Acc 455 week 2 problem set

Discussion Questions

C:23

Bruce and Bob organize Black LLC on May 10 of the current year. What is the entity’s default tax classification? Are any alternative classification(s) available? If so, (1) how do Bruce and Bob elect the alternative classification(s) and (2) what are the tax consequences of doing so?

Comprehensive Problems

C:254

On March 1 of the current year, Alice, Bob, Carla, and Dick form Bear Corporation and transfer the following items:

Property Transferred

Transferor

Asset

Basis to Transferor

FMV

Number of Common Shares Issued

Alice

Land

$12,000

$30,000

Building

38,000

70,000

400

Mortgage on the land and building

60,000

60,000

Bob

Equipment

25,000

40,000

300

Carla

Van

15,000

10,000

50

Dick

Accounting services

–0–

10,000

100

Alice purchased the land and building several years ago for $12,000 and $50,000, respectively. Alice has claimed straight-line depreciation on the building. Bob also receives a Bear note for $10,000 due in three years. The note bears interest at the prevailing market rate. Bob purchased the equipment three years ago for $50,000. Carla also receives $5,000 cash. Carla purchased the van two years ago for $20,000.

1. Does the transaction satisfy the requirements of Sec. 351?

2. What are the amount and character of the gains or losses recognized by Alice, Bob, Carla, Dick, and Bear?

3. What is each shareholder’s basis in his or her Bear stock? When does the holding period for the stock begin?

4. What is Bear’s basis in its property and services? When does the holding period for each property begin?

C:255

On June 3 of the current year, Eric, Florence, and George form Wildcat Corporation and transfer the following items:

Item Transferred

Transferor

Asset

Basis to Transferor

FMV

Number of Common Shares Issued

Eric

Land

$200,000

$50,000

500

Florence

Equipment

–0–

25,000

250

George

Legal services

–0–

25,000

250

Eric purchased the land (a capital asset) five years ago for $200,000. Florence purchased the equipment three years ago for $48,000. The equipment has been fully depreciated.

1. Does the transaction meet the requirements of Sec. 351?

2. What are the amount and character of the gains or losses recognized by Eric, Florence, George, and Wildcat?

3. What is each shareholder’s basis in his or her Wildcat stock? When does the holding period for the stock begin?

4. What is Wildcat’s basis in the land, equipment, and services? When does the holding period for each property begin?

Tax Strategy Problems

C:256

Assume the same facts as in Problem C:2-55.

1. Under what circumstances is the tax result in Problem C:2-55 beneficial, and for which shareholders?

2. Can you suggest ways to enhance the tax benefit?

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