1. On February 19, 2012, Ron and Mindy form IC Corporation as equal 50/50
shareholders with the following investment, for which each received 1,000 shares of IC
From Ron From Mindy
Land (basis $50,000; fair market value $200,000) $200,000
a. What are the federal income tax consequences if, on May 1, 2012, IC Corporation
distributes 5 shares of IC Corporation preferred stock to each of Ron and Mindy?
b. What consequences if IC Corporation is liquidated & distributes the land and its cash
pro rata on December 31, 2012 after having no income or activity for the year?
2. K Corporation wants to acquire all the assets of the StiffChip division of P
Corporation. These assets include intellectual property (brand names), and equipment
held directly by P Corporation, as well as stock in StiffChip, Inc., a 100% owned
subsidiary of P Corporation. Stiffchip, Inc.’s assets have a value of $150m and a tax
basis of $50m; P Corporation’s basis in the stock of StiffChip, Inc. is also $50m. K
Corporation will pay P Corporation a lump sum of $200m in cash in return for both P
Corporation’s StiffChip division assets and the stock of StiffChip, Inc. Describe the
federal tax consequences of this acquisition and the options or elections available to K
Corporation to enhance its tax result from the acquisition.
3. P Corporation wants to acquire the business of Intellinet, Inc., a corporation owned by
two founder-shareholders. The Intellinet shareholders do not want to pay U.S. tax (either
individually or at the corporate level) on the acquisition.
a. What options are available if P Corporation wants to acquire the assets of Intellinet,
but wants to use cash and is required to assume certain liabilities of Intellinet?
b. What options are available if P Corporation wants to acquire the stock of Intellinet,
but wants to use some cash in the acquisition?
4. M Corporation, which is publicly-traded, has run a successful chain of bookstores and
a website that sells books for a number of years. M Corporation now wishes to spin off
the website to its shareholders. M Corporation forms WebCo, contributes the website
business to it, and then distributes WebCo stock pro rata to its shareholders. M
Corporation had a net operating loss (NOL) of $10m at the time of the distribution.
a. What are the federal income tax results of this distribution?
b. What result if, six months after the distribution, G Corporation acquires 100% of the
stock of M Corporation for $100m? Will G Corporation be able to utilize M
c. Would your answer to a. change if, instead of contributing the website to WebCo, M
Corporation contributed U.S. government bonds?
5. Ricky & Walter decide to start their own tax law practice. On March 1, 2011, they
establish R&W LLC, and file elections to treat it first as a corporation, and then as an “S”
corporation for tax purposes. Ricky and Walter each contribute $1,000 to R&W, and
each receives a 50% membership interest in the entity. Ricky and Walter also become
employees of R&W LLC, paying themselves a $20,000 salary each for 1,500 hours of
work (by each) during 2011. R&W LLC earns $200,000 from clients and has $60,000 of
other deductible expenses (such as rent), in addition to the $40,000 in salaries paid to
Ricky & Walter, for 2011. Ricky and Walter each take a $50,000 distribution from R&W
LLC during 2011, in addition to their $20,000 salaries.
a. Describe the tax treatment of these transactions if the form of these transactions is
respected for tax purposes.
b. In what manner is the IRS likely to re-characterize these transactions? What would be
the tax consequences of such recharacterization?
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