CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #9

1501. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #9
Eagle, Inc. recognizes that it may have an accumulated earnings tax problem. According to its calculation, Eagle anticipates it has accumulated taxable income, before reduction for dividends paid, of $600,000 in 2011. Assume that its shareholders are in the 35% marginal tax bracket.

a.	Calculate the maximum amount of tax that Eagle and its shareholders might pay if the accumulated earnings tax is assessed.
b.	Calculate the maximum amount of tax that Eagle and its shareholders might pay if it distributes dividends to prevent an accumulated earnings tax assessment from occurring.

1502. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #10
Swallow, Inc., is going to make a distribution of $550,000 to Marjean who is in the 35% tax bracket.

a.	Determine the tax liability to Marjean if the form of the distribution is a dividend.
b.	Determine the tax liability to Marjean if the form of the distribution is a stock redemption. Assume Marjean’s adjusted basis for the stock redeemed is $400,000 and that she has owned the stock for five years.

1503. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #11
Kirk is establishing a business in 2011 which could have potential environmental liability problems. Therefore, he is trying to decide between the C corporation form and the S corporation form. He projects that the business will generate losses of approximately $100,000 each year for the first 3 years and then will generate profits of at least $200,000 each year thereafter. All profits will be reinvested in the growth of the business. Kirk projects he will be in the 35% bracket in 2011 and thereafter. Advise Kirk on which tax form he should select.

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1504. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #12
Melanie and Sonny form Bird Enterprises. Sonny contributes cash of $100,000 and land worth $50,000 (adjusted basis of $30,000). Melanie contributes land and building worth $280,000 (adjusted basis of $200,000) and performs services worth $20,000 associated with the formation of the entity. Melanie receives a two-thirds ownership interest and Sonny receives a one-third ownership interest. Determine the tax consequences of the contributions to Melanie, Sonny, and Bird if the business is:

a.	An S corporation.
b.	A C corporation
c.	A partnership.

1505. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #13
Sam and Vera are going to establish a business. Sam will contribute cash of $100,000 for a 50% interest, and Vera will contribute land and a building worth $135,000 (adjusted basis of $65,000) for a 50% interest. The land and building is encumbered by a $35,000 mortgage which the entity assumes. Determine the tax consequences of the contribution to Sam, Vera, and the entity if the business is:

a.	An S corporation.
b.	A partnership.
c.	A C corporation.

1506. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #14
Colin and Reed formed a business entity several years ago. At that date, Colin’s basis for his ownership interest was $40,000 and Reed’s basis for his ownership interest was $50,000. Colin’s profit and loss percentage is 40% and Reed’s profit and loss percentage is 60%. During the intervening period, the entity has reported profits of $200,000. At the beginning of the current year, the entity had liabilities (all recourse) of $50,000. At the end of the current year, the liabilities (all recourse) had increased to $70,000. Determine Colin and Reed’s basis for their ownership interest if the entity is:

a.	A partnership.
b.	A C corporation.
c.	An S corporation.

1507. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #15
Ashley contributes property to the TCA Partnership which was formed 7 years ago by Clark and Tara. Ashley’s basis for the property is $70,000 and the fair market value is $150,000. Ashley receives a 25% interest for his contribution. Because the TCA Partnership is unsuccessful in having the property rezoned from agricultural to commercial, it sells the property 12 months later for $210,000.

a.	Determine the tax consequences to Ashley and to the partnership on the contribution of the property to the partnership.
b.	Determine the tax consequences to Ashley and the other partners on the sale of the property.
c.	Would the tax consequences in b. differ if the entity were an S corporation?

1508. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #16
Alice has a 70% interest in a business entity. Her basis for her ownership interest is $260,000. The net income of the business for the tax year is $100,000 and the entity liabilities have increased by $50,000. Determine the effect of the earnings and the liabilities on Alice’s basis for her ownership interest if the business is:

a.	A C corporation.
b.	An S corporation.
c.	A partnership.

1509. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #17
Wren, Inc. is owned by Alfred (30%) and Mabel (70%). Alfred’s marginal tax rate is 25% and Mabel’s marginal tax rate is 33%. Wren’s taxable income for 2011 is $400,000.

a.	Determine the amount of the distribution that Wren would make to enable Alfred and Mabel to pay their tax liabilities associated with Wren’s $400,000 taxable income if Wren is an S corporation.
b.	If Wren is a C corporation.

1510. CHAPTER 13—COMPARATIVE FORMS OF DOING BUSINESS Question PR #18
Eagle, Inc., a C corporation, distributes $250,000 to its shareholder, Jean, and land worth $250,000 (adjusted basis of $190,000) to its shareholder, Pam. Eagle has earnings and profits of $700,000. Determine the tax consequences to Eagle, Jean, and Pam.