30. LO.1, 4 At the start of the current year, Blue Corporation (a calendar year taxpayer)<\/p>\n
has accumulated E & P of $100,000. Blue\u2019<\/b>s current E & P is $60,000, and at the end of<\/p>\n
the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon.<\/p>\n
Pam\u2019<\/b>s stock basis is $11,000; Jon\u2019<\/b>s stock basis is $26,000. How is the distribution treated<\/p>\n
for tax purposes?<\/p>\n
33. LO.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following<\/p>\n
transactions in 2013, its second year of operation.<\/p>\n
Taxable income $330,000<\/p>\n
Federal income tax liability paid 112,000<\/p>\n
Tax-exempt interest income 5,000<\/p>\n
Meals and entertainment expenses (total) 3,000<\/p>\n
Premiums paid on key employee life insurance 3,500<\/p>\n
Increase in cash surrender value attributable to life insurance premiums 700<\/p>\n
Proceeds from key employee life insurance policy 130,000<\/p>\n
Cash surrender value of life insurance policy at distribution 20,000<\/p>\n
Excess of capital losses over capital gains 13,000<\/p>\n
MACRS deduction 26,000<\/p>\n
Straight-line depreciation using ADS lives 16,000<\/p>\n
Section 179 expense elected during 2012 100,000<\/p>\n
Dividends received from domestic corporations (less than 20% owned) 25,000<\/p>\n
Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by<\/p>\n
$10,000 during 2013. In addition, Sparrow sold property on installment during 2012.<\/p>\n
The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During<\/p>\n
2013, Sparrow received a $15,000 payment on the installment sale. Finally, assume that<\/p>\n
no additional first-year depreciation was claimed. Compute Sparrow\u2019<\/b>s current E & P.<\/p>\n
F<\/p>\n
42. LO.1, 2, 3, 4, 5 Cerulean Corporation has two equal shareholders, Eloise and Olivia.<\/p>\n
Eloise acquired her Cerulean stock three years ago by transferring property worth<\/p>\n
$700,000, basis of $300,000, for 70 shares of the stock. Olivia acquired 70 shares in Cerulean<\/p>\n
Corporation two years ago by transferring property worth $660,000, basis of<\/p>\n
$110,000. Cerulean Corporation\u2019<\/b>s accumulated E & P as of January 1 of the current year<\/p>\n
is $350,000. On March 1 of the current year, the corporation distributed to Eloise property<\/p>\n
worth $120,000, basis to Cerulean of $50,000. It distributed cash of $220,000 to Olivia.<\/p>\n
On July 1 of the current year, Olivia sold her stock to Magnus for $820,000. On<\/p>\n
December 1 of the current year, Cerulean distributed cash of $90,000 each to Magnus<\/p>\n
and Eloise. What are the tax issues?<\/p>\n
44. LO.2, 6 Parrot Corporation is a closely held company with accumulated E & P of<\/p>\n
$300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50%<\/p>\n
share in Parrot, and they share management responsibilities equally. What are the tax<\/p>\n
consequences of each of the following independent transactions involving Parrot, Tom,<\/p>\n
and Jerry? How does each transaction affect Parrot\u2019<\/b>s E & P?<\/p>\n
a. Parrot sells an office building (adjusted basis of $350,000; fair market value of<\/p>\n
$300,000) to Tom for $275,000.<\/p>\n
b. Parrot lends Jerry $250,000 on March 31 of this year. The loan is evidenced by a note<\/p>\n
and is payable on demand. No interest is charged on the loan (the current applicable<\/p>\n
Federal interest rate is 7%).<\/p>\n
c. Parrot owns an airplane that it leases to others for a specified rental rate. Tom and<\/p>\n
Jerry also use the airplane for personal use and pay no rent. During the year, Tom<\/p>\n
used the airplane for 120 hours, and Jerry used it for 160 hours. The rental value of<\/p>\n
the airplane is $350 per hour, and its maintenance costs average $80 per hour.<\/p>\n
d. Tom leases equipment to Parrot for $20,000 per year. The same equipment can be<\/p>\n
leased from another company for $9,000 per year.<\/p>\n
51. LO.8, 9 Robert and Lori (Robert\u2019<\/b>s sister) own all of the stock in Swan Corporation<\/p>\n
(E & P of $1 million). Each owns 500 shares and has a basis of $85,000 in the shares.<\/p>\n
Robert wants to sell his stock for $600,000, the fair market value, but he will continue to<\/p>\n
be employed as an officer of Swan Corporation after the sale. Lori would like to purchase<\/p>\n
Robert\u2019<\/b>s shares and, thus, become the sole shareholder in Swan, but Lori is short<\/p>\n
of funds. What are the tax consequences to Robert, Lori, and Swan Corporation under<\/p>\n
the following circumstances?<\/p>\n
a. Swan Corporation distributes cash of $600,000 to Lori, and she uses the cash to purchase<\/p>\n
Robert\u2019<\/b>s shares.<\/p>\n
b. Swan Corporation redeems all of Robert\u2019<\/b>s shares for $600,000.of funds. What are the tax consequences to Robert, Lori, and Swan Corporation under<\/p>\n
the following circumstances?<\/p>\n
a. Swan Corporation distributes cash of $600,000 to Lori, and she uses the cash to purchase<\/p>\n
Robert\u2019<\/b>s shares.<\/p>\n
b. Swan Corporation redeems all of Robert\u2019<\/b>s shares for $600,000.<\/p>\n","protected":false},"excerpt":{"rendered":"
30. LO.1, 4 At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $100,000. Blue\u2019s current E & P is $60,000, and at the end of the year, it distributes $200,000 Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-50146","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/50146","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=50146"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/50146\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=50146"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=50146"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=50146"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}