Tax 9

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PR 9-1

During the current year, Karen sells her entire interest in Central Corporation common stock for $22,000. She is the sole shareholder, and originally organized the corporation several years ago by contributing $89,000 in exchange fro her stock, which qualifies as Sec. 1244 stock. Since its incorporation, Central has been involved in the manufacture of items that protect personal computers from static electricity. Unfortunately, this market is extremely competitive, and Central Corporation incurs substantial losses throughout its existence.
Required: Solution
a. Assuming Karen is single, what are the amount and character of the loss recognized on the sale of the Central Corporation stock?
b. Assuming Karen is married and files a joint return, what are the amount and the character of the loss recognized on the sale of the Central Corporation stock?
c. How would your answer to Part a change if Karen had originally purchased the stock from another shareholder rather than organizing the corporation?
d. How might Karen have structured the transaction in Part a to receive a greater tax advantage?

PR 9-2

Five years ago, Brian and his brother Boyd formed Stewart Corp., a golf apparel manufacturing corporation. At that time, Brian contributed $300,000 to the corporation in exchange for 50% of its stock. During the current year, Brian needed some cash to purchase a golf course so he sold a third of his interest in Stewart Corp. for $85,000. He also sold stock in the following companies for the amounts indicated:
Corporation Sale Proceeds Adjusted Basis When Acquired
IBM $ 15,000 $ 10,000 52 months ago
Microsoft 25,000 45,000 18 months ago
Tidal Radio 32,000 12,000 7 months ago
Wavetable 20,000 26,000 4 months ago
During the year Brian hired a collection agency to collect a $14,000 loan he made to an old friend, which was due in full on January 1 of the current year. The agency found no trace of his friend. Also during the year, BTR Corporation, in which he owns stock, went bankrupt. His investment was worth $94,000 on January 1, he purchased it six years ago for $100,000, and he expects to receive only $8,000 in redemption of his stock. Finally, Brian's salary for the year was $114,000 for his work as an associate professor.
Required: Solution
a. What are the net gains and losses from the above items and their character?
b. What is Brian's AGI for the year assuming he has no other items of income or deduction?

PR 9-3

In the current year Alice reports $150,000 of salary income, $20,000 of income from activity X, and $35,000 and $15,000 losses from activities Y and Z, respectively. All three activities are passive with respect to Alice and are purchased during the current year.
Solution
Required:
a. What is the amount of loss that may be deducted with respect to each of these activities?
b. Compute the amount of loss that must be carried over for each activity.

PR 9-4

During the current year, Irene, a married individual who files a joint return, reports the following items of income and loss:
Item Amount
Salary $ 130,000
Activity X (passive) 10,000
Activity Y (rental real estate, nontrade or business) (30,000)
Activity Z (rental real estate, nontrade or business) (20,000)
Irene actively participates in activities Y and Z and owns 100% of both Y and Z.
Solution
Required:
a. What is Irene's AGI for the year?
b. What is the amount of suspended losses (if any) that may be carried over with respect to each activity?

PR 9-5

Jerry sprayed all of the landscaping around his home with a pesticide in June of the current year. Shortly thereafter, all of the trees and shrubs unaccountably died. The FMV and the adjusted basis of the plants were $15,000. Later in the year, the pesticide manufacturer announced a recall of the particular batch of pesticide that Jerry used. It also announced a program whereby consumers would be repaid any damage caused by the improper mixture. Jerry is single and reports $38,000 AGI in the current year and $42,000 in the subsequent year.
Required: Solution
a. Assume that in the current year Jerry files a claim for his losses and receives notification that payment of $15,000 will be received in the subsequent year; however, Jerry receives full payment for the damage in the current year. How should the loss and the reimbursement be reported?
b. How will your answer to Part a change if in the subsequent year the manufacturer files bankruptcy and Jerry receives $1,500 in total and final payment for his claim?
c. How will your answer to Part a change if the announcement and the reimbursement do not occur until late in the subsequent year, after Jerry has already filed his tax return for the previous tax year?

PR 9-6

Michelle and Mark are married and file a joint return. Michelle owns and unincorporated dental practice. Mark works part-time as a high school math teacher, and spends the remainder of his time caring for their daughter. During the current year, they report the following items:
Item Amount
Mark's salary $ 18,000
Interest earned on savings account 1,200
Interest paid on personal residence 7,100
Itemized deductions for state and local taxes 3,400
Items related to Michelle's dental practice
Revenues 65,000
Payroll and salary expense 49,000
Supplies 17,000
Rent 16,400
Advertising 4,600
Depreciation 8,100
Required: Solution
a. What is Michelle and Mark's taxable income or loss for the year?
b. What is Michelle and Mark's NOL for the year?