Computational Exercises 19-20

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Chapter 19
Computational Exercises
21. LO.1 At the beginning of the year, Myrna Corporation (a calendar year taxpayer) has E & P of $32,000. The corporation generates no additional E & P during the year. On December 31, the corporation distributes $50,000 to its sole shareholder,
Abby, whose stock basis is $10,000. How is the distribution treated for tax purposes?
22. LO.3 On January 1 of the current year, Rhondell Corporation has accumulated E & P of $13,000. Current E & P for the year is $84,000, earned evenly throughout the year. Elizabeth and Jonathan are sole equal shareholders of Rhondell from January
1 to April 30. On May 1, Elizabeth sells all of her stock to Marshall. Rhondell makes two distributions to shareholders during the year: A total of $42,000 ($21,000 to Elizabeth and $21,000 to Jonathan) on April 30 and a total of $58,000 ($29,000 to
Jonathan and $29,000 to Marshall) on December 31.
Determine the allocation of the distributions by completing the table below.
Assume the shareholders have sufficient basis in their stock for any amount that is treated as return of capital.
From Current
E & P
From Accumulated
E & P
Treated as Return of Capital
April 30 distribution of $42,000 ___________ ___________ ___________
December 31 distribution of $58,000 ___________ ___________ ___________
23. LO.4, 10 Robin Corporation would like to transfer excess cash to its sole shareholder,
Adam, who is also an employee. Adam is in the 28% tax bracket, and Robin is in the 34% bracket. Because Adam’s contribution to the business is substantial,
Robin believes that a $25,000 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Robin is considering paying Adam a $25,000 dividend because the tax rate on dividends is lower than the tax rate on compensation. Is Robin correct in believing that a dividend is the better choice? Why or why not?
24. LO.5 Global Corporation distributed property with an $850,000 fair market value and a $415,000 adjusted basis to one of its shareholders. The property was subject to a $230,000 mortgage, which the shareholder assumed. Global has ample
E & P to cover any distribution made during the year. What is the amount of the shareholder’s dividend income on the distribution? What is the shareholder’s basis in the property received?
25. LO.5 Quinlan has ample E & P to cover any distributions made during the year.
One distribution made to a shareholder consists of a property with an adjusted basis of $150,000 and a fair market value of $90,000. What are the tax consequences of this distribution to Quinlan?
26. LO.6 Deerwood Corporation lends its principal shareholder, Lafayette, $500,000 on
July 1 of the current year. The loan is interest-free and payable on demand.
On December 31, the imputed interest rules are applied. Assume that the Federal rate is 6%, compounded semiannually. What are the tax consequences of this loan to Lafayette?
27. LO.7 What are the tax consequences to Euclid from the following independent events?
a. Euclid bought 500 shares of common stock five years ago for $50,000. This year, Euclid receives 20 shares of common stock as a nontaxable stock dividend.
What is Euclid’s basis per share after this event?
b. Assume instead that Euclid received a nontaxable preferred stock dividend of
20 shares. The preferred stock has a fair market value of $5,000, and the common stock, on which the preferred is distributed, has a fair market value of $75,000.
28. LO.8 During the current year, Gnatcatcher, Inc., (E & P of $1 million) distributed $200,000 each to Brandi and Yuen in redemption of some of their
Gnatcatcher stock. The two shareholders acquired their shares five years ago. Each shareholder is in the 33% tax bracket, and each had a $45,000 basis in her redeemed stock.
a. Assume the distribution to Brandi is a qualifying stock redemption. Determine
Brandi’s tax liability on the distribution.
b. Assume the distribution to Yuen is a nonqualified stock redemption. Determine
Yuen’s tax liability on the distribution.
29. LO.8 Rosalie owns 50% of the outstanding stock of Salmon Corporation. In a qualifying stock redemption, Salmon distributes $80,000 to Rosalie in exchange for one-half of her shares, which have a basis of $100,000. Compute Rosalie’s recognized loss, if any, on the redemption.
30. LO.8 Derk owns 250 shares of stock in Rose Corporation. The remaining 750 shares of Rose are owned as follows: 150 by Derk’s daughter, 200 by Derk’s aunt, and 400 by a partnership in which Derk has an 80% interest. Determine the number of shares Derk owns (directly and indirectly) in Rose Corporation.
31. LO.9 Caramel Corporation has 5,000 shares of stock outstanding. In a qualifying stock redemption, Caramel distributes $145,000 in exchange for 1,000 of its shares. At the time of the redemption, Caramel has paid-in capital of $800,000 and E & P of $300,000. Calculate the reduction to Caramel’s E & P as a result of the distribution.


Chapter 20
Computational Exercises
12. LO.1 Sunset Corporation, with E & P of $400,000, makes a cash distribution of $120,000 to a shareholder. The shareholder’s basis in the Sunset stock is $50,000.
a. Determine the tax consequences to the shareholder if the distribution is a nonqualified stock redemption.
b. Determine the tax consequences to the shareholder if the distribution is a qualifying stock redemption.
c. Determine the tax consequences to the shareholder if the distribution is pursuant to a complete liquidation of Sunset.
13. LO.1 Pursuant to a complete liquidation, Carrot Corporation distributes to its shareholders real estate held as an investment (basis of $650,000, fair market value of $880,000).
a. Determine the gain or loss recognized by Carrot on the distribution if no liability is involved.
b. Determine the gain or loss recognized by Carrot on the distribution if the real estate is subject to a liability of $690,000.
c. Determine the gain or loss recognized by Carrot on the distribution if the real estate is subject to a liability of $885,000.
14. LO.1 Osprey Corporation stock is owned by Pedro and Pittro, who are unrelated.
Pedro and Pittro each own 50% of the stock in the corporation. Osprey has the following assets (none of which were acquired in a § 351 or contribution to capital transaction) that are distributed in complete liquidation of the corporation.
Adjusted Basis Fair Market Value
Cash $300,000 $300,000
Land 200,000 440,000
Equipment 250,000 140,000
Assume that Osprey Corporation distributes the land to Pedro and the cash and equipment to Pittro.
a. Determine Osprey’s recognized gain or loss on the distribution of land.
b. Determine Osprey’s recognized gain or loss on the distribution of the equipment.
15. LO.1 On January 4, 2016, Martin Corporation acquires two properties from a shareholder in a transaction that qualifies under § 351. The shareholder’s basis, the fair market value, and the built-in gain (loss) of each property are:
Shareholder’s Basis Fair Market Value Built-In Gain (Loss)
Property 1 $300,000 $375,000 $ 75,000
Property 2 525,000 400,000 (125,000)
Net built-in loss ($ 50,000)
Martin adopts a plan of liquidation later in the year and distributes Property 2 to a
30% shareholder when the property is worth $350,000.
a. Compute Martin’s basis in Property 1 and in Property 2 as of January 4, 2016.
b. Compute Martin’s realized and recognized loss on the liquidating distribution of
Property 2.
16. LO.1 Green Corporation’s assets are valued at $920,000 after payment of all corporate debts, except for $134,000 of taxes payable on net gains it recognized on the liquidation. Bruno, an individual and the sole shareholder of Green, has a basis of $280,000 in his stock. Compute the gain or loss recognized by Bruno on the liquidation of Green Corporation.
17. LO.2 The stock of Quail Corporation is held as follows: 85% by Pheasant Corporation and 15% by Gisela, an individual. Quail Corporation is liquidated in
December of the current year pursuant to a plan adopted earlier in the year. At the time of its liquidation, Quail Corporation has assets with a basis of $730,000 and fair market value of $1 million. Quail Corporation distributes the property pro rata to
Pheasant Corporation and to Gisela.
a. Compute Quail’s recognized gain or loss on the distribution of property to
Pheasant.
b. Compute Quail’s recognized gain or loss on the distribution of property to Gisela.
18. LO.2 Goose Corporation has a basis of $2.4 million in the stock of Swift Corporation, a wholly owned subsidiary acquired 30 years ago. Goose liquidates
Swift Corporation and receives assets that are worth $2 million and have a basis to
Swift of $1.7 million.
a. Determine Goose Corporation’s recognized gain or loss on the liquidation.
b. Determine Goose Corporation’s basis in the assets received in liquidation.
19. LO.3 Rebecca holds 100 shares of Gotchas stock that she purchased for $1,000 several years ago. In a merger of Gotchas into Solis, Inc., Rebecca exchanges her
100 Gotchas shares for 1,000 Solis shares and $500. Gotchas is valued at $40 per share and Solis at $3.50 per share.
a. What is Rebecca’s realized and recognized gain/loss from the reorganization?
b. What is Rebecca’s basis in her Solis stock?
20. LO.3 In a qualifying reorganization, Cato exchanges $1.2 million worth of stock and property valued at $500,000 ($245,000 basis) for all of Firestar’s assets, which have a value of $1.7 million and a $350,000 basis. Firestar distributes the property received from Cato. The exchange meets the § 368 requirements.
a. What is Cato’s recognized gain/loss from the reorganization?
b. What is Firestar’s recognized gain/loss from the reorganization?
21. LO.3 Townsend, the sole shareholder of Pruett Corporation, has a $480,000 basis in his stock. He exchanges his Pruett stock for $600,000 of Rogers Corporation voting common stock plus land with a fair market value of $100,000 and basis of $25,000 that is transferred by Rogers to Pruett. This exchange qualifies under § 368.
a. What is Townsend’s recognized gain/loss from the reorganization?
b. What is the gain/loss recognized by Pruett Corporation and Rogers Corporation on the reorganization?
c. What is Townsend’s basis in the Rogers stock and the land received?
22. LO.3 Hosha exchanges all of her Leaf stock for Petal stock plus $5,000 cash. The exchange is pursuant to a tax-free reorganization. Hosha paid $25,000 for the
Leaf stock five years ago. The Petal stock received by Hosha has an $18,000 fair market value.
a. What is Hosha’s realized and recognized gain/loss from the reorganization?
b. What is Hosha’s basis in the Petal stock she received?