ACC 842 Final: Exam Review.docx

Aubrey Newman transferred two items of property to Ncorporation, in return for 800 shares of N corporation (which hadonly 150 shares outstanding prior to Aubrey's transfer). One itemshe transferred had an adjusted basis of $10,000 and fair marketvalue of $15,000 and was subject to an $8,000 liability. The seconditem had an adjusted basis of $2,000 and a fair market value of$5,000 and was subject to a $3,000 liability. In return, shereceived the 800 shares of stock with a fair market value of $8,000plus $2,000 in cash. Please address the following: 1 Is thisexchange taxable to Aubrey and N corporation? Why or why not? 2What is the amount of gain (if any) that Aubrey must recognize onthis ex- change? 3 What is her basis in the N corporation stock shereceives? 4 What is the basis of N corporation in the assets itreceives in the transfer? 5 How would your answer differ if Aubreyperformed services (instead of transferring property) in return forthe shares of N corporation? 2- Cotte Inc. has three shareholders,Phil, Bill, and Hill. Each shareholder owns 100 shares of commonstock. On July 1 of this year, Cotte Inc. redeemed 30 shares fromeach share- holder. In return, each shareholder received $10,000.Phil acquired his shares three years ago and his adjusted ba- sisin his 100 shares was $3,000 at the time of the redemption. Cottehas $100,000 of accumulated E&P as of the end of the prioryear, and anticipates earning a further $20,000 in E&P in thecurrent year. Please address the following: 1 What are the federaltax consequences to Cotte, Inc. and Phil arising from thisdistribution? 2 Would your answer to 1. change if the reason CotteInc. redeemed the shares was because it sold one of its businessesit actively had been con- ducting since 1990? 3 Would your answerto 1. change if the only transaction was a redemption of 60 ofPhil's shares, while Bill and Hill continued to hold their original100 shares? 4 Would your answer to 3. change if Bill, Phil, andHill were siblings? 3 - At the beginning of the year, Jenny, Inc.(a corporation for tax purposes) had a negative $15,000 in E&P.During the year,  the company had $5,000 in profits. On July 1,the company distributed property with an adjusted basis of $50,000and a fair market value of $40,000 to Jenny (an individual), thesole shareholder of the corporation. It was the only distributionthat the company made during the year. Jenny's stock in the companyhad a fair market value of $50,000 and an adjusted basis of$20,000. Please address the following: 1 What is the amount of thedistribution to Jenny? 2 What are the federal tax consequences toJenny of the distribution? 3 What are the federal tax consequencesto Jenny, Inc. of the distribution? 4 What alternative transactionwould have given Jenny and Jenny Inc.a bet- ter result here?

Rex and Felix are the sole shareholders of the Dogs and CatsCorporation (DCC). After several years of operations using theaccrual method, they decided to liquidate the corporation andoperate the business as a partnership. Rex and Felix hired a lawyerto draw up the legal papers to dissolve the corporation, but theyneed some tax advice from you, their trusted accountant. They arehoping you will find a way for them to liquidate the corporationwhile minimizing their total income tax liability.

Rex has a tax basis in his shares of $72,000 and Felix has a taxbasis in his shares of $36,000. The DCC’s tax accounting balancesheet at the date of liquidation is as follows: (Negativeamounts should be indicated by a minus sign. Leave no answer blank.Enter zero if applicable.) Corporate tax rate

Required:

A. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming each shareholder receives a pro rata distribution of thecorporation’s assets and assumes a pro rata amount of theliabilities.

B. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming Felix receives $35,000 in cash and Rex receives theremainder of the assets and assumes all of the liabilities.

For parts c and d: Assume Felix received the accounts receivableand equipment and assumed the accounts payable.

C. Will Felix recognize any income when hecollects the accounts receivable?

D. Will Felix be able to take a deduction whenhe pays the accounts payable?

For parts e and f: Assume Rex is a corporate shareholder ofDCC.

E. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming each shareholder receives a pro rata distribution of thecorporation’s assets and assumes a pro rata amount of theliabilities.

F. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming Felix receives $36,000 in cash and Rex receives theremainder of the assets and assumes all of the liabilities.

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.