c. Unrealized receivables of a cash basis taxpayer-Property d. Installment obligations-Property e. Cash-Property

Compute the current-year income tax liability for each of the following unrelated calendar year C corporations. A. Darter Corporation has taxable income of $68,000. b. Owl Corporation has taxable income of $10,800,000. c. Toucan Corporation, a personal service corporation, has taxable income of $170,000.

a. The tax on $68,000 is $14,280= (21% x $68,000). b. $2,268,000 =(21% x $10,800,000) c. $35,700= (21% × $170,000).

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 $15,000 (basis of $3,000) and for legal services (worth $165,000) in organizing the corporation. a. What gain or income, if any, will the parties recognize on the transfer? b. What basis do Ann and Bob have in the Robin Corporation stock? c. What is Robin Corporation's basis in the property and services it received from Ann and Bob?

a. The value of property transferred by Bob is less than 10% of the value of the services he provided. Bob will probably not qualify as a member of the control group. If Bob does not qualify as a member of the control group, Ann's transfer will also not qualify since she transferred property for only 70% of the stock. Therefore, both Ann and Bob would recognize gain/income on the exchanges: Ann recognizes gain of $270,000 ($420,000 - $150,000), and Bob recognizes gain of $12,000 on the transfer of property ($15,000 - $3,000) plus $165,000 of compensation income relating to the services provided. b. Ann has a basis of $420,000 =[$150,000 (basis in property transferred) + $270,000 (gain recognized)] in her stock, while Bob has a basis of $180,000 in his stock =[$3,000 (basis in property transferred) + $12,000 (gain recognized) + $165,000 (income recognized)]. c. Robin's basis in the property transferred by Ann and Bob will be their fair market values, or $420,000 and $15,000, respectively.

Which of the following statements is not true for tax years beginning after 2017?

a.Affiliated corporations that file consolidated returns can take a 100% dividends received deduction. b.The dividends received deduction for a small investment in an unrelated corporation is 50%. c.The dividends received deduction for a large investment in a corporation is 65%. d.There is no income limitation on the dividends received deduction.

Hirsch, Incorporated, is a calendar year corporation that has had revenues of less than $500,000 since inception. In 2019, Hirsch had a net operating loss that was able to be used in full in 2020. For 2020, Hirsch expects to have taxable income of $100,000. How will Hirsch avoid a penalty for underpayment of estimated Federal taxes in 2020?

a.Hirsch must pay 100% of the tax shown on its 2020 return via estimated taxes to avoid an underpayment penalty.

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?

grebe Corporation's holding period for the property received includes the transferor-shareholder's holding period . However, the transferor-shareholder's holding period, as to stock received for a capital asset or § 1231 property, includes the holding period of the property transferred . The holding period for stock received for any other property begins on the day after the exchange .

Gearty and Olinto organized The Worthington Corp., which issued voting common stock with a fair market value of $240,000. They each transferred property in exchange for stock as follows: The building was subject to a $20,000 mortgage that was assumed by The Worthington Corp. What was Gearty's basis in The Worthington Corp. stock? The building was subject to a $20,000 mortgage that was assumed by The Worthington Corp. What amount of gain did Gearty recognize on the exchange?

it is 80000-20000=60000 b. 0