ACTG 2P40 Study Guide - Legal Personality, Chapter 27, Institute For Operations Research And The Management Sciences

During the current year, Marlene, Nancy and Olive formed a new SCorporation. Solely in exchange for stock, Marlene and Nancycontributed appreciated property, while Olive contributed services.The exchanges of Marlene and Nancy will be nontaxable if:

In June of 2018, Alice acquired heronly machine for $30,000 to use in her business. The machine isclassified as 5-year property. Alice’s maximum depreciation(including bonus) on the machine this year is:

Cactus Corporation, an S Corporation, had accumulated earningsand profits of $200,000 at the beginning of the tax year. Tex andShirley each own 50% of the stock. During the current year Cactushad $100,000 of ordinary income and distributed $10,000 to Tex and$10,000 to Shirley. What is Tex's taxable income for the currentyear?

Bristol Corporation was formed as an S Corporation on January 1,2014 and elected S corporation status at that date. Bristol has hadthe same 25 shareholders throughout its existence and has one classof stock. Bristol's S election will terminate if it:

On February 10, 2018, Ace Corporation, a new calendar yearcorporation, elected S corporation status and all shareholdersconsented to the election. There was no change in its shareholdersduring the current year. Ace met all eligibility requirements foran S corporation during the preelection portion of the year. Whatis the earliest date on which Ace can be recognized as an Scorporation?

In March of 2017 Frederick acquired an passenger automobile for$45,000 and used the automobile 85% for business. Themaximum depreciation deduction for 2017 is:

In August of 2017, Joseph acquires andplaces into services business equipment costing $300,000. Theequipment is classified as 5-year recovery property. No otheracquisitions are made during the year. Joseph elects to expense themaximum amount under Sec. 179. Joseph’s total deductions for theyear are

For the current tax year, VBN, an S Corporation distributes$100,000 to its sole shareholder, Raymond. His basis in the stockwas $140,000 before the distribution. VBN had once been a regular CCorporation and had remaining accumulated earnings and profits(E&P) from those years of $70,000. However, VBN has no balancein its accumulated adjustment account. How should the distributionof $100,000 be handled?

$100,000 as a taxable distribution

$70,000 as a taxable dividend, and $30,000 has a non taxablereturn of capital

$50,000 as a taxable dividend, and $100,000 as a non taxablereturn of capital

$70,000 as a taxable dividend; and $30,000 as a capital gain

Stahl, an individual who owns 100% of Talon, an S corporation,had a basis of $50,000 at the first of the year. During the yearTalon reported the following: Ordinary Loss of $10,000; Municipalinterest income of $8,000, Long term capital gain of $4,000; andLong term capital loss of $9,000. What was Stahl's basis in Talonat year end?

Gross Receipts of $70,000; Tax Exempt Interest Income of $4,000;Dividends of $10,000; Supplies Expense of $3,000; and UtilitiesExpense of $1,500. What amount is the S Corporation's ordinarytaxable income?

Bob and Sam each owned 50% of Lostalot, an S Corporation. Bob'sbasis is $30,000 and Sam's basis is $15,000. The corporation hasoperating loss for the current year of $50,000. Howmuch loss can each shareholder deduct in the current year assumingthey materially participate in the business:

Terra Corporation, a calendar-yeartaxpayer, purchases and places into service in 2017 machinery witha 7-year life that cost $650,000. The mid-quarter convention doesnot apply. Terra’s taxable income for the year before the Sec. 179deduction is $700,000. What is Terra’s total maximum depreciationdeduction related to this property?

Identify which of the following statements is false.

TAX 502 - LessonAssignment #6: Penalty Taxes onUndistributed Corporate Income, Dividendsand Other NonliquidatingDistributions

Reading

Text: StudyChapters 7 and 8 of the Bittker & Eustice text.

Assignments

The following Assignmentsshould be completed and submitted to the course faculty via thelearning platform for evaluation and grading. Submit your responsesto these questions in one WORD document. List the question first,and then your response.

Copy the question, andthen provide your answer on all of the following:

LESSON 6, PROBLEM#1

In not less than 1,000 words discuss"earnings and profits". Your discussion should include majordifferences between computing current earnings and profits andcurrent taxable income as well as why earnings and profits shouldbe calculated before a corporation decides to make a distributionto its shareholders.

LESSON 6, PROBLEM#2

Allan owns all of the stock of CadyCo.The stock’s basis is $100,000. CadyCo has a total of current andaccumulated earnings and profits of $50,000. CadyCo distributes$200,000 cash to Allan “with respect to his stock” (i.e., as astate law “dividend”). How is the $200,000 taxed? What is Allan’sstock basis after the distribution? Alternatively, CadyCodistributes to Allan his note to CadyCo for $200,000 borrowed fromCadyCo.

LESSON 6, PROBLEM#3

Assumptions: The stock ofChadCo is owned equally by two shareholders: SecondCo (acorporation) and Arnold (an individual). ChadCo and SecondCo usethe accrual method, Arnold uses the cash method. All use a calendartaxable year. Assume § 1059 does not apply. Use a 34 percentcorporate tax rate in this problem. During the current year, ChadCoaccrued income and expenses as follows:

On December 24 of the preceding year, SecondCo and Arnoldincorporated ChadCo and capitalized ChadCo with cash of $100,000each. On December 31 of that preceding year, SecondCo and Arnoldreceived distributions from ChadCo of $5,000 each; ChadCo did notearn any income for that year. In addition, SecondCo and Arnoldreceived distributions of $5,000 each, in the current year.

Which distributions should begross income to SecondCo and Arnold, in what amounts, and why? Whatdoes E&P have to do with this?

Alternative: Arnold just bought the ChadCo shares on December 30of the current year from another shareholder for FMV of $145,000,before the declaration and payment of a

$5,000 distribution to Arnold onDecember 31 of the current year.

Should the distribution be taxableincome to Arnold? Why?

Now assume that SecondCo’s basis in its ChadCo stock is $100,000and Arnold’s basis in his ChadCo stock is $40,000. On January 2 ofthe current taxable year, ChadCo distributes $100,000 in cash toSecondCo and $100,000 in cash to Arnold. As of the end of thepreceding taxable year, ChadCo’s accumulated E&P was zero.

What are the tax consequences ofthis distribution to ChadCo, SecondCo, and Arnold? [Hint: Firstcompute ChadCo’s current-year taxable income and then computecurrent- year E&P before reducing the E&P for thedistribution (“interim E&P”); after reducing for thedistribution, compute final accumulated E&P.]

Variation: Assume Arnold’s shares were owned by a differentshareholder every quarter and $50,000 was distributed ratably toall shareholders quarterly?

How much dividend would SecondCoand the holders of Arnold’s shares receive?

Suppose under the basic facts in (3) above that ChadCo had anaccumulated deficit of

$100,000 in its E&P account as ofDecember 31 of the preceding taxable year.

If, on December 1 of the current year (the declaration date),ChadCo’s board of directors voted to pay the $200,000 distributionby mailing the checks on December 31 of the current taxable year(the payment date, the identification of which is a practicegenerally used only by widely held corporations) to shareholders ofrecord on December l5 of the current taxable year (the recorddate), such checks actually being received by SecondCo and Arnoldin the mail on January 2 of the next year? Assume that SecondCo andArnold are the public and that they are the only shareholders (asin the basic facts).

How would your answer to (3) abovechange?

Suppose that SecondCo is an individual and that ChadCo hasalways been an S corporation.

What is ChadCo’s E&P‘? How iseach shareholder’s personal income tax return affected for thecurrent year by the tax items of ChadCo? How willChadCo distribution of

$100,000 to each shareholder inthe current year affect shareholders?