WEEK 2 HOMEWORK QUESTIONS

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Week 2 Homework Questions

C:2.4-7

Identify which of the following statements is true.

Section 351 was enacted to allow taxpayers to incorporate without incurring adverse tax consequences.

The exchange of stock for services rendered is not a taxable transaction.

The repeal of Sec. 351 would result in more existing businesses being incorporated.

All of the above are false.

C:2.4-9

For Sec. 351 purposes, the term "property" does not include

cash.

inventory.

accounts receivable.

services rendered.

C:2.4-12

Jermaine owns all 200 shares of Peach Corporation stock valued at $50,000. Kenya, a new shareholder, receives 200 newly issued shares from Peach Corporation in exchange for inventory with an adjusted basis of $40,000 and an FMV of $50,000. Which of the following statements is correct?

Kenya may defer the recognition of any tax until the stock is sold.

The transaction results in $10,000 of ordinary income for Kenya.

No gain will be recognized by Kenya.

The transaction results in $10,000 of capital gain for Kenya.

C:2.4-14

Barry, Dan, and Edith together form a new corporation; Barry and Dan each contribute property in exchange for stock. Within two weeks after the formation, the corporation issues additional stock to Edith in exchange for property. Barry and Dan each hold 10,000 shares and Edith will receive 9,000 shares. Which transactions will qualify for nonrecognition?

Only the first transaction will qualify for nonrecognition.

Only the second transaction will qualify for nonrecognition.

Because of the step transaction doctrine, neither transaction will qualify.

Both transactions will qualify under Sec. 351 if they are part of the same plan of incorporation.

QC:3-1 (book/static)

High Corporation incorporates on May 1 and begins business on May 10 of the current year. What alternative tax years can High elect to report its initial year's income?

Unless High Corporation is an S corporation or a personal service corporation, High can select a tax year ending on the last day of any month.

Unless High Corporation is a personal service corporation, High can select May 31 or December 31 as a tax year.

High Corporation can only select May 31 as its tax year since that is the month of incorporation, or December 31.

High Corporation cannot select its tax year. The IRS must determine the company's tax year. Therefore, High Corporation must wait for the IRS's written statement that is mailed after incorporation takes place.

QC:3-4 (book/static)

Compare the tax treatment of capital gains and losses by a corporation and by an individual.

Corporations and individuals compute capital gains and losses the same way. However, corporations have a preferential tax rate for net capital gains that is lower than the ordinary income rate of corporations, so more corporations invest for gains.

Corporations can net capital losses with ordinary income since they are taxed at the same rate. However, individuals can only carry losses forward for an indefinite period.

Corporations and individuals compute capital gains and losses the same way. However, corporations cannot deduct capital losses from ordinary income, and instead carry a capital loss back three years and forward five years to offset capital gains. Individuals carry losses forward for an indefinite period.

Capital gains are computed the same way for corporations and individuals. However, capital losses are treated as a carry back of 5 years and a carry forward of 20 years for corporations. Individuals can only take capital losses in the year they are incurred

QC:3-6 (book/static)

What are start-up expenditures? How are they treated for tax purposes?

Start-up expenditures are ordinary and necessary business expenses paid or incurred to investigate the creation or acquisition of an active trade or business, to create an active trade or business, or to conduct an activity engaged in for profit or the production of income before the time the activity becomes an active trade or business. A corporation can elect to deduct the first $5,000 of the expenditures and amortize the remainder over a period of 180 months starting with the month in which an active trade or business begins.

Start-up expenditures are outlays incident to the creation of a corporation, chargeable to the corporation's capital account, and of a character that would be amortizable if the corporation had a limited life. A corporation can elect to deduct the first $500 of the expenditures and amortize the remainder over a period of 72 months starting with the month in which the corporation begins business operations.

Start-up expenditures are ordinary and necessary business expenses paid or incurred to investigate the creation or acquisition of an active trade or business, to create an active trade or business, or to conduct an activity engaged in for profit or the production of income before the time the activity becomes an active trade or business. A corporation can elect to deduct the first $500 of the expenditures and amortize the remainder over a period of 72 months starting with the month in which an active trade or business begins.

Start-up expenditures are outlays incident to the creation of a corporation, chargeable to the corporation's capital account, and of a character that would be amortizable if the corporation had a limited life. A corporation can elect to deduct the first $5,000 of the expenditures and amortize the remainder over a period of 180 months starting with the month in which the corporation begins business operations.

QC:3-10 (book/static)

Why are corporations allowed a dividends-received deduction? What dividends qualify for this special deduction?

Corporations are allowed a dividends-received deduction to prevent abuse in situations where a corporation is closely held. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 70%, 80%, or 100% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are not eligible.

Corporations are allowed a dividends-received deduction to partially or fully mitigate the effects of multiple taxation of corporate earnings. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 60%, 70%, or 80% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are eligible.

Corporations are allowed a dividends-received deduction to partially or fully mitigate the effects of multiple taxation of corporate earnings. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 70%, 80%, or 100% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are not eligible.

Corporations are allowed a dividends-received deduction to prevent abuse in situations where a corporation is closely held. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 60%, 70%, or 80% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are eligible.

PC:3-34 (similar to)

Cedar

Corporation incorporates on January 7, begins business on July 10, and elects to have its initial tax year end on

September

Cedar

incurs the following expenses between January and

September

related to its organization during the current year:

(Click

on the icon to view list of expenses.)

Requirement

What alternative treatments are available for

Cedar

expenditures?

What amount of organizational expenditures can

Cedar

Corporation deduct on its first tax return for the fiscal year ending

September

What amount of start-up costs can

Cedar

Corporation deduct on its first tax return?

Requirement a. What alternative treatments are available for

Cedar

expenditures?

Select the tax treatment for each expenditure. Begin with the expenditures incurred through June 1. Then, complete the table for the expenditures through July 15.

Date	Expenditure	Amount	Treatment
January 30	Travel to investigate potential business site	$2,500
May 15	Legal expenses to draft corporate charter	4,500
May 30	Commissions to stockbroker for issuing and selling stock	3,500
May 30	Temporary directors' fees	2,600
June 1	Expense of transferring building to Cedar	3,000

PC:3-39 (similar to)

Gala

Corporation reports the following results for the current year:

(Click

the icon to view the results.)

Read the

requirements

Requirement a. What is

Gala

taxable income for the current year, assuming qualified production activities income is

$ 1 comma 000

(If a box is not used in the table, leave the box empty; do not enter a zero. Use parentheses or a minus sign for a

NOL .)

	Part a
Gross profit on sales
Dividends
Gross income
Minus: Operating expenses
Taxable income before dividends-received deduction
Dividends-received deduction
U.S. production activities deduction
Taxable income (NOL)

PC:3-43 (similar to)

Delta

Corporation reports the following results for the current year:

(Click

on the icon to view the results for the current year.)

In addition,

Delta

has a

$ 47 comma 000

NOL carryover from the preceding tax year, and its qualified production activities income is

$ 120 comma 000

Requirements

What is

Delta's

taxable income for the current year?

What carrybacks or carryovers are available to other tax years?

Requirement a. What is

Delta's

taxable income for the current year?

Begin by computing

Delta

taxable income before special deductions. (Enter the special deductions in the specific sequence dictated by the tax rules.)



Gross income
Minus:

Taxable income before special deductions

PC:3-33 (similar to)

Lambda

Corporation sold the following property on

March

3 of the current year:

(Click

the icon to view the property sold.)

Aside from these transactions,

Lambda

had

$ 740 comma 000

of operating net income during the current year.

Lambda

has a

$ 28 comma 000

nonrecaptured Sec. 1231 loss from prior years.

Requirement

Determine the character of the gains and losses, and calculate the corporation's taxable income. Ignore the U.S. production activities deduction.

Begin by calculating the total depreciation recapture, if any. (If a box is not used in the table, leave the box empty; do not select a label or enter a zero.)




Total depreciation recapture

PC:3-37 (similar to)

Zaide

Corporation reports the following results for Year 1 and Year 2:

	Year 1	Year 2
Adjusted taxable income	$170,000	$250,000
Charitable contributions (cash)	22,500	24,000

The adjusted taxable income is before

Zaide

claims any charitable contributions deduction, NOL or capital loss carryback, dividends-received deduction, or U.S. production activities deduction.

Read the

requirements

Requirement a. How much is

Zaide

charitable contributions deduction in Year 1? In Year 2?

Zaide's charitable contributions deduction in Year 1 is $

PC:3-41 (similar to)

Amber

Corporation purchased for

$ 700 comma 000

7 comma 000

shares of Beer Corporation common stock (less than 5% of the outstanding Beer stock) at the beginning of the current year. It used

$ 630 comma 000

of borrowed money and

$ 70 comma 000

of its own cash to make this purchase.

Amber

paid

$ 63 comma 000

of interest on the debt this year.

Amber

received a

$ 55 comma 000

cash dividend on the Beer stock on September 1 of the current year.

Requirements

What amount can

Amber

deduct for the interest paid on the loan?

What dividends-received deduction can

Amber

claim with respect to the dividend?

Requirement a. What amount can

Amber

deduct for the interest paid on the loan?

Amber

▼

can't deduct

may deduct 80% of

may deduct 90% of

may deduct all

the interest paid on the loan.

PC:3-43 (similar to)

Alpha

Corporation reports the following results for the current year:

(Click

on the icon to view the results for the current year.)

In addition,

Alpha

has a

$ 49 comma 000

NOL carryover from the preceding tax year, and its qualified production activities income is

$ 95 comma 000

Requirements

What is

Alpha's

taxable income for the current year?

What carrybacks or carryovers are available to other tax years?

Requirement a. What is

Alpha's

taxable income for the current year?

Begin by computing

Alpha

taxable income before special deductions. (Enter the special deductions in the specific sequence dictated by the tax rules.)



Gross income
Minus:

Taxable income before special deductions

PC:3-44 (similar to)

Eco

Corporation sells a truck for

$ 22 comma 000

Jaime

who owns

of its stock. The truck has a

$ 30 comma 000

adjusted basis on the sale date.

Jaime

sells the truck to an unrelated party,

Murphy

for

$ 40 comma 000

two years later after claiming

$ 7 comma 000

in depreciation.

Requirements

What is

Eco

realized and recognized gain or loss on selling the truck?

What is

Jaime

realized and recognized gain or loss on selling the truck to

Murphy

How would your answers to Part b change if

Jaime

instead sold the truck for

$ 5 comma 000

Requirement a. What is

Eco

realized and recognized gain or loss on selling the truck?

Begin by computing the realized gain or loss. (Use parentheses or a minus sign for a loss.)

	-		=	Realized gain (loss)
	-		=

PC:2-34 (similar to)

Hulio

Hank

and

Carson

form

Comptrol

Corporation and transfer the following items to

Comptrol

(Click

the icon to view the items transferred.)

Requirements

a.	Is the exchange nontaxable under Sec. 351? Explain the tax consequences of the exchange to Hulio

Hank

Carson

and

Comptrol

How would your answer to Part a change if

Hank

instead had received

260

shares of common stock and

260

shares of preferred stock?

How would your answer to Part a change if

Carson

instead had contributed

$ 1 comma 000

cash as well as services worth

$ 10 comma 000

Requirement a. Is the exchange nontaxable under Sec. 351? Explain the tax consequences of the exchange to

Hulio

Hank

Carson

and

Comptrol

as nontaxable under Sec. 35

PC:2-41 (similar to)

Nicole

transfers to

Houston

Corporation depreciable machinery originally costing

$ 17 comma 000

and now having a(n)

$ 13 comma 000

adjusted basis. In exchange,

Nicole

receives all

shares of

Houston

stock having a(n)

$ 19 comma 000

FMV

and a three-year

Houston

note having a(n)

$ 9 comma 000

FMV.

Requirements

What are the amount and character of

Nicole

recognized gain or loss?

What are

Nicole

bases in the

Houston

stock and note?

What is

Houston

basis in the machinery?

Requirement a. What are the amount and character of

Nicole

recognized gain or loss?

Nicole realizes a(n)

and recognizes a(n)