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Corporations: Formation and Operation
Solutions to Problem Materials DISCUSSION QUESTIONS
19-1 There are six corporate characteristics. These are associates, profit motive, continuity of life, centralized management, limited liability, and free transferability of interest. In the past, only those entities that possessed a majority of the last four corporate characteristics listed above were treated as corporations for tax purposes. However, the new "check-the box" regulations simplified the entity classification process. Currently, a corporation is an entity chartered by a state and those unincorporated business entities that elect to be taxed as corporations. (See pp. 19-2 and 19-3 and Reg. 301.7701-2.) IRS may try to disregard the corporation if its organization and/or operation is solely to reduce taxes (i.e., a sham). The shareholders may try to ignore the corporation if they want the limited liability without double taxation. (See pp. 19-3 and 19-4.) a. b. c. d. Corporations are entitled to a 70, 80, or 100 percent dividends-received deduction. [See p. 19-6 and 243(a).] Corporations do not have the dichotomy of deduction between for and from A.G.I. All allowable deductions are considered in arriving at taxable income. (See p. 19-5.) Corporate casualty losses are not reduced by either the $100 or 10 percent of A.G.I. (See p. 19-6.) The charitable contribution deduction for corporations is limited to 10 percent of taxable income without reduction for charitable contributions, the dividends-received deduction, NOL carrybacks, and capital loss carrybacks. Individuals apply limitations of 20, 30, or 50 percent of A.G.I. [See pp. 19-12 through 19-15 and 170(b)(2) and (e).] Capital losses may only be used to reduce capital gains. Individuals can offset up to $3,000 of ordinary income with capital losses. (See pp. 19-15 and 19-16.) Corporations are limited to a three-year back and five-year forward carryover of capital losses. All carryovers are deemed short-term losses. Individuals may carry forward capital losses indefinitely. Capital loss carryforwards for individuals retain their identity as short-term or long-term losses. (See pp. 19-15 and 19-16.) Corporations are subjected to depreciation recapture under 1245 and 1250 in the same manner as individuals. In addition, 291 reclasses 20 percent of the otherwise 1231 gain as ordinary on the sale of 1250 property. (See pp. 19-16 and 19-17.) 19-2 19-3 e. f. g. 19-4 Corporations are permitted a dividends-received deduction to negate the triple taxation caused by the inclusion of dividends in income without an offsetting deduction by the payor corporation. Normally, the deduction is 70 percent. The deduction is 80 percent if the recipient owns at least 20 percent of the payor but less than 80 percent. (See pp. 19-6 and 19-7.)
19-1 19-2 Chapter 19 Corporations: Formation and Operation 19-5 The dividends-received deduction generally may not exceed 70 percent of the corporation's taxable income computed without the dividends-received deduction, NOL carryovers, or capital loss carrybacks. This limitation is ignored if the corporation has an NOL for the year. The dividends-received deduction is also limited if the stock purchase was debt financed. (See pp. 19-6, and 19-9 and 19-10.) A corporation must carry forward its qualified charitable contributions to the extent they exceed 10 percent of taxable income before certain deductions. Current contributions are deducted before carryovers. The order was probably imposed to limit the tax benefit of prior year's contributions. (See p. 19-14.) A 5 percent surtax is imposed on corporations with taxable income in excess of $100,000. The marginal rate on taxable income of $170,000 is 39 percent--the 34 percent regular tax plus 5 percent surtax. The flat rate is 34 percent on corporations with income of $335,000 or more. (See pp. 19-18 and 19-19.) Property includes real and personal, tangible and intangible property, including money but not services. The fair market value of stock received for services must be included in the income of the recipient. (See p. 19-28.) Person includes individuals, estates, trusts, partnerships, associations, and corporations. Section 351 can be used for starting a new business, incorporating an existing business, forming a subsidiary, and contributing additional assets to existing corporations. (See pp. 19-29 and 19-30.) Stock may be common or preferred, voting or non-voting, participating or non-participating. It does not include rights or warrants. Certain redeemable preferred stock is considered to be boot and not stock. The solely requirement was included to prevent sales transactions from receiving tax free treatment. (See pp. 19-30 and 19-31.) Control means at least 80 percent of the voting power and at least 80 percent of all other classes of stock. Immediately after means following the last of a unified series of transfers. [See p. 19-30 and 368(c).] A 351 transfer will be taxable to the extent of boot received. (See pp. 19-30 and 19-31.) There can be valid business reasons for transferring debt to a corporation under 351. Therefore, the transfer of a liability to a corporation generally will not be treated as boot received by the transferor shareholder. There are two exceptions, however. First, if the transfer of a liability was made for tax avoidance purposes, the transferor shareholder will be deemed to have received boot in an amount equal to the sum of all liabilities transferred to the corporation by this shareholder. Second, if the amount of the liability transferred exceeds the shareholder's adjusted basis in all property transferred, the transferor shareholder must recognize gain to the extent of the excess amount. (See pp. 19-31 and 19-32 and 357.) The transfer of the liability does not have a valid business purpose. Therefore, the entire amount of the liability will be considered boot. The amount of gain recognized will be the same under both options. [See pp. 19-31 and 19-32 and 357(b).] The basis of the stock will be the basis of the property transferred plus gain recognized minus any cash received, the fair market value of property received, and liabilities transferred to the corporation. If both common and preferred stock are received, the total basis is allocated based on the relative fair market values of the common and preferred stock. (See p. 19-33 and 358.) The corporation's basis will equal the basis to the transferor plus any gain recognized. A partially taxable 351 transaction will permit the corporation to increase its basis, which will be beneficial. (See p. 19-34 and 362.) Depreciation recapture only occurs if the transferor recognizes gain. Otherwise the corporation will be responsible for the recapture on disposition of the assets. (See p. 19-34.) 19-6 19-7 19-8 19-9 19-10 19-11 19-12 19-13 19-14 19-15 19-16 19-17 Solutions to Problem Materials 19-3 PROBLEMS
19-18 a. b. c. Individual--$10,000 Corporation--$3,000 (30% $10,000) (See Exhibit 19-3 and pp. 19-6 and 19-7.) Individual--$1,900 (FMV $100) Corporation--$2,700 (basis) (See p. 19-6.) Individual--$8,000 [($8,000 $3,000 net NSTCG) $3,000 loss carryover] Note that an individual is able to deduct for A.G.I. up to $3,000 of capital loss. Corporation--$5,000 ($8,000 $3,000 $6,000 carryover) (See p. 19-15.) Individual--$30,000 (50% A.G.I.) Corporation--$5,000 (10% taxable income) (See pp. 19-12 and 19-13.) $14,000 ($20,000 70%) $12,600 [($120,000 $102,000) 70%] The dividends-received deduction is limited to 70 percent of taxable income before certain deductions since the dividends received exceed taxable income but will not produce a net operating loss. (See Example 4 and pp. 19-6 through 19-10.) $22,400 [($210,000 $178,000) 70%] $28,000 ($40,000 70%) Since R will show an NOL with the full 70 percent dividends-received deduction, the income limitation is not applied. (See Example 5 and pp. 19-6 through 19-10.) $5,040 [$5,000 ($1,800/180 4)] $120 ($1,800/180 12) $80 ($1,800/180 8) d. 19-19 a. b. 19-20 a. b. 19-21 a. b. c. (See pp. 19-10 and 19-11.) 19-22 a. b. $70,000 ($700,000 10%) $8,000 ($70,000 $68,000 $2,000; $10,000 $2,000) (See Example 13 and pp. 19-14 and 19-15.) 19-23 15% $50,000 25% $25,000 34% $75,000 5% $50,000 $ 7,500 6,250 25,500 2,500 $41,750 (See pp. 19-18 and 19-19.) 19-24 Net income from operations Dividends Income before special deductions Less sum of: NOL carryover Charitable contributions (max) [10% ($160,000 $30,000)] Dividends-received deduction (70% $10,000) Taxable income $150,000 10,000 $160,000 $30,000 13,000 7,000 (50,000) $110,000 11a. $26,150 [$13,750 (34% $35,000) (5% $10,000)]. b. Charitable contribution carryover from 2010 $17,000. Capital loss carryover from 2009 $4,000 ($9,000 carryover $5,000 2010 gain). (See pp. 19-6 through 19-9, 19-11 through 19-17, and 19-18.) 19-4 Chapter 19 Corporations: Formation and Operation 19-25 a. b. c. d. e. f. Realized $50,000 ($100,000 FMV of stock $50,000 basis of assets transferred); recognized 0 Realized loss $10,000; recognized 0 ($100,000 FMV of stock $110,000 basis of assets) Basis $50,000 (basis of land transferred) Basis $50,000 (carryover basis of land) Basis $110,000 ($80,000 basis of property $30,000 cash) Basis $80,000 (carryover basis of property) (See pp. 19-29 through 19-34.) 19-26 a. b. c. d. e. f. g. h. i. Realized $70,000 ($80,000 FMV of stock $20,000 liabilities $30,000 basis); recognized 0 Basis $10,000 ($30,000 basis in land $20,000 liabilities assumed) Basis $30,000 (carryover basis) Recognize 0 Basis $75,000 ($50,000 cash $25,000 basis of equipment) Basis $25,000 (carryover basis) $12,000 (12 shares $1,000) Basis $30,000 ($18,000 $12,000) $5,030 [$5,000 ($1,800/180 $10 3)] (See pp. 19-29 through 19-34.) 19-27 a. b. c. d. Recognized 0; basis in stock $40,000; basis in land $60,000 Recognized $9,000 (boot received); basis in stock $4,000 ($4,000 $9,000 $9,000); basis in machinery $13,000 ($4,000 $9,000 gain recognized) Recognized $5,000 (excess liabilities); basis in stock 0 ($4,000 $5,000 gain recognized $9,000 liabilities assumed); basis in machinery $9,000 ($4,000 $5,000 gain recognized) Recognized $20,000; basis in stock is $20,000 ($30,000 $20,000 $30,000); basis in bond is the $20,000 face amount; basis in equipment is $50,000 ($30,000 $20,000). (See pp. 19-29 through 19-34.) TAX RESEARCH PROBLEMS
Solutions to the Tax Research Problems (19-2819-29) are contained in the Instructor's Resource Guide and Test Bank for 2012. ...
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This note was uploaded on 02/05/2012 for the course ACCT 110 taught by Professor Smith during the Spring '11 term at Adrian College.
- Spring '11