Aubrey Newman transferred two items of property to N corporation, in return for

Question

Aubrey Newman transferred two items of property to N corporation, in return for 800 shares of N corporation (which had only 150 shares outstanding prior to Aubrey's transfer). One item she transferred had an adjusted basis of $10,000 and fair market value of $15,000 and was subject to an $8,000 liability. The second item had an adjusted basis of $2,000 and a fair market value of $5,000 and was subject to a $3,000 liability. In return, she received the 800 shares of stock with a fair market value of $8,000 plus $2,000 in cash. Please address the following: 1 Is this exchange taxable to Aubrey and N corporation? Why or why not? 2 What is the amount of gain (if any) that Aubrey must recognize on this ex- change? 3 What is her basis in the N corporation stock she receives? 4 What is the basis of N corporation in the assets it receives in the transfer? 5 How would your answer differ if Aubrey performed services (instead of transferring property) in return for the shares of N corporation? 2- Cotte Inc. has three shareholders, Phil, Bill, and Hill. Each shareholder owns 100 shares of common stock. On July 1 of this year, Cotte Inc. redeemed 30 shares from each share- holder. In return, each shareholder received $10,000. Phil acquired his shares three years ago and his adjusted ba- sis in his 100 shares was $3,000 at the time of the redemption. Cotte has $100,000 of accumulated E&P as of the end of the prior year, and anticipates earning a further $20,000 in E&P in the current year. Please address the following: 1 What are the federal tax consequences to Cotte, Inc. and Phil arising from this distribution? 2 Would your answer to 1. change if the reason Cotte Inc. redeemed the shares was because it sold one of its businesses it actively had been con- ducting since 1990? 3 Would your answer to 1. change if the only transaction was a redemption of 60 of Phil's shares, while Bill and Hill continued to hold their original 100 shares? 4 Would your answer to 3. change if Bill, Phil, and Hill were siblings? 3 - At the beginning of the year, Jenny, Inc. (a corporation for tax purposes) had a negative $15,000 in E&P. During the year, the company had $5,000 in profits. On July 1, the company distributed property with an adjusted basis of $50,000 and a fair market value of $40,000 to Jenny (an individual), the sole shareholder of the corporation. It was the only distribution that the company made during the year. Jenny's stock in the company had a fair market value of $50,000 and an adjusted basis of $20,000. Please address the following: 1 What is the amount of the distribution to Jenny? 2 What are the federal tax consequences to Jenny of the distribution? 3 What are the federal tax consequences to Jenny, Inc. of the distribution? 4 What alternative transaction would have given Jenny and Jenny Inc.a bet- ter result here?

Explanation / Answer

PART 1

1) Yes this is taxable to Aubrey and N corporation.As there is transfer of shares and cash to between Aubrey and N corporation.

2.)Aubrey will have a gain of ($15000-8000) and ($5000-$3000) i.e $9000

3)Basis in the N coporation stock is Shares which she has transferred.

4) Basis of N coporation for receiving assets is Shares .

5) If Aubrey performed services instead of transferring property then tax treatment would be different.

PART 2

1) Tax consequenses to Cotte,inc and phil will be that the shars sold by the cotte will be taxable.

2)Yes answer would be different if cotte sold the business earlier as per short term gain.

3)No answer would be same if shares transfer

4) If shares are transfer to siblings then they need not to be taxable.

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