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tax problems - questin and answer,.,. ch 18

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Question;24. LO.1, 3 Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration:Consideration TransferredBasis toTransferorFair MarketValueNumber ofShares IssuedFrom Seth?Inventory $30,000 $96,000 30*From Pete?Equipment ($30,000 of depreciation taken by Pete in prior years) 45,000 99,000 30**From Cara?Secret process 15,000 90,000 30From Jen?Cash 30,000 30,000 10 * Seth receives $6,000 in cash in addition to the 30 shares. ** Pete receives $9,000 in cash in addition to the 30 shares.Assume that the value of each share of Kingfisher stock is $3,000. As to these transactions, provide the following information:a. Seth?s recognized gain or loss. Identify the nature of any such gain or loss.b. Seth?s basis in the Kingfisher Corporation stock.c. Kingfisher Corporation?s basis in the inventory.d. Pete?s recognized gain or loss. Identify the nature of any such gain or loss.e. Pete?s basis in the Kingfisher Corporation stock.f. Kingfisher Corporation?s basis in the equipment.g. Cara?s recognized gain or loss.h. Cara?s basis in the Kingfisher Corporation stock.i. Kingfisher Corporation?s basis in the secret process.j. Jen?s recognized gain or loss.k. Jen?s basis in the Kingfisher stock.25. LO.1, 3 Tom and Gail form Owl Corporation with the following consideration:Consideration TransferredBasis toTransferorFair MarketValueNumber ofShares IssuedFrom Tom?Cash $ 50,000 $ 50,000Installment obligation 240,000 350,000 40From Gail?Inventory 60,000 50,000Equipment 125,000 250,000Patentable invention 15,000 300,000 60The installment obligation has a face amount of $350,000 and was acquired last year from the sale of land held for investment purposes (adjusted basis of $240,000). As to these transactions, provide the following information:a. Tom?s recognized gain or loss.b. Tom?s basis in the Owl Corporation stock.c. Owl Corporation?s basis in the installment obligation.d. Gail?s recognized gain or loss.e. Gail?s basis in the Owl Corporation stock.f. Owl Corporation?s basis in the inventory, equipment, and patentable invention.g. How would your answers to the preceding questions change if Tom received common stock and Gail received preferred stock?h. How would your answers change if Gail was a partnership?26. LO.1, 7 Jane, Jon, and Clyde incorporate their respective businesses and form StarlingCorporation. On March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exchanges his property (basis of $70,000 and value of $500,000) for 500 shares in Starling.On May 10, Clyde transfers his property (basis of $90,000 and value of $350,000) for 350 shares in Starling.a. If the three exchanges are part of a prearranged plan, what gain will each of the parties recognize on the exchanges?b. Assume that Jane and Jon exchanged their property for stock four years ago, whileClyde transfers his property for 350 shares in the current year. Clyde?s transfer is not part of a prearranged plan with Jane and Jon to incorporate their businesses. What gain will Clyde recognize on the transfer?c. Returning to the original facts, if the property that Clyde contributes has a basis of $490,000 (instead of $90,000), how might the parties otherwise structure the transaction?27. 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 by Sarah Mitchell, who acquired her stock several years ago. You represent Michael, who asks whether he must report gain on the transfer. Prepare a letter to Michael and a memorandum for the tax files documenting your response.28. LO.1 John organized Toucan Corporation 10 years ago. He contributed property worth $1 million (basis of $200,000) for 2,000 shares of stock in Toucan (representing100% ownership). John later gave each of his children, Julie and Rachel, 500 shares of the stock. In the current year, John transfers property worth $350,000 (basis of $170,000) to Toucan for 1,000 more of its shares. What gain, if any, will John recognize on the transfer?29. 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 $30,000) and for legal services (worth $15,000) in organizing the corporation.a. What gain or income, if any, will the parties recognize on the transfer?b. What basis do Ann and Bob have in the stock in Robin Corporation?c. What is Robin Corporation?s basis in the property and services it received from Ann and Bob?30. LO.1, 7 Rhonda owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel, have decided that additional contributions of capital are needed ifPeach is to remain successful in its competitive industry. The two shareholders have agreed that Rhonda will contribute assets having a value of $200,000 (adjusted basis of $15,000) in exchange for additional shares of stock. After the transaction, Rhonda will hold 75% of Peach Corporation and Rachel?s interest will fall to 25%.a. What gain is realized on the transaction? How much of the gain will be recognized?b. Rhonda is not satisfied with the transaction as proposed. How will the consequences change if Rachel agrees to transfer $1,000 of cash in exchange for additional stock?In this case, Rhonda will own slightly less than 75% of Peach and Rachel?s interest will be slightly more than 25%.c. If Rhonda still is not satisfied with the result, what should be done to avoid any gain recognition?31. LO.1, 2, 3 Cynthia, a sole proprietor, was engaged in a service business and reported her income on the cash basis. On February 1, 2013, she incorporates her business asDove Corporation and transfers the assets of the business to the corporation in return for all of the stock in addition to the corporation?s assumption of her proprietorship?s liabilities. All of the receivables and the unpaid trade payables are transferred to the newly formed corporation. The balance sheet of the corporation immediately after its formation is as follows:Dove CorporationBalance SheetFebruary 1, 2013AssetsBasis to Dove Fair Market ValueCash $ 80,000 $ 80,000Accounts receivable ?0? 240,000Equipment (cost $180,000, depreciation previously claimed $60,000) 120,000 320,000Building (straight-line depreciation) 160,000 400,000Land 40,000 160,000Total $400,000 $1,200,000Liabilities and Stockholder?s EquityLiabilities:Accounts payable?trade $ 120,000Notes payable?bank 360,000Stockholder?s equity:Common stock 720,000Total $1,200,000Discuss the tax consequences of the incorporation of the business to Cynthia and toDove Corporation.32. LO.1, 2, 3 Allie forms Broadbill Corporation by transferring land (basis of $125,000, fair market value of $775,000), which is subject to a mortgage of $375,000. One month prior to incorporating Broadbill, Allie borrows $100,000 for personal reasons and gives the lender a second mortgage on the land. Broadbill Corporation issues stock worth $300,000 to Allie and assumes the mortgages on the land.a. What are the tax consequences to Allie and to Broadbill Corporation?b. How would the tax consequences to Allie differ if she had not borrowed the $100,000?33. LO.1, 3 Rafael transfers the following assets to Crane Corporation in exchange for all of its stock. (Assume that neither Rafael nor Crane plans to make any special tax elections at the time of incorporation.)Assets Rafael?s Adjusted Basis Fair Market ValueInventory $ 60,000 $100,000Equipment 150,000 105,000Shelving 80,000 65,000a. What is Rafael?s recognized gain or loss?b. What is Rafael?s basis in the stock?c. What is Crane?s basis in the inventory, equipment, and shelving?d. If Rafael has no intentions of selling his Crane stock for at least 15 years, what action would you recommend that Rafael and Crane Corporation consider? How does this change the previous answers?34. 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 value of $165,000, and agrees to serve as manager of Osprey for one year, in return, Jane receives 50 shares in Osprey. The value of Jane?s services to Osprey is $35,000.a. What gain or income do Alice and Jane recognize on the exchange?b. What is Osprey Corporation?s basis in the property transferred by Alice and Jane?How does Osprey treat the value of the services that Jane renders?35. LO.1, 3 Assume in Problem 34 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 corporation. The value of Jane?s services is $35,000.a. What gain or income does Jane recognize?b. What is Osprey Corporation?s basis in the property transferred by Jane? How doesOsprey treat the value of the services that Jane renders?36. 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 of $3 million) and cash of $1 million.a. How much gain or income, if any, must Red Corporation recognize?b. What basis will Red Corporation have in the land?c. Within one year of the contribution, Red constructs a building for $800,000 and purchases inventory for $200,000. What basis will Red Corporation have in each of those assets?37. 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 in bonds bearing interest of 8% and maturing in nine years.Several years later Emily lent the corporation an additional $50,000 on open account. In the current year, Teal Corporation becomes insolvent and is declared bankrupt. During the corporation?s existence, Emily was paid an annual salary of $60,000. Write a letter toEmily in which you explain how she would treat her losses for tax purposes.38. 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. Vera, Wade, and Wes each propose to lend Jaybird Corporation $300,000, taking from Jaybird a $300,000 four-year note with interest payable annually at two points below the prime rate. Jaybird Corporation has current taxable income of $2 million. You represent Jaybird Corporation. Jaybird?s president, Steve Ferguson, asks you how the payments on the notes might be treated for tax purposes. Prepare a letter to Ferguson and a memo for your tax files in which you document your conclusions.39. 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 current tax year.a. How will the loss be treated for tax purposes?b. Assume instead that Sam sold the stock to his sister, Kara, a few months after it was acquired for $100,000 (its fair market value). If Kara sells the stock for $60,000 in the current year, how should she treat the loss for tax purposes?40. 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, when it was still worth $40,000, he gave it to his brother, MikeSanders. Mike, who is married and files a joint return, sells the stock for $25,000 in the current tax year. Mike asks you, his tax adviser, how the sale will be treated for tax purposes.Prepare a letter to your client and a memo for the file. Mike?s address is 10 HuntWood Drive, Hadley, PA 16130.41. LO.6 Gigi transfers real estate (basis of $60,000 and fair market value of $40,000) toMonarch Corporation in exchange for shares of ? 1244 stock. (Assume that the transfer qualifies under ? 351.)a. What is the basis of the stock to Gigi? (Gigi and Monarch do not make an election to reduce her stock basis.)b. What is the basis of the stock to Gigi for purposes of ? 1244?c. If Gigi sells the stock for $38,000 two years later, how will the loss be treated for tax purposes?42. 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 Cora each loan Purple Corporation $150,000. The notes toFrank and Cora bear interest of 8% per annum. Mitch leases equipment to PurpleCorporation for an annual rental of $12,000. Discuss whether the shareholder loans from Frank and Cora might be reclassified as equity. Consider in your discussion whether Purple Corporation has an acceptable debt-equity ratio.

 

Paper#38665 | Written in 18-Jul-2015

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