ACCOUNTING-ACC 634 Advanced Business Taxation Fall 2015

QUESTION

ACC 634
Advanced Business Taxation

Fall 2015

Quiz
DUE:
Tuesday, October 20th (beginning of class)

·
the
text, your notes, Checkpoint, etc. may all be consulted.
·
The
quiz consists of 6 questions. You must
complete all of the questions.
·
Be
certain to answer each of the questions completely. Provide full explanations in complete
sentences and show all of your work in arriving at any numerical answers. Your work must be typed.
·
Point
values are as indicated (100 points total)

1. Assume that the only judicial
precedents relating to a particular tax issue are as follows:

Court Decision
Tax
Court decided for the taxpayer
8th Circuit Court of
Appeals decided for the taxpayer (affirming the
Tax
Court)
U.S.
District Court of E. Louisiana decided for the taxpayer
5th Circuit Court of
Appeals decided
for the government (reversing the

U.S. District Court of E. Louisiana)

Required:

a.
Discuss the precedential value of
the foregoing decisions to your client, who is a California resident.

b.
If your client, a Texas resident, litigates this particular issue in the
Tax Court, how

will the Court rule?

10
points.

2. Joker
Corporation owns 80% of Klue Corporation.
Joker Corporation also owns 45% of
Lion
Corporation and 45% of Mark Corporation.
Klue Corporation owns 40% of Lion Corporation and 10% of Mark
Corporation.

Required: Are any of the corporations
members of a “controlled group”? If yes,
what type?

10 points
3. Brad, Otis, Wade and Andrea
form Teal Corporation with the following investments:

Basis to Shares
Transferor FMV Issued

From Brad—
Personal services rendered
to
Teal Corporation $
-0- $30,000 30

From Otis—
Equipment $345,000 $300,000 270

From Wade—
Cash $60,000 $60,000
Unrealized accounts receivable
-0- 90,000 150

From Andrea—
Land and building $210,000 $450,000
Mortgage on land and building
300,000 300,000 150

The mortgage transferred by
Andrea is assumed by Teal Corporation.
The value of each share of Teal Corporation stock is $1,000. Otis receives $30,000 cash in addition to the
270 shares.

Required: What
are the tax consequences to each of the transferors and Teal Corporation
as a result of the formation?

25
points.

4.
Eric
operates a drycleaning business as a sole proprietorship. The business operates in a building that Eric
owns. Last year, he borrowed $150,000 by
placing a mortgage on the building and the land on which the building
sits. He used the money for a
downpayment on his personal residence and college expenses for his two
children. He now wants to incorporate
his business and transfer the building and the mortgage to the new corporation
along with other assets and some accounts payable. The amount of the unpaid mortgage balance will
not exceed Eric’s adjusted basis for the land and building at the time he
transfers it to the corporation.

Required: Explain
to Eric the tax consequences of this proposed corporate formation. You need not address the tax consequences to
the Corporation.

15 points.
5. Laser Corporation owns three
machines that it uses in its business.
It no longer needs two
of these machines and is considering distributing them to its two shareholders
as a property distribution. All three machines have a fair market value of
$40,000. The basis of each machine is as follows:

Machine
A $47,000
Machine
B $40,000
Machine
C $32,000

Required: a. Explain fully the tax consequences of
each proposed distribution to both the shareholder and Laser Corporation. Assume sufficient E&P for all distributions.

b. What is your recommendation?

15 points

6. Jackson Corporation is owned by three
individuals: Annie, Betty, and Charlotte.
There is one class of voting common stock outstanding. Annie owns 40 shares with a basis of $100 per
share. Betty owns 25 shares with a basis
of $100 per share. Charlotte owns 35
shares with a basis of $50 per share.
All of the shareholders have held their stock interests for over one
year. The fair market value of the
common stock is $200 per share. Jackson
Corporation has E&P of $5,000.

Required: What are the tax consequences to the shareholders under each
of the following alternative redemption transactions (ie. amount and character
of any realized or recognized gain or loss and basis of any remaining shares)? For each
transaction, be sure to discuss the applicability of §302(b)(1), (2), and
(3).

a.
Jackson
redeems 10 shares from Annie for $200 per share. All of the shareholders are unrelated.

b.
Jackson
redeems all 25 of Betty’s shares for $80 per share. Betty is Annie’s granddaughter. Charlotte is unrelated to the other
shareholders.

c.
Jackson
redeems 25 shares from Annie for $200 per share. Charlotte is Annie’s mother. Betty is unrelated to the other
shareholders. Charlotte and Annie have
been estranged due to a bitter feud for over 15 years.

d. Jackson redeems 10 shares from Betty
for $200 per share. Shortly thereafter,
Jackson redeems 15 shares from Charlotte for $200 per share in an exchange that
had been agreed to during the preceding year.
All of the shareholders are unrelated.
Discuss the tax consequences to Betty only.

25 points

ANSWER:

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