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24 Nov 2018

Determine whether the following transactions are taxable. If a transaction is not taxable, indicate what type of reorganization is effected, if any.

A. AlphaPsi Corporation owns two lines of business that it has conducted for the last eight years. For liability protection, AlphaPsi’s shareholders decide that it would be best to separate into two corporations. The assets and liabilities of the garbage collection division are transferred to Alpha Corporation in exchange for all of its stock. The manufacturing division’s assets and liabilities are exchanged for all of the stock of Psi Corporation. The Alpha and Psi stocks are distributed to the AlphaPsi shareholders in return for all of their AlphaPsi stock. Then AlphaPsi liquidates.

B. Alpha, Inc., owns assets valued at $1 million and liabilities of $450,000. Beta Corporation transfers $500,000 of its voting stock and $50,000 in cash for all of Alpha’s assets. Beta assumes Alpha’s liabilities. Alpha distributes the Beta stock and cash to its shareholders and then liquidates.

C. Alpha Corporation moves its headquarters and state of legal incorporation from Salem, Oregon, to Dover, Delaware. It also changes its name to Beta, Inc.

D. Beta Company holds assets valued at $850,000 and liabilities of $50,000. Alpha, Inc., transfers $790,000 of its voting and $10,000 of nonvoting common stock for all of Beta’s common and preferred stock. Beta becomes a subsidiary of Alpha.

E. Alpha, Inc., owns assets valued at $600,000 and liabilities of $150,000. Beta Corporation exchanges $270,000 of its voting stock and investments worth $180,000 for all of Alpha’s assets and liabilities. Alpha distributes the Beta stock to its shareholders for 60% of their stock and retains the investments.

F. Beta Company holds assets valued at $3 million and liabilities of $100,000. Nu Company transfers $2.85 million of its voting stock for 95% of Beta’s assets. Beta distributes the Nu stock, the remaining assets, and the liabilities to its shareholders; it then liquidates

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Elin Hessel
Elin HesselLv2
24 Nov 2018

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For each of the scenarios provided (1-12) answer the followingquestions:

a. Is the transaction taxable?
b. If not, indicate the type of reorganization.
c. In 2 or 3 sentences, support your decision. For example, if youstate the transaction is a Type B reorganization, explain why thetransaction qualifies as a Type B reorganization.

Scenario:

Red Corporation owns assets valued at $500,000 and liabilitiesat $200,000, and White Corporation has assets valued at $1 millionand liabilities of $150,000. Red transfers 75% of its voting stockto White in exchange for 90% of its assets. White distributes theRed stock, its own remaining assets, and all of its liabilities tothe White shareholders. White then liquidates.

Green Corporation holds assets valued at $600,000 andliabilities of $150,000. Blue Corporation transfers $540,000 of itsvoting stock for 90% of Green’s assets. Blue assumes none ofGreen’s liabilities. Green distributes the Blue stock, its ownretained assets, and its liabilities to the Green shareholders andthen liquidates.

Orange owns assets valued at $400,000 and liabilities of$100,000. Yellow Corporation exchanges $200,000 of its voting stockand land worth $100,000 for all of Orange’s assets and liabilities.Orange distributes the Yellow stock to the Orange stockholders andretains the land.

Apricot Corporation moves its headquarters and incorporationfrom Rochester, New York, to Santa Fe, New Mexico. It changes itsname to Chile Pepper, Inc.

Pink Corporation holds assets valued at $500,000 and liabilitiesat $100,000. Black Corporation transfers $350,000 of its votingstock and $50,000 of nonvoting stock for all of Pink’s voting andnonvoting stock. Pink becomes a subsidiary of Black.

Gray Corporation’s paperclip division owns assets valued at$300,000 and liabilities of $50,000. The staple division holdsassets valued at $900,000 and liabilities of $150,000. Gray wouldlike the two divisions to be separate corporations. It createsSilver Corporation and transfers all of the paperclip divisionassets and liabilities in exchange for 100% of Silver’s stock. Graythen distributes the Silver stock to its own shareholders inexchange for 25% of their stock in Gray. The divisions have been inexistence for 10 years.

Purple holds assets valued at $800,000 and liabilities at$200,000. Brown Corporation transfers $280,000 of its voting stockfor 60% of Purple’s assets and all of its liabilities. Purpledistributes the Brown stock and its remaining assets to the Purpleshareholders. Purple then liquidates.

Rust Corporation holds assets valued at $500,000 and liabilitiesat $150,000. Beige Corporation transfers $350,000 of its votingstock and $30,000 in cash for all of Rust’s assets and assumes 80%of its liabilities. Rust distributes the Beige stock, cash, and theremaining Rust liabilities to its shareholders and thenliquidates.

Gold Corporation owns assets valued at $850,000 and liabilitiesat $800,000. To keep its creditors from foreclosing, Gold creates anew corporation, Fish, Inc., and transfers all of Gold’s assets toFish under the guidance of the state court. The creditors received$800,000 of Fish stock, and the former Gold shareholders receivethe remaining shares in Fish.

Cyan Corporation holds assets valued at $100,000 withliabilities of $20,000. Coral Corporation has assets valued at$900,000 with liabilities of $100,000. Cyan exchanges 80% of itsvoting stock for 40% of Coral’s assets and liabilities. Coraldistributes the Cyan stock and the remaining Coral assets andliabilities to the Coral shareholders. Coral then liquidates.

Fuchsia Corporation obtained 40,000 shares of SlateCorporation’s stock four years ago. In the current year, Fuchsiaexchanges 20% of its stock for 42,000 of the remaining 60,000shares of Slate stock. After the transaction, Fuchsia owns 82,000of the 100,000 Slate shares outstanding.

Chartreuse Corporation has two lines of business (waterpurification and mining), which have been conducted for the past 20years. Chartreuse’s shareholders decide that it would be best tosplit Chartreuse into two corporations. The assets and liabilitiesof the water purification plant are transferred to Aqua Corporationin exchange for all of its stock. The mining division’s assets andliabilities are exchanged for all of the stock in CopperCorporation. The Aqua and Copper stock is distributed to theChartreuse shareholders in return for all of their Chartreusestock. Chartreuse then liquidates.

Parent owns 100% of subsidiary.

The two corporations have the following balance sheet.

Assets

Parent

Subsidiary

General assets

1,500,000

750,000

Investment in Subsidiary

200,000

Note receivable from Subsidiary

1,000,000

Total

2,700,000

750,000

Liabilities and Equity

General liabilities

1,500,000

150,000

Note payable to parent

1,000,000

Common Stock

300,000

200,000

Retained Earnings (deficit)

900,000

-600,000

Total

2,700,000

750,000

Parent’s basis in Subsidiary stock is $200,000. The corporationsdo not file a consolidated tax return.

Prior to liquidation, Subsidiary uses $150,000 to pay off thegeneral liabilities.

Subsidiary transfers all of its assets to Parent in a completeliquidation.

What are the consequence to Subsidiary and Parent?

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:

Olive receives 30% of the stock

Olive receives 80% of the stock

Olive receives 15% of the stock

Marlene and Nancy together receive 50% of the stock

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:

$30,000

$12,000

$6,000

$18,000

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?

$10,000

$0

$100,000

$50,000

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:

10% of the shareholders vote to revoke the election

to purchase 10 shares

Allows a variation in the voting rights of the stock

Increases the number of shareholders to 125

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?

February 10, 2018

January 1, 2019

February 10, 2019

January 1, 2018

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:

$3,160

$11,160

$8,928

$9,486

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

$60,000

$500,000

$100,000

$300,000

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?

$56,000

$65,000

$53,000

$43,000

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?

$75,500

$79,500

$70,000

$65,500

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:

Bob: $25,000; Sam: $15,000

Bob: $0; Sam: $0

Bob: $25,000; Sam: $25,000

Bob: $30,000; Sam: $15,000

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?

$585,718

$521,345

$92,885

$500,000

Identify which of the following statements is false.

The PTI (previously taxed income) represents the balance ofundistributed net income which were already taxed.

The AAA balance can be negative, but the shareholder's basis inthe S corporation stock cannot be less than zero.

Tax exempt income increase the AAA and the basis of the Scorporation stock.

An S Corporation may or may not have accumulated Earnings andProfits

Elaine owns an unincorporated manufacturing business. In 2017,she purchases and places in service $600,000 of qualifying fiveyear equipment for use in her business. Her taxable income from thebusiness before any section 179 deduction is $100,000. Which of thefollowing statements is true?

Elaine cannot deduct any Section 179 deduction for 2017

Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $400,000 carryover to next year.

Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $500,000 carryover to the next year

Elaine can deduct $500,000 as a section 179 deduction in2017

Charles, an individual, owned 100% of the Alpha, an Scorporation. At the first of the year, Charles' basis in Alpha was$25,000. In the current year, Alpha realized ordinary income of$1,000; and a long term capital gain of $3,000. Alpha distributed$25,000 to Charles at the end of the year. What amount of the$25,000 is taxable to Charles?

$0

$7,000

$1,000

$25,000

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