1. Steve and Tony each own 50% of Avenge, This, Inc., a calendar year corporatio

Question

1. Steve and Tony each own 50% of Avenge, This, Inc., a calendar year corporation. At the end of June, Steve sell his shares to Hank Pym for $110,000. On January 1, the corporation had accumulated E & P of $200,000. Its current E & P is $250,000 (prior to any distributions). Avenge distributed $260,000 on April 15 ($130,000 to Steve and $130,000 to Tony). On November 9, it distributed another $260,000 on ($130,000 to Tony and $130,000 to Hank). What are the tax implications of the $130,000 distribution to Hank?

2. Susquehanna Hat Corporation has 2,500 shares of stock outstanding: (a) Moe owns 800 shares, (b) Curley owns 500 shares, (c) Larry owns 500 shares, (d) Shemp Partnership owns 300 shares, and Niagara Corporation owns 400 shares. Moe and Larry are unrelated individuals, Curley is Moe's brother. All three are equal partners of Shemp. Moe owns 35% of the stock in Niagara Corporation, Curley owns 20%. a. Applying the § 318 stock attribution rules, determine how many shares in Susquehanna Hat Corporation each shareholder owns, directly and indirectly: Moe: Larry: Curley: Shemp Partnership: Niagara Corporation: b. Assume, instead, that Moe and Larry are father and son. How many shares does each shareholder own, directly and indirectly?

3. As of January 1 of the current year, Flywheel, Inc. has E & P of $25,000. Groucho owns all 320 shares of its common stock (basis: $45,000). On that date, Flywheel declares and distributes a nontaxable preferred stock dividend. Groucho receives 100 shares. Immediately after, the FMV of one share of common stock is $500 and the FMV of one share of preferred stock is $200. Three years later, Groucho sells the 100 shares of preferred stock to an unrelated individual for $24,000. a. Assuming Groucho is in the 33% tax bracket, what are his income tax consequences resulting from the sale of the preferred stock? b. What is the effect on Flywheel’s E & P as a result of the sale of the preferred stock? c. Assume Groucho sells the preferred stock back to Flywheel at a time when its E &P is $15,000. What are his income tax consequences?

4. Bud and Lou, unrelated taxpayers, own all of Whose On, Inc.’s stock. Bud owns 60% and Lou 40%. One year before the complete liquidation of Whose On, Bud transfers (a) land (basis: $200,000; FMV $130,000) and (b) equipment (basis: $20,000, FMV: $100,000) to Whose On as a contribution to capital. In liquidation, Whose On distributes the land to Lou. At the time of the liquidation, the land is worth $110,000. a. How much loss, if any, may the corporation recognize on the distribution of the land to Lou? b. Assume that (1) the transfer of land to the corporation was made so that the corporation build a distribution center but a subsequent deterioration of economic conditions forced the corporation to liquidate and (2) the basis of the equipment at time of contribution was $ 50,000. What amount of loss may the corporation recognize on the distribution of the land to Lou?

Explanation / Answer

Question 1 Dividend received by Henk will be the ordinary income. Hence Henk is liable to pay tax on income of $130,000 Question 2a. Moe Curely Larry Own share 800 500 500 Share of Shemp 100.00 100.00 100.00 Share of Niagara 140 80 Total Shares Owned 1040 680 600 Question 2b. Moe Curely Family Total Larry 800 500 1300 500 100.00 100.00 200 100.00 140 80 220 1040 680 1720 600 So Moe and Curely each own 1720 shares and Larry own 600 shares. Question 3a. Groucho held preferred stock for 3 years. any assets held for more than one year are considered as capital assets. Any income on sale of such assets are considered Capital Gain. So he will pay capital Gain tax and not Income tax. Question 3b. Flywheel do not have impact on it's E&P. Because the gain on sale Does not have impact on the income of Flywheel. Question 3c. When buy back preferred stock any gain or loss must be adjusted with the paid in capital in excess of preferred stock. This gain or loss are of Capital nature. Should not be treated as income.

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