Taxation exam

Ramon incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and adjusted bases:

FMV

Adjusted Basis

Inventory

20,750

6,000

Building

52,000

45,250

Land

111,000

57,000

Total

183,750

108,250

The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Ramon.

a. What amount of gain or loss does Ramon realize on the transfer of the property to his corporation?

b. What amount of gain or loss does Ramon recognize on the transfer of the property to his corporation?

c. What is Ramon's basis in the stock he receives in his corporation?

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Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet:

FMV

Adjusted Basis

Appreciation

Cash

$

140,000

$

140,000

Building

28,000

14,000

14,000

Land

112,000

56,000

56,000

Total

$

280,000

$

210,000

$

70,000

Under the terms of the agreement, Shauna will receive the $140,000 cash in exchange for her 50 percent interest in WFI. Shauna's tax basis in her WFI stock is $35,000. Danielle will receive the building and land in exchange for her 50 percent interest in WFI. Danielle's tax basis in her WFI stock is $70,000. Assume for purposes of this problem that the cash available to distribute to the shareholders has been reduced by any tax paid by the corporation on gain recognized as a result of the liquidation.

a. What amount of gain or loss does WFI recognize in the complete liquidation?

b. What amount of gain or loss does Shauna recognize in the complete liquidation?

c. What amount of gain or loss does Danielle recognize in the complete liquidation?

d. What is Danielle's tax basis in the building and land after the complete liquidation?

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Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 65 shares with a basis of $3,900, and Clyde owns the remaining 35 shares with a basis of $14,500. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. (Round your answers to the nearest whole number. Leave no answer blank. Enter zero if applicable.)

Required:

• Getaway redeems 21 of Bonnie's shares for $4,000. Getaway has $31,000 of E&P at year-end and Bonnie is unrelated to Clyde.
• Getaway redeems 32 of Bonnie's shares for $8,000. Getaway has $31,000 of E&P at year-end and Bonnie is unrelated to Clyde.
• Getaway redeems 4 of Clyde's shares for $4,500. Getaway has $31,000 of E&P at year-end and Clyde is unrelated to Bonnie.

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Bulldog Corporation reported taxable income of $905,000 this year, before any deduction for any payment to its sole shareholder and employee, Georgia Brown. Bulldog chose to pay a bonus of $185,000 to Georgia at year-end. Bulldog Corporation is subject to a flat-rate tax of 34 percent. The bonus meets the requirements to be "reasonable" and is therefore deductible by Bulldog. Georgia is subject to a marginal tax rate of 35 percent on the bonus. What is the income tax imposed on the corporate income earned by Bulldog and the income tax on the bonus paid to Georgia?

Corporate tax

Shareholder tax

Total income tax

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On the last day of its current tax year, Buy Rite LLC received $260,000 when it sold a machine it had purchased for $180,000 three years ago to use in its business. At the time of the sale, the basis in the equipment had been reduced to $140,000 due to tax depreciation taken. How much did the members' self-employment earnings from Buy Rite increase when the equipment was sold?

Self-employment earnings increase by

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On the last day of its current tax year, Buy Rite LLC received $400,000 when it sold a machine it had purchased for $290,000 three years ago to use in its business. At the time of the sale, the basis in the equipment had been reduced to $270,000 due to tax depreciation taken. How much did the members' self-employment earnings from Buy Rite increase when the equipment was sold?

Self-employment earnings increase by

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Newton is a one-third owner of ProRite Partnership. Newton has decided to sell his interest in the business to Betty for $70,500 cash plus the assumption of his share of ProRite's liabilities. Assume Newton's inside and outside basis in ProRite are equal. ProRite shows the following balance sheet as of the sale date:

Tax Basis

FMV

Assets:

Cash

119,000

119,000

Receivables

39,000

39,000

Inventory

46,000

108,700

Land

34,750

15,750

Totals

238,750

282,450

Liabilities and capital:

Liabilities

60,000

Capital

- Newton

59,583

- Barbara

59,584

- Liz

59,583

Totals

238,750

What is the amount and character of Newton's recognized gain or loss?

• $20,900 capital gain
• $20,900 ordinary income and $9,983 capital loss
• $20,900 capital gain and $9,983 ordinary gain
• $9,983 capital Loss
• Neither gain nor loss recognized

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Joy is a 30 percent partner in the JOM Partnership when she sells her entire interest to Hope for $90,000 cash. At the time of the sale, Joy's basis in JOM is $57,500 (which includes her $10,500 share of JOM liabilities). JOM does not have any hot assets. What is Joy's gain or loss on the sale of her interest?

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At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments account balance of $19,600 and accumulated E&P of $25,750 from a previous year as a C corporation. During the year, Nicolette (a 40 percent shareholder) received a $25,750 distribution (the remaining shareholders received $38,625 in distributions). Assume her stock basis is $51,500 after considering her share of Bombay's income for the year but before considering the effects of the distribution.

Required:

• What is the amount and character of gain Nicolette must recognize from the distribution?
• What is her basis in her Bombay stock at the end of the year?

Wood Corporation was a C corporation in 2016 but elected to be taxed as an S corporation in 2017. At the end of 2016, its earnings and profits were $21,750. The following table reports Wood's (taxable) income for 2017 (its first year as an S corporation).

Wood Corporation

Income Statement

December 31, 2017

Sales revenue

212,500

Cost of goods sold

(47,500)

Salary to owners

(85,000)

Employee wages

(70,000)

Depreciation expense

(9,000)

Miscellaneous expenses

(9,000

Interest income

15,500

Qualified dividend income

4,500

Overall net income

12,000

What is Wood Corporation's excess net passive income tax for 2017?

Excess net passive income tax

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LeMond Incorporated, a Wisconsin corporation, runs bicycle tours in several states. LeMond also has a Wisconsin retail store and an Internet store that ships to out-of-state customers. The bicycle tours operate in Colorado, North Carolina, and Wisconsin, where LeMond has employees and owns and uses tangible personal property. LeMond has real property only in Wisconsin and logs the following sales:

LeMond Sales

State

Goods

Services

Total

Arizona

35,026

0

35,026

California

112,148

0

112,148

Colorado

26,681

358,580

385,261

North Carolina

17,321

226,567

243,888

Oregon

15,951

0

15,951

Wisconsin

243,486

879,985

1,123,471

Totals

450,613

1,465,132

1,915,745

Assume the following tax rates: Arizona (5.6 percent), California (7.75 percent), Colorado (8 percent), North Carolina (6.75 percent), Oregon (8 percent), and Wisconsin (5 percent).

How much sales and use tax must LeMond collect and remit?

State

Sales and Use Tax

Arizona

California

Colorado

North Carolina

Oregon

Wisconsin

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Herger Corporation does business in California, Nevada, and Oregon, and has nexus in these states as well. Herger's California state tax base was $941,070 after making the required federal/state adjustments. Herger's federal tax return contains the following items:

Item

Amount

Federal T-note interest income

5,700

Nevada municipal bond interest income

3,440

California municipal bond interest income

7,200

Interest expense related to T-note interest income

2,030

Royalty income

150,000

Travel expenses

9,000

Determine Herger's California business income.

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Owl Vision Corporation (OVC) is a North Carolina corporation engaged in the manufacture and sale of contact lenses and other optical equipment. The company handles its export sales through sales branches in Belgium and Singapore. The average tax book value of OVC's assets for the year was $220 million, of which $176 million generated U.S. source income and $44 million generated foreign source income. The average fair market value of OVC's assets was $264 million, of which $198 million generated U.S. source income and $66 million generated foreign source income. OVC's total interest expense was $22 million. (Enter your answers in millions.)

a. What amount of the interest expense will be apportioned to foreign source income under the tax book value method?

Interest expense =

million

b. What amount of the interest expense will be apportioned to foreign source income under the fair market value method?

Interest expense =

million

c. If OVC wants to maximize its foreign tax credit limitation, which method produces the better outcome?

• Fair market value method
• OR
• Tax book value method

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