Abel, Baker and Cane decided to form the ABC Corporation. They contributed the following assets on Jan 1, 2005.
Abel contributed cash of $37,000 and some land which cost him $32000 and had a fair market value of $50000. The land had a mortgage attached of $12000 which was assumed by the corporation.
Baker contributed services which were valued at $30,000 and some equipment which cost $52,000 but had a fair market value of $45000.
Cane contributed inventory which had a fair market value of $58000 and had a cost basis of $23000 to Cane. He also contributed tools which had a basis of $28000 and fair market value of $24,000.
Each shareholder received 100 shares of stock except Cane who also received $7000 of cash.
The corporation started operations on January 1, 2005. The results of the year ended December 31, 2011 were as follows:
Book income
Sales $750000
Cost of Sales 485000
Salary expense 125000
Rent expense 32000
Utility expense 14250
Depreciation expense 43000
Interest expense 17500
Meal expense 11300
Insurance expense 8400
Capital gains 19700
Capital losses 14800
Charitable contributions 15400
Interest income 33000
Dividend income 47900
Maintenance expense 9400
Fines 6100
Tax depreciation consisted of a $12000 179 expense deduction and $24000 of regular depreciation using the half year convention. The interest expense included $4500 of interest on loans to buy the tax exempt securities. The insurance expense included $1500 of premiums to purchase key man life insurance. Of the $33000 of interest income $18200 was from tax exempt bonds. All of the dividend income came from corporations which ABC had less than a 10% stake. $1400 of dividend income came from a foreign corporation.
From 2010 ABC had an unused capital loss of $800 and an unused charitable contribution of $1480.
During 2011 ABC made the following distributions to the shareholders.
Abel received cash of $7000 and section 1231 property which had a basis of $4000 and a fair market value of $11000.
Baker received a parcel of land which cost $32000 but had a fair market value of $37000. Attached to the land was a mortgage of $19000 assumed by Baker.
Cane received cash of $18000.
At the beginning of 2011 ABC had accumulated earnings and profits of $13000.
From the above information answer the following questions. You must put your answers underneath each question on this form. If you do not put your answers on this form, you will not receive credit. You must show your computations to receive credit. You may attach an Excel spreadsheet to show your computations.
1. For Abel how much is realized gain?
How much is recognized gain?
How much is his basis in the stock?
For Baker how much is realized gain?
How much is recognized gain?
How much is his basis in the stock?
For Cane how much is realized gain?
How much is recognized gain?
How much is his basis in the stock?
2. How much taxable income did the ABC Corporation have during 2011?
3. How much is ABC's income tax?
4. How much is the current earnings and profit for ABC for the year 2011?
5. What effect does the distribution have on Abel? Is it a dividend, return of capital or capital gain and how much?
6. What effect does the distribution have on Baker? Is it a dividend, return of capital or capital gain and how much?
7. What effect does the distribution have on Cane? Is it a dividend, return of capital or capital gain and how much?
8. What effect do the distributions have upon ABC's earnings and profit? What is the amount of earnings and profit at the end of 2011?