Question

1. Anna transfers land worth $500,000, basis of $100,000, to a newly formed corporation, Robin Corporation, for all of Robin’s stock, worth $300,000, and a 10-year note. The note was executed by Robin Corp. and made payable to Anna in the amount of $200,000. Because of the transfer: a. Kevin does not recognize gain. b. Kevin recognizes gain of $400,000. c. Robin Corporation has a basis of $100,000 in the land. d. Robin Corporation has a basis of $300,000 in the land. 2. Nathan forms Collins Corporation by transferring land (basis of $125,000; fair market value of $750,000) which is subject to a mortgage of $375,000. Two weeks prior to incorporating Collins, Nathan borrows $125,000 for personal purposes and gives the lender a second mortgage on the land. Collins Corporation issues stock worth $250,000 to Nathan and assumes the two mortgages on the land. What are the tax consequences to Nathan and to Collins Corporation? 3. Gold Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. Federal income taxes paid $110,000 Net operating loss carryforward from previous year deducted currently 70,000 Gain recognized this year on an installment sale from a prior year 44,000 Depreciation deducted on tax return (ADS depreciation would have been $10,000) 40,000 Interest income on Iowa state bonds 8,000 ​ Gold Corporation’s current E & P is: a. $254,000. b. $214,000. c. $194,000. d. $104,000. Please show all calculations. 4.Jenna and Jason, equal shareholders in Diamond Corporation, receive $600,000 each in distributions on December 31 of the current year. Diamond's current year taxable income is $1 million and it has no accumulated E & P. Last year, Diamond sold an appreciated asset for $1,200,000 (basis of $400,000). Payment for one-half of the sale of the asset was made this year. How much of Jenna’s distribution will be taxed as a dividend? a. $0 b. $300,000 c. $500,000 d. $600,000 Please show all calculations. 5. The tax treatment of corporate distributions at the shareholder level does not depend on: a. The character of the property being distributed. b. The earnings and profits of the corporation. c. The basis of stock in the hands of the shareholder. d. Whether the distributed property is received by an individual or a corporation.

Answer 1

1) Solution: Robin Corporation has a basis of $300,000 in the land

Explanation: Due to the transfer the Robin Corporation would have basis of $300,000 in the land

　

2) In the given case, both §§ 357(b) and (c) would be applicable. Since the land is subject to two mortgages which exceeds the basis, under § 357(c) Nathan would have a recognized gain on the transfer for the amount of $375,000. However as Nathan borrowed an amount of $125,000 shortly before incorporating and utilised it for personal purpose thus § 357(b) is also applicable. Because § 357(b) results all the liabilities to be tainted, Nathan has boot for the amount $500,000. Of the realized gain of Nathan $625,000 [= Stock value received and release of mortgages – basis in the land = $750,000 - $125,000 = $625,000], gain of $500,000 (the boot's amount) is recognized.

If §§ 357(b) and (c) both are applicable on the same transfer, § 357(b) predominates. Collins Corporation holds the basis of $625,000 in the land, calculated as: Carryover basis from Nathan + Gain recognized by Rita = $125,000 + $500,000 = $625,000

Nathan has a basis of $125,000 in her stock, calculated as: Basis in the land + Recognized gain - Assumed liabilities by Collins Corporation = $125,000 + $500,000 - $500,000 = $125,000

　

3) Solution: $254,000

Working: Computation of current E & P

Taxable Income	300,000
Federal income taxes paid	-110,000
Net operating loss carry forward deducted currently	70,000
Gain recognized this year on an instalment sale from a prior year	-44,000
Depreciation deducted on tax return (only excess of depreciation )	30,000
Interest income on Iowa state bonds	8,000
	254,000

　

4) Solution: $300,000

Working: Diamond increased the E & P previous year for the entire deferred gain amount on the installment sale. As one-half of the $800,000 gain is already inclusive in the current year in taxable income, taxable income must be decreased by this amount to compute the current E & P. Thus Diamond Corporation’s current year E & P would be computed as:

[$1 million taxable income - $400,000 of installment sale gain] = $600,000

Now as 50% of current E & P is allocated to Jenna’s distribution, $300,000 dividend thus will be taxed at $300,000

　

5) Solution: The character of the property being distributed

Explanation: At the shareholder level the tax treatment of corporate distributions would not consider the character of the property being distributed