Question 4

a.Enviro Corporation reports the following results:

Service income (not passive income)$80,000

Dividend income60,000

Interest income120,000

Passive income-related expenses40,000

Other expenses100,000

At the end of the year, Enviro's Subchapter C E&P is $100,000. What is Enviro Corporation's excess net passive income and its excess net passive income tax for the year?

b.Crew Corporation elects S status effective for tax year 2010.As of January 1, 2010, Crew's assets were appraised as follows

Adjusted Basis

Fair Market Value

Cash

Accounts receivable

Inventory (FIFO)

Investment in land

Building

Goodwill

$ 16,010

-0-

70,000

110,000

220,000

-0-

$ 16,010

55,400

90,000

195,000

275,000

93,000

In each of the following situations, calculate any built-in gains tax, assuming that the highest corporate tax rate is 35%.C corporation taxable income would have been $100,000.

i.

During 2010, Crew collects $40,000 of the accounts receivable and sells 80% of the inventory for $99,000.

ii.

In 2011, Crew sells the land held for investment for $203,000.

iii.

In 2012, the building is sold for $270,000.

Question 5

a.Marsha is a shareholder in a calendar year S corporation. At the beginning of the year, her stock basis is $20,000, her share of AAA is $4,000, and her share of corporate AEP is $10,000. She receives a $12,000 distribution, and her share of S corporation items includes a $4,000 long-term capital gain and $18,000 ordinary loss. Determine the effects of these events on AAA, stock basis, and AEP

b.Jacob is a 50% shareholder in Babylon Corporation which is an S corporation. The S corporation had a $40,000 ordinary loss last year and $5,000 of ordinary income this year. Before accounting for last year's losses, Jacob's basis in his Babylon stock is $16,000 and Babylon owed Jacob $2,000 (an unsecured note having a basis of $2,000) at the end of last year. In addition, Babylon had $50,000 of other liabilities owed to creditors other than Jacob at the end of last year. What income and loss must Jacob report on his current return as a result of owning the Babylon stock (ignoring the at-risk and passive activity limitations)?

Question 6

Paris Corporation, a calendar year taxpayer, has been an S corporation for several years. Derek and Dawn each own 50% of Paris's stock. On September 1 of the current year (assume a non- leap year), Paris issues additional common stock to Berlin Corporation for cash. Derek, Dawn, and Berlin each end up owning one- third of Paris's stock. Paris reports ordinary income of $ 250,000 and a short- term capital loss of $ 30,000 in the current year. Eighty percent of the ordinary income and all the capital loss accrue after Berlin purchases its stock. Paris makes no distributions to its shareholders in the current year. What income and losses do Paris, Berlin, Derek, and Dawn report as a result of the current year's activities? If there is more than one possible method, discuss both methods.

Megan and Melanie organized Beauty Corporation 15 years ago and have each owned 50% of the corporation since its inception. In the current year, Beauty reports ordinary income/ taxable income of $ 40,000. Assume the business does not qualify for the U. S. production activities deduction. On April 30, Beauty distributes $ 200,000 cash to Megan and distributes land with a $ 200,000 FMV and a $ 140,000 adjusted basis to Melanie. Beauty had purchased the land as an investment two years ago. What are the tax implications to Beauty, Megan, and Melanie of the land distribution in each of the situations that follow? Use this data for Question 7 and 8.

Question 7

Beauty was formed as a C corporation but made an S election three years after its formation. On January 1 of the current year, Megan's basis in his stock is $ 200,000, and Melanie's stock basis is $ 160,000. Beauty had the following earnings balances on January 1 of the current year: Accumulated Adjustments Account $ 250,000 Accumulated E& P 60,000

Question 8

Beauty was formed as a partnership and continues to operate in that form. On January 1 of the current year, Megan's basis in her partnership interest is $ 200,000, and Melanie's partnership basis is $ 160,000. The partnership has no liabilities and no unrecognized precontribution gains.

Question 9

The ABC Partnership has the following balance sheets at December 31:

Basis

FMV

Cash

$45,000

$45,000

Accounts Receivable

0

108,000

Inventory

66,000

120,000

Land

420,000

285,000

$531,000

$558,000

Capital, A

$177,000

$186,000

Capital, B

177,000

186,000

Capital, C

177,000

186,000

$531,000

$558,000

On that date, C sells his interest in the partnership to unrelated buyer G for $186,000.

a.How much gain or loss will C recognize in connection with the sale to G?

b.What will be the character of C's gain or loss?

Question 10

Cato Corporation incorporated on July 1, 2004, in California, with Tim and Elesa, husband and

wife, owning all the Cato stock. On August 15, 2004, Cato made an S election effective for 2004. Tim and Elesa filed the necessary consents to the election. On March 10, 2008, Tim and Elesa transferred 15% of the Cato stock to the Reid and Susan Trust, an irrevocable trust created three years earlier for the benefit of their two minor children. In early 2009, Tim and Elesa's tax accountant, Susan, learns about the transfer and feels that that the transfer of the stock to the trust may have terminated Cato's S election. Tim and Elesa's business was handled by Susan's manager last year and probably wouldn't be too pleased if Susan were to second guess her. Susan is wondering whether she should raise the issue with her manager and client or whether she should just remain silent.

a.Are there any ethical issues that concern you in this situation?

b.Is Cato's S election terminated?

c.What advice would you give Susan, Tim and Elesa?

Support your opinion with relevant tax authorities (code, reg, rev ruls, rev procs, court cases etc.) wherever necessary.