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business
south western federal taxation

Questions and Answers of South Western Federal Taxation

LO.5 Five years ago, Jack purchased an Inu Corporation 15-year bond having a face value of $150,000 and paying 6% annual interest. In a “Type E” reorganization, Inu is going to exchange Jack’s
LO.2, 3, 4, 5, 6 Float Corporation is in the luxury yacht business and has been hit hard by the downturn in the economy. It has been barely breaking even, and its investments of its previous profits
LO.3, 4 Joe, Greg, Lynn, and Shanna each own a 25% interest in Norwich Corporation, which manufactures shoe polish. Joe is irascible and often argues with the other three shareholders. They tend to
LO.3 Beach Corporation, a service business, is owned by 50 unrelated shareholders. It just lost a $1.5 million product liability lawsuit. Its assets currently have a value of $6 million, and its
LO.2, 3 The Rho Corporation was incorporated in 2001 by Tyee and Danette. Tyee received 5,000 shares of common stock for his $100,000 contribution, and Danette received 10,000 shares of common stock
LO.3, 6 In 2000, Canine Corporation was organized to manufacture dog food with equal contributions from Jane, Claire, and Brian. In 2002, Canine opened retail pet stores in North Dakota. In 2004,
LO.3, 6 Birdie Corporation has obtained a patent on a revolutionary putter that is sure to be an instant success with serious golfers. Unfortunately, Birdie does not have the capital to market the
LO.3, 6 Several years ago, Apso, Inc., was organized with equal contributions from April, ShibCo, and Otter Corporation. Last year, April purchased additional Apso stock from Otter, such that her
LO.2 Jed acquired 25% of the stock of Alpha Corporation (basis of $100,000) 12 years ago, and the other 75% was purchased by Zia (basis of $510,000) three years ago. Jed also holds a 10-year,
LO.2 Quail Corporation was created in 2000 through contributions from Kasha($800,000) and Frank ($200,000). In a transaction qualifying as a reorganization, Quail exchanges all of its assets
LO.2, 3 Spinone Corporation directs its sole shareholder to exchange all of his common stock valued at $200,000 (basis of $50,000) for $100,000 of common stock, $80,000 of preferred stock, and
LO.2 Sahara Corporation acquires Oasis Corporation in a “Type A” reorganization by exchanging 35% of its stock for all of the Oasis assets (fair market value of $950,000), liabilities ($300,000),
LO.2 Cole acquired 55% of Dane Corporation for $400,000 eight years ago. In the current year, Dane merges with Great Corporation, and Cole receives 7.5% of Great’s stock plus $300,000 in land. The
LO.5 Demonstrate how a 55 percent ownership interest can be sold over the shortest period of time without causing an owner shift in any one year.
LO.5, 6 Alpha Corporation is considering acquiring Beta Corporation. Beta has a good product line and a fairly new production plant; however, it has made some unprofitable investments. Currently,
LO.5 Why does the calculation of the § 382 limitation for business credits require calculations beyond what is necessary for NOLs?
LO.5 Provide the formulas for the § 382 limitation and the restriction on the § 382 limitation in the year of the ownership change.
LO.5 What are owner shifts and equity shifts? What is the difference in their ability to invoke the § 382 limitation?
LO.5 Explain why the assumption of the target’s liabilities is problematic for certain reorganizations and not for others.
LO.5 What types of reorganizations are subject to the § 381 limitation?
LO.3, 4 Alpha Corporation would like to acquire the rights to an electrical process owned by Beta Corporation. Beta cannot sell the process because the rights are not transferrable under the current
LO.4 Briefly describe the judicial doctrines of sound business purpose, continuity of business enterprise, and the step transaction doctrine.
LO.3, 4, 5 Alpha Corporation is interested in acquiring Beta Corporation. Beta produces equipment for scuba diving, and Alpha manufactures parachutes for skydiving.Beta has had some setbacks on its
LO.3 The acquiring corporation in a “Type G” reorganization must reduce the tax attributes carried over from the bankrupt corporation. To what extent must the attributes be reduced? In what order
LO.3 Why do “Type F” reorganizations not jeopardize the predecessor’s tax characteristics, such as its § 1244 stock or other corporate attributes?
LO.3 What types of transactions receive tax-free treatment in “Type E” reorganizations?
LO.3 What is the difference between a split-up, a split-off, and a spin-off? How do these differ from an acquisitive “Type D” reorganization?
LO.3 A “Type C” reorganization requires that substantially all of the target’s assets be transferred to the acquiring corporation. Explain what is meant by “substantially all” of the assets.
LO.3 What is the difference in the treatment of liabilities between a “Type A” and a“Type C” reorganization?
LO.3 Compare the relationship between the acquiring and target corporations immediately after a “Type B” and a “Type C” reorganization.
LO.3 How does a “Type A” reorganization differ from a “Type B” with regard to the consideration that is permissible in the restructuring?
LO.1, 2, 3 An acquiring corporation transfers property and stock to the target corporation in a reorganization and receives the target’s assets in exchange. What are the relevant tax issues?
LO.2 How is the four-column template in Concept Summary 7.1 used to determine a shareholder’s basis in the new stock received in a corporate restructuring?
LO.2 Summarize the tax consequences of a § 368 reorganization.
LO.1 Provide a description of the corporate reorganizations available under § 368(a)(1).
LO.1 Why do the tax laws often dictate the legal form of corporate reorganizations? Be specific.
LO.1 Explain why it is wise to obtain a private letter ruling from the IRS when structuring a corporate reorganization.
LO.3, 6 Determine whether the source of income in each of the following situations is U.S. or foreign.a. Development, Inc., a U.S. corporation, earns $400,000 in royalty income from Far East, Ltd., a
LO.3 Chock, a U.S. corporation, purchases inventory for resale from distributors within the United States and resells this inventory at a $1 million profit to customers outside the United States.
LO.3 Willa, a U.S. corporation, owns the rights to a patent related to a medical device.Willa licenses the rights to use the patent to IrishCo, which uses the patent in its manufacturing facility
LO.3 Create, Inc., produces inventory in its foreign manufacturing plants for sale in the United States. Its foreign manufacturing assets have a tax book value of $5 million and a fair market value
LO.4 Peck, Inc., a U.S. corporation, purchases weight-lifting equipment for resale from HiDisu, a Japanese corporation, for 75 million yen. On the date of purchase, 75 yen is equal to $1 U.S.
LO.4 Table, Inc., a U.S. corporation, operates a manufacturing branch in Mexico and a sales branch in Canada. The Mexican branch uses the peso for all of its activities, and the Canadian branch uses
LO.4 Bench, Inc., a U.S. corporation, operates a sales branch in France. Although the operations are located in France, where the euro is the local currency, all of the branch’s sales are to
LO.4, 6 Marian Manufacturing, Inc., a calendar year domestic corporation, operates a branch in Ireland. In the current year, the branch generated 750,000 euros in net profit.On December 31 of the
LO.5 Hometown, a U.S. C corporation, makes a sale to a customer in Sustainia, a country that applies a 25% income tax to business profits. The customer found out about Hometown through an Internet
LO.5 Buckeye Corporation transferred inventory (basis of $10, fair market value of$40) and machinery used in a U.S. factory (basis of $50, fair market value of $85) to MapleLeaf, a newly formed
LO.5 WorldCo, a domestic corporation, is planning to incorporate a branch that it has been operating in a foreign country. WorldCo’s branch has a large amount of inventory.In no more than three
LO.5 Beach, Inc., a domestic corporation, operates a branch in Mexico. Over the last 10 years, this branch has generated $50 million in losses. For the last 3 years, however, the branch has been
LO.5 Round, Inc., a U.S. corporation, owns 80% of the only class of stock of Square, Inc., a CFC. Square is a CFC until May 1 of the current tax year (not a leap year). Round has held the stock since
LO.5 Brandy, a U.S. corporation, operates a manufacturing branch in Chad, which does not have an income tax treaty with the United States. Brandy’s worldwide Federal taxable income is $30 million,
LO.5 Mary, a U.S. citizen, is the sole shareholder of CanCo, a Canadian corporation.During its first year of operations, CanCo earns $14 million of foreign-source taxable income, pays $6 million of
LO.5 ABC, Inc., a domestic corporation, owns 100% of HighTax, a foreign corporation.HighTax has $50 million of undistributed E & P, all of which is attributable to general limitation income, and $30
LO.5 USCo, a domestic corporation, reports worldwide taxable income of $1.5 million, including a $400,000 dividend from ForCo, a wholly owned foreign corporation. ForCo holds $16 million in
LO.5 USCo, a domestic corporation, reports worldwide taxable income of $500,000, including a $300,000 dividend from ForCo, a wholly owned foreign corporation. ForCo holds $1 million in undistributed
LO.5 Your client Chips, Inc., is engaged in the cookie production business, with production plants in Florida and Singapore. The U.S. plant has always produced profits, but the Singapore operation
LO.5 Skills, Inc., a U.S. corporation, reports current foreign-source income classified in two different FTC income baskets. It earns $50,000 in passive foreign-source income and suffers a net loss
LO.5 Canteen, Inc., a U.S. corporation, owns 100% of NewGrass, Ltd., a foreign corporation.NewGrass earns only general limitation income. During the current year, New-Grass paid Canteen a $10,000
LO.4, 5 Partin, Inc., a foreign subsidiary of Jones, Inc., a U.S. corporation, has pretax income of 200,000 euros for 2012. Partin accrues 60,000 euros in foreign taxes on this income. The average
LO.6 Vanguard, S.A., a Peruvian corporation, manufactures inventory in Peru. The inventory is sold to independent distributors in the United States, with title passing to the purchaser in the United
LO.6 Palm, Ltd., a foreign corporation, operates a sales branch in the United States that constitutes a U.S. trade or business. Rather than return the profits from the sales branch to the foreign
LO.6 Continue with the facts of Problem 72.What are the Federal income tax withholding requirements with respect to Martinho’s sale? Who pays the withheld amount to the U. S. Treasury?
LO.6 ForCo, a foreign corporation not engaged in a U.S. trade or business, received a$500,000 dividend from USCo, a domestic corporation. ForCo incurred $20,000 in expenses related to earning the
LO.6 ForCo, a foreign corporation not engaged in a U.S. trade or business, received a$200,000 dividend from USCo, a domestic corporation. ForCo incurred $5,000 in expenses related to earning the
LO.6 ForCo, a foreign corporation not engaged in a U.S. trade or business, received an $800,000 dividend from USCo, a domestic corporation. ForCo incurred $40,000 in expenses related to earning the
LO.1, 8 ABC Partnership distributed cash and appreciated land to partner Bell in a proportionate nonliquidating distribution. What is the effect to Bell and ABC?
LO.1 How is the basis determined for land and inventory received in a proportionate nonliquidating distribution? How is the partner’s basis in the partnership interest affected?
LO.1 How does a proportionate nonliquidating distribution of cash from a partnership to a partner compare with one from a Subchapter C corporation to a shareholder?
LO.2 Describe the tax treatment to the partner of a proportionate liquidating distribution(where the partnership also liquidates) of cash, land, and inventory. When might the partner recognize a gain
LO.2 How is the partner’s basis determined for land and inventory received in a proportionate liquidating distribution (where the partnership also liquidates)? How is the partner’s basis in the
LO.2 What is the effect on a partnership of a proportionate liquidating distribution of cash, appreciated land, and inventory where the partnership also liquidates? How does this compare to
LO.1, 2 The LizMack Partnership distributes the following assets to partner Liz:• $20,000 cash.• Inventory with a $20,000 value and a $10,000 basis to the partnership.• A parcel of land with a
LO.1, 2 What theories of taxation underlie the rules related to proportionate liquidating and nonliquidating distributions? (In other words, what are these distribution rules trying to accomplish?)
LO.3 What issues arise if a partner contributes appreciated property to a partnership and that property is later distributed to another partner?
LO.4 What is a disproportionate distribution? What is the theory underlying the disproportionate distribution rules? What are they trying to accomplish?
LO.1, 4, 6 What are hot assets? How do they affect a partner’s gain or loss on sale of a partnership interest?
LO.6, 8 Jody sells her partnership interest to Bill for $10,000. What issues must be addressed by Jody, Bill, and the partnership?
LO.7 What methods can be used when a partnership incorporates? Why is it important to specify the method being used?
LO.7 What tax consequences result from the death of a partner?
LO.8 Why might a partner want the partnership to make a § 754 election? Why might the partnership not want to make the election?
LO.8 Who makes the optional adjustment-to-basis election? How is the election made?What is its effect on future years?
LO.9 Describe the various types of events that can cause a partnership termination.Which of these can cause a “technical” termination?
LO.1, 2, 3, 4, 5, 6, 8, 10, 12 Comment on the validity of each of the following statements.a. A partner may recognize a capital gain if a proportionate nonliquidating distribution of cash exceeds the
LO.1 Greg’s outside basis in his interest in the GO Partnership is $360,000. In a proportionate nonliquidating distribution, the partnership distributes to him cash of$60,000, inventory (fair
LO.1 When Melanie’s outside basis in the TMF Partnership is $200,000, the partnership distributes to her $40,000 cash, an account receivable (fair market value of $80,000, inside basis to the
LO.8 Assume the facts of Problem 23.In each independent case, are additional planning opportunities available to the partnership to maximize its inside basis in its assets?If so, by how much can the
LO.1 Mark’s basis in his partnership interest is $39,000. In a proportionate nonliquidating distribution, Mark receives $30,000 cash and two inventory items with bases of$10,000 each to the
LO.1 Cari Hawkins is a 50% partner in the calendar year Hawkins-Henry Partnership.On January 1, 2012, her basis in her partnership interest is $160,000. The partnership has no taxable income or loss
LO.1, 2 At the beginning of the tax year, Monica’s basis in the MIP LLC was $100,000, including Monica’s $50,000 share of the LLC’s liabilities. At the end of the year, MIP distributed to
LO.1, 3, 4 Vincent is a 50% partner in the TAV Partnership. He became a partner three years ago when he contributed land with a value of $60,000 and a basis of $30,000(current value is $100,000).
LO.1, 3, 4 Assume the same facts as in Problem 28, except that TAV distributes$100,000 of cash to Vincent, $50,000 of marketable securities to Tyler, and $50,000 of accounts receivable to Anita. In
LO.1, 3, 4 Assume the same facts as Problem 28, except that TAV distributes a$50,000 interest in the land and $50,000 of accounts receivable to Vincent and $25,000 of cash and $25,000 of accounts
LO.2, 3, 4, 12 Use the assets and partners’ bases from Problem 28.Assume that the partnership distributes all of its assets in a liquidating distribution. In deciding the allocation of assets, what
LO.2, 12 The basis of Jesse’s partnership interest is $90,000. Jesse receives a pro rata liquidating distribution consisting of $30,000 cash, land with a basis of $50,000 and a fair market value of
LO.2 Assume the same facts as in Problem 33, except that Jesse’s basis in the partnership is $120,000 instead of $90,000.a. How much gain or loss, if any, must Jesse recognize on the
LO.2, 12 Paula’s basis in her partnership interest is $60,000. In liquidation of her interest, the partnership distributes to Paula cash of $20,000 and inventory (basis of $5,000 and value of
LO.2 Julie’s basis in her partnership interest is $108,000. In a proportionate distribution in liquidation of the partnership, Julie receives $50,000 cash and two parcels of land with bases of
LO.2, 12 Assume the same facts as in Problem 36, except that Julie receives $50,000 cash and a desk having a basis of $1,200 to the partnership and a fair market value of$2,000.a. How much loss, if
LO.3 In 2009, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits. In 2012, the
LO.3 Derek contributed a tract of undeveloped land to the Nightingale Partnership in 2009. He originally paid $20,000 for the property in 1999, but its value was $70,000 at the date of the

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