Research Problems
Research Problem 1. Lynn Jones, Shawn, Walt, and Donna are trying to decide whether they should organize a corporation and transfer their shares of stock in several corporations to this new corporation. All of their shares are listed on the New
York Stock Exchange and are readily marketable. Lynn would transfer shares in
Brown Corporation, Shawn would transfer stock in Rust Corporation, Walt would transfer stock in White Corporation, and Donna would transfer stock in several corporations.
The stock would be held by the newly formed corporation for investment purposes. Lynn asks you, her tax adviser, whether she would have gain on the transfer of her substantially appreciated shares in Brown Corporation if she transferred the shares to a newly formed corporation. Your input will be critical as they make their decision. Prepare a letter to your client, Lynn Jones, and a memo for the firm’s files. Lynn’s address is 1540 Maxwell Avenue, Highland, KY 41099.
Research Problem 2. Tim is a real estate broker who specializes in commercial real estate. Although he usually buys and sells on behalf of others, he also maintains a portfolio of property of his own. He holds this property, mainly unimproved land, either as an investment or for sale to others.
In early 2014, Irene and Al contact Tim regarding a tract of land located just outside the city limits. Tim bought the property, which is known as the Moore farm, several years ago for $600,000. At that time, no one knew that it was located on a geological fault line. Irene, a well-known architect, and Al, a building contractor, want Tim to join them in developing the property for residential use. They are aware of the fault line but believe that they can circumvent the problem by using newly developed design and construction technology. Because of the geological flaw, however, they regard the Moore farm as being worth only $450,000. Their intent is to organize a corporation to build the housing project, and each party will receive stock commensurate to the property or services contributed.
After consulting his tax adviser, Tim agrees to join the venture if certain modifications to the proposed arrangement are made. The transfer of the land would be structured as a sale to the corporation. Instead of receiving stock, Tim would receive a note from the corporation. The note would be interest-bearing and be due in five years. The maturity value of the note would be $450,000—the amount that even Tim concedes is the fair market value of the Moore farm.
What income tax consequences ensue from Tim’s suggested approach? Compare this result with what would happen if Tim merely transferred the Moore farm in return for stock in the new corporation.
Research Problem 3. Sarah is the sole owner of Bluegrass Corporation. The basis and value of her stock investment in Bluegrass are approximately $100,000. In addition, she manages Bluegrass’s operations on a full-time basis and pays herself an annual salary of $40,000. Because of a recent downturn in business, she needs to put an additional $80,000 into her corporation to help meet short-term cash-flow needs (e.g., inventory costs, salaries, and administrative expenses). Sarah believes that the $80,000 transfer can be structured in one of three ways: as a capital contribution, as a loan made to protect her stock investment, or as a loan intended to protect her job.
From a tax perspective, which alternative would be preferable in the event that Bluegrass’s economic slide worsens and bankruptcy results? Explain your answer.
Research Problem 4. Identify two publicly traded corporations that have issued more than one class of stock to their shareholders. Was the issuance of the additional classes of stock part of the original incorporation, or did it occur later? Determine the rationale for the corporations’ actions.
Research Problem 5. Limited liability company (LLC) status has become a popular form of operating a business in the United States. Investigate how the growth of LLC status has affected the relative number of new businesses that have chosen to operate as corporations.
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
Roger CPA Review Questions
1. Kellye and Becky formed Whoop! Shotz Corporation by contributing property with a fair market value of $50,000 and $70,000 cash, respectively, each for a 50% ownership in the newly formed company. What is Kellye’s taxable gain in this situation if the adjusted basis in the property is $25,000 and the company is valued at $120,000?
a. $0
b. $10,000
c. $25,000
d. $35,000
2. Kellye, Becky, and Emily formed Whoop! Shotz Corporation with the following contributions:
Kellye $50,000 cash
Becky $50,000 cash
Emily Legal services
Each was given a one-third ownership in Whoop! Shotz. What amount of income will Emily recognize if the company is valued at $150,000 after formation?
a. $50,000
b. $33,333
c. $0
d. $40,000
3. Emily, Becky, and Kellye form Whoop! Shotz with the following contributions:
Emily $25,000
Becky $25,000
Kellye Legal services
After the formation, each has a one-third stake in the company. What amount of gain or income will they each record if the company is valued at $100,000?
Emily Becky Kellye
a. $ –0– $ –0– $25,000
b. 8,333 8,333 33,333
c. –0– –0– 33,333
d. 25,000 25,000 25,000
4. Kellye and Becky create Whoop! Shotz Corporation by contributing property with a fair market value of $50,000 and cash of $70,000, respectively. Each receives a 50% share in the company, which is valued at $150,000 immediately after the formation.
The property has an adjusted basis of $25,000 and is subject to a $10,000 mortgage, which is assumed by the company. What gain will Kellye recognize in this situation?
a. $0
b. $10,000
c. $15,000
d. $25,000
5. Herman, a single individual, formed a corporation in year 1 by way of a qualifying § 351 tax-free asset transfer, in which he transferred property having an adjusted basis of $250,000 and a fair market value of $220,000 and received § 1244 small business corporation stock in exchange. In year 3 Herman sold all of the stock for $210,000. What is the amount and character of loss that Herman must recognize as a result of selling the stock in year 3?
Ordinary Loss Capital Loss
a. $ –0– $40,000
b. 10,000 30,000
c. 40,000 –0–
d. 10,000 –0–
Research Problem 1. Lynn Jones, Shawn, Walt, and Donna are trying to decide whether they should organize a corporation and transfer their shares of stock in several corporations to this new corporation. All of their shares are listed on the New
York Stock Exchange and are readily marketable. Lynn would transfer shares in
Brown Corporation, Shawn would transfer stock in Rust Corporation, Walt would transfer stock in White Corporation, and Donna would transfer stock in several corporations.
The stock would be held by the newly formed corporation for investment purposes. Lynn asks you, her tax adviser, whether she would have gain on the transfer of her substantially appreciated shares in Brown Corporation if she transferred the shares to a newly formed corporation. Your input will be critical as they make their decision. Prepare a letter to your client, Lynn Jones, and a memo for the firm’s files. Lynn’s address is 1540 Maxwell Avenue, Highland, KY 41099.
Research Problem 2. Tim is a real estate broker who specializes in commercial real estate. Although he usually buys and sells on behalf of others, he also maintains a portfolio of property of his own. He holds this property, mainly unimproved land, either as an investment or for sale to others.
In early 2014, Irene and Al contact Tim regarding a tract of land located just outside the city limits. Tim bought the property, which is known as the Moore farm, several years ago for $600,000. At that time, no one knew that it was located on a geological fault line. Irene, a well-known architect, and Al, a building contractor, want Tim to join them in developing the property for residential use. They are aware of the fault line but believe that they can circumvent the problem by using newly developed design and construction technology. Because of the geological flaw, however, they regard the Moore farm as being worth only $450,000. Their intent is to organize a corporation to build the housing project, and each party will receive stock commensurate to the property or services contributed.
After consulting his tax adviser, Tim agrees to join the venture if certain modifications to the proposed arrangement are made. The transfer of the land would be structured as a sale to the corporation. Instead of receiving stock, Tim would receive a note from the corporation. The note would be interest-bearing and be due in five years. The maturity value of the note would be $450,000—the amount that even Tim concedes is the fair market value of the Moore farm.
What income tax consequences ensue from Tim’s suggested approach? Compare this result with what would happen if Tim merely transferred the Moore farm in return for stock in the new corporation.
Research Problem 3. Sarah is the sole owner of Bluegrass Corporation. The basis and value of her stock investment in Bluegrass are approximately $100,000. In addition, she manages Bluegrass’s operations on a full-time basis and pays herself an annual salary of $40,000. Because of a recent downturn in business, she needs to put an additional $80,000 into her corporation to help meet short-term cash-flow needs (e.g., inventory costs, salaries, and administrative expenses). Sarah believes that the $80,000 transfer can be structured in one of three ways: as a capital contribution, as a loan made to protect her stock investment, or as a loan intended to protect her job.
From a tax perspective, which alternative would be preferable in the event that Bluegrass’s economic slide worsens and bankruptcy results? Explain your answer.
Research Problem 4. Identify two publicly traded corporations that have issued more than one class of stock to their shareholders. Was the issuance of the additional classes of stock part of the original incorporation, or did it occur later? Determine the rationale for the corporations’ actions.
Research Problem 5. Limited liability company (LLC) status has become a popular form of operating a business in the United States. Investigate how the growth of LLC status has affected the relative number of new businesses that have chosen to operate as corporations.
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
Roger CPA Review Questions
1. Kellye and Becky formed Whoop! Shotz Corporation by contributing property with a fair market value of $50,000 and $70,000 cash, respectively, each for a 50% ownership in the newly formed company. What is Kellye’s taxable gain in this situation if the adjusted basis in the property is $25,000 and the company is valued at $120,000?
a. $0
b. $10,000
c. $25,000
d. $35,000
2. Kellye, Becky, and Emily formed Whoop! Shotz Corporation with the following contributions:
Kellye $50,000 cash
Becky $50,000 cash
Emily Legal services
Each was given a one-third ownership in Whoop! Shotz. What amount of income will Emily recognize if the company is valued at $150,000 after formation?
a. $50,000
b. $33,333
c. $0
d. $40,000
3. Emily, Becky, and Kellye form Whoop! Shotz with the following contributions:
Emily $25,000
Becky $25,000
Kellye Legal services
After the formation, each has a one-third stake in the company. What amount of gain or income will they each record if the company is valued at $100,000?
Emily Becky Kellye
a. $ –0– $ –0– $25,000
b. 8,333 8,333 33,333
c. –0– –0– 33,333
d. 25,000 25,000 25,000
4. Kellye and Becky create Whoop! Shotz Corporation by contributing property with a fair market value of $50,000 and cash of $70,000, respectively. Each receives a 50% share in the company, which is valued at $150,000 immediately after the formation.
The property has an adjusted basis of $25,000 and is subject to a $10,000 mortgage, which is assumed by the company. What gain will Kellye recognize in this situation?
a. $0
b. $10,000
c. $15,000
d. $25,000
5. Herman, a single individual, formed a corporation in year 1 by way of a qualifying § 351 tax-free asset transfer, in which he transferred property having an adjusted basis of $250,000 and a fair market value of $220,000 and received § 1244 small business corporation stock in exchange. In year 3 Herman sold all of the stock for $210,000. What is the amount and character of loss that Herman must recognize as a result of selling the stock in year 3?
Ordinary Loss Capital Loss
a. $ –0– $40,000
b. 10,000 30,000
c. 40,000 –0–
d. 10,000 –0–