1. {planning} What tax advice could you give Sam and Devon to change the tax consequences you identified that relate to Sam in question 40.e.? 

2. Ron and Hermione formed Wizard Corporation on January 2.  Ron contributed cash of $200,000 in return for 50 percent of the corporation’s stock.  Hermione contributed a building and land with the following fair market values and tax-adjusted bases in return for 50 percent of the corporation’s stock. 

                                                    FMV                       Tax-Adjusted Basis

            Building                            75,000                             20,000
            Land                                175,000                             80,000

            Total                            $  250,000                   $      100,000

To equalize the exchange, Wizard Corporation paid Hermione $50,000 in addition to her stock. 

a What amount of gain or loss does Ron realize on the formation of the corporation?  What amount, if any, does he recognize?                       

b What is Ron’s tax basis in the stock he receives in return for his contribution of property to the corporation?              

c What amount of gain or loss does Hermione realize on the formation of the corporation?  What amount, if any, does she recognize?  

d  What is Hermione’s tax basis in the stock she receives in return for her contribution of property to the corporation?                     

e.  What tax-adjusted basis does Wizard Corporation take in the land and building received from Hermione?          

Assume Hermione’s tax-adjusted basis in the land was $200,000. 

f  What amount of gain or loss does Hermione realize on the formation of the corporation?  What amount, if any, does she recognize?

g What tax-adjusted basis does Wizard Corporation take in the land and building received from Hermione?

Assume Hermione’s tax-adjusted basis in the land was $250,000.

h.What amount of gain or loss does Hermione realize on the formation of the corporation?  What amount, if any, does she recognize?

i What tax-adjusted basis does Wizard Corporation take in the land and building received from Hermione?

j. What election can Hermione and Wizard Corporation make to allow Wizard Corporation to take a carryover basis in the land?

3. {planning} On October 31, 2010, Jack O. Lantern incurred a $60,000 loss on the worthlessness of his stock in the Creepy Corporation (CC).  The stock, which Jack purchased in 2005, met all of the §1244 stock requirements at the time of issue.  In December 2010, Jack’s wife Jill incurred a $75,000 loss on the sale of Eerie Corporation (EC) stock that she purchased in July 2005 and which also satisfied all of the §1244 stock requirements at the time of issue.  Both corporations are operating companies. 

a How much of the losses incurred on the two stock sales can Jack and Jill deduct in 2010, assuming they do not have capital gains in the current or prior years? 

b Assuming they did not engage in any other property transactions in 2010, how much of a net capital loss carryover to 2011 will Jack and Jill have? 

c What would be the tax treatment for the losses if Jack and Jill reported only $60,000 of taxable income in 2010, excluding the securities transactions?    

d hat tax planning suggestions can you offer the Lanterns to increase the tax benefits of these losses?

4. Breslin, Inc. made a capital contribution of investment property to its 100 percent-owned subsidiary, Crisler Company.  The investment property had a fair market value of $3,000,000 and a tax basis to Breslin of $2,225,000. 

a What are the tax consequences to Breslin, Inc. on the contribution of the investment property to Crisler Company? 

b What is the tax basis of the investment property to Crisler Company after the contribution to capital?                      :

5.  {research} On February 27, 2005, Federated Department Stores (Macy’s) acquired The May Department Stores Company (Marshall Fields) in a tax-deferred acquisition.  The Form 8-K describing the transaction was issued on February 28, 2005.  You can access the Form 8-K at the company’s Web site, www.federated-fds.com/ and accessing the company’s SEC filings from its Investor website.  Read “Item 1.01, Entry into a Material Definitive Agreement” and determine which form of merger was used to affect the acquisition. 

6. {research} On January 28, 2005, The Proctor & Gamble Company acquired The Gillette Company in a tax-deferred acquisition.  The Form 8-K describing the transaction was issued on January 28, 2005.  You can access the Form 8-K at the company’s Web site, www.pg.com/ and accessing the company’s SEC filings.  Read “Item 1.01, Entry into a Material Definitive Agreement” and determine which form of merger was used to affect the acquisition. 

7. Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line, Inc. (BLI).  As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company’s tax accounting balance sheet.  The relevant information is summarized as follows:

                                                    FMV           Tax-Adjusted Basis    Appreciation

            Cash                            $    10,000       $       10,000

            Receivables                       15,000                15,000

            Building                          100,000                50,000                        50,000

            Land                                225,000                75,000                      150,000

            Total                            $  350,000       $     150,000                $    200,000

            Payables                      $     18,000      $       18,000

            Mortgage*                        112,000             112,000

            Total                            $   130,000      $     130,000

* The mortgage is attached to the building and land.

Ernesto was asking for $400,000 for the company. His tax basis in the BLI stock was
$100,000. Included in the sales price was an unrecognized customer list valued at $100,000. The unallocated portion of the purchase price ($80,000) will be recorded as goodwill.

a. What amount of gain or loss does BLI recognize if the transaction is structured as a direct asset sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?

b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a direct asset sale to Amy and Brian, and BLI distributes the after-tax proceeds (computed in question a.) to Ernesto in liquidation of his stock?

c. What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a direct asset purchase?

8. [LO 4] Using the same facts in Problem 47, assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $400,000.

a. What amount of gain or loss does BLI recognize if the transaction is structured as a stock sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34%?

b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian?:

c. What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a stock sale?:

9. [LO 4] Rather than purchase BLI directly (as in Problems 47 and 48), Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto $200,000 plus voting stock in STS worth $200,000. Ernesto will become a 10 percent shareholder in STS after the transaction.

a. Will the continuity of ownership interest (COI) requirements for a straight Type A merger be met? Explain.:

b. What amount of gain or loss does BLI. recognize if the transaction is structured as a Type A merger? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34%?:

c. What amount of gain or loss does Ernesto recognize if the transaction is structured as a Type A merger?

d. What is Ernesto's tax basis in the STS stock he receives in the exchange?

e. What are the tax bases of the BLI assets held by STS after the merger?

10. Robert and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU, Inc., in a tax-deferred triangular Type A merger using an acquisition subsidiary of WU. The sole shareholder of EMU, Edie Eagle, will receive $250,000 plus $150,000 of WU voting stock in the transaction.

a. Can the transaction be structured as a forward triangular Type A merger? Explain why or why not.

b. Can the transaction be structured as a reverse triangular Type A merger? Explain why or why not.

11. Robert and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU, Inc., in a stock-for-stock Type B acquisition. The sole shareholder of EMU, Edie Eagle, will receive $400,000 of WU voting stock in the transaction. Edie's tax basis in her EMU stock is $100,000.

a. What amount of gain or loss does Edie recognize if the transaction is structured as a stock-for-stock Type B acquisition?

b. What is Edie's tax basis in the WU stock she receives in the exchange?

c. What is the tax basis of the EMU stock held by WU after the exchange?:

12. Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions, Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet.

                                                    FMV           Tax-Adjusted Basis    Appreciation

            Cash                            $  200,000       $     200,000

            Building                            50,000                10,000                        40,000

            Land                                150,000                90,000                        60,000

            Total                            $  400,000       $     300,000                $    100,000

Under the terms of the agreement, Shauna will receive the $200,000 cash in exchange for her 50 percent interest in WFI. Shauna's tax basis in her WFI stock is $50,000. Danielle will receive the building and land in exchange for her 50 percent interest in WFI. Danielle's tax basis in her WFI stock is $100,000. Assume for purposes of this problem that the cash available to distribute to the shareholders has been reduced by any tax paid by the corporation on gain recognized as a result of the liquidation.

a. What amount of gain or loss does WFI recognize in the complete liquidation?:

b. What amount of gain or loss does Shauna recognize in the complete liquidation?

c. What amount of gain or loss does Danielle recognize in the complete liquidation?:

e. What is Danielle's tax basis in the building and land after the complete liquidation?

12. Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions, Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet.

FMV Tax-Adjusted Basis Appreciation
Cash $ 200,000 $ 200,000
Building 50,000 10,000 40,000
Land 150,000 90,000 60,000
Total $ 400,000 $ 300,000 $ 100,000

Under the terms of the agreement, Shauna will receive the $200,000 cash in exchange for her 50 percent interest in WFI. Shauna's tax basis in her WFI stock is $50,000. Danielle will receive the building and land in exchange for her 50 percent interest in WFI. Danielle's tax basis in her WFI stock is $100,000. Assume for purposes of this problem that the cash available to distribute to the shareholders has been reduced by any tax paid by the corporation on gain recognized as a result of the liquidation.

a. What amount of gain or loss does WFI recognize in the complete liquidation?

b. What amount of gain or loss does Shauna recognize in the complete liquidation?

c. What amount of gain or loss does Danielle recognize in the complete liquidation?

e. What is Danielle's tax basis in the building and land after the complete liquidation?

13. Tiffany and Carlos decided to liquidate their jointly owned corporation, Royal Oak Furniture (ROF). After liquidating its remaining inventory and paying off its remaining liabilities, ROF had the following tax accounting balance sheet.

FMV Tax-adjusted Basis Appreciation (Depreciation)
Cash $ 200,000 $ 200,000
Building 50,000 10,000 40,000?
Land 150,000 200,000 (50,000)
Total $ 400,000 $ 410,000 $ (10,000)

Under the terms of the agreement, Tiffany will receive the $200,000 cash in exchange for her 50 percent interest in ROF. Tiffany's tax basis in her ROF stock is $50,000. Carlos will receive the building and land in exchange for his 50 percent interest in ROF. His tax basis in the ROF stock is $100,000. Assume for purposes of this problem that the cash available to distribute to the shareholders has been reduced by any tax paid by the corporation on gain recognized as a result of the liquidation.

a. What amount of gain or loss does ROF recognize in the complete liquidation?

b. What amount of gain or loss does Tiffany recognize in the complete liquidation?

c. What amount of gain or loss does Carlos recognize in the complete liquidation?

d. What is Carlos's tax basis of the building and land after the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $160,000 in the liquidation and Carlos will receive the land and building plus $40,000.

e. What amount of gain or loss does ROF recognize in the complete liquidation?

f. What amount of gain or loss does Tiffany recognize in the complete liquidation?

g. What amount of gain or loss does Carlos recognize in the complete liquidation?

h. What is Carlos's tax basis in the building and land after the complete liquidation?

14. Jefferson Millinery, Inc. (JMI) decided to liquidate its wholly-owned subsidiary, 8 Miles High, Inc. (8MH). 8MH had the following tax accounting balance sheet.

FMV Tax-Adjusted Basis Appreciation
Cash $ 200,000 $ 200,000
Building 50,000 10,000 40,000
Land 150,000 90,000 60,000
Total $ 400,000 $ 300,000 $ 100,000

a. What amount of gain or loss does 8MH recognize in the complete liquidation?

b. What amount of gain or loss does JMI recognize in the complete liquidation?

c. What is JMI's tax basis in the building and land after the complete liquidation?

15. Jefferson Millinery, Inc. (JMI) decided to liquidate its wholly-owned subsidiary, 8 Miles High, Inc. (8MH). 8MH had the following tax accounting balance sheet.

FMV Tax-Adjusted Basis Appreciation
Cash $ 200,000 $ 200,000
Building 50,000 10,000 40,000
Land 150,000 200,000 (50,000)
Total $ 400,000 $ 410,000 $ (10,000)

a. What amount of gain or loss does 8MH recognize in the complete liquidation?

b. What amount of gain or loss does JMI recognize in the complete liquidation?

c. What is JMI's tax basis in the building and land after the complete liquidation?