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tax problems - questin and answer,.,. ch 19




Question;15. LO.4,10 Robin Corporation would like to transfer excess cash to its sole shareholder,Adam, who is also an employee. Adam is in the 28% tax bracket, and Robin is in the 34% bracket. Because Adam?s contribution to the business is substantial, Robin believes that a $25,000 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Robin is considering paying Adam a $25,000 dividend because the tax rate on dividends is lower than the tax rate on compensation. IsRobin correct in believing that a dividend is the better choice? Why or why not?16. LO.6,10 Pink Corporation has several employees. Their names and salaries are listed below.Judy $470,000Holly (Judy?s daughter) 100,000Terry (Judy?s son) 100,000John (an unrelated third party) 320,000Holly and Terry are the only shareholders of Pink Corporation. Judy and John share equally in the management of the company?s operations. Holly and Terry are both full-time college students at a university 200 miles away. Pink has substantial E & P and has never distributed a dividend. Discuss any problems related to Pink?s salary arrangement.17. LO.8, 9, 10 Chao, Louis, and Mari, unrelated individuals, own all of the shares of Cerise Corporation. All three shareholders have been active in the management of Cerise since its inception. In the current year, Chao wants to retire and sell all of her shares in the corporation.What issues should be considered in determining whether Chao should sell her stock to one of the other shareholders, to Cerise Corporation, or to a third party?18. LO.8 During the current year, Gnatcatcher, Inc., distributed $200,000 each to Brandi and Yuen in redemption of some of their Gnatcatcher stock. The two shareholders acquired their shares five years ago. Each shareholder is in the 33% tax bracket, and each had a $45,000 basis in her redeemed stock. Brandi incurred $23,250 of tax on her redemption, but Yuen incurred $30,000 on her redemption. Discuss the likely reason for the difference in tax liabilities arising from the stock redemptions.19. LO.8 Corporate shareholders typically prefer dividend treatment on a stock redemption.Why? 20. LO.8 Rosalie owns 50% of the outstanding stock of Salmon Corporation. In a qualifying stock redemption, Salmon distributes $80,000 to Rosalie in exchange for one-half of her shares, which have a basis of $100,000. As a result of the redemption, Rosalie has a recognized loss of $20,000. Assess the validity of this statement.21. LO.8 A shareholder?s basis in property received in a stock redemption is the same whether the redemption is qualifying or nonqualified. Comment on the validity of this statement.22. LO.8 How do the ? 318 stock attribution rules apply to partnerships and their partners?23. LO.8 Do the stock attribution rules apply to all stock redemptions? Explain.24. LO.8 Briefly discuss the requirements for a redemption to qualify as a not essentially equivalent redemption.25. LO.8 If a redemption is treated as a dividend (?nonqualified stock redemption?), what happens to the basis of the stock redeemed?26. LO.8, 9 Tammy and Barry formed Pheasant Corporation several years ago in a transaction that qualified under ? 351. Both shareholders serve as officers and on the board of directors of Pheasant. In the current year, Pheasant Corporation redeemed all of Barry?s shares in the corporation with a property distribution. What are the tax issues for Barry and Pheasant?27. LO.8 Explain the requirements for a redemption to pay death taxes. What are the tax consequences of a redemption to pay death taxes for the shareholder and the corporation?28. LO.8, 9 Angie and her daughter, Ann, who are the only shareholders of Bluebird Corporation, each paid $100,000 four years ago for their shares in Bluebird. Angie also owns 20% of the stock in Redbird Corporation. The Redbird stock is worth $500,000, andAngie?s basis in the stock is $50,000. Angie dies in 2013 leaving all of her property to her husband, Gary, but Ann wants to be the sole shareholder of Bluebird Corporation. Bluebird has assets worth $4 million (basis of $700,000) and E & P of $1 million. Angie?s estate is worth approximately $6 million. Angie had made gifts during her lifetime to Ann. What are the tax issues for Angie?s estate, Ann, and Bluebird?29. LO.9, 10 Indigo Corporation wants to transfer cash of $150,000 or property worth $150,000 to one of its shareholders, Linda, in a redemption transaction that will be treated as a qualifying stock redemption. If Indigo distributes property, the corporation will choose between two assets that are each worth $150,000 and are no longer needed in its business: property A (basis of $75,000) and property B (basis of $195,000). Indigo is indifferent as to the form of the distribution, but Linda prefers a cash distribution.Considering the tax consequences to Indigo on the distribution to redeem Linda?s shares, what should Indigo distribute?


Paper#38675 | Written in 18-Jul-2015

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