Question: Rose dies with passive activity property having

> Discuss the rationale for the reduced tax rates on dividends paid to individuals.

> Dan bought a hotel for $2,600,000 in January 2013. In May 2017, he died and left the hotel to Ed. While Dan owned the hotel, he deducted $289,000 of cost recovery. The fair market value in May 2017 was $2,800,000. The fair market value six months later w

> Larry is the sole proprietor of a trampoline shop. During 2017, the following transactions occurred: • Unimproved land adjacent to the store was condemned by the city on February 1. The condemnation proceeds were $15,000. The land, acquired in 1986, had

> Review Examples 49 and 51 in the text. In both examples, the taxpayer’s AGI is $129,400 even though in Example 51 there is $700 of nonrecaptured § 1231 loss from 2016. Explain why the two AGI amounts are the same.

> Lucy sells her partnership interest, a passive activity, with an adjusted basis of $305,000 for $330,000. In addition, she has current and suspended losses of $28,000 associated with the partnership and has no other passive activities. Calculate Lucy’s t

> Derk owns 250 shares of stock in Rose Corporation. The remaining 750 shares of Rose are owned as follows: 150 by Derk’s daughter, 200 by Derk’s aunt, and 400 by a partnership in which Derk has an 80% interest. Determine the number of shares Derk owns (di

> Caramel Corporation has 5,000 shares of stock outstanding. In a qualifying stock redemption, Caramel distributes $145,000 in exchange for 1,000 of its shares. At the time of the redemption, Caramel has paid-in capital of $800,000 and E & P of $300,000. C

> Which of the following individuals qualify for the earned income credit? a. Thomas is single, 21 years old, with no qualifying children. His income consists of $9,000 in wages. b. Shannon, who is 27 years old, maintains a household for a dependent 11-yea

> 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

> On January 1 of the current year, Rhondell Corporation has accumulated E & P of $13,000. Current E & P for the year is $84,000, earned evenly throughout the year. Elizabeth and Jonathan are sole equal shareholders of Rhondell from January 1 to Ap

> At the beginning of the year, Myrna Corporation (a calendar year taxpayer) has E & P of $32,000. The corporation generates no additional E & P during the year. On December 31, the corporation distributes $50,000 to its sole shareholder, Abby, whose stock

> 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. Compute Rosalie’s recognized loss, if any, on

> During the current year, Gnatcatcher, Inc., (E & P of $1 million) 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

> What are the tax consequences to Euclid from the following independent events? a. Euclid bought 500 shares of common stock five years ago for $50,000. This year, Euclid receives 20 shares of common stock as a nontaxable stock dividend. What is Euclid’s b

> Beth R. Jordan lives at 2322 Skyview Road, Mesa, AZ 85201. She is a tax accountant with Mesa Manufacturing Company, 1203 Western Avenue, Mesa, AZ 85201 (employer identification number 11-1111111). She also writes computer software programs for tax practi

> In late 2016, Randy and Rachel Erwin paid $7,000 in legal fees, adoption fees, and other expenses directly related to the adoption of an infant son, Jameson. The adoption becomes final in 2017, and the Erwins then pay an additional $8,000 in adoption fee

> Deerwood Corporation lends its principal shareholder, Lafayette, $500,000 on July 1 of the current year. The loan is interest-free and payable on demand. On December 31, the imputed interest rules are applied. Assume that the Federal rate is 3%, compound

> Quinlan has ample E & P to cover any distributions made during the year. One distribution made to a shareholder consists of a property with an adjusted basis of $150,000 and a fair market value of $90,000. What are the tax consequences of this distributi

> In the current year, Ed invests $30,000 in an oil partnership. He has taxable income for the current year of $2,000 from the oil partnership and withdraws $10,000. What is Ed’s at-risk amount at the end of the year?

> Global Corporation distributed property with an $850,000 fair market value and a $415,000 adjusted basis to one of its shareholders. The property was subject to a $230,000 mortgage, which the shareholder assumed. Global has ample E & P to cover any distr

> Ahmed Zinna (16 Southside Drive, Charlotte, NC 28204), one of your clients, owns two retail establishments in downtown Charlotte and has come to you seeking advice concerning the tax consequences of complying with the Americans with Disabilities Act. He

> Ash, Inc., a closely held personal service corporation, has $100,000 of passive activity losses. In addition, Ash has $80,000 of active business income and $20,000 of portfolio income. How much of the passive activity loss may Ash use to offset the other

> Lynn Jones, Shawn, Walt, and Donna are trying to decide whether they should organize a corporation and transfer their shares of stock in several corporations to this new corporation. All of their shares are listed on the New York Stock Exchange and are r

> Sarah is the sole owner of Bluegrass Corporation. The basis and value of her stock investment in Bluegrass are approximately $100,000. In addition, she manages Bluegrass’s operations on a full-time basis and pays herself an annual salary of $40,000. Beca

> Tim is a real estate broker who specializes in commercial real estate. Although he usually buys and sells on behalf of others, he also maintains a portfolio of property of his own. He holds this property, mainly unimproved land, either as an investment o

> On May 2, 1987, Hannah Weather (Social Security Number: 111-22-3333) acquired residential real estate for $450,000. Of the cost, $100,000 was allocated to the land and $350,000 to the building. On August 20, 2016, the building, which then had an adjusted

> Assume in Problem 36 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 g

> As sole heir, Dazie receives all of Mary’s property (adjusted basis of $1,400,000 and fair market value of $3,820,000). Six months after Mary’s death in 2017, the fair market value is $3,835,000. a. Can the executor of Mary’s estate elect the alternate v

> 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 if Peach is to remain successful in its competitive industry. The two shareholders have agreed

> 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 t

> 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 (representing 100% ownership). John later gave each of his children, Julie and Rachel, 500 shares of the stoc

> Michael Kennedy (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.

> Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. 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 exch

> Troy’s financial records for the year reflect the following: Interest income from bank savings account………………..$ 900 Taxable annuity receipts……………………………………………….1,800 City ad valorem property tax on investments…………………125 Investment interest expense…………………

> Tom, a calendar year taxpayer, informs you that during the year, he incurs expenditures of $40,000 that qualify for the incremental research activities credit. In addition, Tom’s research-credit base amount for the year is $32,800. a. Determine Tom’s inc

> Tom and Gail form Owl Corporation with the following consideration: The installment note 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,

> On June 1, 2013, Skylark Enterprises (not a corporation) acquired a retail store building for $500,000 (with $100,000 being allocated to the land). The store building was 39-year real property, and the straight-line cost recovery method was used. The pro

> Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration: Assume that the value of each share of Kingfisher stock is $3,000. As to these transactions, provide the following information: a. Seth’s recogniz

> 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 to Frank a

> Ira Cook is planning to make a charitable contribution to the Boy Scouts of Crystal, Inc. stock worth $20,000. The stock has an adjusted basis of $15,000. A friend has suggested that Ira sell the stock and contribute the $20,000 in proceeds rather than c

> Gigi transfers real estate (basis of $60,000 and fair market value of $40,000) to Monarch 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 d

> 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, Mike

> Sam Upchurch, a single taxpayer, acquired stock in Hummer 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 treat

> 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 $3

> 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. Se

> 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

> 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 o

> On December 1, 2015, Lavender Manufacturing Company (a corporation) purchased another company’s assets, including a patent. The patent was used in Lavender’s manufacturing operations; $49,500 was allocated to the patent, and it was amortized at the rate

> Green Corporation hires six individuals on January 4, 2017, all of whom qualify for the work opportunity credit. Three of these individuals receive wages of $8,500 during 2017, and each individual works more than 400 hours during the year. The other thre

> 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.) a. What is Rafael’s recognized g

> On September 18, 2017, Gerald received land and a building from Frank as a gift. Frank’s adjusted basis and the fair market value at the date of the gift are as follows: No gift tax was paid on the transfer. a. Determine Geraldâ

> 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 l

> Cynthia, a sole proprietor, was engaged in a service business and reported her income on the cash basis. In February of the current year, she incorporates her business as Dove Corporation and transfers the assets of the business to the corporation in ret

> What does “property” include for purposes of § 351?

> Katie, a single taxpayer, invested $75,000 in the stock of Penguin Corporation, which recently declared bankruptcy. Although distressed over the loss of her investment, Katie is relieved that she can claim a $75,000 ordinary (rather than capital) loss de

> In a § 351 transfer, Grebe Corporation receives property in exchange for stock. Will Grebe’s holding period for the property be the same as the shareholder’s holding period for the stock? Explain.

> How does the transfer of mortgaged property to a controlled corporation affect the transferor-shareholder’s basis in stock received? Assume that no gain is recognized on the transfer.

> Copper Industries (a sole proprietorship) sold three § 1231 assets during 2017. Data on these property dispositions are as follows: a. Determine the amount and the character of the recognized gain or loss from the disposition of each asset.

> Four friends plan to form a corporation for purposes of constructing a shopping center. Charlie will be contributing the land for the project and wants more security than shareholder status provides. He is contemplating two possibilities: receive corpora

> Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.” Nancy formed the business several years ago as a sole proprietorship, and it has been very successful. Assets currently have a fair market value of $450,0

> Paul Chaing (4522 Fargo Street, Geneva, IL 60134) acquires a qualifying historic structure for $350,000 (excluding the cost of the land) and plans to substantially rehabilitate the structure. He is planning to spend either $320,000 or $380,000 on rehabil

> What is the control requirement of § 351? Describe the effect of the following in satisfying this requirement: a. A shareholder renders only services to the corporation for stock. b. A shareholder renders services and transfers property to the corporatio

> Margo receives a gift of real estate with an adjusted basis of $175,000 and a fair market value of $100,000. The donor paid gift tax of $15,000 on the transfer. If Margo later sells the property for $110,000, what is her recognized gain or loss?

> Noah, who has $62,000 of AGI before considering rental activities, has $70,000 of losses from a real estate rental activity in which he actively participates. He also actively participates in another real estate rental activity from which he has $33,000

> Does the receipt of securities in exchange for the transfer of appreciated property to a controlled corporation cause recognition of gain? Explain.

> Can gain ever be recognized in a § 351 transfer if boot is not received? Explain.

> Under what circumstances will gain and/or loss be recognized on a § 351 transfer?

> In terms of justification and effect, § 351 (transfers to a controlled corporation) and § 1031 (like-kind exchanges) are much alike. Explain.

> Albert owns 100 acres of land on which he grows spruce Christmas trees. His \adjusted basis for the land is $100,000. He receives condemnation proceeds \of $10,000 when the city’s new beltway takes 5 acres along the eastern boundary of \his property. He

> Sarah incorporates her small business but does not transfer the machinery and equipment the business uses to the corporation. Subsequently, the machinery and equipment are leased to the corporation for an annual rent. What tax reasons might Sarah have fo

> Keith’s sole proprietorship holds assets that, if sold, would yield a gain of $100,000. It also owns assets that would yield a loss of $30,000. Keith incorporates his business using only the gain assets. Two days later, Keith sells the loss assets to the

> Under what circumstances, if any, may a shareholder deduct a business bad debt on a loan made to the corporation?

> In structuring the capitalization of a corporation, what are the advantages and disadvantages of utilizing debt rather than equity?

> Barbara incurred the following expenses during the year: $840 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $240 for multiple vitamins and antioxidant vitamins, $500 for a smoking cessation

> The Wilmoths plan to purchase a house but want to determine the after-tax cost of financing its purchase. Given their projected taxable income, the Wilmoths are in the 28% Federal income tax bracket and the 8% state income tax bracket (i.e., an aggregate

> Donna donates stock in Chipper Corporation to the American Red Cross on September 10, 2017. She purchased the stock for $18,100 on December 28, 2016, and it had a fair market value of $27,000 when she made the donation. a. What is Donna’s charitable cont

> A corporation acquires property as a contribution to capital from a shareholder and from a nonshareholder. Are the rules pertaining to the property’s basis the same? Explain.

> Discuss how each of the following affects the calculation of the basis of stock received by a shareholder in a § 351 transfer: a. The transfer of a liability to the corporation along with property. b. Property that has been transferred has built-in losse

> Rhonda has an adjusted basis and an at-risk amount of $7,500 in a passive activity at the beginning of the year. She also has a suspended passive activity loss of $1,500 carried over from the prior year. During the current year, she has a loss of $12,000

> Siena Industries (a sole proprietorship) sold three § 1231 assets during 2017. Data on these property dispositions are as follows: a. Determine the amount and the character of the recognized gain or loss from the disposition of each asset.

> At a point when Robin Corporation has been in existence for six years, shareholder Ted transfers real estate (adjusted basis of $20,000 and fair market value of $100,000) to the corporation for additional stock. At the same time, Peggy, the other shareho

> Grady exchanges qualified property, basis of $12,000 and fair market value of $18,000, for 60% of the stock of Eadie Corporation. The other 40% of the stock is owned by Pedro, who acquired it five years ago. Calculate Grady’s current income, gain, or los

> Marie and Ethan form Roundtree Corporation with the transfer of the following. Marie performs personal services for the corporation with a fair market value of $80,000 in exchange for 400 shares of stock. Ethan contributes an installment note receivable

> Several years ago, Lowell, who is single, acquired § 1244 stock in Blue Corporation at a cost of $60,000. He sells the Blue stock for $5,000 in the current year. Determine the amount and nature of Lowell’s gain or loss recognized this year.

> Chaz transfers cash of $60,000 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $15,000. The income is credited to its earnings and profits account. The corporation distributes $5,000 to Chaz. a.

> Yvonne and Simon form Ion Corporation. Yvonne transfers equipment (basis of $110,000 and fair market value of $165,000). Simon invests $130,000 of cash. They each receive 100 shares in Ion Corporation, worth $130,000, but Yvonne also receives $35,000 in

> Martin transfers real estate with an adjusted basis of $260,000 and fair market value of $350,000 to a newly formed corporation in exchange for 100% of the stock. The corporation assumes the liability on the transferred real estate in the amount of $300,

> Nicky receives a car from Sam as a gift. Sam paid $48,000 for the car. He had used it for business purposes and had deducted $10,000 for depreciation up to the time he gave the car to Nicky. The fair market value of the car is $33,000. a. Assuming that N

> Oak Corporation holds the following general business credit carryovers. 2013…………………………$ 5,000 2014…………………………..15,000 2015…………………………….6,000 2016…………………………...19,000 Total carryovers………..$45,000 If Oak’s general business credit generated by 2017 activitie

> Jocelyn contributes land with a basis of $60,000 and fair market value of $90,000 and inventory with a basis of $5,000 and fair market value of $8,000 in exchange for 100% of Zion Corporation stock. The land is subject to a $15,000 mortgage. Determine Jo

> Jingie owns two parcels of business land (§ 1231 assets). One parcel can be sold at a loss of $60,000, and the other parcel can be sold at a gain of $70,000. Jingie has no nonrecaptured § 1231 losses from prior years. The parcels could be sold at any tim

> A personal service corporation (PSC) generally is limited to the calendar year for reporting purposes. One exception to this rule is when the PSC can demonstrate a business purpose for a fiscal year-end. Discuss the business purpose exception, including

> A new client, John Dobson, recently formed John’s Premium Steakhouse, Inc., to operate a new restaurant. The restaurant will be a first-time business venture for John, who recently retired after 30 years of military service. John transferred cash to the

> Forrester owns a nonrental business with two separate departments. Department A generates net income of $70,000, and Department B generates a net loss of $58,000. Forrester participates 800 hours in the operations of Department A and 300 hours in the ope

> Tern Corporation, a calendar year C corporation, is solely owned by Jessica Ramirez. Tern’s only business since its incorporation in 2014 has been land surveying services. In Tern’s state of incorporation, land surveying can be performed only by a licens

> In the current year, Wilson Enterprises, a calendar year taxpayer, suffers a casualty loss of $90,000. How much of the casualty loss will be deductible by Wilson under the following circumstances? a. Wilson is an individual proprietor and has AGI of $225

> Heron Company purchases commercial realty on November 12, 1999, for $650,000. Straight-line depreciation of $287,492 is claimed before the property is sold on February 23, 2017, for $850,000. What are the tax consequences of the sale of realty if Heron i

> During 2017, Gorilla Corporation has net short-term capital gains of $15,000, net long-term capital losses of $105,000, and taxable income from other sources of $460,000. Prior years’ transactions included the following: 2013 net short-term capital gains

> Virginia owns 100% of Goshawk Company. In the current year, Goshawk Company sells a capital asset (held for three years) at a loss of $40,000. In addition, Goshawk has a short-term capital gain of $18,000 and net operating income of $90,000 during the ye

> Roberto has received various gifts over the years. He has decided to dispose of the following assets he received as gifts: a. In 1951, he received land worth $32,000. The donor’s adjusted basis was $35,000. Roberto sells the land for $95,000 in 2017. b.