acct414 - exam #2

Clark and Hunt organized Jet Corp. with authorized voting common stock of $400,000. Clark contributed $60,000 cash. Both Clark and Hunt transferred other property in exchange for Jet stock as follows: Clark Adj Basis: $50,000 FMV: $100,000 % stock: 40% Hunt Adj Basis: $120,000 FMV: $240,000 % stock: 60% What was Clark's basis in Jet stock?

$110,000 $50,000 basis + $60,000 cash = $110,000

Ron, David, and Mary formed Widget, Inc. Ron and David each received 40% of the stock, and Mary received the remaining 20%. Ron contributed land with an FMV of $70,000 and an adjusted basis of $20,000. The corporation also assumed a $30,000 liability on the property. David contributed land with an FMV of $30,000 and an adjusted basis of $15,000. David also contributed $10,000 in cash. Mary received her stock for services rendered. She normally would bill $20,000 for these services. What is David's basis in the corporate stock received?

$25,000 $15,000 basis + $10,000 cash = $25,000

At the start of the current year, Blue Corporation has accumulated E&P of $350,000. Blue's current E&P is $210,000 and at the end of the year distributes $700,000 ($350,000 each) to its equal shareholders, Pooja and Jon. Pooja's stock basis is $49,000; Jon's stock basis is $196,000 What are the following for both Pooja and Jon? dividend income? capital gain? stock basis after distribution?

$350,000 + $210,000 = $560,000 / 2 = $280,000 $350,000 - $280,000 = $70,000 $70,000 - $49,000 = $21,000 $196,000 - 70,000 = $126,000 Pooja div inc: $280,000 capital gain: $21,000 stock basis: $0 Jon div inc: $280,000 capital gain: $0 stock basis: $126,000

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?

$40,000 - whenever an organization receives any asset contributed by its shareholder, its basis would be the basis of shareholder increased by any amount by it on that asset. $30,000 basis + 10,000 cash = $40,000

A qualified small business corporation is a C corporation whose aggregate gross assets did not exceed _____ million on the date the stock was issued and at least ___% of the corporations assets must be used in the active conduct of one or more qualified trades or businesses.

$50 million 80%

Gearty and Olinto organized the Worthington Corp, which issued voting common stock with FMV of $240,000. They each transferred property in exchange for stock: Gearty: Building: Basis - $80,000 FMV - $164,000 % stock - 60% Olinto: Land Basis - $10,000 FMV - $96,000 % stock - 40% The building was subject to a $20,000 mortgage that was assumed by Worthington Corp. What was Gearty's basis in the Worthington Corp stock? What amount of gain did Gearty recognize on the exchange?

$60,000 - $80,000 basis - $20,000 mortgage = $60,000 $0 - in exchange for stock

Geary and Olinto organized the Worthington Corp, which issued voting common stock with a FMV of $240,000. They each transferred property in exchange for stock as follows: Gearty: Building: Basis - $80,000 FMV - $164,000 % stock - 60% Olinto: Land Basis - $10,000 FMV - $96,000 % stock - 40% The building was subject to a $20,000 mortgage that was assumed by the Worthington Corp. What was the basis in the building?

$80,000

If stocks and bonds are capital assets in their owner's hands, losses from their worthlessness are governed by ____ (g)(1). Under this provision, a capital loss materializes as of the _____ of the taxable year in which the stocks or bonds become worthless. In addition, (no) deduction is allowed for a mere decline in value.

(§ 165) (last day)

Chapter 6: liquidations

- a corporate liquidation exists when a corporation ceases to be a going concern - a complete liquidation produces sale or exchange treatment to the shareholder

Chapter 4: Section 351

- deals with transfers to controlled corporations - provides that gain or loss is not recognized upon the transfer of property to a corporation when certain conditions are met - non recognition of gain occurs only when the shareholder receives stock

general rule of gain and loss recognition by a liquidating corporation

- losses are not recognized on certain liquidating distributions to related party shareholders - losses are not recognized on certain sales and liquidating distributions of property that were contributed to the corporation with a built in loss shortly before the adoption of a plan liquidation

qualifying dividends

- the stock on which the dividend is paid must be held for more than 60 days during the 121 day period beginning 60 days before the ex dividend date - to be considered a qualifying dividend, dividends must be paid by either domestic or certain qualified foreign corporations

tax aspects of the capital structure of a corporation

- when money or property is received in exchange for capital stock (including treasury stock) the corporation does not recognize any gain or loss - contributions by non shareholders, such as land contributed to a corporation, are included in the gross income of corporation - the basis of property received by a corporation from a non shareholder as a capital contribution is equal to the basis of property in the hands of the shareholder

thin capitalization

- whether funds loaned to the corporation are used to finance initial operations or capital asset acquisitions - whether holdings of debt and stock are proportionate (each shareholder same %) - whether payment is contingent upon earnings - whether the debt instrument bears a reasonable rate of interest and has a definite maturity date

The holder of qualified small business stock acquired after 09/27/10 may exclude up to ____% of any gain from the sale or exchange of such stock. Only ____ shareholders qualify for the exclusion. To qualify for the exclusion, the taxpayer must have held the stock for more than ___ years and must have acquired the stock as part of an original issue.

100% non corporate 5

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

Adam recognizes a gain of $10,000 and the basis of stock is $0. - $60,000 liability - $50,000 basis = $10,000 gain Swift Corp basis is $60,000 - $50,000 basis + $10,000 gain = $60,000

Global Corporation distributed property with a $850,000 FMV and $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 distribution made during the year. What is the taxable dividend and basis?

As a result, the shareholder receives a taxable dividend of $620,000 and a basis of $850,000 for the property $850,000 FMV - $230,000 mortgage = $620,000 basis = FMV = $850,000

On Jan 2, Martin Corp acquires two properties from a shareholder in a transaction that qualifies under 351. The shareholder's basis, FMV and loss are: P1: 300,000 basis; 375,000 FMV; 75,000 gain P2: 525,000 basis; 400,000 FMV; 125,000 loss Net Loss: 50,000 Martin adopts a plan of liquidation and distributes P2 to a 30% shareholder when the property is worth $350,000. P1 basis? P2 basis? Realized and recognized loss on P2?

Basis P1: carryover $300,000 Basis P2: stepped down $475,000 - ($525,000 - 50,000 = $475,000) Realized Loss: $125,000 - ($350,000 - 475,000 = $125,000) Recognized Loss: 75,000 - ($400,000 - 475,000 = 75,000)

Gigi transfers real estate (basis of $60,000 and FMV of $40,000) to Monarch Corporation in exchange for shares of § 1244 stock. Assume that the transfer qualifies under § 351. What is the basis of the stock to Gigi? (Gigi and Monarch do not make an election to reduce her stock basis.) What is the basis of stock to Gigi for purposes of 1244? If Gigi sells the stock for $38,000 two years later, how will the loss be treated for tax purposes?

Basis is $60,000 1244 Basis: $40,000 Gigi would have a capital loss of $20,000 and an ordinary loss of $2,000. - $60,000 - $40,000 = $20,000 - $40,000 - $38,000 = $2,000

Grady exchanges qualified property, basis of $32,333 and FMV of $38,800 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 $6,467 and $38,800 basis in his shares of stock $38,800 FMV - $32,333 Basis = $6,467 Gain $32,333 Basis + $6,467 Gain = $38,800

Janice and Thom formed Level Corporation. Janice transfers equipment (worth $60,000, basis of $40,000) for 50% of the stock in Level. Thom transfers inventory (worth $20,000, adjusted basis of $15,000) and provides services worth $40,000 for 50% of the stock

Because this transaction meets the control of the corporation requirement, Janice has income of $0 and Thom has income of $40,000 - requirements for nonrecognition of gain or loss are property is transferred, in exchange for stock, in control after exchange

Trey, Amy, and Erin incorporate their businesses by forming Whitehead Corporation. As part of a prearranged plan, Trey exchanges his qualified property (basis $500; fair market value $1,000) for 100 shares in Whitehead on May 9, 2021. Amy exchanges her qualified property (basis $1,800; fair market value $2,000) for 200 shares of Whitehead Corporation stock on May 12, 2021, and Erin exchanges her qualified property (basis $2,000; fair market value $3,000) for 300 shares in Green on March 5, 2021.

Because this transaction meets the control of the corporation requirement: Trey has income of $0 and $500 basis in his shares of stock. Amy has income of $0 and $1,800 basis in her shares of stock Erin has income of $0 and $2,000 basis in her shares of stock

Chaz transfers cash of $60,000 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $15,000. The income is credited to its earnings and profits account. The corporation distributes $5,000 to Chaz.

Chaz has a taxable dividend of $5,000 and the corporation has a deduction of $0

Assume, instead, that Chaz transfers to the corporation cash of $30,000 for stock and cash of $30,000 for a note of the same amount. The note is payable in equal annual installments of $3,000 and bears interest at the rate of 6%. At the end of the year, the corporation pays an amount to meet this obligation.

Chaz has interest of $1,800 and a note repayment of $3,000 of which $1,800 is taxable to Chaz. The corporation has a deduction of $1,800 $30,000 x 6% = $1,800

At the beginning of the year, Myrna Corporation has E&P of $116,650. The corporation generates no additional E&P during the year. On Dec 31, the corporation distributes $174,975 to its sole shareholder, Abby, whose stock basis is $34,995. How is the distribution related for tax purposes?

Dividend Income: $116,650 Return of capital: $34,995 Capital gain: $23,330 $174,975 - $116,650 - $34,995 = $23,330 Stock basis after distribution: $0

Global Corporation distributed property with an $262,500 FMV and a $144,375 adjusted basis to one of its shareholders. The property was subject to a $79,406 mortgage, which the shareholder assumed. Global has ample E&P to cover any distribution made during the year. What is the amount of the shareholder's dividend income on the distribution? What is the shareholder's basis in the property received?

Dividend Income: $183,094 Basis: $262,500 $262,500 FMV - $79,406 mortgage = $183,094

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 Dec 31, the corporation distributes $50,000 to its sole shareholder, Emerson, whose stock basis is $10,000 What is Emerson's dividend income, taxable capital gain, and stock basis after distribution?

Dividend income: $32,000 Taxable capital gain: $8,000 $50,000 - 32,000 - 10,000 = $8,000 (Capital Gain) Stock basis: $0

Ester transfers land (basis of $200,000 and FMV of $355,000) to a controlled corporation in return for stock in the corporation. However, shortly before the transfer, Ester mortgages the land and uses the $25,000 proceeds to meet personal obligations. Along with the land, the mortgage is transferred to the corporation.

Ester has a realized gain on the transfer of a $155,000 and a recognized gain of $25,000 - Realized Gain = FMV - basis ($355,000 - $200,000) = $155,000

Fargo Corporation distributes property (basis of $332,000 and FMV $398,400) to a shareholder. Fargo Corporation has sufficient E&P for its distributions. What are the tax consequences of this distribution to Fargo?

Fargo Corporation recognizes a gain of $66,400. The net decrease to Fargo's E&P is $332,000. The shareholder has dividend income of $398,400 $398,400 - $332,000 = $66,400

Goose Corp has a basis of $4,337,500 in the stock of Swift Corp, a wholly owned subsidiary acquired 30 years ago. Goose liquidates Swift Corp and receives assets that are worth $3,470,000 and have a basis to Swift of $3,036,250 Determine recognized gain or loss and basis in the assets received

Goose recognizes no gain or loss Goose has a carryover basis of $3,036,250 in the assets received in liquidation

Red Corporation wants to set up a manufacturing facility. Land (FMV $3,000,000 and cash of $1,000,000) How much income must be recognized? What basis will Red have in the land? Assume property tax is reduced by 40%. What are the tax consequences?

Income: $4,000,000 Basis: $3,000,000 When a municipality grants a tax abatement to a corporation for locating in the jurisdiction, the abatement is not considered a contribution to capital. In addition, it is not taxable.

John organized Toucan Corporation 10 years ago. He contributed property worth $1,000,000 (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 stock. In the current year, John transfers property worth $350,000 (basis of $170,000) to Toucan for 1,000 more of its shares. What gain, if any, will John recognize on the transfer?

John's shares: 2,000 - Kids Shares: (1,000) + Purchased: 1,000 Total Shares: 2,000 Value of shares: 350,000 - Basis: (170,000) Gain: 180,000

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 Dec 31, the imputed interest rules are applied. Assume that the Federal rate is 6% compounded semiannually. What are the tax consequences of this loan?

Lafayette has dividend income of $15,000 and Deerwood has interest income of $15,000 ($500,000 x 6% x 6/12) = $15,000

Deerwood Corporation lends its principal shareholder, Lafayette, $1,183,400 on July 1. The loan is interest free and payable on demand. On Dec 31, the imputed interest rules are applied. Assume the Federal rate is 4%, compounded semiannually What are the tax consequences of this loan?

Lafayette has dividend income of $23,668 and Deerwood has interest income of $23,668 $1,183,400 * (6/12) * .04 = $23,668

Osprey Corporation stock is owned by Pedro and Pittro, who are unrelated. Pedro owns 50% and Pittro owns 50% of the stock. Osprey has the following assets: cash. basis: 300,000; FMV 300,000 land. basis: 200,000; FMV 440,000 equip. basis: 250,000; FMV 140,000 Recognized gain or loss on land? On equipment?

Land: gain of $240,000 - ($440,000 FMV - 200,000 basis = $240,000) Equip: loss of $110,000 - ($140,000 FMV - 250,000 basis = $110,000)

Maria and Bob form Robin Corporation. Maria transfers property worth $395,000 (basis of $138,250) for 70 shares in Robin Corporation. Bob receives 30 shares for property worth $158,000 (basis of $31,600) and for legal services (worth $15,800) in organizing the corporation. What gain or income, if any, will the parties recognize on the transfer? What basis do Maria and Bob have in the Robin Corporation stock? What is Robin Corp's basis in the property and services it received from Maria and Bob?

Maria recognizes no gain or loss ($0). Bob recognizes ordinary income of $15,800. - legal services Maria has a basis of $138,250 Bob has a basis of $47,400 - $31,600 basis + $15,800 services = $47,400 Robin Corp has a basis of $138,250 in the property Maria transferred and a basis of $31,600 in the property Bob transferred

Marie and Ramesh form Roundtree Corporation with the transfer of the following: Marie performs personal services for the corporation with a FMV of $109,200 in exchange for 400 shares of stock. Ramesh contributes an installment note receivable (basis $25,000; FMV $30,000), land (basis $50,000, FMV $170,000) and inventory (basis $189,440, FMV $236,800) in exchange for $1,600 shares. Determine Marie and Ramesh's current income, gain or loss and calculate the basis that each takes in the Roundtree stock.

Marie has income of $109,200 and $109,200 basis in her 400 shares of stock. - personal services Ramesh has income of $0 and $264,440 basis in his $1,600 shares of stock - add all three asset basis

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.

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.

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

Several years ago, Minjun, who is single, acquired 1244 stock in Blue Corporation at a cost of $86,000. He sells the Blue stock for $8,600 in the current year. Determine the amount and nature of Minjun's gain or loss recognized this year.

Minjun's sale of Blue Corporation stock produces a total loss of $77,400 of which $27,400 is treated as a capital loss $86,000 - $8,600 = $77,400 $77,400 - $50,000 = $27,400 The maximum limit of treating the loss as ordinary loss is $50,000 for individual tax returns.

In January of the current year, Wanda transferred machinery worth $200,000 (basis of $30,000) to a controlled corporation, Oriole Inc., in a transfer that qualified under 351. Wanda had deducted depreciation on the machinery in the amount of $165,000 when she held the machinery for use. Later in the year, Oriole sells the machinery for $190,000. Does Wanda recognize a gain or loss of any kind of the transfer of the machinery to Oriole? Which taxpayers will recognize a gain as a result of the sale? What is Oriole's basis in the machinery before the sale? What is Oriole's gain from the sale?

No gain is recognized. Oriole $30,000 basis $160,000 gain treated as ordinary income under 1245 - $190,000 - $30,000 = $160,000

Several years ago, Lowell, who is single, acquired 1244 stock in Blue Corporation at a cost $60,000. He sells the Blue stock for $5,000 in the current year. Lowell's sale of Blue Corporation stock produces a loss that is treated as follows:

Ordinary loss of $50,000 Capital loss of $5,000 Total loss on the sale is $55,000 ($60,000 - $5,000), the first $50,000 receives ordinary loss treatment and excess $5,000 is capital loss.

Rhonda owns 50% of the stock of Peach Corp. She and the other 50% shareholder, Rachel, have decided that additional contributions of capital are needed if Peach is to remain successful. The two shareholders have agreed that Rhonda will contribute assets having a value of $200,000 (adjusted basis of $15,000) in exchange for additional shares of stock. After the transaction, Rhonda will hold 75% of Peach Corporation and Rachel's interest will fall to 25%. What gain is realized on the transaction? How much of the gain will be recognized?

Realized gain $185,000 Recognized gain $185,000 $200,000 stock - $15,000 basis = $185,000 The transaction is fully taxable because Rhonda, the sole transferor of property, does not have control immediately after the transaction. Therefore, all of the realized gain is recognized.

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 FMV of $90,000 What is realized loss recognized and basis?

Realized loss of $60,000 of which $0 is recognized. - $150,000 - 90,000 = 60,000 Shareholder received property with a basis of $90,000

Quinlan has ample E&P to cover any distributions made during the year. One distribution made to a shareholder consists of property with an adjusted basis of $1,038,600 and a FMV of $623,160. What is realized loss? Basis?

Realized loss: $415,440 $1,038,600 - $623,160 = $415,440 Recognized loss: $0 Basis: $623,160

Diego transfers real estate with an adjusted basis of $677,000 and FMV of $947,800 to a newly found corporation in exchange for 100% of the stock. The corporation assumes the liability on the transferred real estate in the amount of $805,630. Determine Diego's recognized gain on the transfer and the basis for his stock.

Recognized Gain - $128,630 $805,630 liability - $677,000 basis = $128,630 Basis - $0

Blush Corp owns long term bonds (basis of $1,300,000) of its subsidiary, Brass Corp, that were acquired at a discount. Upon liquidation of Brass pursuant to 332, Blush receives a distribution of $1,500,000 (face amount of bonds). Determine Blush Corp's recognized gain or loss on the distribution

Recognized gain of $200,000 - ($1,500,000 - 1,300,000 = 200,000)

Green Corp's assets are valued at $920,000 after payment of all corporate debts, except for $134,000 of taxes payable on net gains it recognized on the liquidation. Bruno, an individual and sole shareholder of Green, has a basis of $280,000 in his stock. Gain or loss recognized?

Recognized gain of $506,000 - ($920,000 - 134,000 - 280,000 = $506,000)

Ron, David, and Mary formed Widget, Inc. Ron and David each received 40% of the stock, and Mary received the remaining 20%. Ron contributed land with an FMV of $70,000 and an adjusted basis of $20,000. The corporation also assumed a $30,000 liability on the property. David contributed land with an FMV of $30,000 and an adjusted basis of $15,000. David also contributed $10,000 in cash. Mary received her stock for services rendered. She normally would bill $20,000 for these services. What is Ron's basis in the corporate stock received? What is Mary's basis in the corporate stock received? What is Ron's taxable gain as a result of the transaction?

Ron Basis: $0 Mary Basis: $20,000 - services Ron Gain: $10,000 - $30,000 liability - $20,000 basis = $10,000

Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax bracket and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $92,400 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $92,400 dividend because the tax rate on dividends is lower than the tax rate on compensation. Regarding taxes, which would benefit Aleshia the most? Which would benefit Rover the most? Which would provide the most tax savings?

The $92,400 dividend would benefit Aleshia because after taxes she would have $78,540 from the dividend and $70,224 from the bonus $92,400 * .15 = $13,860 → $92,400 - $13,860 = $78,540 $92,400 * .24 = $22,176 → $92,400 - $22,176 = $70,224 The $92,400 bonus because it would save Rover $19,404 in taxes $92,400 * .21 = $19,404 The $92,400 bonus because when the overall effect to both the corporation and the shareholder are considered the net tax savings is $11,088 $78,640 - $70,224 = $8,316 → $19,404 - $8,316 = $11,088

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.

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

A county donates land worth $250,000 to Quarles Corporation as an inducement for Quarles to locate in the county. In addition, the city has agreed to reduce the standard real estate tax rate for Quarles by 25% on newly constructed property in the county. Quarles estimates that the reduction in taxes will save about $180,000 in taxes.

The receipt of the land produces taxable income to Quarles and the land's basis to the corporation is 250,000. In addition, the real estate tax abatement produces no taxable income to Quarles

What are the tax consequences to Euclid from the following events? a. Euclid bought 500 shares of common stock 5 years ago for $98,000. This year, Euclid receives 20 shares of common stock as a nontaxable stock dividend. What is his share per basis? b. Assume Euclid received a nontaxable preferred stock dividend of 20 shares. The preferred stock has a FMV of $9,800 and the common stock has a FMV of $147,000. What is the basis of the preferred stock? Basis of the common stock?

a. $188.46 $98,000 / 520 shares = $188.46 b. N?A

A corporation with common stock outstanding declares a nontaxable dividend payable in rights to subscribe to common stock on June 30 of the current year. Each right entitles the holder to purchase one share of stock for $75. One right is issued for every share of stock owned. Thomas owns 100 shares of stock purchased 10 years ago for $3,800. At the time of the distribution of the rights, the market value of the common stock is $113 per share and market value of the rights is $15 per right. Thomas receives 100 rights. On Sept 30 he exercises 75 of the rights and sells the remaining 25 rights for $18 per right. a. Basis in the new stock? b. When does holding period begin for the new stock? c. What are the tax consequences of the sale of the rights?

a. $5,625 - 75 * 75 = $5,625 b. on the date the new stock was purchased c. the sale of rights produces a long term capital gain of $450 - 25 rights * $18 = $450

Apricot Corporation distributes property ($125,000 basis; $150,000 FMV) to its sole shareholder, Ellie. The property is subject to a liability of $200,000, which Ellie assumes. Apricot has E&P of $325,000 prior to the distribution. a. what gain or loss does Apricot recognize on the distribution? what is Apricot's accumulated E&P at the start of the following year? b. what is the amount of Ellie's dividend income on the distribution? what is her basis in the property received?

a. Apricot has a gain of $75,000 on the distribution and new E&P after the distribution of $400,000 - ($200,000 liability - $125,000 basis = $75,000) - ($325,000 + $75,000 = $400,000) b. div inc: $0 basis: $200,000

The stock of Quail Corp is held as follows: 95% by Pheasant Co 5% by Gisela, an individual Quail Co is liquidated in Dec. Assets have a basis of $804,200 and a FMV of $1,125,880 What is the recognized gain or loss on property to Pheasant? to Gisela?

a. The liquidation of Quail is a parent-subsidiary liquidation, recognizing no gain or loss. b. Gisela is a minority shareholder, Quail recognizes a gain of $16,804 - ($1,125,880 FMV - $804,200 basis = $321,680 * .05 = $16,084)

Pursuant to a complete liquidation, Carrot Corporation distributes to its shareholders real estate held as an investment (basis $650,000; FMV $880,000) a. determine the gain or loss if no liability is involved b. if real estate liability is $690,000 c. if liability is $885,000

a. gain of $230,000 - ($880,000 - $650,000 = $230,000) b. gain of $230,000 c. gain of $235,000 - ($885,000 - 880,000 = $235,000)

when computing E&P, which is added and deducted?

added: - tax exempt interest income - proceeds from life insurance - excess MACRS deduction - dividends received deduction - LIFO adjustment deducted: - federal income tax liability paid - non deductible meals and entertainment expenses - life insurance premiums - excess of capital losses over capital gains - section 179 expense elected in 2020 - installment sale

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.

because this transaction does not meet the control of the corporation requirement, Grady has income of $6,000 and $18,000 basis in his shares of stock

Computation of Earnings & Profits

calculation generally begins with taxable income, plus or minus certain adjustments + previously excluded income items and certain deductions - certain nondeductible items

Property v Not Property

not property - services property - plant and equipment - unrealized receivables of a cash basis taxpayer - installment obligations - cash

Chapter 5: Earnings & Profits (E&P)

similar to retained earnings (financial reporting), but often not the same E&P represents - upper limit on amount of dividend income recognized on corporate distributions - corporation's economic ability to pay dividend without impairing capital

At the beginning of the current year, Sparrow Corp has accumulated E&P of $100,400. The corporation incurs a deficit in current E&P of $140,560 that accrues ratably throughout the year. On June 30, Sparrow distributes $60,240 to its sole shareholder, Libby. If Libby's stock has a basis of $10,040, how is she taxed on the distribution? Taxable dividend? Return of capital? Capital gains?

taxable div: $30,120 - ($140,560 / 2 = $70,280) - ($100,400 - 70,280 = $30,120) return of capital: $10,040 capital gains: $20,080

Cornflower Corporation distributes equipment (adj basis $70,000; FMV $55,000) to its shareholder, Maria. Assume that Cornflower has more than $100,000 of current E&P. What are the tax consequences to Cornflower Corporation and to Maria?

taxable div: $55,000 basis: $55,000 Cornflower has a realized loss which is not recognized. The distribution reduces Cornflower's E&P by $70,000.

On Sept 30, Silver Corp sold a parcel of land (basis of $400,000) for a $1,000,000 note. The note is payable in five installments, with the first payment due next year. Because Silver did not elect out of the installment method, none of the $600,000 gain is taxed this year. Silver Corp had a $300,000 deficit in accumulated E&P at the beginning of the year. Before considering the effect of the land sale, Silver had a deficit in current E&P of $50,000. Javiera, the sole shareholder of Silver, has a basis of $200,000 in her stock. Javiera holds the Silver Corp stock as an investment. If Silver distributes $900,000 to Javiera on Dec 31, how much income must she report for tax purposes?

taxable dividend $550,000 ($600,000 gain - $50,000 deficit) capital gain: $150,000 ($550,000 - $400,000 basis) stock basis: $0