Apply the following rules in solving all homework questions:

• Assume that corporations are subject to a 25% tax rate on all capital gains and ordinary income.
• Individual taxpayers are subject to a 40% tax bracket on ordinary income and a 25% tax bracket on net long-term capital gains.
• An individual can claim a maximum net capital loss of $3,000 per year. The remaining net loss is carried forward indefinitely.
• A corporation can claim a maximum net capital loss of $0. The remaining net loss is carried back up to 3 years and forward up to 5 years.
• In evaluating a stock redemption, shares are attributed to a person from his or her parents, children, grandchildren, and spouse.
• The dividends-received deduction, when applicable, is 100% for ownership levels of at least 80%; 65% for ownership of between at least 20% and 80%; and 50% for lesser ownership levels
• None of the taxpayers have capital gains or losses, other than those expressly indicated.

The following facts apply to questions 1 through 6:

Marco is a 40% shareholder of Italia, Inc. and his wife Marcella owns the other 60% of the stock. They have each owned their shares for over 12 years, since 2010.

On April 4, 2022, Marco transferred all of his Italia, Inc. stock, with a total basis of $10,000, to Italia, Inc. In return, Marco received from the company cash of $59,900 and a UCLA sweatshirt worth $100 that the corporation recently purchased for $100. Marco filed a special election with the IRS in which he agreed to “completely terminate his interest” in Italia, Inc. forever. Prior to this transaction, Italia, Inc. had current earnings and profits of $40,000 and zero accumulated earnings and profits.

The company made no other distributions to its shareholders during the year. Neither Marco nor his wife had any other income, any capital losses or capital loss carryforwards.

• 1. How much income, if any, does Marco recognize as a result of this transaction? State your answer, then show your calculations (4 pts).
• 2. What tax rate will Marco incur on the income reported as a result of this transaction (4 pts)?
• 3. What is the amount of Italia, Inc.’s current earnings and profits after taking into account this transaction (4 pts)?

For questions 4 through 6, apply the above fact, but instead, assume that Marco forgot to file the “complete termination of interest” document referred to above.

• 4. How much income, if any, does Marco recognize as a result of this transaction?
• 5. What dollar amount of tax will Marco incur on the income reported as a result of this transaction?
• 6. Marco just discovered that he had a capital loss during the preceding year, 2020, which created a capital loss carryforward for him of $100,000 in 2021. By what amount, if any, does this newly-discovered fact change your answer to question 5 above?

Answer rating: 100% (QA)

1 Marco recognizes 49900 in income as a result of this transaction formula Total distribution Basis ... View the full answer