Problem 1:
Individuals Devon and Marian each own 50% of the stock of VARIN INC ?ling as a tax c corporation. VARIN INC issues a $50,000 cash dividend to each Devon and Marin at the end of year one. At the end of year one VARIN INC has $250,000 Earnings and Pro?ts before the dividend distribution.
Question :
What do we call the distribution made to Devon and Marian by VARIN INC and is it taxable income to Devon and Marian? How many $ remain in VARIN's INC Earnings and Pro?ts account once they make the distribution to the two shareholders? Is this distribution taxable to VARIN INC.
Problem 2:
Individuals Devon and Marian each own 50% of the stock of VARIN INC ?ling as a tax c corporation. After VARIN INC has been operating for a period of years it distributes a real estate property to Devon having FMV $500,000 and tax cost basis to the corporation of $100,000.
VARIN INC also distributes to Marian a patent having a $500,000 FMV and $25,000 tax cost basis to the corporation. VARIN INC has signi?cant Earnings and Pro?ts to cover these transactions.
VARIN INC pays taxes at 35% rate.
Questions
You can address the following:
• Provide the $ taxable income Devon and Marian (each) recognize on the non liquidating distribution from DEVON INC.
• Provide the tax cost basis Devon and Marian (each) take in the two assets.
• Provide the $ tax gain DEVON INC recognizes on these transactions.
• Provide the $ adjustment for Earnings and Pro?ts DEVON INC makes from the shareholder distributions.
Problem 3:
VARIN INC pro?tability continues to improve over time and it has built up a large $2 Million cash position on its balance sheet along with and Earnings and Pro?t account balance of over $2 Million. Devon and Marian (remember they each own 50% of VARIAN) would like to have VARIN INC give them each a $500,000 cash distribution. Devon owns 500 shares and Marian owns 500 shares of the total 1,000 shares VARIN INC shares outstanding.
Devon and Marian are not eager to get a Section 301 dividend from VARIAN INC but they want the cash - just at a lower tax cost. They estimate VARIN Net Assets FMV equals $5 Million. So, they are thinking that they will have VARIN buy (redeem) 100 shares each from Devon and Marin in turn for the $500,000 payments to each shareholder.
Questions
How did Devon and Marian equate 100 shares to $500,000 based on the above information?
Why does Devon and Marian want the transaction structured as a sale versus a dividend (you may consider using CH4 material to come up with the tax reasoning)?
Following tax law will this transaction represent a sale or a dividend to Marian and Devon? And, why with explanation?
Problem 4: (Applying sections 331 and 336 to Corporate Liquidating Distributions)
Noah owns 100% of the stock of CAL INC (a tax C corporation). Noah has a $2 Million tax cost in the stock. CAL INC was incorporated some years ago and capitalized by Noah (meaning Noah funded the corporation with cash in turn for stock). Currently, CAL INC owns two assets:
appreciated raw land worth $8 Million with a $2 Million Tax Cost to CAL INC; and $2.2 Million cash ($2,200,000) from selling additional land some time ago. CAL INC has $1 Million long term liabilities (note attached to the land) and has no current liabilities as all paid off due to the upcoming liquidation (detailed below). For this problem, you can assume CAL INC tax rate for any gains equals 35%. For this problem you can assume Noah's of any gains equals 15%.
Noah and his current tax advisor have been talking about tax deal structure. Noah wishes to bring in some partners to develop the land with a new apartment structure. The tax advisor explains the C tax structure is not favorable going forward with new investors coming into the deal. As, Noah's attorney has recommended the limited partnership as a legal entity and then the tax advisor has agreed that tax partnership will work nicely for the deal. They cannot use S as it does not allow the ?exibility required for the special allocations they have planned for the deal as Noah wishes to get a special allocation of pro?ts as general partner for structuring the deal. [Note: class this whole paragraph is not required to solve the problem at hand. I am just providing some background information to make the problem more real life].
CAL INC in complete liquidation distributes the assets including the note to Noah in turn for all of Noah's stock. And, CAL INC then cancels all of its stock and goes out of business. Note: you want to complete the Section 336 transaction ?rst. Then, you compute Noah's Section 331 transaction.
Problem 5: (Applying sections 332 and 337 to Corporate Liquidating Distributions)
Samson Inc (a tax C corporation) owns various assets and has been in business for a period of years. Samson Inc has ?ve subsidiary corporations and Samson owns 100% of the stock of each.
The ?ve subsidiaries are also corporations and they represent tax c corporations.
Samson Inc ?les a consolidated tax return under Section 1501. Thus, Samson Inc ?les one tax return for the consolidated group of the Parent Samson and the ?ve subsidiaries as the group meets the requirements of Section 1504 to ?le a consolidated return as an af?liated group.
Samson has decided to liquidate one of its subsidiaries called Devon Inc (transfer all net assets of the subsidiary to the parent in turn for the parent returning the stock to Devon Inc. Devon will then cancel the stock and go out of business.
Samson Inc. has $50 Million tax basis in the Devon Inc stock. Devon's stock has $85 Million FMV. Devon's net assets have a $60 Million tax basis and they have a $85 Million FMV.
Questions:
Can Samson use Section 332 to avoid gain recognition on the transfer of Devon's net asset properties to Samson?
Explain how this concept works?
What tax basis does Samson take in the Devon net assets. [Hint see Section 334(b)(1)].
How does Devon use Section 337 to create a nonrecognition gain transaction when Devon transfers appreciated assets to Samson?
Explain the bene?ts of these two tax provisions for parent subsidiary groups.