During the current year, Swallow corporation, a calendar year C corporation, has the following transactions:
income from operations $660,000
Expenses from operations $720,000
Dividends received from Brown Corp $240,000
a. Swallow Corporation owns 12% of Brown Corporation’s stock. How much is Swallow’s taxable income or NOL for the year?
b. Assume instead that Swallow Corporation owns 26% of Brown Corporation’s stock. How much is Swallow’s taxable income or NOL for the year?
The following information for 2014 relates to Sparrow Corporation, a calendar year, accrual method taxpayer.
Net income per books (after tax) $174,100
Federal income tax expense per books $86,000
Tax-exempt interest income $4,500
MACRS Depreciation in excess of straight-line depreciation
used for financial statement purposes $7,200
Excess of capital loss over capital gains $9,400
Nondeductible meals and entertainment $5,500
Interest on loan to purchase tax-exempt bonds $1,100
based on the above information, use schedule M-1 of Form 1120, which is available on the IRS website, to determine Sparrow’s taxable income for 2014.
Cynthia, a sole proprietor, was engaged in a service business and reported her income on the cash basis. On February 1, 2014, she incorporates her business as Dove Corporation and transfers the assets of the business to the corporation in return for all of the stock in addition to the corporation’s assumption of her proprietorship’s liabilities. All of the receivables and the unpaid trade payables are transferred to the newly formed corporation. The balance sheet of the corporation immediately after its formation is as follows:
Dove Corporation
Balance Sheet
February 1, 2014
Assets
Basis to Dove Fair Market Value
Cash $ 80,000 $ 80,000
Accounts receivable –0– 240,000
Equipment (cost $180,000; depreciation previously claimed $60,000) 120,000 320,000
Building (straight-line depreciation) 160,000 400,000
Land 40,000 160,000
Total $400,000 $1,200,000
Liabilities and Stockholder’s Equity
Liabilities:
Accounts payable—trade $ 120,000
Notes payable—bank 360,000
Stockholder’s equity:
Common stock 720,000
Total $1,200,000
Discuss the tax consequences of the incorporation of the business to Cynthia and to Dove Corporation.
Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The corporation’s assets have a tax basis of $50,000 and a fair market value of $600,000. In the current year, Frank and Cora each loan Purple Corporation $150,000. The notes to Frank and Cora bear interest of 8% per annum. Mitch leases equipment to Purple Corporation for an annual rental of $12,000. Discuss whether the shareholder loans from Frank and Cora might be reclassified as equity. Consider in your discussion whether Purple Corporation has an acceptable debt-equity ratio.
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