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ACCT-6604- Module 4 Midterm
Chapter 1
1. D. Centralized management
2. B. Survive if one of its owners declares bankruptcy
3. C. Owner’s liability is limited to their investment
4. A, C & D
5. C. Trade or business real property solely in exchange for stock.
6. B. Transferee Corporations only
7. A. Ca
yover basis applied to the corporation and the transfero
8. D. Boot includes liabilities assumed in excess of basis of the assets transfe
ed
9. C. Transfer cash back to the transferor.
10. D. A description of the property transfe
ed and its basis in the hands of the transfero
11. C. Are deductible (up to a statutory limit) in the year incu
ed
12. B. Pre-opening advertising
Chapter 3
1. A. 25%
2. D. Have five or fewer owners who own 80% of the outstanding stock of each corporation.
3. A. Must be related via ownership
4. D. Is required for controlled corporation to document certain shared tax benefits.
5. B. May be changed as each subsequent corporation’s return in the group is filed.
6. B. Deductions peculiar to corporation
7. B. Based on outstanding stock of the invested company.
8. B. Must be ca
ied back using Form 1139.
Chapter 5
1. B. taxability is determined at the shareholder level
2. A. Are treated as return of capital
3. D. Affected by dividends paid
4. C. Accrual basis income of a cash basis taxpaye
5. B. Must be deemed distributed at fair market value
6. C. It recognizes gain to the extent basis exceeds the amount of debt distributed
7. D. The principal balance of the debt
8. D. The corporation declares the dividend as taxable.
9. A. Is increased by the amount of taxable income recognised
10. B. Prefe
ed and common shareholders each get a stock dividend of their own class of stock
11. C. The corporation provides certain benefits for shareholders.
12. C. They are deductible to the corporation and non-taxable to the shareholders
13. D. Amounts paid for office
shareholders for financial planning to the extent the amount has been included on the individual’s Form W-2.
14. B. Sale of assets at fair value to shareholders
Chapter 6
1. A. 50% or more by five or fewer individuals
2. C. Is 60% of the Corporation’s Adjusted Ordinary Gross Income
3. D. Adjusted Ordinary Gross Income
4. D. Services provided under a personal service contract with the corporation
5. B. Is computed using Undistributed PHC Income
6. B. Adjusted Ordinary Gross Income
7. D. Not applicable to corporations who pays income taxes
8. C. Is not assessed if the corporation has paid dividends
9. A. Reasonably anticipated needs of the business according to the accountant
10. A. Are defined by the Bardahl Formula
11. B. Accounts receivable by Sales
12. D. Is a tool to use to help determine what the reasonable needs of the business are
13. B. Is computed starting with taxable income
14. C. $150000
15. D. A corporation that performs only personal services and nothing else
16. A. Subject to reallocation of income and deductions between the PSC and its owner-employees
17. D. Taxed at 35%
Chapter 15- M2- Corp: Problems
1. (a). A, B, C, D and E, all individuals, form X Corporation to engage in a manufacturing business
A. Realized Gain = $0; Recognized Gain = $0; Basis = $25,000; Holding Period = starts at the date of purchase
B. Realized Gain = $5,000; Recognized Gain = $0; Basis = $5,000; Holding Period = starts at the date of purchase
C. Realized Gain = $5,000; Recognized Gain = $0; Basis = $25,000; Holding Period = includes prior holding period (ca
yover)\
D. Realized Gain = $20,000; Recognized Gain = $0; Basis = $5,000; Holding Period = includes prior holding period (ca
yover)
E. Realized Gain = $18,000; Recognized Gain = $0; Basis = $2,000; Holding Period = includes prior holding period (ca
yover)
(b). What are the tax consequences?
Cash:
Recognized Gain = $0
Basis = $25,000
Holding Period = starts at the date of purchase
Inventory:
Recognized Gain = $0
Basis = $5,000
Holding Period = starts at the date of purchase
Land:
Recognized Gain = $0
Basis = $20,000
Holding Period = includes prior holding period (ca
yover)
Equipment:
Recognized Gain = $0
Basis = $5,000
Holding Period = includes prior holding period (ca
yover)
Note:
Recognized Gain = $0
Basis = $2,000
Holding Period = includes prior holding period (ca
yover)
(c). Assume all the same facts except that C transfers
    
    Adjusted Basis
    Fair Market Value
    Parcel 1
    $15000
    $10000
    Parcel 2
    $8000
    $10000
    Total
    $23000
    $20000
Built-in (Loss) = $20,000 - $23,000 = ($3,000)
The loss applies proportionally to parcel 1 only because parcel 2 does not have a loss.
X’s Basis = ($15,000 - $3,000) + $8,000
X’s Basis = $12,000 + $8,000 = $20,000
(d). There was $5,000 of gain inherent in the inventory transfe
ed by B.
Double Taxation:
If X sells the inventory, there will be a $5,000 gain, and it will be taxed.
If B sells the $5,000 worth of stocks (basis), the gain will also be taxed.
2. Consider whether the following transactions qualify under Section 351:
(a). A and B are unrelated individuals.
The section 351 applies to A’s transfer of property in exchange of stock and post the transaction, A had control of Newco. Thus, A is unable to identify the gain and take $10000 in 50 shares of Newco on a transfer basis. Further, stock u/s 358 (a) (1) and a tacked Holding Period u/s 1223(1) is a capital asset when assuming it to be a transfe
ed property. Further, Newco is unable to identify the gain u/s 1032(a) and u/s 362 (a) takes the stock on a transfer basis.
B’s transfer is unrelated. Post this transfer B will have no control of Newco. B will have 10/60 of Newco and it is lower than 80%. As B is unable to satisfy the stipulations of section 368(c), IRC 351 is not applicable for B. Hence, B has $9000 gain by taking a basis of $10000 in Newco’s shares on a cost basis. Further, there is no gain u/s 1032 for the issuance of stock.
(b). Same as (a) above except the transfers by A and B were part of a single integrated plan?
Transfers were the part of both A and B’s integrated plan and qualifies for non-recognition u/s 351. Also, A & B are transferors and controls 100% ownership of Newco. Delay in time is non-fatal as per sec 1.351-1(a). B’s receiving of prefe
ed stock is fine.
(c). Same as (b) above, except A transfe
ed 25 of her 50 shares to her daughter, D as gift on March 5?
The answer of (b) above will not change due to A’s gift of March 5th as both the transferors have control u/s 368 (c) post the transfer was made on March 2nd. Also, A was not under any contract which was binding prior to the transaction. If A’s gift was made on 5th January, the section 351 will not be applicable as B’s contribution towards the property does not have control. This is because D has more than 20% of stock but is not a transferor.
(d). Same as (b) above except that two months after B’s transfer, A sold 15 shares to E pursuant to a pre-existing oral understanding, without which Newco would not have been formed.
No, since as per section 351 there was a pre agreement for the transferor for selling the shares of Newco during the time of transfer. Post the sale is made as there is no control, A & B would not identify gain and will take a basis which is equivalent to the FMV of the Newco shares. E will be able to take only 15 shares on cost basis.
3. In exchange for their respective contributions.
(a). Nate will not qualify for any transaction u/s 351. He must identify all the realized gains and the transferors. Venture will have no gains on purchase of stock through cash and takes $150000 on the stock on a cash basis. The manager recognizes ordinary income u/s 83 and will be on a basis of tax-cost on the stock.
(b). If the managers earn $80000 annually and pays $150000 for the Newco stocks, she will be considered as transferors and will be subjected to section 351as there is more than 80% of the control. Further he does not observe any profits or incurs losses and hence will be able to use $50000 on a stock basis. There will be no profit or loss for Venturer and the amount which is paid will be on stock cost basis. Further, if the manager uses promissory note and are unable to raise cash then the note will be treated as a property.
(c). If the manager is paying $1000 and as per the documents incorporated states that she receives shares in exchange of cash instead of service, that will be ineligible u/s 351 as the manager receives stock in exchange of services. Nate must account for the entire realized gain which Venture will not. The manager must account for $150000 - $1000 = $149000 in ordinary income.
(d). If manager pays $20000 in cash instead of a transaction amounting $1000, it will qualify u/s 351 as all the shares received will be included in the consideration of control as there was a transfer of property and service.
(e). The manager cannot authorise more than 130 stocks, then we would advise the managers conduct a section 83 election.
4. a b and c form x corporation by transfe
ing the following assets:
Value received:
    Stocks
    Common Stocks
    P/ Stocks
    Cash
    X’s notes
    Total
    A
    (15) $15000
    (100) $5000
    $2000
    
    $22000
    B
    (15) $15000
    
    $15000
    
    $30000
    C
    (10) $10000
    
    $5000
    $35000
    $50000
For the businesses, the non-cash asset contribution is the fair market value. Its significance is the ability for generating a financial outcome for the future. This is a function which cannot be done on an adjusted basis. The shareholders are interested in the basis identified from these assets which illustrates their shares of the potential profits.
The value from the stocks and cash received by each contributor is equal to the fair market value of the contributions made and it is more than the value of individual bases held in asset contributed. It is a gain on the part of contributing shareholders. Thus, A, B and C will identify the financial gains which is $7000, $10000 and $30000 respectively. As the gain is benefitted the individual contributor which is X Corporation must identify and amortize the amount of the gains over a certain period. The loss will amount to $47000. The loss is on an individual basis recognized above and are held by the shareholders.
(b). The amount of basis should have been as per the installment method. Here the company will recognize the income generated as a proportion of payment for the taxable year in which the gross profit was realized or is equal to the total price of the property transfer contract.
5. A organized X corporation by transfe
ing the following: inventory with a basis of $20,000.
    Assets
    Basis
    FMV
    Recourse Debt
    Inventory
    $20000
    $10000
    
    Unimproved Land
    $20000
    $40000
    $30000
Receipts:
20 X shares – FMV $20000
The land – subject to the debt
(a). Section 357 (b) is permitted as the treatment of assets transfer for cash payments. Where it is not applicable; A reports a $10000 gain with a holding period which is equal to the amount initially stipulated for the payment of debt.
(b) A gain an amount of $45000
(c) It is the gain from property and it really makes sense.
(d) $50000
(e) Increased his basis in the property
6. B organized Y corporation and transfe
ed a building with a basis of $100000 and a fair market value of $400000
(a). There was no valid reason for conducting the business for the purpose of bo
owing $10000 shortly prior to incorporating the business as the assumption of personal debt qualify as an evil purpose category u/s 357 (b). Under this section, all the debt assumed. All the debts along with personal debt is treated as boot received. B would hence identify the lower of gain realized of $300000 or the liabilities transfe
ed/ boot received to the amount of $90000.
B's Basis in stock: Ca
yover basis 100,000
Plus: gain recognized 90,000
Less: liabilities assumed (90,000)
Basis 100,000
(b). B would only recognize $10,000 of gain.
B's Basis in stock: Ca
yover basis 100,000
Plus: gain recognized 10,000
Less: boot receive (10,000)
Less: liabilities assumed (80,000)
Basis 20,000
(c). The variation is unjustified as the economic impact is same for the first two events. Section 357 (b) was implemented for preventing abuse.
(d). If there was liability during the taxpayer’s pre-incorporation of business such would have been with a valid business purpose for the assumption of debt of the corporation. Further, if the bo
owed fund was been used for personal reasons and debt was been assumed by the corporation, the IRS will determine it as an evil purpose for avoidance of tax.
Chapter 16- M3- Corp: Problems
1. X corporation is a cash method calendar year taxpaye
Gross profits from sales $20,000
Dividend from IBM    $5,000
Total Income    $25,000
Less:
Salaries paid    $10,250
Depreciation    $2,800
LTCL    $2,500
Total Deduction    $15,550
Taxable income    $9,450
Calculations:
LTCG sale of stock $2,500
LTCL sale of stock $ (5,000)
Net LTCL $ (2,500)
Gross profits from sales $20,000
Dividend from IBM    $5,000
Tax exempt interest received    $3,000
Long term capital gain $2,500
Total Income    $30,500
2. Ann owns all of the common stock
(a). Distribution exceeds the earning & profit $10,000 which is on a tax basis to Ann with respect to the Pelican stock.
Pelican has $5,000 of cu
ent earning & profit and no accumulated earning & profit. It distributes $17,500.
Result: a) $5,000 dividend - 301(c)(1)
) $10,000 return of capital - 301(c)(2); zero basis for the stock.
c) $2,500 capital gain - 301(c)(3).
Pelican's earning & profit is reduced to zero - 312(a)(1).
(b). Here, the Nimble dividend rule is applied:
$15000 is accumulated deficit in earnings and is profit for the prior year.
$10000 is cu
ent earnings and profits which is distributed by the corporation at present
Result: $10000 is distributed as dividend toward Ann according to the Nimble dividend rule.
Pelican continues to have $15000 deficit in the earnings and profit and there is no cu
ent profits and earnings
(c). Distribution & Mid-year stock partial sale:
1) 1st April distribution of $10000: 2000 on a pro-rate portion of 4000 on the cu
ent earnings and profits. 8000 of 10000 from the accumulated earnings and profits received as dividend distribution
2) 1st October distribution of $5000 and $5000 to two shareholders. $2000 of the cu
ent earnings and profit with $1000 two each shareholder. Remaining $2000 in the form of accumulated profits and earnings (10000 less 8000) which is allocated ½ (1000) for each shareholder. Each has a capital return of $3000.
3) on 1st July the shareholders sell ½ of stock for $15000. This results in zero earnings for the distributors.
(d). Cu
ent Year Deficit
Pelican has a $10,000 deficit in Year Two.
1) April 1 distribution of $10,000
1/4th of 10,000 loss (2,500) is allocable to the April 1 distribution of 10,000 (no earmarking); 7,500 dividends (reducing earning & profit to zero) & 2,500 return of capital.
Stock basis is reduced from 10,000 to 7,500.
Option One (chronological)
2) July 1 - Ann sells 1/2 of stock for 15k.
(15,000 less 3,750 (1/2 basis) = 11,250 gain)
3) October 1 distribution of $5,000 & $5,000 to two shareholders - No cu
ent earning & profit & no accumulated earning & profit. Treatment to Ann:
Less: distribution 5,000
Basis is: 3,750
Result: 1,250 gains
Option Two (dividends 1st)
2) October 1 distribution of $5,000 & $5,000. No cu
ent earning & profit & no acc. earning & profit. Option(s): Basis is: 7,500 3,750 (1/2?)
Less: distribution 5,000 5,000
Result: ...