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business
south western federal taxation

Questions and Answers of South Western Federal Taxation

LO.7 Your client, Raptor Corporation, declares a dividend permitting its common shareholders to elect to receive 9 shares of cumulative preferred stock or 3 additional shares of Raptor common stock
LO.6, 8 Condor Corporation pays its president and sole shareholder, Katrina, an annual salary of $500,000. Katrina wants to avoid dividends because of the double tax result. However, she is concerned
LO.6, 8 Green Corporation has several employees. Their names and salaries are listed below.Samantha $600,000 Chris (Samantha’s daughter) 100,000 Joey (Samantha’s son) 100,000 Jack (an unrelated
LO.4, 8 Orange Corporation would like to transfer excess cash to its sole shareholder, Danielle, who is also an employee. Danielle is in the 28% tax bracket, and Orange is in the 34% bracket. Because
LO.6 Whether compensation paid to a corporate employee is reasonable is a question of fact to be determined from the surrounding circumstances. How would the resolution of this problem be affected by
LO.6 Judy is the president and sole shareholder of Parakeet Corporation. She is paid an annual salary of $600,000, while her son, Mike, the company’s chief financial officer, is paid a salary of
LO.6 To be treated as a dividend for tax purposes, must a corporation’s distribution to its shareholders meet the legal requirements of a dividend, be formally declared, or be issued pro rata to
LO.5 Tangerine Corporation is considering a property distribution to its shareholders.If appreciated property is to be used, does it matter to Tangerine whether the property distributed is a
LO.5 What is the effect on the corporation when it makes a property distribution?
LO.5 Seagull Corporation owns three machines that it uses in its business. It no longer needs two of these machines and is considering distributing them to its two shareholders as a property
LO.5 Ochre Corporation’s board of directors decides to distribute property to its shareholders rather than pay a cash dividend. Why might Ochre’s board make this decision?
LO.5 Assume the same facts as in Question 9, except that property is distributed. What factors must be considered when determining how the distribution is treated for tax purposes by Red Corporation?
LO.1, 2, 3, 4, 5 Red Corporation distributes $500,000 in cash to each of its three shareholders: Jack, Susan, and Orange Corporation. What factors must be considered when determining how the
LO.4 Discuss the rationale for the reduced tax rates on dividends paid to individuals.
LO.3 A calendar year corporation has substantial accumulated E & P, but it expects to incur a deficit in current E & P for the year due to significant losses in the last half of the year. A cash
LO.3 Describe the effect of a distribution in a year when the distributing corporation has:a. A deficit in accumulated E & P and a positive amount in current E & P.b. A positive amount in accumulated
LO.2 In what ways does the computation of E & P require more conservative accounting than the computation of taxable income?
LO.5 Discuss the impact each of the following has on generating or adding to a deficit in E & P.a. The distribution of a property dividend, where the basis of the property exceeds its fair market
LO.2 In determining Blue Corporation’s current E & P for 2012, how should taxable income be adjusted as a result of the following transactions?a. A capital loss carryover from 2012, fully used in
LO.1 What factors affect the tax treatment of corporate distributions?
LO.2 What is meant by the term earnings and profits?
LO.5, 7 Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The corporation’s assets have a tax basis of $50,000 and a fair market value of $600,000. In the current year, Frank and
LO.6 Susan transfers property (basis of $50,000 and fair market value of $25,000) to Thrush Corporation in exchange for shares of § 1244 stock. (Assume that the transfer qualifies under § 351.)a.
LO.6 Three years ago and at a cost of $40,000, Paul Sanders acquired stock in a corporation that qualified as a small business corporation under § 1244. A few months after he acquired the stock,
LO.6 Sam, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244 at a cost of $100,000 three years ago. He sells the stock for $10,000 in the
LO.5, 6 Stock in Jaybird Corporation (555 Industry Lane, Pueblo, CO 81001) is held equally by Vera, Wade, and Wes. Jaybird seeks additional capital in the amount of$900,000 to construct a building.
LO.5, 6 Emily Patrick (36 Paradise Road, Northampton, MA 01060) formed Teal Corporation a number of years ago with an investment of $200,000 cash, for which she received$20,000 in stock and $180,000
LO.4 Red Corporation wants to set up a manufacturing facility in a midwestern state.After considerable negotiations with a small town in Ohio, Red accepts the following offer: land (fair market value
LO.1, 3 On January 6, 2012, Donna transferred machinery worth $100,000 (basis of$30,000) to a controlled corporation, Jay, in a transfer that qualified under § 351.Donna had deducted depreciation on
LO.1, 3 Assume in Problem 41 that Jane receives the 50 shares of Osprey Corporation stock in consideration for the appreciated property and for the provision of accounting services in organizing the
LO.1, 3 Alice and Jane form Osprey Corporation. Alice transfers property, basis of$25,000 and value of $200,000, for 50 shares in Osprey Corporation. Jane transfers property, basis of $50,000 and
LO.1, 2, 3 Fay, a sole proprietor, is engaged in a cash basis service business. In the current year, she incorporates the business to form Robin Corporation. She transfers assets with a basis of
LO.1, 3 Michael transfers the following assets to Peach Corporation in exchange for all of its stock. (Assume that neither Michael nor Peach plans to make any special tax elections at the time of
LO.1, 2, 3 David organizes White Corporation with a transfer of land (basis of$200,000, fair market value of $600,000) that is subject to a mortgage of $150,000. A month before the incorporation,
LO.1, 2, 3 Four years ago Gene exchanged commercial real estate worth $1.5 million(basis of $300,000) and subject to a mortgage of $200,000 for land worth $1.15 million, subject to a mortgage of
LO.1, 2, 3 Adam transfers property with an adjusted basis of $50,000 (fair market value of $400,000) to Swift Corporation for 90% of the stock. The property is subject to a liability of $60,000,
LO.1, 7 Rhonda Johnson owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel Powell, have decided that additional contributions of capital are needed if Peach is to
LO.3 Kim is an employee of Azure Corporation. In the current year, she receives a salary of $30,000 and is given 10 shares of Azure stock for services she renders to the corporation.The shares in
LO.1, 3 Assume in Problem 32 that the property Bob transfers to Robin Corporation is worth $15,000 (basis of $3,000) and that his services in organizing the corporation are worth $165,000. What are
LO.1, 3 Ann and Bob form Robin Corporation. Ann transfers property worth$420,000 (basis of $150,000) for 70 shares in Robin Corporation. Bob receives 30 shares for property worth $165,000 (basis of
LO.1 Juan organized Teal Corporation 10 years ago. He contributed property worth$1 million (basis of $200,000) for 2,000 shares of stock in Teal (representing 100%ownership). Juan later gave each of
LO.1 Dan and Patricia form Crane Corporation. Dan transfers land (worth $200,000, basis of $60,000) for 50% of the stock in Crane. Patricia transfers machinery (worth$150,000, adjusted basis of
LO.1 Michael Robertson (1635 Maple Street, Syracuse, NY 13201) exchanges property(basis of $200,000 and fair market value of $850,000) for 75% of the stock of Red Corporation.The other 25% is owned
LO.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)
LO.1, 3 Ron and Gail form Maple Corporation with the following consideration:Consideration Transferred Basis to Transferor Fair Market Value Number of Shares Issued From Ron—Cash $ 50,000 $ 50,000
LO.1, 3 Elizabeth, Rod, June, and Whit form Zelcova Corporation with the following consideration:Consideration Transferred Basis to Transferor Fair Market Value Number of Shares Issued From
LO.7 Sarah incorporates her small business but does not transfer the machinery and equipment the business uses to the corporation. Subsequently, the machinery and equipment are leased to the
LO.1, 7 Keith’s sole proprietorship holds assets that, if sold, would yield a gain of$100,000. It also owns assets that would yield a loss of $30,000. Keith incorporates his business using only the
LO.6 Four years ago Nelson purchased stock in Black Corporation for $37,000. The stock has a current value of $5,000. Nelson needs to decide which of the following alternatives to pursue. Determine
LO.6 Under what circumstances, if any, may a shareholder deduct a business bad debt on a loan made to the corporation?
LO.6 Assuming that § 1244 does not apply, what is the tax treatment of stock that has become worthless?
LO.5 In determining whether debt of a corporation should be reclassified as stock, comment on the relevance of the following:a. The loan is on open account.b. The loan is payable on demand.c. The
LO.5 In structuring the capitalization of a corporation, what are the advantages and disadvantages of utilizing debt rather than equity?
LO.4 A corporation acquires property as a contribution to capital from a shareholder and from a nonshareholder. Are the rules pertaining to the property’s basis the same?Explain.
LO.3 In a § 351 transfer, Jorge transfers appreciated property to Bluebird Corporation in exchange for Bluebird stock.a. What is Bluebird’s holding period for the property it received from
LO.3 Identify a situation when a corporation can deduct the value of the stock it issues for the rendition of services. Identify a situation when a deduction is not available.
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 transfer of a liability to the corporation along with
LO.2 If both § 357(b) and § 357(c) apply to a transfer of property to a corporation under § 351, which provision takes precedence?
LO.2 Before incorporating her apartment rental business, Libbie takes out second mortgages on several of the units. She uses the mortgage proceeds to make capital improvements to the units. Along
LO.2 How does the transfer of mortgaged property to a controlled corporation affect the transferor-shareholder’s basis in stock received? Assume that no gain is recognized on the transfer.
LO.1 At a point when Robin Corporation has been in existence for six years, shareholder Ted transfers real estate (adjusted basis of $20,000 and fair market value of$100,000) to the corporation for
LO.1 Should a transferor who receives stock for both property and services be included in the control group in determining whether an exchange meets the requirement of§ 351? Explain.
LO.1 Bruce and Joyce form Warbler Corporation by transferring appreciated property in exchange for 50 shares each of Warbler stock. If Bruce donates his shares to a qualified charity immediately
LO.1, 2, 7 Four friends plan to form a corporation for purposes of constructing a shopping center. Charlie will be contributing the land for the project and wants more security than shareholder
LO.1 Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.” Nancy formed the business in 1997 as a sole proprietorship, and it has been very
LO.1 What is the control requirement of § 351? Describe the effect of the following in satisfying this requirement:a. A shareholder renders only services to the corporation for stock.b. A
LO.1 Does the receipt of a 10-year note in exchange for the transfer of appreciated property to a controlled corporation cause recognition of gain? Explain.
LO.1 Does “stock” include stock rights and stock warrants under § 351? Does it include preferred stock?
LO.1 What does “property” include for purposes of § 351?
LO.1 Under what circumstances will gain and/or loss be recognized on a § 351 transfer?
LO.1 In terms of justification and effect, § 351 (transfer to a controlled corporation)and § 1031 (like-kind exchange) are much alike. Explain.
LO.10 Your client is facing a possible personal holding company tax or accumulated earnings tax in 2012. Advise the client as to the total tax due and what the effective tax rate will be for this
LO.10 In each of the following independent situations relating to the penalty tax under§ 531, determine the dividend the corporation would have to pay to make its ATI (accumulated taxable income) be
LO.8 Brown Corporation, a calendar year taxpayer, began operations in 2009. It reports the following pre-adjusted AMTI and ACE for 2009 through 2012:Pre-adjusted AMTI ACE 2009 $80,000,000 $70,000,000
LO.6, 7 For 2012, Silver Corporation (a calendar year business) incurred the following transactions:Taxable income $3,950,000 Accelerated depreciation on pre-1987 real property(in excess of
LO.6, 7 For 2012, Gold Corporation (a calendar year business) had the following transactions:Taxable income $4,200,000 Accelerated depreciation on pre-1987 real property (in excess of straight-line
LO.6, 7 For 2012, Apple Corporation (a calendar year integrated oil company) had the following transactions:Taxable income $4,000,000 Regular tax depreciation on realty in excess of ADS (placed in
LO.6 Vorhies, Inc., a calendar year corporation that was created in January 2008, has gross receipts as follows:Year Gross Receipts 2008 $3,250,000 2009 3,700,000 2010 4,950,000 2011 7,800,000 2012
LO.1, 2, 5 The Ryan LLC has two equal members in the 35% marginal tax bracket. If the LLC has QPAI of $13 million in 2011 and $11 million in 2012, what would be the maximum tax savings for this LLC
LO.2, 3, 4, 5 Assume the same facts as in Problem 43, except that Lee Corporation and Crimson, Inc., are members of an EAG. Determine their:a. DPGR.b. QPAI.c. DPAD.
LO.2, 3, 4, 5 Lee Corporation manufactures a treadmill at a cost of $1,600 and sells the machine to Crimson, Inc., for $2,400 in 2012. Crimson incurs TV advertising expenses of $600 and sells the
LO.5 Parson, Inc., a calendar year taxpayer, manufactures ice cream that it wholesales to grocery stores and other food outlets. The company also operates an ice cream shop near its factory, where it
LO.2, 3, 4 Danping Corporation, a calendar year taxpayer, sells lawn furniture through big box stores. It manufactures some of the furniture and imports some from unrelated foreign producers. For tax
LO.3, 4 Assume the same facts as in Problem 37, except that Stilt incurred only $340(not $400) in production costs.a. What is Stilt’s DPGR per unit? Its QPAI?b. How could this result have been
LO.3, 4 Stilt Corporation sells portable water filtration systems by means of the Internet and direct mail orders. Most of the components are purchased from foreign suppliers at a cost of $1,600.
LO.3 Cowbird, Inc., refines and sells gasoline in the United States. Of the gasoline it sells, about 4% is refined in Louisiana and the remaining 96% is purchased from a nonrelated source in the
LO.2 In each of the following independent situations, determine the DPAD for 2012 for the corporation involved.Taxpayer QPAI TI W–2 Wagesa. White $800,000 $600,000 $120,000b. Red 400,000 500,000
LO.1 Tiger, Inc., has $13 million of taxable income. What is the tax savings from Tiger’s maximum DPAD in 2012?
LO.10 Ashley McQuiston calls to ask you what impact future tax rates on dividends and capital gains will have on his closely held corporation. He is worried about the accumulated earnings tax. What
LO.6, 7, 8, 11 A regular corporation anticipates AMT problems next year. Prepare PowerPoint slides for a technical presentation to the audit staff pointing out some strategies available to avoid or
LO.10 ATI = Taxable income ! Adjustments + Dividends received − Accumulated earnings credit. Comment on the validity of this formula.
LO.8 When must a corporation file Form 4626?
LO.8 Which of the following credits may be used to offset the AMT?a. General business credit.b. Federal solar credit.c. Foreign tax credit.d. Qualified electric vehicle.
LO.8 Alice Tiras, an auditor on your staff, calls you to ask what impact current E & P has on ACE. She wants to know if ACE is the same as current E & P. Prepare a tax file memo indicating what you
LO.6, 7, 8 Using the legend provided, classify the impact that each of the following items has when starting with regular taxable income or loss and then computing AMTI.Ignore the ACE
LO.6, 7 In arriving at AMTI, why are NOLs stated separately instead of being included with other adjustments?
LO.7 Percentage depletion claimed by a taxpayer is a tax preference item. Assess the validity of this statement.
LO.6, 7 Because tax preference items are merely timing differences, they may be positive or negative. Assess the validity of this statement.
LO.6 What is the small corporation exemption from the AMT? When is it available and not available?
LO.6 If the AMT is greater than the regular corporate tax, the corporation must pay the greater AMT. Discuss.

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