FTax IRGTB ch19 p001-018

See p 19 30 368c and rev rul 59 259 e all of the

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Unformatted text preview: ck rights and warrants are excluded from the definition of stock under 351 since these represent only the right to obtain an equity interest. [See p. 19-30 and Reg. 1.351-1(a)(1)(ii).] e. The values and liabilities are used to calculate gain realized. (See p. 19-33.) b. The excess liability is the gain recognized ($90,000 $40,000). (See pp. 19-31 and 19-32.) c. Contributions to capital by a nonshareholder are excluded from income, as are shareholder contributions. However, property contributed by a nonshareholder is assigned a zero basis. (See p. 19-37.) 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 19 Corporations: Formation and Operation Comprehensive Problems 1. John created X Corporation on April 1 of this year. Part of the assets transferred were 100 shares of A Corporation, a publicly traded corporation, and 1,000 out of the 2,000 issued and outstanding shares of B Corporation. Organization costs of X Corporation were $2,400. For the year, X Corporation reported the following: Sales revenue Cost of goods sold Dividends-received from A Corporation Dividends-received from B Corporation Charitable contributions Loss on the sale of A Corporation stock $100,000 90,000 5,000 6,000 20,000 (10,000) a. b. c. d. 2. Compute the deduction for organization expenses. What is the amount of the charitable contribution deduction? What is the amount of the dividends-received deduction? What is X Corporation's taxable income? Mary, Kathy, and Janey form a new corporation. Mary transfers $100,000 cash for 100 shares of stock. Kathy transfers land and building with a basis of $500,000 and a fair market value of $1 million. The corporation issues 50 shares of stock and assumes a $950,000 mortgage on the property. Janey receives 30 shares of stock in exchange for services and $1. a. b. c. d. e. f. g. How much income must Mary recognize? What is the basis of Mary's stock? How much income must Kathy recognize? What is the basis of Kathy's stock? How much income must Janey recognize? What is the basis of Janey's stock? What is the basis of the land and building to the new corporation? 19-17 19-18 Chapter 19 Corporations: Formation and Operation Solutions to Comprehensive Problems 1. a. $2,400. Because the organization costs were less than $5,000, the entire amount is deductible in X Corporation's first tax year. b. Sales Dividends Subtotal Less: Cost of goods sold Organization expenses Income before special deduction Maximum rate Charitable contribution $ 100,000 11,000 $ 111,000 (90,000) $ 21,000 (2,400) , $ 18,600 ,10% $ 1,860 c. General rule is used since X Corporation is profitable. 70% $5,000 80% $6,000 $3,500 4,800 $8,300 d. Income before special deductions Special deductions: Charitable contributions Dividends-received deduction Taxable income $18,600 (1,860) (8,300) $ 8,440 The capital loss does not offset ordinary income. The excess charitable contribution is carried forward five years. 2. a. b. c. d. No income is recognized since Mary transferred property in exchange for control of the new corporation. Mary's basis is $100,000. $450,000 recognized income. The excess of the liability transferred over the basis of the property is recognized under 357(c). Kathy's basis is: Basis of land and building Less: Liability assumed Plus: Gain recognized $ 500,000 (950,000) 450,000 $ 0 e. Janey is receiving stock for services. Therefore, she must recognize the value of the stock as income less the amount paid. 30 $1,000 $30,000 $1 $29,999. The $1 that Janey transferred is so small that she is not treated as having transferred property in exchange for the stock. Her basis is the income reported, $29,999, plus the cost, $1, or a total of $30,000. The corporation basis is the carryover basis of $500,000 plus gain recognized by Kathy of $450,000 for a total of $950,000. f. g....
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This note was uploaded on 02/05/2012 for the course ACCT 112 taught by Professor Smith during the Spring '11 term at Adrian College.

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