Required:
- Determine the tax consequences of the corporate formation to Able, Baker, and Lifecycle Corporation.
- For 2017 through 2019, prepare schedules showing corporate taxable income, taxes, and E&P activity. Assume that Lifecycle pays its taxes in the same year they accrue.
- For 2020, prepare a schedule showing the results of this years transactions on Lifecycle Corporation, Able, and Baker.
C:6-54 The following facts pertain to Lifecycle Corporation: Able owns a parcel of land (Land A) having a $30,000 FMV and $16,000 adjusted basis. Baker owns an adjacent parcel of land (Land B) having a $20,000 FMV and $22,000 adjusted basis. On January 2, 2017, Able and Baker contribute their parcels of land to newly formed Lifecycle Corporation in exchange for 60% of the corporation's stock for Able and 40% of the corporation's stock for Baker. The corporation elects a calendar tax year and the accrual method of accounting. On January 21 2017, the corporation borrows $2 million and uses the loan proceeds to build a factory ($1 million), purchase equipment ($500,000), produce inventory ($450,000), pay other operating expenses ($30,000), and retain working cash ($20,000). Assume the corporation sells all inventory produced and collects on all sales immediately so that, at the end of any year, the corporation has no accounts receivable or inventory balances. Operating results for 2017 are as follows: $964,000 450,000 140,000 Sales Cost of goods sold Interest paid on loan Depreciation: Equipment Building Operating expenses 70,000 24,000 30,000 $25,000 for E&P) $24,000 for E&P) Of these amounts, $250,000 is qualified production activities income. The deduction percentage is 9%. In 2018, Lifecycle Corporation invests $10,000 of excess cash in Macro Corporation stock (less than 20% owned) and $20,000 in tax-exempt bonds. In addition, the corporation pays Able a $12,000 salary and distributes an additional $42,000 to Able and $28,000 to Baker. The corporation also makes a $100,000 principal payment on the loan. Results for 2018 are as follows: $990,000 500,000 130,000 $50,000 for E&P) $25,000 for E&P) Sales Cost of goods sold Interest paid on loan Depreciation: Equipment Building Operating expenses Salary paid to Able Dividend received on Macro Corporation stock Short-term capital gain on sale of portion of Macro Corporation stock holdings ($4,000 - $3,000) Tax-exempt interest received Charitable contributions 125,000 25,000 40,000 12,000 2,000 1,000 1,500 500 Of these amounts, $158,000 is qualified production activities income. The deduction percentage is 9%. . In 2019, the corporation did not pay a salary to Able and made no distributions to the shareholders. The corporation, however, made a $30,000 principal payment on the loan. Results for 2019 are as follows: Sales Cost of goods sold Interest paid on loan $500,000 280,000 125,000 90,000 25,000 60,000 ($50,000 for E&P) $25,000 for E&P) Depreciation: Equipment Building Operating expenses Long-term capital gain on sale of remain- ing Macro Corporation stock ($9,000 - $7,000) Long-term capital gain on sale of tax-exempt bond ($21,000 - $20,000) 2,000 1,000 Of these amounts, qualified production activities income is zero (because it is negative) On January 2, 2020, the corporation receives a refund for the 2019 NOL carried back to 2017. When carrying back the NOL, remember to recalculate the U.S. production activities deduction in the carryback year because of the reduced taxable income resulting from carryback. In addition, the corporation sells its assets, pays taxes on the gain, and pays off the $1.87 million remaining debt. Equipment Building Land A Land B Total Sales Price $ 250,000 986,000 80,000 50,000 $1,366,000 Tax Adj. Basis* $ 215,000 926,000 16,000 20,000 $1,177,000 E&P Adj. Basis $ 375,000 926,000 16,000 20,000 $1,337,000 *NOTE: Technically, the equipment should be depreciated for 1/2 year in the year of disposition, and the building should be depreciated for 1/2 month (because of the January disposition). However, for simplicity, the above calculations ignore depreciation deductions in the disposition year, which creates an offsetting overstatement of adjusted basis. Section 362(e) (2) limits Land B basis to the FMV. Immediately after these transactions, the corporation makes a liquidating distribution of the remaining cash to Able and Baker. The remaining cash is $348,639, which the corporation distributes in proportion to the shareholders' ownership (60% and 40%). Assume that the shareholder's long-term capital gains will be taxed in 2020 at 23.8% (the 20% maximum capital gains rate plus the 3.8% rate on net investment income). C:6-54 The following facts pertain to Lifecycle Corporation: Able owns a parcel of land (Land A) having a $30,000 FMV and $16,000 adjusted basis. Baker owns an adjacent parcel of land (Land B) having a $20,000 FMV and $22,000 adjusted basis. On January 2, 2017, Able and Baker contribute their parcels of land to newly formed Lifecycle Corporation in exchange for 60% of the corporation's stock for Able and 40% of the corporation's stock for Baker. The corporation elects a calendar tax year and the accrual method of accounting. On January 21 2017, the corporation borrows $2 million and uses the loan proceeds to build a factory ($1 million), purchase equipment ($500,000), produce inventory ($450,000), pay other operating expenses ($30,000), and retain working cash ($20,000). Assume the corporation sells all inventory produced and collects on all sales immediately so that, at the end of any year, the corporation has no accounts receivable or inventory balances. Operating results for 2017 are as follows: $964,000 450,000 140,000 Sales Cost of goods sold Interest paid on loan Depreciation: Equipment Building Operating expenses 70,000 24,000 30,000 $25,000 for E&P) $24,000 for E&P) Of these amounts, $250,000 is qualified production activities income. The deduction percentage is 9%. In 2018, Lifecycle Corporation invests $10,000 of excess cash in Macro Corporation stock (less than 20% owned) and $20,000 in tax-exempt bonds. In addition, the corporation pays Able a $12,000 salary and distributes an additional $42,000 to Able and $28,000 to Baker. The corporation also makes a $100,000 principal payment on the loan. Results for 2018 are as follows: $990,000 500,000 130,000 $50,000 for E&P) $25,000 for E&P) Sales Cost of goods sold Interest paid on loan Depreciation: Equipment Building Operating expenses Salary paid to Able Dividend received on Macro Corporation stock Short-term capital gain on sale of portion of Macro Corporation stock holdings ($4,000 - $3,000) Tax-exempt interest received Charitable contributions 125,000 25,000 40,000 12,000 2,000 1,000 1,500 500 Of these amounts, $158,000 is qualified production activities income. The deduction percentage is 9%. . In 2019, the corporation did not pay a salary to Able and made no distributions to the shareholders. The corporation, however, made a $30,000 principal payment on the loan. Results for 2019 are as follows: Sales Cost of goods sold Interest paid on loan $500,000 280,000 125,000 90,000 25,000 60,000 ($50,000 for E&P) $25,000 for E&P) Depreciation: Equipment Building Operating expenses Long-term capital gain on sale of remain- ing Macro Corporation stock ($9,000 - $7,000) Long-term capital gain on sale of tax-exempt bond ($21,000 - $20,000) 2,000 1,000 Of these amounts, qualified production activities income is zero (because it is negative) On January 2, 2020, the corporation receives a refund for the 2019 NOL carried back to 2017. When carrying back the NOL, remember to recalculate the U.S. production activities deduction in the carryback year because of the reduced taxable income resulting from carryback. In addition, the corporation sells its assets, pays taxes on the gain, and pays off the $1.87 million remaining debt. Equipment Building Land A Land B Total Sales Price $ 250,000 986,000 80,000 50,000 $1,366,000 Tax Adj. Basis* $ 215,000 926,000 16,000 20,000 $1,177,000 E&P Adj. Basis $ 375,000 926,000 16,000 20,000 $1,337,000 *NOTE: Technically, the equipment should be depreciated for 1/2 year in the year of disposition, and the building should be depreciated for 1/2 month (because of the January disposition). However, for simplicity, the above calculations ignore depreciation deductions in the disposition year, which creates an offsetting overstatement of adjusted basis. Section 362(e) (2) limits Land B basis to the FMV. Immediately after these transactions, the corporation makes a liquidating distribution of the remaining cash to Able and Baker. The remaining cash is $348,639, which the corporation distributes in proportion to the shareholders' ownership (60% and 40%). Assume that the shareholder's long-term capital gains will be taxed in 2020 at 23.8% (the 20% maximum capital gains rate plus the 3.8% rate on net investment income)
