Problem #1.

Lenny and Squiggy form a corporation in a transaction that qualifies under Section 351. Lenny transfers property with an adjusted basis of $150,000 and a FMV of $200,000 in exchange for one-half of the stock. The property has an $80,000 mortgage, which the corporation assumes.

-What is the corporation's tax basis in the property transferred by Lenny?

Problem #2.

Flower Corporation is a calendar year, cash method "C" corporation. April, an individual, owns 100% of Flower Corporation's stock. April's basis in the stock is $7,000. Flower Corporation has a positive current E&P balance of $15,000 and a deficit accumulated E&P balance of $20,000. If, on December 31, Flower Corporation distributes $50,000 in cash to April in a nonliquidating distribution (the only distribution made by Flower all year)

-What are the income tax consequences to April?

Problem #3

You work for Smart Corporation. Smart Corporation is owned 49% by Brilliant Corporation and 51% by Jed, an individual. The CEO of Smart Corporation comes to you and says, "I'm thinking that Smart Corporation ought to declare a dividend to its stockholders. I've heard that there is something called a DVD in tax law that may be important in deciding what the tax consequences are to the stockholders upon receiving a dividend." He then waits for you to respond. First, you politely inform the CEO that what he means to refer to is the "DRD," not "DVD." You then explain that DRD stands for "dividends received deduction." The CEO then asks you, "How are Brilliant, Smart, and Jed treated for income tax purposes if Smart distributes a dividend to them?" Please respond to the CEO.

Problem #4

On May 1 of the current year, Kimberly, Victor, Pam, and Joe form Newco Corporation.

Kimberly transfers land with a tax basis of $70,000 and a fair market value of $130,000. The land is encumbered with an $80,000 liability, which the corporation assumes as part of the transfer. Kimberly purchased the land four years ago. Kimberly received 50 shares of stock in return.

Victor transfers equipment with a tax basis of $20,000 and a fair market value of $40,000 in exchange for 30 shares of stock and $10,000 in cash from the corporation. Victor purchased the equipment three years ago.

Joe provides legal services to the corporation worth $10,000 in exchange for 10 shares of stock.

Pam transfers a personal car to with a tax basis of $25,000 and a fair market value of $15,000 in exchange for 10 shares of stock and $5,000 in cash from the corporation. Pam purchased the car two years ago.

a. What is Kimberly's amount realized?

b. What is your authority for your answer in Question a?

c. What is Kimberly's gain or loss realized?

d. What is Kimberly's gain or loss recognized?

e. What is your authority for your answer in Question d?

f. What is Kimberly's stock basis?

g. What is your authority for your answer in f?

h. What is Victor's gain or loss recognized?

i. What is Joe's stock basis?

j. What is Pam's gain or loss realized?

k. What is Pam's gain or loss recognized?

l. What is Pam's stock basis?

m. What is Newco's tax basis in the equipment?

Problem #5

Stockton Corporation is a cash method, calendar year corporation. On December 31, Stockton Corporation distributes $32,000 to its sole individual shareholder, Malone, in a nonliquidating distribution. At the time of the distribution, Stockton's current E&P is $12,000 and its accumulated E&P is $8,000. Malone's basis in his Stockton stock is $21,000.

- What is Malone's basis in his Stockton stock after the distribution?

Problem #6

When does the accumulated earnings tax apply? Be as specific as possible.

Problem #7

What is a personal holding company? Why does Congress impose such a penalty tax on them?

Problem #8

In the Thor Power Tool case, the taxpayer kept its books according to GAAP. The Tax Court and other courts agreed that the taxpayer properly complied with GAAP. Why, then, did the taxpayer lose this case?

Problem #9

Your clients, Ben and Jerry, want to form a corporation to conduct a consulting business. They will be the only owners. Unfortunately, neither of them has cash or property to contribute to the corporation other than the following:

Ben: One share of Nike stock. Tax basis $30 and fmv $100

Jerry: One share of Disney stock. Tax basis $10 and fmv $100

Ben and Jerry each have owned their respective stock in Nike and Disney for three years. Ben and Jerry don't want to sell the stock and then contribute the cash proceeds to the corporation. Rather, they propose to contribute the stock to the corporation as a capital contribution in exchange for shares of stock in the newly formed corporation. Advise them of the tax consequences if they pursue this approach.

Problem #10

C corporation is a cash method, calendar year corporation. R, an individual, is C corporation's sole shareholder. On December 31, C corporation has a $225 current earnings and profits balance and a $50 accumulated earnings and profits balance. During the year C corporation made equal quarterly cash distributions of $100 each to R. R has a stock basis of $70 in his C corporation stock.

-What are the tax consequences to R of each distribution?

Problem #11

C corporation distributes land to its only shareholder, individual R, in a nonliquidating distribution. The land has a tax basis of $130 to the corporation and its fmv is $150. The corporation has $500 in current earnings and profits and $200 in accumulated earnings and profits.

a. What is the gain or loss recognized by C corporation on the distribution?

b. What are the tax consequences to R?

c. Suppose instead that the land had a fair market value of $100 instead of $150 (and its basis is still $130) at the time of the distribution. What is the gain or loss recognized by C corporation on the distribution? What are the tax consequences to R?

Problem #12.2

Sally is the sole shareholder of an S corporation. At the beginning of the year her stock basis is $35,000. During the year the S corporation experienced the following:

Sales $50,000

Cost of goods sold $20,000

Tax-exempt interest income $4,000

Long-term capital gain $2,000

Advertising expenses $5,000

Charitable contribution $5,000

Distribution to Sally $24,000

-What is Sally's stock basis at the end of the year?

Problem #13.2

R is the sole shareholder of an S corporation. R's tax basis in the stock of the S corporation is $200 at the beginning of Year 1. During Year 1, the S corporation has an $800 ordinary loss. R also loans the S corporation $500 in Year 1. In Year 2, the S corporation has a $600 ordinary income.

-How much of the loss in Year 1 is deductible by R in Year 1? How much in Year 2?

Explain.

-What is R's stock basis and R's debt basis at the end of Year 2?

Problem #14.2

Bee Corporation, a C corporation, owns 80% of the single class of stock in Fly Corporation, a C corporation. The other 20% is owned by Mandy, an individual. Bee's basis in its Fly Corporation stock is $120,000 and Mandy's basis is $10,000. Fly Corporation distributes property having an adjusted basis of $60,000 and a FMV of $80,000 to Bee Corporation and $20,000 of money to Mandy as a liquidating distribution. Fly Corporation has E&P of $100,000 at the time of the distribution.

-What are the income tax consequences to Fly, Bee?

-What are the income tax consequences to Mandy?

Problem #15.2

R, an individual, is the sole shareholder of a C corporation. R has a stock basis of $30 in the C corporation. The C corporation has one asset, Blackacre (tax basis $60, fmv $100). The C corporation completely liquidates by distributing Blackacre to R.

-What are the income tax consequences to R as a result of the liquidation of the C

corporation?

Problem #17.2

Beth, an individual, owns 25% of Sandy Corporation's single class of stock. Sandy Corporation is a C corporation. Beth's tax basis in Sandy Corporation's stock is $18,000. Sandy Corporation's E&P is $26,000. Beth is not related to any other Sandy Corporation shareholder.

-If Sandy Corporation redeems all of Beth's stock for $30,000, how much capital gain does Beth recognize?

Problem #18.2

R is the sole owner of ABC, Inc., and ABC, Inc. is the sole owner of XYZ, Inc. Explain the following in detail:

-Is either ABC, Inc. or XYZ, Inc. a qualified subchapter S subsidiary (QSub)?

-Additionally, how is a QSub treated for income tax purposes?

Problem #19.2

Stanley, Amber, and Martin are the only shareholders of SAM Corporation. SAM Corporation has only 1 class of stock outstanding. Stanley and Martin are brothers. Amber is Martin's spouse (Stanley's sister-in-law). Stanley owns 40 shares of SAM, Amber owns 30 shares of SAM and Martin owns 30 shares of SAM. SAM Corporation redeems 25 of Martin's shares for $10,000.

-Martin's basis in those 25 shares is $7,000. Assume that SAM Corporation's earnings and profits balance is $50,000. Explain the tax consequences to Martin on the redemption of the 25 shares.

(Analyze this problem using the substantially disproportionate redemption test.)