Spring 2022
Homework
(100 points): This homework should be uploaded to the folder in Submissions no later than Make sure you show your work to receive partial credit. I suggest that you either use an excel spreadsheet (each question answered on a separate worksheet tab) or submit a Word doc. with all of your supporting calculations.
Problem #1: (20 points)
Jamestown, Inc. is family-owned C-corporation whose stock is not traded on an exchange. Jamestown, Inc. stock is owned as follows:
- Virginia 6,000 shares
- Miles 8,000 shares
- John 2,000 shares
- Hope 4,000 shares
- Z corporation 3,000 shares
- VM partnership 2,000 shares
- Total shares issued & outstanding 25,000 shares
Virginia would like to redeem 3,000 shares of her stock. The stock has a fair market value of $500,000 and Virginia has a basis of $150/share for her stock. Here are the relationships Virginia has with the other shareholders of Jamestown, Inc.:
- Miles is Virginia’s older brother
- John is Virginia’s father
- Hope is Virginia’s sister
- Virginia owns 60% of the stock of Z corporation
- Virginia has a partnership interest of 30% in VM partnership.
- How many shares of stock is Virginia deemed to own in Jamestown, Inc.
- Assume that Virginia is in the 37% tax bracket. How much tax would Virginia owe if the transaction above (i.e. the redemption of 3,000 share of her Jamestown stock) occurs?
- You are Virginia’s tax advisor and you know that Virginia would like to minimize her tax liability. In addition, Virginia has a long-term capital loss carryforward of $20,000. Could you offer another option to Virginia? Be as specific as possible in explaining the tax implications of your plan.
Problem #2 (20 points)
- In 2021, Emily and Erick form the EE Partnership by transferring assets from their sole proprietorships. Emily contributes the furniture and fixtures with a fair market value of $500,000 and a basis of $200,000. Erick contributes land with a fair market value of $600,000 and basis of $400,000. The land (contributed by Erick) had a mortgage of $100,000 which EE partnership assumes. Emily and Erick will share income, gains m and losses 50/50.
- Determine Emily’s outside basis in EE Partnership after she and Erick have formed EE Partnership.
- Determine Erick’s outside basis in EE Partnership after he and Emily have formed EE Partnership.
- During 2023, the partnership has the following results:
- Sales $1,000,000
- Cost of sales 600,000
- Utilities, rent, etc. 50,000
- Salary to sales staff 100,000
- LTCG (sale of stock) 5,000
- Charitable contributions 2,000
- Tax exempt income 1,000
- Distribution of cash to Erick 15,000
At the beginning of 2023, the partnership had a total debt (all of which is either recourse or qualified nonrecourse debt) of $400,000. At the end of 2023, the partnership had a total of recourse and qualified nonrecourse debt of $425,000.
Also, at the beginning of 2023, Erick’s outside basis in EE Partnership of $525,000
Determine:
1). Erick’s outside basis in EE Partnership at the end of 2023.
2). How Erick will be taxed on his transactions with the partnership. Identify the amount and character of the income/loss/deductions. You do NOT need to determine the amount of the tax liability.
2. In 2024, EE Partnership sells the land originally contributed by Erick. The sales price is $750,000. Determine the amount of gain that must be allocated to Emily and to Erick as a result of the sale of this property.
Problem #3 (20 points)
In 2022, Paul, a 50% partner is Alpha Partnership, has an outside basis of $270,000, Paul received a proportionate non-liquidating distribution as follows:
Adjusted basis Fair Market Value
Cash $125,000 $125,000
Inventory 30,000 45,000
Land 90,000 165,000
- Does Paul recognize gain or loss from this distribution?
- What is Paul’s basis in:
- Inventory
- Land
- What is Paul’s outside basis in his interest in Alpha Partnership following this distribution?
- Assume that in 2022, Paul sells the land for $200,000. How much gain or loss (if any) must Paul recognize?
- What is Paul’s basis in:
How would your answers change if the distribution was a proportionate liquidating distribution?
- Does Paul recognize gain or loss from this distribution?
- What is Paul’s basis in:
- Inventory
- Land
- What is Paul’s outside basis in his interest in Alpha Partnership following this distribution?
- Assume that in 2022, Paul sells the land for $200,000. How much gain or loss (if any) must Paul recognize?
Problem #4 (20 points)
- Jana is a single taxpayer who will take the $12,950 standard deduction in 2022. Jana is the owner of Put Your Best Foot Forward, a boutique shoe store in Elite Suburb, Il. Jana operates her store as an S corporation (she is the sole shareholder). In 2022 her qualified business income from Put Your Best Foot Forward was $400,000. She paid $150,000 in w-2 wages (note: these wages are included in the $400,000 of qualified business income). In addition, the unadjusted basis in assets was $1,600,000 (this amount includes the building in which the store is located as well as the store fixtures). Jana had interest income of $25,000 (in addition to her earnings from her store). Determine Jana’s taxable income in 2022.
- Assume that instead of owning and operating Put Your Best Foot Forward, Jana was a dentist earning $400,000. She paid w-2 wages of $150,000 and the unadjusted basis of her office furnishings and equipment was $1,600,000. She will continue to take the $12,950 standard deduction rather than itemize. Under this scenario, what is Jana’s taxable income in 2022?
Problem #5 (20 points)
In 2010, Stephan formed a calendar-year C-corporation. In 2017, Stephan realized that his interests would be better served by converting from a C corporation to an S corporation. Thus, in 2017, Stephan filed the necessary paperwork with the IRS to convert his corporation to an S corporation. Stephan is the sole shareholder. At the beginning of 2021, Daniel had a stock basis of $500,000, an accumulated adjustments account (AAA) balance of $125,000, and accumulated earnings and profits of $205,000.
This year, Daniel receives a $250,000 distribution. Per his k-1, Stephan has a $14,000 long-term capital gain and $100,000 of non-separately stated income.
- Determine Stephan’s ending balance in AAA, AEP and stock basis.
- What are the tax consequences to Stephan from his ownership of this S corporation? Be specific—i.e. what is the amount and character of any income, gain or loss that would pass through and appear on Stephan’s 1040 return? Note: you do NOT need to calculate the amount of tax—just determine the items of taxable income.
