Federal Taxation Ch.19 Homework

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’s current E & P is $60,000, and at the end of

the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon.

Pam’s stock basis is $11,000; Jon’s stock basis is $26,000. How is the distribution treated

for tax purposes?

33. LO.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following

transactions in 2013, its second year of operation.

Taxable income $330,000

Federal income tax liability paid 112,000

Tax-exempt interest income 5,000

Meals and entertainment expenses (total) 3,000

Premiums paid on key employee life insurance 3,500

Increase in cash surrender value attributable to life insurance premiums 700

Proceeds from key employee life insurance policy 130,000

Cash surrender value of life insurance policy at distribution 20,000

Excess of capital losses over capital gains 13,000

MACRS deduction 26,000

Straight-line depreciation using ADS lives 16,000

Section 179 expense elected during 2012 100,000

Dividends received from domestic corporations (less than 20% owned) 25,000

Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by

$10,000 during 2013. In addition, Sparrow sold property on installment during 2012.

The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During

2013, Sparrow received a $15,000 payment on the installment sale. Finally, assume that

no additional first-year depreciation was claimed. Compute Sparrow’s current E & P.

F

42. LO.1, 2, 3, 4, 5 Cerulean Corporation has two equal shareholders, Eloise and Olivia.

Eloise acquired her Cerulean stock three years ago by transferring property worth

$700,000, basis of $300,000, for 70 shares of the stock. Olivia acquired 70 shares in Cerulean

Corporation two years ago by transferring property worth $660,000, basis of

$110,000. Cerulean Corporation’s accumulated E & P as of January 1 of the current year

is $350,000. On March 1 of the current year, the corporation distributed to Eloise property

worth $120,000, basis to Cerulean of $50,000. It distributed cash of $220,000 to Olivia.

On July 1 of the current year, Olivia sold her stock to Magnus for $820,000. On

December 1 of the current year, Cerulean distributed cash of $90,000 each to Magnus

and Eloise. What are the tax issues?

44. LO.2, 6 Parrot Corporation is a closely held company with accumulated E & P of

$300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50%

share in Parrot, and they share management responsibilities equally. What are the tax

consequences of each of the following independent transactions involving Parrot, Tom,

and Jerry? How does each transaction affect Parrot’s E & P?

a. Parrot sells an office building (adjusted basis of $350,000; fair market value of

$300,000) to Tom for $275,000.

b. Parrot lends Jerry $250,000 on March 31 of this year. The loan is evidenced by a note

and is payable on demand. No interest is charged on the loan (the current applicable

Federal interest rate is 7%).

c. Parrot owns an airplane that it leases to others for a specified rental rate. Tom and

Jerry also use the airplane for personal use and pay no rent. During the year, Tom

used the airplane for 120 hours, and Jerry used it for 160 hours. The rental value of

the airplane is $350 per hour, and its maintenance costs average $80 per hour.

d. Tom leases equipment to Parrot for $20,000 per year. The same equipment can be

leased from another company for $9,000 per year.

51. LO.8, 9 Robert and Lori (Robert’s sister) own all of the stock in Swan Corporation

(E & P of $1 million). Each owns 500 shares and has a basis of $85,000 in the shares.

Robert wants to sell his stock for $600,000, the fair market value, but he will continue to

be employed as an officer of Swan Corporation after the sale. Lori would like to purchase

Robert’s shares and, thus, become the sole shareholder in Swan, but Lori is short

of funds. What are the tax consequences to Robert, Lori, and Swan Corporation under

the following circumstances?

a. Swan Corporation distributes cash of $600,000 to Lori, and she uses the cash to purchase

Robert’s shares.

b. Swan Corporation redeems all of Robert’s shares for $600,000.of funds. What are the tax consequences to Robert, Lori, and Swan Corporation under

the following circumstances?

a. Swan Corporation distributes cash of $600,000 to Lori, and she uses the cash to purchase

Robert’s shares.

b. Swan Corporation redeems all of Robert’s shares for $600,000.

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