LAW 641-001 – Taxation of Businesses

Problem Answers


501
      • Gain: None
      • Basis: $25,000
      • Holding Time: When stock purchased
      • Gain: None
      • Basis: $5,000
      • Holding Time: When stock purchased
      • Gain: None
      • Basis: $25,000
      • Holding Time: When land purchased
      • Gain: None
      • Basis: $5,000
      • Holding Time: When stock purchased
      • Gain: None
      • Basis: $25,000
      • Holding Time: When inventory purchased?
      • Gain: None
      • Basis: $5,000
      • Holding Time: When stock purchased
      • Gain: None
      • Basis: $20,000
      • Holding Time: When land purchased
      • Gain: None
      • Basis: $5,000
      • Holding Time: When equipment purchased?
    • Neither has gain
    • C's basis in stock is $23,000
    • X's bases are $12,000 and $8,000
    • C's holding period is ...?
    • X's holding periods is when C bought the parcels
  1. It will be taxed twice
521
      • Gain: $2,000
      • Basis: $15,000
      • Holding Time:
      • Inventory:
        • Gain: $10,000
      • Land:
        • Gain: None
      • Stock:
        • Basis: $15,000? $30,000?
        • Holding Time:
      • Gain: $30,000
      • Basis: $10,000
      • Holding Time:
        • Gain: None
        • Basis: $17,000
        • Holding Time:
        • Inventory:
          • Gain: None
          • Basis: $17,000
          • Holding Time:
        • Land:
          • Gain: None
          • Basis: $13,000 (or maybe $10,000?)
          • Holding Time:
        • Gain: None
        • Basis: $50,000
        • Holding Time:
540/1
    • Gain: None
    • Basis: $10,000
      • $20,000 + $20,000 - $30,000
    • Holding Period: When stock purchased?
    • Gain: $5,000
    • Basis: $0
      • $20,000 + $5,000 - $30,000 = $-5,000
    • Holding Period: When stock purchased?
  1. It would be 80% ($20,000 ÷ $25,000) ordinary gain and 20% capital gain.
  2. $25,000
  3. Pay down the debt, contribute more, or give a promissory note
540/2
  1. $90,000 of gain
  2. $10,000 gain
  3. Sure
  4. When the property was already being used for the business and the debt incurred therefor or when the value of the property is greater?
591
  • Taxable Income: $3,450
    • $20,000 - $10,250 - $2,800 + $2,500 - $5,000 - $1,000
  • Earnings and Profits: $11,650
    • $3,450 + $3,000 + $5,000 + $1,000 - $800, or
    • $20,000 - $10,250 + $3,000 + $5,000 - $2,800(?) + $2,500 - $5,000 - $800
596
    • Ann recognizes $5,000 in capital gains from qualified dividend income, her basis in her stock is reduced to $0, and she recognizes $2,500 in gain from sale of the stock.
    • Pelican accumulates no earnings and profits.
    • Ann recognizes $10,000 in capital gains from qualified dividend income.
    • Pelican neither depletes nor accumulates any earnings and profits. It remains $15,000.
    • Ann recognizes $11,500 gain on the sale of her stock to Baker; she recognizes $12,000 in capital gains from qualified dividend income; and her basis in her stock is reduced by $3,000 to $7,000, which was then halved to $3,500 during the sale.
      • $15,000 - $3,500 = $11,500
      • The earnings and profits are allocated proportionally to the distributions. Since these were equal sizes, each is treated as if the earnings are profits were half of what they actually were. (Thus, $5,000 and $2,000.)
      • 1st distribution: $10,000 - $2,000 (portion of E&P and therefore QDI) - $5,000 (portion of accumulated E&P and therefore also QDI) = $3,000 (removed from basis (before the sale))
      • 2nd distribution: $5,000 - $2,000 (portion of E&P and therefore QDI) - $3,000 (portion of accumulated E&P and therefore also QDI) = $2,000 (remaining portion of basis (although an equal half would remain from the distribution to Baker))
      • QDI: $2,000 + $5,000 + $2,000 + $3,000 = $12,000
    • Pelican is left with $4,000 of accumulated earnings. ($2,000 from each party on the second distribution. See above.)
601

Zane always gets a basis equal to the fair market value.

    • Zane recognizes $20,000 in capital gains from qualified dividend income because of the accumulated earnings.
    • Sturdley recognizes $9,000 in gain under 26 U.S.C. § 311(b); and its earnings and profits are decreased by $11,000, under 26 U.S.C. § 312(b), leaving $14,000.
      • $25,000 + ($20,000 - $11,000) - $20,000 = $14,000
    • Zane's basis in his stock is reduced to $0, and he recognizes $12,000 in gain from sale of the stock.
    • Sturdley recognizes $9,000 in gain under 26 U.S.C. § 311(b); and accumulates no earnings and profits.
    • Zane recognizes $4,000 in capital gains from qualified dividend income because of the accumulated earnings.
      • Fair market value of land minus the mortgage assumed
    • Sturdley recognizes $9,000 in gain under 26 U.S.C. § 311(b); and its earnings and profits are decreased by $27,000, under 26 U.S.C. § 312(b)–(c), leaving $0.
      • $25,000 + ($20,000 - $11,000) - $20,000 - $16,000 = $-2,000
      • This is really confusing, so I'm just guessing. Lemme know what the right answer is.
    • Distributing property:
      • Zane recognizes $20,000 in capital gains from qualified dividend income.
      • Sturdley does not recognize gain or loss because of 26 U.S.C. § 311(a), and its earnings and profits are decreased by $30,000 because of 26 U.S.C. § 312(a), leaving $10,000.
    • Selling property and distributing proceeds:
      • Zane recognizes $20,000 in capital gains from qualified dividend income.
      • When Sturdley sells the land, it recognizes $10,000 of loss, and its earnings and profits are decreased by $10,000. When it distributes the proceeds, its earnings and profits are further reduced by $20,000, leaving $10,000 in earnings and profits.
634/1
  • Grandfather: 85
    • 25 + 20 + 15 + 5 + 5 + (30 / 2)
  • Mom's daughter: 55
    • 20 + 15 + 5 + (30 / 2)
  • Grandmother's estate: 100
    • 25 + 20 + 15 + 5 + 5 + 30
670/1
  1. The estate lost 0% of its portion of the voting stock, thus it is not substantially disproportionate under 26 U.S.C. § 302(b)(2)(c). Thus, $4,000,000 of the redemption is treated as a dividend out of its accumulated earnings and profits. $2,050,000 is treated as a recovery of basis, first $50,000 of the preferred stock, then $2,000,000 of the common stock.
    • 8,000 + 800 + 300 + 100 = 10,000 (out of 10,000; 100%)
    • 2,000 + 800 + 300 + 100 = 4,000 (out of 4,000; 100%)
  2. 800,000(AR) - 80,000(AB) = 720,000
    • 160 + 800 + 800 + 300 + 100 = 2,160 (out of 10,000; 21.6%)
    • 160 + 800 + 300 + 100 = 1,360 (out of 10,000; 14.8% (65.8% of what it was before the redemption))
    • 8,000 + 800 + 300 + 100 = 9,200 (out of 9,200; 100%)
    • 3,800 + 800 + 300 + 100 = 5,000 (out of 5,000; 100%)
672/4

None are a substantially disproportionate redemption under 26 U.S.C. § 302(b)(2).

    • 800 + 300 = 1100 (out of 2000; 55%)
    • 700 + 300 = 1000 (out of 1900; 52.6%)
    • Not SDR
    • 800 + 300 = 1100 (out of 2000; 55%)
    • 700 + 300 = 900 (out of 1800; 50% (~91% of 55%))
    • Not SDR, but may be a "meaningful reduction of the shareholder's proportionate interest in the corporation" and therefore not essentially equivalent to a dividend under 26 U.S.C. § 302(b)(1)
    • 100 (out of 2000; 5%)
    • 90 (out of 1990; 4.5% (90% of 5%))
    • Not SDR
677
  1. Did not cease operation so not a partial liquidation according to 26 U.S.C. § 302(e)(2).
  2. 26 U.S.C. § 302(b)(3) complete termination if he waives family attribution if he resigns directorship. Is 26 U.S.C. § 302(b)(4) partial liquidation.
  3. 26 U.S.C. § 320(b)(2) & 26 U.S.C. § (b)(3)
  4. Not partial liquidation because its securities portfolio is not a qualified trade or business
  5. Liquidating Beta is not a taxable transaction under 26 U.S.C. § 332 & 26 U.S.C. § 337, so it is a qualified trade or business under 26 U.S.C. § 302(e)(3), so it is a partial liquidation under 26 U.S.C. § 302(4), so it is in exchange for the stock.
680
998
  1. Eligible because of the family rule in 26 U.S.C. § 1361(c)(1).
  2. At A's death it is still eligible, but when it is distributed to F, it becomes ineligible.
  3. Eligible as QSST even after SS dies.
  4. 26 U.S.C. § 1361(b)(1)(D) single class, 26 U.S.C. § 1.1361-1(3)(1), equal rep to distribute his proceeds means same class
1003
1019/1

S Corps don't pay taxes. They make their sharholders do it for them.

If sep into acct then try diff than if not sep out

S Corp gain increases basis (Cuz it can't be a dividend

Business incomeNonsep
Tax-exempt interestSSI
Salary expense(Nonsep)
Depreciation(Nonsep)
Property taxes(Nonsep)
Supplies(Nonsep)
Interest expense paid on a margin acount (inv. int. exp.)SSL
§ 1245 gainNonsep
§ 1231 gainSSI
Short-term capital gainSSI
Long-term capital gain/loss (Combine the two types and sources)SSI
Bribe of government official (Not deductible)SSL
Recovery of bad debt previously deductedSSI
  1. ItemAmount (of A's Portion)SSISSLND/NC
    NSCI24,000
    NET LTCG4,000
    Net STCG5,000
    § 1231 gain8,000
    Bad debt recovery3,000
    Investment interest expense-4,000
    Tax-exempt income667
    Bribe24,000-4,000
  2. § 1.1367-1(f) Basis at the beginning of the current year12,000
    20,667
    § 1367(a)(1)(B) increase: NSCI24,000
    § 1367(a)(2)(A) decrease: Distributions not included in income0
    § 1367(a)(2)(D) decrease: Non cap/nonded exp § 1.1367-1(c)(2)-4,000
    § 1367(a)(2)(B) decrease: SS items of deduction and loss-4,000
    § 1367(a)(2)(C) decrease: NSCL
    Basis at the end of the current year48,667
1019/2
  1. EFDG
    NSCI4040201010
    SSL-20-20-10-5-5
    D's stock basis as of...June 30December 31
    Begin Basis 1/11010
    SSI
    NSCI2010
    Distributions
    SSL-10-5
    NSCL
    End Basis2015
    AR minusABGain
    D's stock sale gain on June 30 sale251015
    D reports for year
    NSCI20 + 10 = 30
    SSL-10 + -5 = -15
    Stock sale gain15
  2. Election to treat as 2 tax years permitted but not made; allocate per share per day for entire year

    EFDG
    NSCI4040201020
    SSL-20-20-10-5-10
    D's stock basis as of...June 30
    Begin Basis 1/110
    SSI
    NSCI20
    Distributions
    NC/ND
    ......
    TY1 Jan 1 to Jun 30EFDG
    NSCI60202020
    SSL-60-20-20-20
    TY1 Jan 1 to Jun 30EFDG
    NSCI60202020
    SSL0
    D's stock basis as of...June 30
    Begin Basis 1/110
    SSI
    NSCI20
    Distributions
    NC/ND
    SSL20
    NSCL
    End Basis10
    50 10 40 20 -20 40 20 20 20 20 -20 -10 0 -10 40 30 D prefers election because stock sale gain is taxed at capital gain rates instead of ordinary loss
1020/3
  1. Harry owns 50 stock with 2 running basis. --4-- 2, 0 NSCL; 2 NSCI

    Dick loaned $4k to Acre and also had 2 running basis with 4, 0 NSCL; NSCI 4; debt basis = 4 - 2 = 2

  2. Harry owns 50 stock with 0 running basis. -3- 2 = 1, 1 NSCI from surplus NSCI; 1 NSCI

    Dick loaned $4k to Acre and also had 2 running basis with 3, 1 NSCI; debt basis = 2 + 2 = 4

  3. Shall not exceed (A) the adjusted basis of the shareholder's stock in the S corporation ... and (B) the shareholder's adjusted basis of any...
1022/1
DeweyMilt
BB$3,000$5,000
SSI$1,000$2,000
NSCI$3,000$6,000
Basis$7,000$13,000
  1. Dewey has his basis reduced to $2,000. Milt has his basis reduced to $3,000.
  2. Dewey has $1,000 stock sale gain. Milt has $3,000.
    • Nobody would actually do this.
  3. The 1k loss is gone forever. The 3k gain will either be capital gain or 1231 gain, but both are separately-stated items, so they will flow through proportionally. Dewey's basis would be increased to $8,000, and then reduced to $0 by the distribution to him.
  4. No § 311(b) gain. Just like problem (b).
1023/2

Long-term capital gain would be a separately-stated item, split $2,000 each.

    • P Corp has $10,000 AAA. ($6,000 + $4,000) This gets wiped out.
    • $5,000 AAA is applied against each's distribution, meaning no taxing or change in basis.
    • P Corp has $10,000 AAA and $6,000 E&P, but both are wiped out.
    • $5,000 AA is applied against each's distribution. $3,000 E&P is applied against each's distribution, giving each a dividend of $3,000. Then $4,000 is applied against each's basis, reducing Opal's to $1,000 and wiping out Nancy's (as well as giving her $31,000 stock sale gain).
      • Distribution is $7,000 under 1368(b) though? and there's $2,000 under 1368(c)?
  1. Nancy: 0 1, 2 0, 2 0, 3 8, -5 3, LTCG 2, NSCI 3, SSG 0, Div 2, TEI 2
  2. Generated 10 AAA in current year, and carried all over cuz no distributions. So Rose has $6,000 distribution, $5,000 out of AAA and $1,000 as a dividend out of E&P.
57
    1. A realized $70,000 gain, but recognized $0 because of 26 U.S.C. § 721. His adjusted basis is $30,000 under 26 U.S.C. § 722. His holding period is fully tacked on, assuming it has been held for more than a year because, although it is not a capital asset under 26 U.S.C. § 1221(1)(2), it is a 26 U.S.C. § 1231 asset.
    2. B realized $50,000 gain, but recognized $0 because of 26 U.S.C. § 721. His adjusted basis is $50,000 under 26 U.S.C. § 722. His holding period is divided and 50% tacked on, assuming it has been held for more than a year because, although it is not a capital asset under 26 U.S.C. § 1221(1)(2), it is a 26 U.S.C. § 1231 asset. The note is a capital asset. The equipment is a 26 U.S.C. § 1231 asset, except for the 26 U.S.C. § 1245 gain, which is just ordinary gain.
    3. C realized $50,000 gain, but recognized $0 because of 26 U.S.C. § 721. His adjusted basis is $50,000 under 26 U.S.C. § 722. His holding period is divided and 70% tacked on, assuming it has been held for more than a year because 70% of the fair market value, although not a capital asset under 26 U.S.C. § 1221(1)(2), is a 26 U.S.C. § 1231 asset.
    4. D realized and recognized $0 gain. His adjusted basis is $100,000 under 26 U.S.C. § 722. His holding period is not tacked on so it begins on the date of transfer.
  1. The partnership recognizes no gain and just takes the partners' bases.
61
InitialPartnership AssetsPartner Capital Accounts
Adjusted Basis under 26 U.S.C. § 723Book ValueAdjusted Basis under 26 U.S.C. § 722Book Value
Cash5050A5050
Land4050B4050
Securities5050C5050
  1. Partnership AssetsPartner Capital Accounts
    Adjusted Basis under 26 U.S.C. § 723Book ValueAdjusted Basis under 26 U.S.C. § 722Book Value
    Cash115115A5555
    Land4050B4555
    C5555
  2. Partnership AssetsPartner Capital Accounts
    Adjusted Basis under 26 U.S.C. § 723Book ValueAdjusted Basis under 26 U.S.C. § 722Book Value
  3. Tax gain = 65 - 40 = 25; Precntn b. 704(c) 10 to B; remaining 15: 5 to A; 5 to B; 5 to C

    1.704
    Partnership AssetsPartner Capital Accounts
    Adjusted Basis under 26 U.S.C. § 723Book ValueAdjusted Basis under 26 U.S.C. § 722Book Value including 26 CFR 1.704-1(b)(2) book gain
    Cash9090Bank300
    Parcel #2330330A14040
    B14040
    C14040
64
  1. Partnership AssetsPartner Capital Accounts
    Building$1,000,000$1,000,000Bank$900,000
    A$250,000$25,000
    B$250,000$25,000
    C$250,000$25,000
    D$250,000$25,000
  2. Partnership AssetsPartner Capital Accounts
    Building$1,000,000$1,000,000Bank$900,000
    A$250,000$25,000
    B$250,000$25,000
    C$250,000$25,000
    D$250,000$25,000
  3. Partnership AssetsPartner Capital Accounts
    Building$1,000,000$1,000,000Bank$900,000
    A$925,000$25,000
    B$25,000$25,000
    C$0$25,000
69/1
  1. Partnership AssetsPartnership Liabilities & Capital Accounts under 722 and 752
    Cash$60,000$60,000Bank$30,000
    Land$10,000$60,000A$40,000$30,000
    B$40,000$30,000
    C$0$30,000
  2. Partnership AssetsPartnership Liabilities & Capital Accounts under 722 and 752
    Cash$60,000$60,000Bank$30,000
    Land$40,000$60,000A$40,000$30,000
    B$40,000$30,000
    C$20,000$30,000
  3. Partnership AssetsPartnership Liabilities & Capital Accounts under 722 and 752
    Cash$60,000$60,000Bank$30,000
    Land$10,000$60,000A$33,333$30,000
    B$33,333$30,000
    C$3,333$30,000
102/1

LP is at risk for $10,000 for the R&D, as that is the amount of cash he contributed and nonrecourse debt is not at-risk, so that is the maximum amount of loss allowed for it. He therefore recognizes $13,000 in gain after combining the movie's $25,000 gain with the R&D loss, raising his basis to $53,000.

102/2
  1. $180,000
  2. $30,000
  3. $30,000
  4. $180,000
110/2

$70,000 gets through §704(d), $65,000 through §465, and $30,000 though §495, allocated proportionally as limited by §495 (~$4,620 for the movie, ~$6,920 for the equipment, and ~$18,460 for the R&D).

LP's basis would be $0 in the movie limited partnership, $80,000 for the equipment LLP, $30,000 more than the initial for the real estate limited partnership, and $20,000 for the R&D limited partnership.

$15,000 loss would be suspended under §704(d) and ~$5,380 under §469 for the movie, $5,000 under §465 and ~$8,080 under §469 for the equipment, and ~$24,540 under §469 for the R&D.