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business
federal taxation 2019

Questions and Answers of Federal Taxation 2019

Choice Corp. decides to incorporate one of its divisions. As a result, assets with a basis of $200,000, but worth $800,000, and liabilities of $325,000 are transferred to a new corporation, Prime
As part of a Type A reorganization, Hall Corp. transferred property with a value of$15 million and a basis of $8 million, in exchange for $13 million worth of stock in Gates Corp. and $2 million
Builders Inc. purchased 40 percent oft he stock of Stairways Inc. for cash and acquired the remaining 60 percent for its own voting stock pursuant to a single plan. As soon as practicable, Stairways
Auto Supplies Inc. has earnings and profits of $200,000 and a stock portfolio. It transfers appreciated stock worth $150,000 with a basis of $80,000 to a newly created corporation, Peak Enterprises
Compute the realized and recognized gain or loss and the new basis in the following transactions, all of which took place pursuant to a plan of recapitalization.a. A shareholder exchanged 100 shares
Kelly owns all the stock in Duncan Corp.Her Duncan stock has a basis of $120,000 and a fair market value of $150,000.Duncan Corp. is merged into Munro Corp.Pursuant to the reorganization, Kelly
Northwestern Ltd. (NW) acquires the only class of stock of Southeastern Ltd. (SE)from the latter's shareholders. Which of the following independent transactions qualify as a Type B reorganization?a.
Carson Corporation has a basis of $10 million in the stock of its 100-percent-owned subsidiary, Griffen Corporation. Both Carson and Griffen have been actively conducting business for more than five
Rose Inc. is an accrual-basis, calendar-year corporation with only voting common stock outstanding. On October 19, 2019, it acquired the assets of Nagg Inc. by issuing 3,000 of its voting common
Nardine Corporation acquired Tabor Corporation pursuant to a statutory merger under state law. As a result of the merger, Tabor Corporation's former shareholders received common stock in Nardine
Mountain Corporation forms Hill Corporation, and acquires Mound Corporation by merging Mound into Hill Corporation, with the former Mound Corporation shareholders receiving solely voting stock of
Pursuant to a corporate reorganization, Marcia exchanged stock she owned in Casey Corp. for stock in Mills Corp. valued at$70,000, plus a Mills Corp. bond worth$9,000 (face amount of $10,000). Marcia
Green Corporation purchased 100 percent of the outstanding stock of White Corporation during 2017. During 2019, Green Corporation distributes all of its White Corporation stock to Green
Holly, the sole shareholder of Peach Corporation, has a basis for her Peach stock of $500,000. As part of a statutory merger of Peach Corporation into Pear Corporation, Holly exchanges her Peach
Wood Corporation is owned equally by two individuals—Allan and Baker.Wood Corporation has two operating divisions, Oak and Pine, that have been conducting business for more than five years. Allan
Parent Corporation and its wholly owned Subsidiary Corporation wish to acquire the stock of Target Corporation. Target has outstanding 100,000 shares of common stock and $300,000 of convertible
Metal Corporation owns all of the stock of Iron Corporation, and owns 100 shares of Steel Corporation, which has 1,000 shares of stock outstanding. The 100 shares of Steel were purchased by Metal in
Pursuant to a Type D corporate reorganization, Cheng Corp. transferred some of its assets to newly formed Racine Corp. The assets transferred had a basis of $60,000 and a value of $90,000, and were
Shipyard Corp. acquired Boatworks Corp. in a Type A reorganization on July 1, 2019. On the date of acquisition, Boatworks had a deficit in its earnings and profits of $30,000. Although Shipyard had
Gate Corp. acquired all of Way Corp's assets in a Type C reorganization on October 19, 2019. On the date of acquisition, Way Corp. had an unused net capital loss of $70,000. Gate Corp. had a net
Diamond Corp. acquired all of Emerald Corp's assets in a Type A reorganization on December 31, 2018. On the date of acquisition, Diamond had accumulated earnings and profits of $400,000, and Emerald
Maples Corp., whose outstanding stock is worth $4 million, has a net operating loss carryforward of $1 million. Maples is owned 45 percent by Alan and 55 percent by Cline, who are otherwise
Tiburon Corp. proposes to acquire Target Corp. in a tax-deferred triangular merger using its 100%-owned Subsidiary Corp.The sole shareholder of Target will receive$350,000 of Tiburon Corp. voting
Denise owns Gal Corp. stock which she purchased ten years ago for $370,000.Pursuant to a plan of corporate reorganization, Gal Corp. will be merged into Lewis Corp. As a result of the merger, Denise
Determine whether the following transactions qualify as Type C reorganizations:a. ‘The acquisition of all assets and liabilities of Bark Inc. by Ark Inc. for 20 percent of Ark’s voting preferred
Label the following transactions:a. A Nevada corporation formed a corporation in Florida and transferred all assets to it for 100 percent ofi ts stock. It then distributed the stock to its
Mr. Aslak owns all the stock in Shoes Inc., which owns 85 percent of Skiing Inc. Ms. Quinn, the manager of Skiing, wishes to share in the profits of the prosperous firm by buying 5 percent of its
In practice, the number of shares paid for an acquired corporation may be contingent on its future performance(e.g., sales and/or earnings). Perhaps 500,000 shares are “paid” up front, while
May the personal holding company tax and the accumulated earnings tax be imposed on the following corporations?a. The same corporation in the same taxable yearb. The same corporation in two different
What is the tax rate on undistributed personal holding company income? On accumulated taxable income?
What is the impact of accelerated cost recovery on the personal holding company tax? On the accumulated earnings tax?
The Loophole Tax Service Inc. has accumulated earnings of $135,000 and current earnings of $60,000. If the dividends- paid deduction is $8,500 and reasonable business needs amount to $160,000, what
A manufacturer of billiard and bowling equipment paid an accumulated earnings tax of $45,000, relating to the previous taxable year. What is the impact on the tax situation of the corporation and its
Mr. Wilson incorporated his bookstore, Occult Books Unlimited, five years ago.Accumulated earnings are $230,000, current earnings are $80,000, and he can show a need for $150,000 ofi nventory. What
Margo’s Cookies Inc. has working capital of$210,000. Selected operating figures include:According to the Bardahl formula, what is Margo's working capital need in total? Average inventory Average
War Games Inc. breaks even on its operations one year, but has dividend income of $2,000. Could it be a personal holding company?a. The following year, War Games has a net operating loss of $50,000
Party Supplies Inc. is owned 60 percent by Sylvester and 40 percent by an unrelated corporation. How much stock is Sylvester deemed to own after he makes the following independent transactions?a.
Parkview West Inc. has gross income of$50,000, consisting of $37,000 of rent receipts and $13,000 of U.S. dividends.Rental deductions of $20,000 are claimed(interest, taxes, and cost recovery).
Ray Cutter, M.D., incorporated his medical practice. Soon thereafter, he transferred his stock portfolio to the corporation.Since Dr. Cutter is the only surgeon in the corporation, all patients
B-Flat Music Supplies Ltd. earned dividends of $30,000, interest of $12,000, adjusted rent of $50,000, and gross income from its primary business of $63,000 in one taxable year.a. Is B-Flat a
Lark Enterprises Inc. is a personal holding company. From the information below, compute its maximum dividends-paid deduction.a. Land with a basis of $10,000 and a value of $50,000 was distributed
Parking Unlimited Ltd.’s financial situation last year may be summarized as follows:a. Is Parking Unlimited a PHC?b. Is the 50 percent test met?c. How much must be paid in dividends, if any, to
David Roberts runs a one-person corporation, a management consulting firm. For the first few years, he paid himself a minuscule salary, no dividends, and no fringe benefits, paying only the regular
Gary’s Garage Inc. never paid a dividend and invested its after-tax earnings in tire company stock. It has no plans to expand and its working capital is ample. Gary owns 100 percent of the stock.a.
Nestor Corp., which is not a mere holding or investment company, derives its income from retail sales. Nestor had accumulated earnings and profits of $145,000 on December 31, Year 1. For the year
To compute the accumulated taxable income, all of the items below are deductible, except:a. Federal income taxesb, After-tax net capital gainsc. Current dividendsd. Deficiency dividends
Engineering Valuations Inc. has accumulated earnings of $190,000 and current earnings of $250,000. The corporation can show a need to expand the business to the tune of$220,000. The amount of the
To arrive at adjusted ordinary gross income from gross income, the following subtractions are made, except:a. Rent and royalty expensesb. Section 1231 gainsc. Ordinary and necessary business
Scandinavian Furniture Inc., a calendar-year corporation, is worried about the accumulated earnings tax. In February, the following facts are available for the preceding year:If the consent dividend
Marital Aids Inc. reported the following results last year:If the corporation has only four individual shareholders, compute the following:a. Adjusted ordinary gross income.b. Personal holding
To what extent may a corporation accumulate earnings for the reasonable needs of a related corporation?To what extent does it matter that the following conditions prevail?a. A parent-subsidiary
corporation is resisting the personal holding company tax, but the Tax Court sides with the IRS. Within 90 days after the adverse decision, one shareholder transfers his stock and $10,000 in cash to
If the partnership agreement contains no provision governing the event, what is the effect of a partner's death on the income tax reporting of the partnership? The deceased partner? The deceased
Under what circumstances will the Internal Revenue Service recognize a minor child as a partner in a service partnership? In a partnership where capital is a major income- producing item?
Ina bona fide, arm’s-length transaction, a son, age 42, purchased from his father a 40 percent interest in the father's partnership, paying the full fair market value. The partnership is a
Joe Quick and Jane Reddy are equal partners in the Quick and Reddy partnership. On the first day of the current taxable year, Joe’s adjusted basis in his partnership interest is$10,000 and Jane’s
Diane Barnes has a 25 percent interest and Ester Newton has a 75 percent interest in the income and capital of D&E Partnership. The partnership reports ordinary income of $25,000, tax-exempt interest
Paul Stanley transfers $20,000 in cash, Joe Sweitzer transfers machinery with an adjusted basis of $5,000 and a fair market value of $20,000, and David Raines transfers land with an adjusted basis of
On September 1, 2014, Leonard contributed land held for investment with a fair market value of $200,000 and an adjusted basis to him of $120,000 for a 20 percent interest in the income and capital of
Elder Attorney had practiced law for several years and had accumulated $50,000 in accounts receivable. He reported his income for tax purposes under the cash receipts and disbursements method. Elder
On January 17 of the current year, the Bamber Partnership was formed by Bob Miller, Carl Penn, and Don Allen. Each partner has an equal interest in the capital and profits of the partnership. The
On January 1, 2019, Kelley became a 10 percent partner of the Realty Partnership upon contributing land he had held as an investment for five years. The basis of the land to Kelley was $200,000, but
Marvin Bridges is a 25 percent partner in the Munson partnership. On November 23, 2018, Marvin contributes property with an adjusted basis of $75,000 and a fair market value of $250,000 to the Munson
Jeff Able is a partner in the Willing and Able partnership. On June 1, 2019, Jeff transfers property to the partnership that has a fair market value of $60,000 and an adjusted basis to Jeff of
Susan Moore contributed land with an adjusted basis of $500,000 and a fair market value of $800,000 to the Whirligig partnership in exchange for a 20 percent interest in the partnership. Susan held
Jed Castanza transfers $90,000 of cash to the JN partnership for a 60 percent interest in the JN partnership. Ned transfers a building with an adjusted basis of $30,000 and a fair market value of
James Michaels invested $25,000 for a one-third interest in the Jabo Partnership on January 1 of the current year. The partnership purchased a building site on February 5 at a cost of $200,000,
Ruben and Albert are both calendar-year taxpayers, and are equal partners in the RA Partnership, which has a fiscal year ending on October 31. During the 2019-2020 fiscal year the partnership earns
The Nelson partnership begins business on July 17, 2019. It is not able to use business purpose to support a tax year. The four partners, their interests in partnership capital and profits, and their
In 2019 the XYZ Partnership incurred the following expenses:If XYZ began business on August 1, 2019, how much in total of these expenses could XYZ deduct (including amortization)? Expenses of selling
Ozone Partnership constructed an office building which has a projected annual income of $100,000 for several years. Archie Edwards, the architect for the building, whose normal fee is $50,000,
Henry Hawkins owns a 20 percent interest in the HI Partnership. On July 1 he sold 100 shares of stock of IPR Corporation to the partnership for $10,000, its fair market value. The stock had cost him
Assume that the HI Partnership in the preceding problem held the IPR stock for three months and on October 1 sold it for $15,000 to Isaac Stanley, the 80 percent partner and a real estate broker. How
Elaine is a 30% partner in the DEF Partnership. She sells some land to the partnership for $50,000, incurring a $30,000 loss on the sale. How much of the loss can she deduct? What happens if DEF
Baker, a cash-basis, calendar-year taxpayer, is a partner in an accrual-basis partnership that reports its taxable income on an October 31 fiscal year. Baker has been provided the following
Because it was anticipated that Bob Short would devote more time to the partnership than would his equal partner Jack Long, it was agreed that Bob would receive a "salary" of $12,000 per year. Bob
On January 1, 2016, Martha Carnes, fresh out of college, contributed $10,000 for a 30 percent interest in an accounting partnership. The senior partner was not attentive to the work, and the first
Jack Dillon and Jake Johnson each own 50 percent of the capital interests in the JJ partnership. They share profits equally, but they agree to allocate 60 percent of the losses to Jack and 40 percent
Frank Caster and George Wilson were equal partners of the F&G partnership, which reported its income on a fiscal year ending September 30. For fiscal year 2018—2019, the partnership's ordinary
William Nest operated a consulting business as a sole proprietor in 2018, generating fees of $50,000. On January 1, 2019, he decided to set up a consulting partnership with his son Wilhelm. William
For federal income tax purposes a partnership may be composed of:a. Two or more individualsb. An individual and a corporationc. A trust, an estate, and an individuald. Two or more partnershipse. All
The basis of a partner's interest in a partnership is increased by:a. Decreases in partnership liabilitiesb. Receipt by the partnership ofa n item of income that is excluded from the definition of
If the partnership agreement is silent regarding the matter:a. The partnership year ends upon the death of one partner in a two-person partnership.b. All items of income, deductions, and credits must
Hazel Patrick owns a building in which she practices dentistry. She also owns substantial amounts of equipment used in her practice. The building cost her $100,000 and its adjusted basis is $60,000;
Barbara Thompson and Colleen Tiller are equal partners in the Boteq partnership. Barbara is age 72 and Colleen age 58. Both are unmarried and the partnership is their sole source of income.During the
Adam, Barbara, and Charlotte formed the equal ABC Partnership; Adam and Barbara each contributed cash of $100,000, and Charlotte contributed land worth $130,000 with a basis of $120,000 and subject
Mary Black, Nell Brown, and Louise Gray each has her own computer equipment and service retail store. In an effort to potentially reduce their costs and increase their control over supply channels,
What tax basis will a partner take in hot assets received from a partnership in a disproportionate distribution?
When a partner sells his/her interest in a partnership, what items are included in the amount realized?
In general, gain or loss recognized on sale of an interest in a partnership is classified as capital gain or loss. Why?
How does the sale of a partnership interest compare to a liquidating distribution from a partnership? How do the tax consequences of the two transactions differ?
What is a "Section 754 election?" What does it allow the partnership to do?
What is a "Section 754 election?" What does it allow the partnership to do?
Explain the difference between a basis adjustment under Section 743(b) and one under Section 734(b). Who benefits from each type of adjustment?
What is a partner's tax basis in a newly purchased partnership interest?
Assume a partnership does not have a Section 754 election in effect, and does not make one. If a new partner purchases his/her partnership interest from another partner, what will be his/her share of
How is a partnership affected for tax purposes when a partner sells his/her interest in the partnership to another person? Assume the partnership does not have a Section 754 election in effect and
Could a partner recognize a deductible loss for tax purposes on sale of his/her partnership interest to an unrelated buyer? What about on the receipt of a liquidating distribution from the
When does Section 736 apply to a liquidating distribution made to a partner?
Why is the application of Section 736 different for partnerships where capital is a material income-producing factor than for those where capital is not a material income- producing factor?

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