Reference no: EM133110838

Questions - Answer each of the following questions and reference all related Internal Revenue Code sections, Treasury regulations, and Revenue Procedures.

Q1) X, Y, and Z have decided to form JW a C corporation. X will transfer land with a basis of $100,000 and a fair market value of $500,000. Y will transfer $400,000 cash. Z will perform services. Consider the following alternative proposals and discuss whether the corporation and individuals recognize gains, losses, or ordinary income.

a) X receives 500 shares and Y receives 400 shares of JW stock. Z receives 300 shares of JW stock and agrees to perform services valued at $60,000 per year for five years. (assume the value of the stock is $1,000 per share)

b) Same as a) above, except Z transfers $300,000 for the JW stock.

c) Same as a) above, except Z transfers $3,000 for the JW stock.

d) Same as a) above, except Z transfers $40,000 for the JW stock.

e) How should Z treat the $60,000 annual payments ?

Q2) A transfers a building (with a basis of $10,000 and a fair market value of $100,000) to JW corporation (a C corporation) in exchange for all of the corporation's stock (fair market value $50,000) and a JW corporate Promissory Note of $50,000.

a) What is the realized gain to A?

b) What is the recognized gain to A?

c) What is A's basis in the stock?

d) What is the corporation's basis in the building?

Q3) A forms a C corporation by transferring $10,000 in exchange for stock. A also loans the corporation $1,000,000 at 10% per year, with principal repayable at $100,000 per year 10 years. The corporation then makes the annual principal and interest payment for a period of 3 years to A. At the end of the 3rd year the Internal Revenue Service audits the corporate and A's individual tax returns for the 3 years and is successful in arguing that all of the debt (e.g. $1,000,000) was really equity. What are the tax implications to both A and the corporation?

Q4) JW corporation is owned and operated by A and B. A and B formed this C corporation 10 years ago by each transferring $400,000 in exchange for all of the stock of the corporation. C has decided to invest $200,000 in JW corporation. If C's investment becomes totally worthless after the third year, how should C recognize the loss in the following situations?

The investment was made in the following manner;

a) A $200,000 JW unregistered 5 year Note, bearing interest at market rate.

b) A $200,000 JW registered 5 year Note, bearing interest at market rate.

c) $200,000 of JW stock.

d) Same as c) above, except A and B originally capitalized the corporation by each transferring $500,000.

e) Same as c) above, except C and his partner D purchased the JW stock through their partnership.

Q5) Bill owns all of the common stock of Big corporation. Bill has a $5,000 basis in his Big stock. What are the tax effects to Bill in each of the following situations (show all calculations)?

a) In year one Big has $50,000 of current earnings and profits and no accumulated earnings and profits. Big distributes $70,000 to Bill.

b) Assume Big has a $50,000 accumulated deficit in earnings and profits at the beginning of year two. In year two Big has $20,000 of current earnings and profits and distributes $20,000 to Bill.

c) Assume Big has a $15,000 accumulated deficit in earnings and profits at the beginning of year three. In year three Big has $25,000 of current earnings and profits and distributes $35,000 to Bill (also assume Bill's basis in his stock is zero).

d) Assume Big distributes an asset to Bill which has a basis of $10,000 and a fair market value of $50,000. What are the tax effects to Big? (gain or loss and effect on earnings and profits)

Q6) Betty owns 6000 shares (60%) of a corporation and is President of the company. The corporation then redeemed all 6000 of Betty's shares for cash. Under the terms of the redemption Betty will remain as President of the company for the next three years at an annual salary of $100,000. Does Betty qualify for capital gains treatment (explain) under the following Code sections? Assume none of Betty's family members own any stock in the corporation.

a) 302(b)(2)

b) 302(b)(3)

c) 302(b)(4)

d) Assume that Betty does not qualify for capital gains treatment under Code section 302(b). What Code section or Code sections would apply to the redemption?

Q7) John owns 1000 shares (100%) of a corporation. John's basis in his stock is $100,000. The corporation adopted a plan of complete liquidation under which all of the assets of the corporation will be distributed to John in exchange for all of his stock. The corporate assets have a fair market value of $600,000 and the corporation's basis in the assets is $50,000. The corporation has accumulated earnings and profits of $100,000 at the time of liquidation.

a) Does the corporation recognize a gain or loss upon the liquidation (show all calculations)?

b) Does John recognize a gain or loss upon the liquidation (show all calculations)?

c) Does Code section 301 apply to this distribution to John (explain)?

d) What is John's basis in the assets received (show all calculations)?

e) Will the corporation satisfy the requirements of a complete liquidation if it does not terminate the corporate existence under State law (explain)?