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business
south western federal taxation

Questions and Answers of South Western Federal Taxation

LO.1 How is a partnership defined for Federal income tax purposes? What parties can own an interest in a partnership?
LO.5 At the time of its liquidation under § 332, Cardinal Corporation (E & P of$560,000) had the following assets and liabilities: cash ($175,000); marketable securities(fair market value of
LO.5 Orange Corporation purchased bonds (basis of $185,000) of its wholly owned subsidiary, Green Corporation, at a discount. Upon liquidation of Green pursuant to§ 332, Orange receives payment in
LO.4, 5 The stock in Ivory Corporation is owned by Gold Corporation (80%) and Imelda (20%). Gold Corporation purchased its shares in Ivory nine years ago at a cost of$650,000, and Imelda purchased
LO.4, 5 The stock of Magenta Corporation is owned by Fuchsia Corporation (90%)and Marta (10%). Magenta is liquidated in the current year, pursuant to a plan of liquidation adopted earlier in the
LO.4 After a plan of complete liquidation has been adopted, Purple Corporation sells its only asset, land, to Rex (an unrelated party) for $500,000. Under the terms of the sale, Purple receives cash
LO.4 Pursuant to a complete liquidation in the current year, Scarlet Corporation distributes to Jake land (basis of $425,000, fair market value of $390,000) that was purchased three years ago and
LO.4 Assume in Problem 60 that the land had a fair market value of $630,000 on the date of its transfer to Pink Corporation. On the date of the liquidation, the land’s fairmarket value has
LO.4 Pink Corporation acquired land and securities in a § 351 tax-free exchange in 2011. On the date of the transfer, the land had a basis of $720,000 and a fair market value of $1 million, and the
LO.4 On March 4, 2011, a shareholder transferred land (basis of $650,000, fair market value of $575,000) to Roadrunner Corporation in a § 351 transaction. This was the only property transferred to
LO.4 On April 21, 2011, Crow Corporation acquired land and equipment in a § 351 transaction. At that time, the land had a basis of $300,000 and a fair market value of$225,000, and the equipment had
LO.4 Bronze Corporation’s stock is held equally by three brothers: Mitchell, Alex, and Ron. Four years ago, the brothers transferred to Bronze Corporation land in which they had owned equal
LO.4 Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land held for three years as an investment (adjusted basis of $250,000, fair market value of $490,000). The
LO.1, 2, 4 Dove Corporation (E & P of $650,000) has 1,000 shares of stock outstanding.The shares are owned as follows: Julia, 600 shares; Maxine (Julia’s daughter), 300 shares; and Janine
LO.3 Martin owns 1,000 shares of stock in Black Corporation and 500 shares of stock in Blue Corporation, representing 100% ownership of Black and 50% ownership of Blue. Martin sells 200 Blue shares
LO.3 Ramon and Sophie are the sole shareholders of Gull Corporation. Ramon and Sophie each have a basis of $75,000 in their 500 shares of Gull common stock. When its E & P was $500,000, Gull
LO.2 Crane Corporation has 2,000 shares of stock outstanding. It redeems 500 shares for $370,000 when it has paid-in capital of $300,000 and E & P of $1.2 million. The redemption qualifies for sale
LO.1, 2 Broadbill Corporation (E & P of $650,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Tammy, 300 shares;Yvette, 400 shares; and Jeremy,
LO.1 The gross estate of Bridgett, decedent, includes stock of Crane Corporation(E & P of $1.3 million) and Eagle Corporation (E & P of $1 million) valued at $750,000 and $2 million, respectively. At
LO.1, 2 The gross estate of Tanya, decedent, includes stock of Finch Corporation(E & P of $2 million) valued at $1.4 million. At the time of her death in 2012, Tanya owned 40% of the Finch stock
LO.1, 2 For the last eleven years, Lime Corporation has owned and operated four different trades or businesses. Lime also owns stock in several corporations that it purchased for investment purposes.
LO.1, 2 Robert and Lori (Robert’s sister) own all of the stock in Swan Corporation(E & P of $700,000). Each owns 500 shares and has a basis of $25,000 in the shares.Robert wants to sell his stock
LO.1 Cyan Corporation (E & P of $700,000) has 4,000 shares of common stock outstanding.The shares are owned as follows: Angelica, 2,000 shares; Dean (Angelica’s son), 1,500 shares; and Walter
LO.1, 2 Stork Corporation (E & P of $850,000) has 1,000 shares of common stock outstanding.The shares are owned by the following individuals: Lana Johnson, 450 shares;Lori Johnson (Lana’s sister),
LO.1 Pedro owns 700 of the 1,000 shares outstanding of Indigo Corporation (E & P of$950,000). Pedro paid $170 per share for the stock 12 years ago. The remaining stock in Indigo is owned by unrelated
LO.1 Magpie Corporation has 3,000 shares of common stock outstanding. Josephina owns 800 shares, Josephina’s daughter owns 500 shares, Josephina’s brother owns 800 shares, Tern Corporation owns
LO.1 How would your answer to parts (a) and (b) of Problem 41 differ if Julio were a corporate shareholder (in the 34% tax bracket) rather than an individual shareholder and the stock ownership in
LO.1 Assume in Problem 39 that Julio has a capital loss carryover of $50,000 in the current tax year. Julio has no other capital gain transactions during the year. What amount of the capital loss may
LO.1 How would your answer to Problem 39 differ if Julio were a corporate shareholder(in the 34% tax bracket) rather than an individual shareholder and the stock ownership in Gray Corporation
LO.1 Julio is in the 35% tax bracket. He acquired 2,000 shares of stock in Gray Corporation seven years ago at a cost of $200 per share. In the current year, Julio received a payment of $450,000 from
LO.1, 2, 6 Teal Corporation, with E & P of $1.9 million, distributes property with a basis of $180,000 and a fair market value of $250,000 to Grace. She owns 28% of the outstanding Teal shares.a.
LO.5 From the perspective of the parent corporation, contrast the tax consequences of a subsidiary liquidation under the general nonrecognition rules with a subsidiary liquidation that follows a §
LO.5 In general, what are the tax consequences of a § 338 election?
LO.5 What happens to a subsidiary’s tax attributes (e.g., net operating loss, E & P, and capital loss carryover) upon a § 332 liquidation?
LO.5 In the context of a § 332 liquidation, a subsidiary corporation distributes property to its parent corporation in satisfaction of indebtedness. Discuss the tax consequences of this distribution
LO.5 A subsidiary corporation is liquidated under § 332.Pursuant to its liquidation, the subsidiary transferred property to a minority shareholder. With respect to this distribution, what are the
LO.5 Does § 332 apply to the liquidation of an insolvent subsidiary? If not, then how does the parent corporation treat such a liquidation?
LO.5 Discuss the tax consequences to the parent corporation in a § 332 liquidation of a subsidiary.
LO.4 Explain the tax consequences to a shareholder of a corporation in the process of liquidation under the general rule of § 331.May a shareholder use the installment method to report gain on a
LO.4 When properties transferred by a shareholder in a § 351 transaction have a net built-in loss (aggregate fair market value less than aggregate basis), the basis step-down rule must be applied.
LO.4 For purposes of the related-party loss limitation within the context of a complete liquidation, what is the definition of disqualified property?
LO.1, 2, 4 One difference between the tax treatment of a liquidation and a qualifying stock redemption is the applicability of § 267.Explain this statement from the perspective of both the
LO.4 Under what circumstances are losses disallowed to a corporation in liquidation?
LO.4 What are some reasons the shareholders of a corporation might want to liquidate the corporation?
LO.3 What issues arise when a shareholder sells shares owned in one corporation to another corporation in which he or she is a shareholder?
LO.3 In general, what are the tax consequences surrounding the sale of § 306 stock?
LO.2 Discuss the deductibility of expenditures, such as legal, accounting, transfer agent, brokerage, and appraisal fees, a corporation might incur in connection with a redemption of its stock.
LO.2 Kackie Corporation (E & P of $1 million) is currently in negotiations to redeem stock from one or more of its shareholders. The form (i.e., cash and/or property) and amount of the
LO.2, 6 Indigo Corporation wants to transfer cash of $150,000 or property worth$150,000 to one of its shareholders, Linda, in a redemption transaction that will be treated as a qualifying stock
LO.1, 2 Angie and her daughter, Ann, who are the only shareholders of Bluebird Corporation, each paid $100,000 four years ago for their shares in Bluebird. Angie also owns 20% of the stock in Redbird
LO.1, 2 Explain the requirements for a redemption to pay death taxes. What are the tax consequences of a redemption to pay death taxes for the shareholder and the corporation?
LO.1 A redemption to pay death taxes usually results in little or no gain or loss being recognized by the estate. Evaluate this statement.
LO.1, 2 Brown Corporation operates several trades and businesses. In the current year, Brown discontinues the operation of one of its trades and businesses. Brown is considering distributing to its
LO.1 The termination of a business test is a safe-harbor rule that satisfies the not essentially equivalent to a dividend requirement for a partial liquidation. Briefly outline the requirements for
LO.1, 6 Lauren owns 600 shares in Viridian Corporation. The remaining 400 shares of Viridian are owned by Lauren’s son, Brett. Currently, Lauren is both President and Chair of the board of
Both shareholders serve as officers and on the board of directors of Pheasant. In the current year, Pheasant Corporation redeemed all of Barry’s shares in the corporation with a property
LO.1, 2 Tammy and Barry formed Pheasant Corporation several years ago in a transaction that qualified under §
LO.1 Explain the requirements for a disproportionate redemption.
LO.1 Briefly discuss the requirements for a redemption to qualify as a not essentially equivalent redemption.
LO.1 The stock attribution rules apply to all stock redemptions. Assess the validity of this statement.
LO.1 How do the § 318 stock attribution rules apply to partnerships and their partners?
LO.1 Would qualifying stock redemption treatment be ensured if the distribution was treated as a sale or exchange of the stock under applicable state law? Explain.
LO.1 A shareholder’s basis in property received in a qualifying stock redemption is the property’s fair market value on the date of the redemption, but a shareholder’s basis in property
LO.1 Rosalie owns 50% of the outstanding stock of Salmon Corporation. In a qualifying stock redemption, Salmon distributes $80,000 to Rosalie in exchange for one-half of her shares, which have a
LO.1 Would a shareholder prefer a qualifying stock redemption or a nonqualified stock redemption? Why?
LO.1 During the current year, Gnatcatcher, Inc., distributed $100,000 each to Brandi and Yuen in redemption of some of their Gnatcatcher stock. The two shareholders acquired their shares five years
LO.1, 2, 6 Chao, Louis, and Mari, unrelated individuals, own all of the shares of Cerise Corporation. All three shareholders have been active in the management of Cerise since its inception. In the
LO.1 Why does the Code limit sale or exchange treatment on stock redemptions to qualifying stock redemptions?
LO.1 Contrast the tax treatment of distributions that are a return from an investment with the treatment of those that are a return of an investment.
LO.4, 8 Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $30,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is
LO.7 Denim Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. One right and $60 entitle the holder to subscribe to one share of stock. One right is issued for
LO.7 Jacob Corcoran bought 10,000 shares of Grebe Corporation stock two years ago for $24,000. Last year, Jacob received a nontaxable stock dividend of 2,000 shares in Grebe Corporation. In the
LO.7 Katie purchased 5,000 shares of Grebe Corporation common stock six years ago for $80,000. In the current year, Katie received a preferred stock dividend of 400 shares, while the other holders of
LO.6 Parrot Corporation is a closely held company with accumulated E & P of$300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50%share in Parrot, and they share
LO.6 Wren Corporation makes a loan evidenced by a written note to its sole shareholder, James. The loan is collateralized by James’s cabin in the Lake Superior area, but the loan is interest-free.
LO.5 Iris Corporation owns 30% of Fresia Corporation’s stock. On November 15, Fresia Corporation, with current E & P of $320,000, distributes land (fair market value of $100,000; basis of $160,000)
LO.1, 2, 5 Petrel Corporation has accumulated E & P of $85,000 at the beginning of the year. Its current-year taxable income is $320,000. On December 31, Petrel distributed business property (worth
LO.1, 2, 3, 4, 5 Cerulean Corporation has two equal shareholders, Eloise and Olivia.Eloise acquired her Cerulean stock three years ago by transferring property worth$700,000, basis of $300,000, for
LO.1, 5 Cornflower Corporation distributes equipment (adjusted basis of $70,000, fair market value of $55,000) to its shareholder, Roy. What are the tax consequences to Cornflower Corporation and to
LO.1, 3 At the beginning of the year, Penguin Corporation (a calendar year taxpayer)has accumulated E & P of $55,000. During the year, Penguin incurs a $36,000 loss from operations that accrues
LO.1, 5 Lime Corporation, with E & P of $500,000, distributes land (worth $300,000, adjusted basis of $350,000) to Harry, its sole shareholder. The land is subject to a liability of $120,000, which
LO.1, 5 Peach Corporation distributes property ($250,000 basis and $300,000 fair market value) to its sole shareholder, Karla. The property is subject to a liability of $400,000, which Karla assumes.
LO.1, 5 Heather, an individual, owns all of the outstanding stock in Silver Corporation.Heather purchased her stock in Silver nine years ago, and her basis is $56,000. At the beginning of this year,
LO.4 In November of the current year, Emerald Corporation declared a dividend of $2 per share (the shareholder record date isDecember 15). Assume that Emerald has sufficient current E & P to cover
LO.4 Sean, a shareholder of Crimson Corporation, is in the 35% tax bracket. This year, he receives a $7,000 qualified dividend from Crimson. Sean has investment interest expense of $16,000 and net
How will Mike and Steve be taxed on the distributions? How much gain will Mike recognize on the sale of his stock to Steve?
LO.1, 3 Mike, the sole shareholder of Daffodil Corporation, sold his Daffodil stock to Steve on July 30 for $200,000. Mike’s basis in the stock was $150,000 at the beginning of the year. Daffodil
LO.1, 3 Complete the following schedule for each case. Unless otherwise indicated, assume that the shareholders have ample basis in the stock investment.Accumulated E & P Beginning of Year Current E
LO.1, 3 Bunting Corporation and Jennifer each own 50% of Sparrow Corporation’s common stock. On January 1, Sparrow has a deficit in accumulated E & P of $150,000.Its current E & P is $65,000.
LO.1, 3 Cardinal Corporation (a calendar year taxpayer) had a deficit in accumulated E & P of $500,000 at the beginning of the current year. Its net profit for the period January 1 through July 30
LO.1, 3 At the beginning of the year, Teal Corporation had E & P of $225,000. On March 30, Teal sold an asset at a loss of $225,000. For the calendar year, Teal incurred a deficit in current E & P of
LO.1, 3 Lark Corporation is a calendar year taxpayer. At the beginning of the current year, Lark has accumulated E & P of $330,000. The corporation incurs a deficit in current E & P of $460,000 that
LO.2 Osprey Corporation, a calendar year taxpayer, made estimated tax payments of$12,000 for 2012 ($3,000 per quarter). Osprey filed its Federal income tax return for 2012 reflecting a tax liability
LO.2 In each of the following independent situations, indicate the effect on taxable income and E & P, stating the amount of any increase (or decrease) as a result of the transaction. Assume that E &
LO.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following transactions in 2012, its second year of operation.Taxable income $330,000 Federal income tax liability paid
LO.1, 2, 3 On September 30, Jade Corporation, a calendar year taxpayer, sold a parcel of land (basis of $300,000) for a $900,000 note. The note is payable in five installments, with the first payment
LO.2 Capon Corporation, a calendar year taxpayer, receives dividend income of$600,000 from a corporation in which it holds a 12% interest. Capon also receives interest income of $90,000 from
LO.1, 4 At the start of the current year, Indigo Corporation (a calendar year taxpayer)has accumulated E & P of $240,000. Indigo’s current E & P is $160,000, and at the end of the year, it
LO.7 How are nontaxable and taxable stock rights handled for tax purposes?
LO.7 Describe the rationale underlying the tax treatment of stock distributions.

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