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Corporate Tax Midterm

Corporate Tax Midterm - Corporate Tax Midterm Problem 1 a...

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Corporate Tax Midterm Problem 1 a) In regards to XYZ distributing inventory (FMV \$20,000, basis \$11,000) to Zane, XYZ recognizes \$9,000 of gain on distribution of inventory according to § 311(b). Section 311(b) states that if the FMV of a property exceeds adjusted basis (in the hands of the distributing corporation (XYZ)), then a gain shall be recognized to the distributing corporation (XYZ) as if such property were sold to the distributee at its FMV. In addition, XYZ increases Current E&P to \$9,000 [§ 312(b)(1)]. For purposes of § 301(b), the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received. Therefore, the amount of distribution to Zane is \$20k, the FMV of inventory. This \$20,000 (\$9,000 from Current E&P and \$11,000 from Accumulated E&P) is a dividend which should be recognized in Zane’s overall gross income [§301 (c)(1)]. Zane’s basis for his newly acquired inventory, will now be the FMV of the product received §301(d). Accumulated E&P at the beginning of next year is \$14,000 (\$25,000 balance at beginning of year + \$9,000 current E&P for gain recognized [§ 312(b)(1)] - \$20,000 value of inventory distributed [§ 312(b)(2)]). b) This problem is similar to A except that XYZ has no current or accumulated E&P before the distribution. In both cases, XYZ recognizes \$9,000 of gain on distribution of inventory [§ 311(b)], increases Current E&P to \$9,000 [§ 312(b)(1)], and distributes \$20,000, the FMV of inventory, to Zane [§ 301(b)]. According to §301 (c)(1), \$9,000 is a dividend (the extent of current E&P). The \$8,000 initial basis of the stock purchased by Zane in XYZ corporation must be applied to his basis [§301(c)(2)] and the amount in excess of basis, which is \$3,000, shall be treated as a capital gain from the exchange of property §301(c)(3). Through this all, Zane takes the \$20,000 FMV basis in inventory [§ 301(d)]. Accumulated E&P at the beginning of next year

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is \$0 (\$0 balance at beginning of year + \$9,000 current E&P for gain recognized - \$9,000 value of inventory (to extent of current E&P) [§ 312(b)(2)]). c) In this problem, XYZ distributes land (\$20,000 FMV, \$11,000 basis) which it has used in its business and Zane takes the land subject to a \$16k mortgage. According to § 311(b), XYZ recognizes \$9,000 of gain on the distribution of the land. In addition, XYZ increases current E&P to \$9,000 [§ 312(b)(1)]. The value of the land that was distributed to Zane, which is \$4,000 (\$20,000 FMV-\$16,000 mortgage), shall now be categorized as a dividend according to §301(c) (1). The FMV basis for the land received is \$20,000 §301(d). Accumulated E&P for the upcoming year is \$25,000 (\$25,000 balance at beginning of year + \$9,000 current E&P for gain recognized [§ 312(b)(1)] - \$20,000 value of land [\$312(b)(2)] + \$16,000 amount of liabilities to which land was subject to [§ 312(c)(1)].
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