30. LO.1, 4 At the start of the current year, Blue Corporation (a calendar year taxpayer)
has accumulated E & P of $100,000. Blue’s current E & P is $60,000, and at the end of
the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon.
Pam’s stock basis is $11,000; Jon’s stock basis is $26,000. How is the distribution treated
for tax purposes?
33. LO.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following
transactions in 2013, its second year of operation.
Taxable income $330,000
Federal income tax liability paid 112,000
Tax-exempt interest income 5,000
Meals and entertainment expenses (total) 3,000
Premiums paid on key employee life insurance 3,500
Increase in cash surrender value attributable to life insurance premiums 700
Proceeds from key employee life insurance policy 130,000
Cash surrender value of life insurance policy at distribution 20,000
Excess of capital losses over capital gains 13,000
MACRS deduction 26,000
Straight-line depreciation using ADS lives 16,000
Section 179 expense elected during 2012 100,000
Dividends received from domestic corporations (less than 20% owned) 25,000
Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by
$10,000 during 2013. In addition, Sparrow sold property on installment during 2012.
The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During
2013, Sparrow received a $15,000 payment on the installment sale. Finally, assume that
no additional first-year depreciation was claimed. Compute Sparrow’s current E & P.
F
42. LO.1, 2, 3, 4, 5 Cerulean Corporation has two equal shareholders, Eloise and Olivia.
Eloise acquired her Cerulean stock three years ago by transferring property worth
$700,000, basis of $300,000, for 70 shares of the stock. Olivia acquired 70 shares in Cerulean
Corporation two years ago by transferring property worth $660,000, basis of
$110,000. Cerulean Corporation’s accumulated E & P as of January 1 of the current year
is $350,000. On March 1 of the current year, the corporation distributed to Eloise property
worth $120,000, basis to Cerulean of $50,000. It distributed cash of $220,000 to Olivia.
On July 1 of the current year, Olivia sold her stock to Magnus for $820,000. On
December 1 of the current year, Cerulean distributed cash of $90,000 each to Magnus
and Eloise. What are the tax issues?
44. LO.2, 6 Parrot Corporation is a closely held company with accumulated E & P of
$300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50%
share in Parrot, and they share management responsibilities equally. What are the tax
consequences of each of the following independent transactions involving Parrot, Tom,
and Jerry? How does each transaction affect Parrot’s E & P?
a. Parrot sells an office building (adjusted basis of $350,000; fair market value of
$300,000) to Tom for $275,000.
b. Parrot lends Jerry $250,000 on March 31 of this year. The loan is evidenced by a note
and is payable on demand. No interest is charged on the loan (the current applicable
Federal interest rate is 7%).
c. Parrot owns an airplane that it leases to others for a specified rental rate. Tom and
Jerry also use the airplane for personal use and pay no rent. During the year, Tom
used the airplane for 120 hours, and Jerry used it for 160 hours. The rental value of
the airplane is $350 per hour, and its maintenance costs average $80 per hour.
d. Tom leases equipment to Parrot for $20,000 per year. The same equipment can be
leased from another company for $9,000 per year.
51. LO.8, 9 Robert and Lori (Robert’s sister) own all of the stock in Swan Corporation
(E & P of $1 million). Each owns 500 shares and has a basis of $85,000 in the shares.
Robert wants to sell his stock for $600,000, the fair market value, but he will continue to
be employed as an officer of Swan Corporation after the sale. Lori would like to purchase
Robert’s shares and, thus, become the sole shareholder in Swan, but Lori is short
of funds. What are the tax consequences to Robert, Lori, and Swan Corporation under
the following circumstances?
a. Swan Corporation distributes cash of $600,000 to Lori, and she uses the cash to purchase
Robert’s shares.
b. Swan Corporation redeems all of Robert’s shares for $600,000.of funds. What are the tax consequences to Robert, Lori, and Swan Corporation under
the following circumstances?
a. Swan Corporation distributes cash of $600,000 to Lori, and she uses the cash to purchase
Robert’s shares.
b. Swan Corporation redeems all of Robert’s shares for $600,000.
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