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. Explain the tax consequences of the redemption of the stock and bonds to Parent and Subsidiary.
> How does the IRS interpret the continuity of business enterprise requirement for a Type A reorganization?
> Sid Kess, a long-time tax client of yours, has decided to acquire the snow blower manufacturing firm owned by Richard Smith, one of his closest friends. Richard has a $200,000 adjusted basis in his Richard Smith Snow Blowers (RSSB) stock. Sid Kess Enterp
> Bailey Corporation owns a number of automotive parts shops. Bill Smith owns an automotive parts shop that has been in existence for 40 years and has competed with one of Bailey’s branches. Bill is considering retiring and would like to
> Tom incorporates his sole proprietorship as Total Corporation and transfers its assets to Total in exchange for all 100 shares of Total stock and four $10,000 interest-bearing notes. The stock has a $125,000 FMV. The notes mature consecutively on the fir
> Sarah plans to invest $1 million in a business venture that will last five years. She is debating whether to operate the business as a C corporation or a sole proprietorship. If a C corporation, she will liquidate the corporation at the end of the five-y
> One way to compare the accumulation of income by alternative business entity forms is to use mathematical models. The following models express the investment after-tax accumulation calculation for a particular entity form: Flow-through entities and sole
> Parent Corporation owns 85% of the common stock and 100% of the preferred stock of Subsidiary Corporation. The common stock and preferred stock have adjusted bases of $500,000 and $200,000, respectively, to Parent. Subsidiary adopts a plan of liquidation
> Parent Corporation has owned 60% of Subsidiary Corporation’s single class of stock for a number of years. Tyrone owns the remaining 40% of the Subsidiary stock. On August 10 of the current year, Parent purchases Tyrone’s Subsidiary stock for cash. On Sep
> Union Corporation is owned equally by Ron and Steve. Ron and Steve purchased their stock several years ago and have adjusted bases for their Union stock of $15,000 and $27,500, respectively. Each shareholder receives two liquidating distributions. The fi
> Bell Corporation is 100% owned by George, who has a $400,000 basis in his Bell stock. Bell’s operations have been unprofitable in recent years, and it has incurred small NOLs. Its operating assets currently have a $300,000 FMV and a $500,000 adjusted bas
> Art owns 80% of Pueblo Corporation stock, and Peggy owns the remaining 20%. Art and Peggy have $320,000 and $80,000 adjusted bases, respectively, for their Pueblo stock. Pueblo owns the following assets: cash, $25,000; inventory, $150,000 FMV and $100,00
> Gabriel Corporation is owned 90% by Zeier Corporation and 10% by Ray Goff, a Gabriel employee. A preliquidation balance sheet for Gabriel is presented below: Gabriel has claimed $150,000 of MACRS depreciation on the equipment. Gabriel purchased the land
> Majority Corporation owns 90% of Subsidiary Corporation’s stock and has a $45,000 basis in that stock. Mindy owns the other 10% and has a $5,000 basis in her stock. Subsidiary holds $20,000 cash and other assets having a $110,000 FMV and a $40,000 adjust
> Subsidiary Corporation is a wholly owned subsidiary of Parent Corporation. The two corporations have the following balance sheets: Other Facts: • Parent’s basis in its Subsidiary stock is $200,000, which corresponds
> Al, Bob, and Carl form West Corporation and transfer the following items to West: The common stock has voting rights. The preferred stock does not. a. Is the exchange nontaxable under Sec. 351? Explain the tax consequences of the exchange to Al, Bob, Ca
> Shareholder owns 100% of Lambda Corporation stock and has a $700,000 basis in that stock. Shareholder has owned the stock for several years. Prior to liquidating, Lambda had the following balance sheet: For Parts a and b below, determine the following r
> Parent Corporation owns 100% of Subsidiary Corporation’s single class of stock and $2 million of Subsidiary debentures. Parent purchased the debentures in small blocks from various unrelated parties at a $100,000 discount from their face amount. Parent h
> Parent Corporation owns 100% of Subsidiary Corporation’s single class of stock. Its adjusted basis for the stock is $175,000. After adopting a plan of liquidation, Subsidiary distributes the following property to Parent: money, $20,000; LIFO inventory, $
> Parent Corporation owns 100% of Subsidiary Corporation’s stock. The adjusted basis of its stock investment is $175,000. A plan of liquidation is adopted, and Subsidiary distributes to Parent assets having a $400,000 FMV and a $300,000 adjusted basis (to
> Pamela owns 100% of Sigma Corporation’s stock. She purchased her stock ten years ago, and her current basis for the stock is $300,000. On June 10, Pamela decided to liquidate Sigma. Sigma’s balance sheet prior to the s
> Assume the same facts as in Problem C:6-40 except, on January 2 of the current year, Gamma Corporation sells all property other than cash to Acquiring Corporation for FMV. Gamma pays off the accounts payable and retains cash to pay any tax liability resu
> Marsha owns 100% of Gamma Corporation’s common stock. Gamma is an accrual basis, calendar year corporation. Marsha formed the corporation six years ago by transferring $250,000 of cash in exchange for the Gamma stock. Thus, she has held
> In March of Year 2, Mike contributed the following two properties, which he acquired in February of Year 1, to Kansas Corporation in exchange for additional Kansas stock: (1) land having a $50,000 FMV and a $75,000 basis and (2) another property having a
> Titan Corporation adopts a plan of liquidation. It distributes an apartment building having a $3 million FMV and a $1.8 million adjusted basis, and land having a $1 million FMV and a $600,000 adjusted basis, to MNO Partnership in exchange for all the out
> Melon Corporation, which is owned equally by four individual shareholders, adopts a plan of liquidation for distributing the following property: • Land (a capital asset) having a $30,000 FMV and a $12,000 adjusted basis. • Depreciable personal property
> Sam and Veronica own 300 and 200 shares, respectively, of PolyElectron Corporation stock, which represent all the shares outstanding. The current market value per share is $25. Poly-Electron needs capital to expand its operations, and Veronica is willing
> What are the amount and character of the gain or loss recognized by the distributing corporation when making liquidating distributions in the following situations? What is the shareholder’s basis for the property received? In any situation where a loss i
> Len Wallace contributed assets with a $100,000 adjusted basis and a $400,000 FMV to Ace Corporation in exchange for all of its single class of stock. The corporation conducted operations for five years and was liquidated. Len received a liquidating distr
> Peter owns 25% of Crosstown Corporation stock in which he has a $200,000 adjusted basis. In each of the following situations, what amount of gain/loss will Peter report in the current year? In the next year? a. Peter is a cash method of accounting taxpa
> For seven years, Monaco Corporation has been owned entirely by Stacy and Monique, who are husband and wife. Stacy and Monique have a $165,000 basis in their jointly owned Monaco stock. The Monaco stock is Sec. 1244 stock. They receive the following asset
> Meridian Corporation originally was owned equally by five individual shareholders. Four years ago, Meridian adopted a plan of liquidation, and each shareholder received a liquidating distribution. Tina, a cash method taxpayer, reported a $30,000 long-ter
> 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 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
> 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 accumulatio
> 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
