15. L0.2, 8 The board of directors of Orange Corporation, a calendar year taxpayer, is holding its year-end meeting on December 28, 2010. One topic on the board’s agenda is the approval of a $25,000 gift to a qualified charitable organization. Orange has a $20,000 charitable contribution carryover to 2010 from a prior year. Identify the tax issues the board should consider regarding the proposed contribution.
24. LO.1 Emu Company, which was formed in 2010, had operating income of $200,000 and operating expenses of $120,000 in 2010. In addition, Emu had a long-term capital loss of $10,000. How does Andrew, the owner of Emu Company, report this information on his individual tax return under the following assumptions?
a. Emu Company is an S corporation and pays no dividends.
b. Emu Company is a C corporation and pays no dividends during the year.
25. LO.1 Ellie and Linda are equal owners in Otter Enterprises, a calendar year business. During the year, Otter Enterprises has $400,000 of gross income and $250,000 of operating expenses. In addition, Otter has tax-exempt interest income of $250,000 and makes distributions to Ellie and Linda of $50,000 each. Discuss the impact of this information on the taxable income of Otter, Ellie, and Linda if Otter is:
a. A Partnership
b. An S corporation
c. A C corporation.
29. LO.2 During the year, Loon Corporation has the following transaction: $400,000 operating income, $355,000 operating expenses, $25,000 municipal bond interest, $60,000 long-term capital gain, and $95,000 shot-term capital loss.
a. Compute Loon’s taxable income for the year.
b. Assume the same facts except that loon’s long-term capital gain is $100,000 (instead of $60,000. Compute Loon’s taxable income for the year.
31. LO.2 During 2010, Gorilla Corporation has net short-term capital gains of $120,000. Net long-term capital losses of $365,000, and taxable income from other sources of $900,000. Prior year’s transaction included the following:
2006 net short-term capital gains $130,000
2007 net long-term capital gains 45,000
2008 net short-term capital gains 115,000
2009 net long-term capital gains 50,000
38. LO2, 7 During the year, Ruby corporation, a calendar year taxpayer, has the following transactions:
Income from operations $300,000
Expenses from operations 375,000
Dividends (less than 20% ownership) 150,000
a. Determine Ruby’s NOL for the year.
b. What are Ruby’s options as to the carryover of the NOL?
39. LO.3 In each of the following independent situations, determine the dividends received deduction. Assume that none of the corporate shareholders owns 20% or more of the stock in the corporations paying the dividends.
Green Corporation Orange Corporation Yellow Corporation
Income from operations $500,000 $500,000 $500,000
Expenses from operations (400,000) (450,000) (510,000)
Qualifying dividends 100,000 100,000 100,000
42. LO.4 In each of the following independent situations, determine the corporation’s income tax liability. Assume that all corporations use a calendar year for tax purposes and that the tax year involved is 2010.
Purple Corporation $65,000
Azul Corporation 210,000
Pink Corporation 335,000
Turquoise Corporation 5,100,000
Teal Corporation 19,500,000
44. LO.5 Apply the controlled and affiliated group rules to determine whether a parent-subsidiary controlled group or an affiliated group exists in each of the following independent situations. Circle Y for yes and N for no.
a. Throughout the year, Parent owns 65% of the stock of Sub Co. Y N Y N
b. Parent owns 70% of SubCo. The other 30% of SubCo. Stock is owned by senior, a wholly owned subsidiary of parent. Y N Y N
Y N Y N
45. LO.6 The following information for 2010 relates to Sparrow Corporation, a calendar year, accrual method taxpayer.
Net income per books (after-tax) $119,738
Federal income tax expense per books 49,862
Tax-exempt interest income 7,500
MACRS depreciation in excess of straight-line
depreciation used for financial statement purposes 10,000
Charitable contribution in excess of taxable income limitation 8,750
Premiums paid on life insurance policy on the president
(Sparrow is beneficiary of policy) 6,250
Interest on loan to purchase tax -exempt bonds 3,700
Based on the above information, use schedule M-1 of Form 1120, which is available on the IRS website, to determine Sparrow’s taxable income for 2010.
7.LO.1 Julie and her son, Wyatt, have been operating a neighborhood garden center. Julie formed the business in 1996 as a sole proprietorship, and it has been very successful. It currently has assets with a fair market value of $250,000 and a basis of $180,000 on the advice of her tax accountant, Julie decides to incorporate her business. Because of Wyatt’s loyalty, Julie would like him to have shares in the corporation. What are the relevant tax issues?
15. LO.3 Discuss how each of the following affects the calculation of the basis of stock received by a shareholder in a 351 transfer:
a. The receipt of “other property” (i.e., boot) in addition to stock.
b. The transfer of a liability to the corporation along with property.
c. The basis in the property transferred to the corporation.
d. Property transferred has built-in losses.
21.LO6 Three years ago, Ralph purchased stock in White Corporation for $40,000. The stock has a current value of $5,000. Ralph needs to decide which of the following alternatives to pursue. Determine the tax effect of each.
a.- Without selling the stock, Ralph deducts $35,000 for the partial worthlessness of the White Corporation investment.
b. Ralph sells the stock to his mother for $5,000 and deducts a $35,000 long term capital loss.
c. Ralph sells the stock to a third party and deducts a #35,000 long-term capital loss.
d. Ralph sells the stick to his aunt for $5,000 and deducts a $35,000 long-term capital loss.
c. Ralph sells the stock to a third party and deducts an ordinary loss.
24. LO.1, 3 Sam, Carl, Lucy and Sylvia form Pine corporation with the following consideration:
Basis to Transfer Fair Market Value Number of share Issued
From Sam ---Inventory $30,000 $96,000 30*
From Carl -- Equipment ($30,000 or depreciation taken by Carl in previous years) 45,000 99,000 30**
From Lucy—Secret process 15,000 90,000 30
From Sylvia—Cash 30,000 30,000 10
*Sam received $6,000 cash in addition to the 30 shares.
**Carl receives $9,000 cash in addition to the 30 shares.
Assume the value of each share of Pine Corporation stock is $3,000. As to these transactions, provide the following information:
a. Sam’s recognized gain or loss. Identify the treatment given to any such gain or loss.
b. Sam’s basis in the Pine stock.
c. Pine Corporation’s basis in the inventory.
d. Carl’s recognized gain or loss and its classification.
e. Carl’s basis in the Pine stock.
f. Pine Corporation’s basis in the equipment.
g. Lucy’s recognized gain or loss.
h. Lucy’s basis in the Pine stock.
i. Pine Corporation’s basis in the secret process.
j. Sylvia’s recognized gain or loss
k. Sylvia’s basis in the Pine stock.
25.LO.1, 3 Mark and Gail form Maple Corporation with the following consideration:
Basis to Transfer Fair Market Value Number of share Issued
From Mark --- Cash
Installment obligation $50,000
From Gail –Cash 150,000 150,000
Equipment 125,000 250,000
Patent 10,000 300,000 70
The installment obligation has a face amount of $250,000 and was acquired last year from the sale of land held for investment purposes (adjusted basis of $140,000). As to these transactions, provide the following information:
a. Mark’s recognized gain or loss.
b. Mark’s basis in the Maple Corporation stock.
c. Maple Corporation’s basis in the installment obligation.
d. Gail’s recognized gain or loss.
e. Gail’s basis in the Maple Corporation stock.
f. Maple Corporation’s basis in the equipment and the patent.
g. How would your answers to the preceding questions change if Mark received common stock and Gail received preferred stock?
h. How would your answers change if Gail was a partnership?
26.L.1, 7 Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exchanges his property (basis of $70,000 and value of $500,000) for 500 shares in Starling. On May 10, Clyde transfers his property (basis of $90,000 and value of $350,000) for 350 shares in Starling.
a. If the three exchanges are part of a prearranged plan, what gain will each of the parties recognize on the exchanges?
b. Assume Jane and Jon exchanged their property for stock four years ago while Clyde transfers his property for350 shares in the current year. Clyde’s transfer is not part of a prearranged plan which Jane and Jon to incorporate their business. What gain will Clyde recognize on the transfer?
c. Returning to the original facts, if the property that Clyde contributes has a basis of $490,000 (instead of $90,000, how might the parties otherwise structure the transaction?
33. LO1, 3 Frank transfers the following assets to Peach Corporation in exchange for all of its stock. (Assume neither frank nor Peach plans to make any special tax elections at the time of incorporation.)
Assets Frank’s Adjusted Basis Fair Market Value
Inventory $60,000 $100,000
Delivery vehicle 150,000 105,000
Shelving 80,000 65,000
a. What is Frank’s recognized gain or loss?
b. What is Frank’s basis in the stock?
c. What is Peach’s basis in the inventory, delivery vehicles, and shelving?
d. If Frank has no intentions of selling his Peach stock for at least 15 years, what action would you recommend that Frank and Peach Corporation consider? How does this change the previous answers?
34. LO.1, 3 Sara and Jane form Wren Corporation. Sara transfers property, basis of $25,000 and value of $200,000, for 50 shares in Wren corporation. Jane transfers property, basis of $10,000 and value of $185,000, and agrees to serve as manager of Wren for one year; in return, Jane receives 50 shares in Wren. The value of Jane’s services to Wren is $15,000 .
a. What gain or income do Sara and Jane recognize on the exchanges?
b. What is Wren corporation’s basis in the property transferred by Sara and Jane? How does wren treat the value of the services Jane renders?
35. LO.1, 3 Assume in Problem 34 that Jane receives the 50 shares of Wren Corporation consideration for the appreciated property and for providing legal services in organizing the corporation. The value of Jane’s services is $15,000.
a. What gain or income does Jane recognize?
b. What is Wren corporation’s basis in the property transferred by Jane? How does Wren treat the value of the services Jane renders?