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business
federal taxation 2019

Questions and Answers of Federal Taxation 2019

Smith Co. has no E\&P, current or accumulated, prior to the following independent transactions with its sole shareholder, Chris:Distribution of LIFO inventory with a basis of \(\$ 7,000\), a FIFO
Tara Corporation had current E\&P of \(\$ 320,000\) in 2018 . During 2018, it distributed numerous items to its sole shareholder, Anne. Indicate the effects of the distribution to Anne and Tara
Sopra Company is a closely-held corporation. Tony owns \(60 \%\), Carmella owns \(20 \%\) and Meadow owns \(20 \%\), and all are related. Sopra Company has very large \(E \& P\). It was audited this
Combat Toys Inc. has an accumulated deficit and current E\&P of \(\$ 20,000\). Joe Gunn, a 60 percent shareholder, withdrew \(\$ 35,000\) from the corporation. Joe reported no income from the
Karl Stick is president of Stock Company. He also owns 100 percent of its stock. Karl's salary is \(\$ 220,000\). At the end of the year, Karl was paid a bonus of \(\$ 100,000\) because the firm had
Refer to Problem 35 and assume that Karl's tax bracket is 32 percent and Stock Company's is 21 percent. What is the dollar impact of the IRS reclassification?
Bill incorporated his business four years ago and owns 100 percent of its stock. The corporation distributes a piece of land, used as a parking lot for the customers, to Bill. Bill's basis in his
Charlie received one warrant (right) to purchase a share of common stock for each ten shares she owned in Ludlow Inc. as a "dividend." The exercise price was \(\$ 70\), the price of the stock was
Super Xtra Inc, is publicly held. One of its shareholders, Fred, owns 100 shares of common stock with a basis of \(\$ 5,000\) and a value of \(\$ 12,000\). On October 17 of this year, Fred receives
Antoinette owns 400 shares of common stock of Gertz Incorporated which she acquired on May 28, 2013, for \(\$ 50,000\). On April 14, 2018, Antoinette received 40 shares of Gertz's common stock. The
Gary owns 100 shares of common stock (class A) in Justine Inc. which he acquired on October 10,2008 , for \(\$ 5,000\). On July 8, 2018, Gary received 20 shares of class \(B\) common stock in a
Hendricks Corporation has very large E\&P. On May 15, 2018, it declared a \(15 \%\) stock dividend payable to all shareholders. On September 15, 2018, when each share was worth \(\$ 500\), it
Beatles Inc. has 1,000 shares issued and outstanding. The shares are owned as follows:How many shares is Paul consider to own for redemption purposes? Name Paul John Corp. (Paul owns 70% of John
Salkey Company has two owners, Gus and Jack, who are father and son. Gus owns 100 shares which he acquired in 2013 for \(\$ 15,000\). Jack owns 100 shares which he acquired in 2015 for \(\$ 21,000\).
Monica is a preferred stockholder with a basis of \(\$ 9,000\) in her 100 shares in Small Appliances Inc. She has one-half her stock redeemed for \(\$ 6,000\) in a transaction that qualifies as a
Samson Corporation has 1,000 shares of common stock outstanding. Sal owns 560 shares, Rita owns 250 shares, and Susan owns 190 shares. None of the owners are related. On August 14, 2018, Samson
Staton Inc. has four unrelated shareholders, Wayne, Judy, Erica, and Josh. Their respective bases in the shares are \(\$ 15,000\), \(\$ 17,000, \$ 19,000\), and \(\$ 21,000\). Each shareholder owns
Foxrun Company has three equal shareholders, Thomas, Kimberly, and Jennifer. Kimberly and Jennifer are Thomas's daughters. On September 2, 2018, Foxrun redeemed all of Thomas's stock in return for
The AB Corp. has been owned equally by individuals \(A\) and \(B\) for over five years. \(A B\) operates two qualified businesses, \(Q\) and R. The XYZ Corp. wishes to acquire Division Q, worth \(\$
Falzone Company has two shareholders, Rita and Sal Corporation. Rita acquired her 300 shares in 2010 for \(\$ 30,000\) and Sal Corporation acquired its 200 shares in 2006 for \(\$ 15,000\). On August
Molly Caruso was the sole shareholder of Seneca Resorts Inc. Her basis in the stock was \(\$ 200,000\). Molly died when her stock was worth \(\$ 5,000,000\). Her gross estate, including the stock,
On the date of Leah Maxwell's death, she owned 50 percent of Skipper Boats Inc. with a fair market value of \(\$ 3,000,000\). She also owned 25 percent of Cabana Corporation with a fair market value
Larry owns 90 of the 100 outstanding shares of EDP Corporation. Larry acquired the 90 shares in 2007 for \(\$ 15,000\). He also owns 70 of the 100 outstanding shares of EDT Corporation. Larry
James owns 100 shares of Price Company which are Section 306 stock. He also owns 300 shares of its common stock. He wants to dispose of these shares in 2018 and is considering several options.
Marcus owned 200 shares (100 percent) of Sterling Company's common stock. His basis in the shares was \(\$ 12,000\). In 2015 , Sterling issued a preferred stock dividend to Marcus. The 50 shares he
Bob owns 100 shares of Dylan Company. Dylan Company's other 400 outstanding shares are owned by unrelated parties. Bob bought the shares on December 14, 2008 for \(\$ 20,000\) ( \(\$ 200\) per
First Co. had a deficit in E\&P of \(\$ 90,000\) on December 31 last year. Its taxable income was \(\$ 180,000\) for this year. Cash dividends on common stock totaling \(\$ 80,000\) were paid in
Sell Corporation has 400 shares of its only class of stock outstanding. Mr. Church owns 60 shares, his wife owns 80 shares, his son owns 200 shares, and his son's daughter owns 60 shares. Under the
During 2018, Kay Co. made the following distributions to an individual shareholder who owns 455 shares of its only class of stock.The shareholder assumed the mortgage on the property. Kay Co's
In 2018 , a corporation distributed property with an adjusted basis of \(\$ 100,000\) and a fair market value of \(\$ 140,000\) to its shareholders. Its earnings and profits for 2018 were \(\$
During 2018, Hero Co. distributed equipment having a fair market value of \(\$ 300,000\) and an adjusted basis of \(\$ 150,000\) to James in exchange for 85 percent of his interest in Hero. The
Monty Company distributed \(\$ 70,000\) to Susan in redemption of all her stock. Susan's basis in the stock is \(\$ 20,000\) and her pro rata share of earnings and profits is \(\$ 30,000\). Assuming
For each of the following independent distributions to shareholders, determine the impact on E\&P; recognized gain, if any, to the distributing corporation; the amount of the dividend; and the basis
Manuel Mesa is a 50 percent shareholder in a landscaping corporation, Mo Lo Inc. He has just incorporated his own wholly-owned landscaping business, Trim Inc. The other (unrelated) shareholder in Mo
Hobbies and Games Inc. has had taxable income the last three years, but is breaking even this year. Sondra, the sole shareholder, has a \(\$ 25,000\) basis in her stock. After consulting with a local
Research Problem. Joe Tucker is the sole shareholder of Tucker Parts Inc. The corporation is cash rich, and Joe wishes to sell his stock to Bill Corker, who has limited funds. The parties proceed as
Constant Corporation is a family-owned corporation. In 2018, Constant redeemed stock from some of its owners. Because of the attribution rules of Code Sec. 318, the redemptions did not qualify for
In a Code Sec. 332 liquidation, what is the tax effect of the distribution of property by a subsidiary in satisfaction of its indebtedness to its parent corporation?
Discuss a parent corporation's tax treatment if the securities that it owns in a subsidiary corporation become worthless.
Discuss the tax treatment of expenses incurred by a corporation in conjunction with a complete liquidation.
How does an acquiring corporation make a Code Sec. 338 election?
Why is Code Sec. 338 of limited interest today?
What is the benefit of a Code Sec. 338(h) (10) election?
What is meant by a parent corporation's "grossed-up" basis in the subsidiary's stock under Code Sec. 338(b)?
Describe the residual method for allocating basis to assets following a Code Sec. 338 election.
Why is the tax cost of incorporating an existing business generally low, while the tax cost of liquidating a business conducted in corporate form generally high?
Baretta Corp. owns 100 percent of the stock of PPK Corp., and also owns PPK Corp. debentures with a face amount (and basis) of \(\$ 200,000\). A plan of liquidation is adopted and PPK is liquidated
Ellen received a liquidating distribution from Lopas Corp. as part of a redemption of all of its stock. Ellen's basis for her Lopas stock was \(\$ 13,000\). In exchange for her stock, Ellen received
Brenda owns 100 percent of Walker Corp. She has a basis for her stock of \(\$ 20,000\). The corporation's only assets are cash of \(\$ 20,000\) and land with a basis of \(\$ 75,000\) and a value of
A cash-method corporation adopts a plan of complete liquidation and distributes the following assets to its shareholders:∎ A truck that was purchased for \(\$ 25,000\), is worth \(\$ 18,000\), and
The stock of Richmond Corp. is owned 60 percent by Sid and 40 percent by Mark, who are unrelated individuals. During 2017, Sid transferred land (basis of \(\$ 300,000\); FMV of \(\$ 260,000\) ) as a
Alex purchased one thousand shares of Ambrose Corporation stock on March 10, 2017 , for \(\$ 95,000\). On August 1, 2018, Alex received the following as a distribution in cancellation of his stock in
Ted purchased all of the stock of Fontana Manufacturing Corporation in 2016 for \(\$ 170,000\). Under Ted's leadership, Fontana Manufacturing soon became unprofitable, and Ted decided to liquidate
Marcia is a 50 percent shareholder of Chevez Corp., which is in the process of liquidation. Marcia's basis for her stock is \(\$ 25,000\). Chevez's balance sheet on the date of liquidation is as
Martin Corporation adopts a plan of complete liquidation. Two months later Martin sells its main asset, a motel, in which it has a basis of \(\$ 300,000\), for \(\$ 800,000\) to an unrelated
Ray owns 400 shares of stock in of Fisher Corporation. He had inherited 300 shares (estate tax value \(\$ 15,000\) ) seven months ago and had purchased 100 shares for \(\$ 2,000\) five months ago.
Shennel owns 65 percent of Tower Corporation. In 2017, Shennel contributed property with an adjusted basis of \(\$ 25,000\) and a fair market value of \(\$ 10,000\) to Tower as a contribution to
The Dicken Corp. has two unrelated shareholders, Dick and Ken, each owning 50 percent of the stock. Dicken has only one asset, a tract of land with a value of \(\$ 130,000\) that was purchased for
Fraser Corp., a 75 percent owned subsidiary of McCoy Corp., made a pro rata distribution of a parcel of land that had been used in its business in redemption of its stock in a complete liquidation.
Parent Corporation purchased 80 percent of the stock of Subsidiary Corporation in one transaction for \(\$ 200,000\). The remaining 20 percent is owned by the MAC partnership. Subsidiary's only asset
Perry Corporation purchased 10 percent of Target Corporation's stock for \(\$ 35,000\) in 2015. On March 1, 2018, Perry purchased an additional 80 percent of Target's stock for \(\$ 200,000\). At
Palm Corporation is owned 60 percent by Jay and 40 percent by Scott. Jay and Scott are unrelated individuals. Palm's two principal assets are cash of \(\$ 140,000\) and a building that Palm purchased
Panashe Corporation purchased 20 percent of Servco Corporation's stock on each of the following dates: January 4, 2017; April 3, 2017; July 14, 2017; December 15, 2017; and January 5, 2018. Can
Doug and Sally (unrelated individuals) own 60 percent and 40 percent respectively of the outstanding stock of Platt Corporation. Platt's assets consist of land (Sec. 1231 property) that was purchased
Elm Corporation has 100 shares of stock outstanding of which Oak Corporation owns 75 shares with a basis of \(\$ 10,000\), and Sherman Forest owns 25 shares with a basis of \(\$ 30,000\). Elm
Giles Corporation adopted a plan of liquidation during September 2018 and subsequently sold its only asset, land, that had a basis of \(\$ 480,000\) to Pat (an unrelated taxpayer) for \(\$ 500,000\).
Felicia owns stock of Huff Corporation that she purchased several years ago for \(\$ 10,000\). Huff has \(\$ 250,000\) of accumulated earnings and profits. What are the tax consequences to Felicia on
Pearl owns 60 percent of Gorman Corp.'s stock. During 2014, Pearl contributed property with an adjusted basis of \(\$ 20,000\) and a fair market value of \(\$ 15,000\) to Gorman Corp. in a
Reina owned stock in Kane Corp. During the current year, Kane Corp. completely liquidated and distributed the following to Reina:Reina's basis for her Kane Corp. stock was \(\$ 275,000\) and she will
Judy owned two blocks of Burr Corp. stock which she had purchased as investments:Judy's stock represented 30 percent of Burr Corp's outstanding stock. Pursuant to the complete liquidation of Burr
Swob Corp. purchased 20 percent of Park Corp's stock on each of the following dates: January 2, 2016; July 1, 2017; August 15, 2017; March 15, 2018; and June 2, 2018. If Swob Corp. wants to apply the
Blaho Corp. has a \(\$ 300,000\) basis in its 100 percent ownership of the stock of Fraser Corp. What are the tax consequences to Blaho Corp. and Fraser Corp. of the following alternative liquidating
The stock of Broward Corporation is owned by Ted \((65 \%)\) and Fred ( \(35 \%)\) who are father and son. Pursuant to a plan of complete liquidation, Broward distributes land with a fair market
Pace Corp. owns \(100 \%\) of the stock of Strom Corp. Pace's basis for the Strom Corp. stock is \(\$ 225,000\). Pursuant to a plan of complete liquidation, Strom distributes to Pace assets with a
Parent Corporation purchased 75 percent of Subsidiary Corporation seven years ago. The remaining 25 percent is owned by Roy. Subsidiary's current balance sheet shows the following figures:Subsidiary
Merten Corp. is \(100 \%\) owned by Carmen. Merten owns one asset, a building worth \(\$ 550,000\) with a \(\$ 90,000\) basis. Carmen's stock basis is \(\$ 150,000\). A plan of complete liquidation
Anaconda Ltd. has substantial earnings and profits and appreciated assets. It adopts a plan of complete liquidation and distributes its assets to its shareholders. Soon thereafter, the shareholders
Mann Corp. owns 80 percent of Tomlin} Corp.'s stock and Vicky owns the remaining 20 percent of Tomlin's stock. Mann Corp.'s basis for its Tomlin stock is $405,000$405,000 and Vicky's 'Tomlin stock
Explain the concept of substantially all assets as it applies in the context of a Type C reorganization.
Explain the boot relaxation rule of a Type C reorganization.
If an acquiring corporation is widely held, how can it avoid obtaining the consent of its shareholders in a Type A reorganization?
In what types of reorganization may subsidiaries of the acquiring corporation be used?
Prior to being acquired, a transferor corporation spins off its unwanted assets to shareholders. It subsequently transfers its remaining assets to the acquiring corporation solely for voting stock of
Define a Type D reorganization and identify its unique requirements.
Define and differentiate a spin-off, split-off, and split-up.
Explain the difference between a triangular merger and a reverse triangular merger.
Discuss the limitations that may apply to the use of a net operating loss that is acquired in a corporate reorganization.
Pursuant to a corporate reorganization, Katie exchanged 1,000 shares in Burton Corp. with a basis of \(\$ 12,000\) and a value of \(\$ 9,500\), for stock in Mead Corp. worth \(\$ 9,000\) and cash of
Leno Hardware is owned and operated as a sole proprietorship by Larry Leno. The location is excellent, and he is approached by a buyer, Hard Bargains Inc., a national chain of hardware stores. What
Maxco Inc. wishes to acquire Minnow Inc. The latter has 500,000 shares of common stock outstanding with voting rights and 100,000 shares of nonvoting preferred stock.a. How many shares of each class
Reynolds Corp. acquired the assets of Putvan Corp. in a nontaxable merger transaction on December 1, 2018. On the date of acquisition, Putvan had a net operating loss carryover of \(\$ 500,000\).
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
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 Gate Corp.
Builders Inc. purchased 40 percent of the 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,
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
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
Rose Inc. is an accrual-basis, calendar-year corporation with only voting common stock outstanding. On October 19, 2018, it acquired the assets of Nagg Inc. by issuing 3,000 of its voting common

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