In each of the following scenarios, indicate why Adobe Corporation’s accumulation of earnings might be unreasonable relative to its business needs. Provide one or more arguments the corporation might put forth to support its position that the accumulation is reasonable. Assume that Tess owns all the Adobe stock. a. Ten years ago, Adobe established a sinking fund to retire its ten-year notes and has added cash to the fund annually. Six months ago, the corporation decided to refinance the notes at maturity at a lower interest rate through the issuance of a new series of bonds sold to an insurance company. The sinking fund balance is invested in stocks and commercial paper. A general plan exists to use the balance to purchase operating assets. No definite plans have been established by year-end. b. Adobe regularly lends money to Tess at a rate slightly below the rate charged by a commercial bank. Tess has repaid about 20% of these loans. The current balance on the loans is $500,000, which approximates one year’s net income for Adobe. c. Adobe has heavily invested in stocks and bonds. The current market value of its investments is $2 million. The investment portfolio comprises approximately one-half of Adobe’s assets. d. Tess owns three other corporations, which, together with Adobe, form a brother-sister controlled group. Adobe regularly lends funds to Tess’s three other corporations. Current loans amount to $500,000. The interest rate charged approximates the commercial rate for similar loans.
> For three years, Diamond Corporation has been owned equally by Arlene and Billy. Arlene and Billy have $40,000 and $20,000 adjusted bases, respectively, in their Diamond stock. Arlene receives a $30,000 cash liquidating distribution in exchange for her D
> Cable Corporation, which operates a fleet of motorized trolley cars in a resort city, is undergoing a complete liquidation. John, who owns 80% of the Cable stock, plans to continue the business in another city, and will receive the cable cars, two suppor
> Alpha Corporation is a holding company owned equally by Harry and Rita. They acquired the Alpha stock many years ago when the corporation was formed. Alpha has its money invested almost entirely in stocks, bonds, rental real estate, and land. Market quot
> Parent Corporation, which operates an electric utility, created a 100%-owned corporation, Subsidiary, that built and managed an office building. Assume the two corporations have filed separate tax returns for a number of years. The utility occupied two f
> What is a plan of liquidation? Why is it advisable for a corporation to adopt a formal plan of liquidation?
> In which of the following unrelated exchanges is the Sec. 351 control requirement met? If the transaction does not meet the Sec. 351 requirements, suggest ways in which the transaction can be structured so as to meet these requirements. a. Fred exchange
> Yancy owns 70% of Andover Corporation stock. At the beginning of the current year, the corporation has $400,000 of NOLs. Yancy plans to liquidate the corporation and have it distribute assets having a $600,000 FMV and a $350,000 adjusted basis to its sha
> Describe the tax treatment accorded the following expenses associated with a liquidation: a. Commissions paid on the sale of the liquidating corporation’s assets b. Accounting fees paid to prepare the corporation’s final income tax return c. Unamortiz
> Cable Corporation is 60% owned by Anna and 40% owned by Jim, who are unrelated. It has noncash assets, which it sells to an unrelated purchaser for $100,000 in cash and $900,000 in installment obligations due 50% in the current year and 50% in the follow
> For a corporation that intends to liquidate, explain the tax advantages to the shareholders of having the corporation (1) adopt a plan of liquidation, (2) sell its assets in an installment sale, and then (3) distribute the installment obligations to its
> Explain the IRS’s position regarding whether a liquidation transaction will be considered open or closed.
> Able Corporation adopts a plan of liquidation. Under the plan, Robert, who owns 60% of the Able stock, is to receive 2,000 acres of land in an area where a number of producing oil wells have been drilled. No wells have been drilled on Able’s land. Discus
> Texas Corporation liquidates through a series of distributions to its shareholders after a plan of liquidation has been adopted. How are these distributions taxed?
> Parent Corporation owns 70% of Subsidiary Corporation’s stock. The FMV of Subsidiary’s assets is significantly greater than their basis to Subsidiary. The FMV of Parent’s interest in the assets also substantially exceeds Parent’s basis for the Subsidiary
> Parent Corporation owns 80% of Subsidiary Corporation’s stock. Sally owns the remaining 20% of the Subsidiary stock. Subsidiary plans to distribute cash and appreciated property pursuant to its liquidation. It has more than enough cash to redeem all of S
> Explain the differences in the tax rules applying to distributions made to the parent corporation and a minority shareholder when a controlled subsidiary corporation liquidates.
> In which of the following independent situations is the Sec. 351 control requirement met? a. Olive transfers property to Quick Corporation for 75% of Quick stock, and Mary provides services to Quick for the remaining 25% of Quick stock. b. Pete transfe
> John and Wilbur form White Corporation on May 3 of the current year. What is the entity’s default tax classification? Are any alternative classification(s) available? If so, (1) how do John and Wilbur elect the alternative classification(s) and (2) what
> Parent Corporation owns all the stock of Subsidiary Corporation and a substantial amount of Subsidiary Corporation bonds. Subsidiary proposes to transfer appreciated property to Parent in redemption of its bonds pursuant to the liquidation of Subsidiary.
> Parent Corporation owns 80% of the stock of Subsidiary Corporation, which is insolvent. Tracy owns the remaining 20% of the stock. The courts determine Subsidiary to be bankrupt. The shareholders receive nothing for their investment. How do they report t
> Compare the general liquidation rules with the Sec. 332 rules for liquidation of a subsidiary corporation with respect to the following items: a. Recognition of gain or loss by the distributee corporation b. Recognition of gain or loss by the liquidati
> What requirements must be satisfied for the Sec. 332 rules to apply to a corporate shareholder?
> Explain the congressional intent behind the enactment of the Sec. 332 rules regarding the liquidation of a subsidiary corporation.
> Kelly Corporation makes a liquidating distribution. Among other property, it distributes land subject to a mortgage. The mortgage amount exceeds both the adjusted basis and FMV for the land. Explain to Kelly Corporation’s president how the amount of its
> Explain the circumstances in which a liquidating corporation does not recognize gain and/or loss when making a liquidating distribution.
> A liquidating corporation could either (1) sell its assets and then distribute remaining cash to its shareholders or (2) distribute its assets directly to the shareholders who then sell the distributed assets. Do the tax consequences of these alternative
> Explain why a shareholder receiving a liquidating distribution would prefer to receive either capital gain treatment or ordinary loss treatment.
> What event or occurrence determines when a cash or accrual method of accounting taxpayer reports a liquidating distribution?
> In the current year, Ed, Fran, and George form Jet Corporation. Ed contributes land (a capital asset) having a $35,000 FMV purchased as an investment four years ago for $15,000 in exchange for 35 shares of Jet stock. Fran contributes machinery (Sec. 1231
> Compare the tax consequences to the shareholder and the distributing corporation of the following three kinds of corporate distributions: ordinary dividends, stock redemptions, and complete liquidations.
> Explain the following statement: A corporation may be liquidated for tax purposes even though dissolution has not occurred under state corporation law.
> Explain why tax advisors caution people who are starting a new business that the tax costs of incorporating a business may be low while the tax costs of liquidating a business may be high.
> Summitt Corporation has manufactured and distributed basketball equipment for 20 years. Its owners would like to avoid the corporate income tax and are considering becoming a limited liability company (LLC). What tax savings may result from electing to b
> What is a complete liquidation? A partial liquidation? Explain the difference in the tax treatment accorded these two different events.
> Indicate whether each of the following statements about a liquidation is true or false. If the statement is false, explain why. a. Liabilities assumed by a shareholder when a corporation liquidates reduce the amount realized by the shareholder on the su
> Nils Corporation, a calendar year taxpayer, adopts a plan of liquidation on April 1 of the current year. The final liquidating distribution occurs on January 5 of next year. Must Nils Corporation file a tax return for the current year? For next year?
> 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
> Your accounting firm has done the audit and tax work for the Peerless family and their business entities for 20 years. Approximately 25% of your accounting and tax practice billings come from Peerless family work. Peerless Real Estate Corporation owns la
> Paul, a long-time client of yours, has operated an automobile repair shop (as a C corporation) for most of his life. The shop has been fairly successful in recent years. His children are not interested in continuing the business. Paul is age 62 and has a
> In the current year, Dick, Evan, and Fran form Triton Corporation. Dick contributes land (a capital asset) having a $50,000 FMV in exchange for 50 shares of Triton stock. He purchased the land three years ago for $60,000. Evan contributes machinery (Sec.
> Steve and Andrew write music and lyrics for popular songs. Two years ago, they organized S&A Music Corporation, each brother owning one-half of its stock. Through the end of the current year, they contributed a total of $250,000 in capital to the busines
> Galadriel and John, married with no children, own all the stock in Marietta Horse Supplies. The couple’s C corporation has been in business for ten years. The business has been successful, permitting both owners to pay themselves a reasonable salary from
> William Queen owns all the stock in Able and Baker Corporations. Able, a successful enterprise, has generated excess working capital of $3 million. Baker is still in its developmental stages and has had substantial capital needs. To meet some of these ne
> Camp Corporation is owned by Hal and Ruthie, who have owned their stock since the corporation was formed fourteen years ago. The corporation uses the calendar year as its tax year and the accrual method of accounting. In Year 1, Camp borrowed $4 million
> Broadway Corporation is a C corporation not exempt from the AMT. During the current year, Broadway contributed significant amounts of cash to various charitable organizations. Should Broadway make any adjustment for its charitable contributions when calc
> Howard Corporation conducts a manufacturing business and has a compelling need to accumulate earnings. Its January 1, E&P balance is $600,000. It reports the following operating results for the current year: Taxable income………………………………………………………………………$700
> Century Cleaning, Inc. provides cleaning services in Atlanta, Georgia. It is not a member of a controlled or an affiliated group. Century reports the following results for the current year: Taxable income…………………………………………………..$500,000 Federal income taxe
> In each of the following scenarios, calculate the accumulated earnings credit. Assume the corporation uses a calendar year as its tax year. Also assume that it realizes no current year capital gains. a. Frank Corporation, a manufacturer of plastic toys,
> Lion Corporation is concerned about a potential accumulated earnings tax liability. It accumulates E&P for working capital necessary to conduct its manufacturing business. The following data appear in its current year balance sheets. Lion reports th
> Lucia, a single taxpayer, operates a florist business. She is considering either continuing the business as a sole proprietorship or reorganizing it as either a C corporation or an S corporation. Her goal is to withdraw $20,000 of profits from the busine
> Alice and Barry own all the shares of Alpha Corporation. For the current year, the corporation reports the following income and expenses: During the eighth month of the current year, Alpha Corporation paid $50,000 in dividends to its shareholders. Assum
> In the current year, Moore Corporation is deemed to be a PHC and reports the following results: Taxable income……………………………………………………………………………..$200,000 Dividend received from an 18%-owned domestic corporation……………..50,000 Dividends paid in the sixth month
> In each of the following four scenarios, determine whether the corporation is a personal holding company. Assume the corporation’s outstanding stock is owned equally by three individuals. Item Scenario 1 Scenario 2 Scenario 3 Scenar
> In which of the following situations will Small Corporation be deemed to be a PHC? Assume that personal holding company income comprises more than 60% of Small’s adjusted ordinary gross income. a. Art owns 100% of Parent Corporation stock, and Parent ow
> Zhao (an individual) and nine other unrelated individuals own all of Duck Corporation’s stock. The following information pertains to Duck for the current year: Adjusted ordinary gross income……………………$390,000 Ordinary gross income…………………………………..450,000 Per
> Dallas Corporation reports the following amounts for Years 1 and 2: Each tax year is a 12-month period. Dallas qualifies as a small corporation for purposes of estimated tax payments, but it does not qualify as a small corporation exempt from the AMT. D
> Ajax Corporation expects to have a $100,000 regular tax and a $70,000 AMT for the current year. Last year, it had a $200,000 regular tax and no AMT. What minimum quarterly estimated tax payment must Ajax make for the current year?
> In the current year, Harden Corporation has $700,000 of regular taxable income, $60,000 of tax preference items, $140,000 of net positive AMT adjustment items (other than the ACE adjustment), and $1 million of adjusted current earnings. Harden’s only ava
> In the current year, Edge Corporation’s regular tax before credits is $165,000. Its tentative minimum tax is $100,000, and its only available tax credit is a $200,000 general business credit relating to research expenditures. a. What amount of general bu
> Several years ago, Bill acquired 100 shares of Bold Corporation stock directly from the corporation for $100,000 in cash. This year, he sold the stock to Sam for $35,000. What tax issues regarding the stock sale should Bill consider?
> Gulf Corporation reports the following amounts for Years 1 through 4: Gulf is not a small corporation exempt from the AMT. In what year(s) does Gulf obtain a minimum tax credit? In what year(s) can Gulf use the minimum tax credit? Type of Tax Year 4
> Duncan Corporation sells land in the current year (Year 1) for $900,000. The land is Sec. 1231 property having a $360,000 adjusted basis. The purchaser of the land pays Duncan $300,000 in the current year and in each of the next two years. Duncan charges
> Jones Corporation has $550,000 of regular taxable income, $120,000 of tax preference items, $240,000 of net positive AMT adjustment items (other than the ACE adjustment), and $970,000 of adjusted current earnings. Jones is not a small corporation exempt
> For the current year, Delta Corporation reports taxable income of $2 million, tax preference items of $100,000, net positive AMT adjustment items (other than the ACE adjustment) of $600,000, and adjusted current earnings of $4 million. Delta is not a sma
> What is Middle Corporation’s regular tax, AMT, total federal income tax, and minimum tax credit generated in each of the following scenarios? Assume that Middle’s ACE adjustments in prior years net to a positive $120,0
> Alabama Corporation conducts a copper mining business. During the current year, it reports regular taxable income of $400,000, which includes a $100,000 deduction for percentage depletion. The depletable property’s adjusted basis at year-end (before redu
> Subach Corporation reports $600,000 of regular taxable income for the current year. Subach also reports the following information (reflected in regular taxable income, if applicable): Depreciation: For regular tax purposes………………………..$440,000 For AMT pur
> Sheldon Corporation reports regular taxable income of $150,000 in the current year. Its regular tax is $41,750. Sheldon takes into account the following facts when calculating the $150,000 amount. • Sheldon deducts $90,000 of MACRS depreciation for regu
> Campbell Corporation reports regular taxable income of $210,000 in the current year. Campbell takes into account the following facts when calculating the $210,000 amount. • Campbell deducts $100,000 of MACRS depreciation for regular tax purposes. Depre
> Bronze Corporation reports the following data for the current year: Net profit from recurring operations……………………………………….…….$278,000 Other income and expenses not included in the $278,000 amount: Dividend from 10%-owned corporation………………………………………...…….
> Carl contributes equipment with a $50,000 adjusted basis and an $80,000 FMV to Cook Corporation for 50 of its 100 shares of stock. His son, Carl Jr., contributes $20,000 cash for the remaining 50 Cook shares. What tax issues regarding the exchanges shoul
> Maple Corporation reports $500,000 of regular taxable income for the current year. Maple also reports the following amounts of interest income earned during the current year (reflected in regular taxable income, if applicable): Franklin County bonds…………
> Towne Corporation has the following amounts of ACE and preadjustment AMTI for Years 1 through 5: Towne’s net ACE adjustments prior to Year 1 are zero. Calculate Towne’s ACE adjustment and AMTI for each year. Year
> Wabash Corporation, a calendar year taxpayer, purchases and places into service $400,000 of equipment in Year 1. The equipment is seven-year MACRS property, and the half-year convention applies to it. Wabash sells the equipment for $245,000 in Year 3. As
> Assume the same facts as in Problem C:5-38 except Water Corporation sells the machine for $9,000 on August 31 of Year 3. Determine the following: a. Water’s gain or loss on the machine’s sale for regular tax and AMT purposes. b. The amount of Water’s A
> On June 1 of Year 1, Water Corporation places into service a machine costing $10,000. The machine is seven-year property under the MACRS rules and has a 12-year class life. Water does not elect Sec. 179 expensing, and assume that bonus depreciation is no
> Willis Corporation is a calendar year corporation that forms on April 1 of Year 1. Willis Corporation reports the following gross receipts: Year………………………….Gross Receipts 1…………………………….$ 3,000,000 2……………………………….5,400,000 3……………………………….7,400,000 4……………….……
> Westwood Corporation has $100,000 of taxable income and $20,000 of tax preference items in the current year. Westwood’s positive and negative AMT adjustment items (other than the ACE adjustment) are $38,000 and $45,000, respectively, and its ACE amount i
> In the current year, Whitaker Corporation has taxable income of $700,000 and tax preference items of $100,000. It also has $250,000 of positive AMT adjustment items and $80,000 of negative AMT adjustment items (neither of which includes the ACE adjustmen
> Woodland Corporation reports the following financial accounting results and other depreciation information for the current year: Sales revenue…………………………………..…………………………………..$ 2,000,000 Plus: Interest income on municipal bonds…………………………………..300,000 Minus:
> McHale is a C corporation owned by eight individuals, three of whom own 51% of the stock and comprise the board of directors. The corporation operates a successful automobile repair parts manufacturing business. It has accumulated $2 million of E&P and e
> Peter Jones has owned all 100 shares of Trenton Corporation stock for the past five years. This year, Mary Smith contributes property with a $50,000 basis and an $80,000 FMV for 80 newly issued Trenton shares. At the same time, Peter contributes $15,000
> Parrish is a closely held C corporation. Robert and Kim Parrish own all its stock. The corporation, now in its second month of operation, expects to earn $200,000 of gross income in the current tax year. This income is expected to consist of approximatel
> Bird Corporation purchases machinery for $3 million and places it in service in June 2017. Installation costs are $75,000. The machine replaces an old machine that Bird purchased several years ago, which Bird sells at a $125,000 financial accounting prof
> Determine whether the following statements about the accumulated earnings tax are true or false: a. Before the IRS can impose the accumulated earnings tax, it need only show that tax avoidance was one of the motives for the corporation’s unreasonable ac
> Different rules for calculating the accumulated earnings credit apply to operating companies, holding and investment companies, and service companies. Explain the differences.
> Explain the Bardahl formula. Why have some tax authorities said that this formula implies a greater degree of mathematical precision than is actually the case? Does the Bardahl formula apply to service companies?
> Gamma Corporation has generated substantial cash flows from its manufacturing activities. It has only a moderate need to reinvest its earnings in existing facilities or for expansion. In recent years, the corporation has amassed a large investment portfo
> How, in its first year of operation, can a newly formed corporation be subject to the PHC tax but not the AMT and the accumulated earnings tax?
> The accumulated earnings tax is imposed only when the corporation is “formed or availed of for the purpose of avoiding the income tax.” Does tax avoidance have to occur at the corporate or the shareholder level for the accumulated earnings tax to be impo
> Explain the following statement: “Although the accumulated earnings tax can be imposed on both publicly held and closely held corporations, the tax is likely to be imposed primarily on closely held corporations.”
> Explain the implication of the following statement: “Like many dogs, the threat (bark) of the PHC tax is much worse than the actual penalties assessed in connection with its (bite).”
> What are the Sec. 351 reporting requirements?
> Determine whether the following statements regarding the PHC tax are true or false: a. In a given tax year, a corporation might not owe the PHC tax even though it is deemed to be a PHC. b. A sale of a large tract of land held for investment can make a
> Explain the advantages of a deficiency dividend. What requirements must a PHC and its shareholders meet to use a deficiency dividend to reduce or eliminate the PHC tax liability? Can a deficiency dividend eliminate interest and penalties, in addition to
> Define the term consent dividend. How can a consent dividend be used to avoid the PHC and accumulated earnings taxes? In each case, what requirements must be met by the distributing corporation and/or its shareholders to qualify a consent dividend for th
> Grayson Corporation is a calendar year taxpayer. In the following independent situations, which of the pro rata dividends paid by Grayson during the current year are eligible for the dividends-paid deduction when it calculates its PHC tax for the current
> Which of the following income items, when received by a corporation, are included in personal holding company income (PHCI)? Indicate whether any special circumstances would exclude an income item that is generally includible in PHCI. a. Dividends b. I
> Because of its quality investments, Carolina Corporation has always generated 30% to 40% of its gross income from passive sources. In the current year, Carolina sold a block of stock in a company it acquired several years ago. As a result of the sale, th
> Which of the following corporate forms are exempt from the PHC tax? The accumulated earnings tax? a. Closely held corporations b. S corporations c. Professional corporations d. Tax-exempt organizations e. Publicly held corporations f. Corporations
