Question 1. The December 31, 2009, balance sheet of the BCD General Partnership reads as follows.
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Basis
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FMV
|
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Cash
Receivables
Capital assets
Total
Ben, capital
Cassie, capital
Deidra, capital
Total
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$180,000
-0-
42,000
$222,000
$ 74,000
74,000
74,000
$222,000
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$180,000
90,000
63,000
$333,000
$111,000
111,000
111,000
$333,000
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Each partner shares in 1/3 of the partnership capital, income, gain, loss, deduction and credit. Capital is not a material income-producing factor to the partnership. On December 31, 2009, general partner Cassie receives a distribution of $120,000 cash in liquidation of her partnership interest under § 736. Nothing is stated in the partnership agreement about goodwill. Cassie’s outside basis for the partnership interest immediately before the distribution is $74,000.
How much is Cassie’s recognized gain from the distribution and what is the character of the gain?
Question 2. Bidden, Inc., a calendar year S corporation, incurred the following items.
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Sales
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$130,000
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Depreciation recapture income
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12,000
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Short-term capital gain
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30,000
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Cost of goods sold
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(42,000)
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Municipal bond interest income
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7,000
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Administrative expenses
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(15,000)
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Depreciation expense
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(17,000)
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Charitable contributions
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(14,000)
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Calculate Bidden’s nonseparately computed income.
Question 3. Adam contributes property with a fair market value of $3,000,000 and an adjusted basis of $1,200,000 to AP Partnership. Adam shares in $2,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $3,200,000. One month after the contribution, Adam receives a cash distribution from the partnership of $3,000,000. Adam would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Adam’s share of partnership liabilities will not change as a result of this distribution.
a. Under the IRS’s likely treatment of this transaction, what is the amount of gain or loss that Adam will recognize because of the $3,000,000 cash distribution?
b. What is the partnership’s basis for the property after the distribution?
c. If Adam is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?
Question 4. Individuals Adam and Bonnie form an S corporation, with Adam contributing cash of $100,000 for a 50% interest and Bonnie contributing appreciated ordinary income property with an adjusted basis of $20,000 and a fair market value of $100,000.
a. Determine Bonnie’s initial basis in her stock, assuming that she receives a 50% interest.
b. The S corporation sells the property for $120,000. Determine Adam’s and Bonnie’s stock basis after the sale.
c. Determine Adam’s and Bonnie’s gain or loss if the company is liquidated.
Question 5. Crow Corporation was organized ten years ago to construct office buildings. Six years ago, Crow began selling office furniture. In the current year, Crow discontinues its office furniture business and sells all of the assets used in that business for $1 million. Further, Crow distributes the entire sales proceeds in a pro rata redemption of 100 shares of stock from each of its two equal shareholders—Monique, an individual, and Eagle Corporation (i.e., 200 shares in total redeemed). Monique has a basis of $80,000 in her redeemed stock, Eagle Corporation has a basis of $95,000 in its redeemed stock, and both shareholders have held their stock interest in Crow for several years. Crow Corporation has E & P of $2 million and 1,000 shares outstanding at the time of the distribution. What are the tax consequences of the stock redemption to Monique, to Eagle Corporation, and to Crow Corporation?
Question 6. Mary and Jane, unrelated taxpayers, own Gray Corporation’s stock equally. One year before the complete liquidation of Gray, Mary transfers land (basis of $300,000, fair market value of $280,000) to Gray Corporation as a contribution to capital. Assume that Mary also contributed other property in the same transaction having a basis of $10,000 and fair market value of $50,000. In liquidation, Gray distributes the land to Jane. At the time of the liquidation, the land is worth $200,000.
a. How much loss may Gray Corporation recognize on the distribution of the land to Jane?
b. Assume that the transfer of land to Gray Corporation was made so that the corporation could subdivide the land and build residential housing. However, a subsequent deterioration of the housing market forced Gray Corporation to abandon its plans. What amount of loss may Gray Corporation recognize on the distribution of the land to Jane?
Question 7: The MOG Partnership reports ordinary income of $60,000, long-term capital gain of $12,000, and tax-exempt income of $12,000. The partnership agreement provides that Molly will receive all long-term capital gains and George will receive all tax-exempt interest income. Their allocation of ordinary income will be reduced accordingly, and Olivia will be allocated a proportionately greater share of ordinary income. (In other words, each partner will receive allocations totaling 1/3 of the total $84,000 of partnership income.) This allocation was agreed upon because Molly and George are in a high marginal tax bracket and Olivia is in a low marginal tax bracket.
a. Describe the elements that must be included in a partnership agreement in order for an allocation to have "economic effect."
b. Discuss whether or not the MOG allocation would be permitted and provide your reasoning.
Question 8: Compare the distribution of property rules for an S corporation with the corresponding partnership rules.
Question 9: Your client has operated a sole proprietorship for several years, and is now interested in raising capital for expansion. He is considering forming either a C corporation, S Corporation or an LLC.
a. Describe the treatment of an LLC and discuss any advantages the LLC offers over the C or S corporation.
b. Assume instead the client has previously operated as a C corporation. Describe the tax consequences of converting to an LLC.
c. Assume that there is an angel investor that is an individual, what are the benefits or disadvantages of being an S Corp.