Question 1

Red, White and Blue Corporations are three unrelated calendar year corporations.
During the year, they report the following information:

Red White
Corporation Corporation

Gross income from operations $ 400,000 $ 320,000

Expenses from operations $ (340,000) $ (340,000)

Dividends received from domestic

corporations (less than 20% owned) $ 200,000 $ 200,000

Taxable income before the

dividends recevied deduction $ 260,000 $ 180,000

Q. What is the amount of dividends receveid deduction for each of the corporations? (show your work)

1) Tentative dividend received deduction

at 50% (due to 20% ownership)

2) Limitation based on taxable income (50%)

3) Dividends received deduction

Lower of the two unless 1) creates or increases
a NOL
orporations.

Blue
Corporation

$ 260,000

$ (340,000)

$ 200,000

$ 120,000

corporations? (show your work)

Question 1

Red, White and Blue Corporations are three unrelated calendar year corporations.
During the year, they report the following information:

Red White Blue

Corporation Corporation Corporation

Gross income from operations $ 400,000 $ 320,000 $ 220,000

Expenses from operations $ (340,000) $ (340,000) $ (340,000)

Dividends received from domestic

corporations (less than 20% owned) $ 200,000 $ 200,000 $ 200,000

Taxable income before the

dividends recevied deduction $ 260,000 $ 180,000 $ 80,000

Q. What is the amount of dividends receveid deduction for each of the corporations? (show your work)

1) Tentative dividend received deduction

at 50% (due to 20% ownership) 100,000 100,000 100,000

2) Limitation based on taxable income (50%) 130,000 90,000 40,000

3) Dividends received deduction 100,000 90,000 100,000

Lower of the two unless 1) greats or increases
a NOL
Question 2

Ann and Bob form Olive Corporation with the transfer of the following consideration:

Consideration Transferred
Basis to Fair Market
Transferor Value
From Ann:
Personal services rendered
to Olive Corporation $ - $ 20,000

From Bob:
Installment obligation $ 5,000 $ 40,000
Inventory $ 10,000 $ 30,000
Secret process $ - $ 10,000

Q. What are the federal income tax consequences to each of Ann and Bob as well as the corporation wh
transferring both with and without Section 351? (Show your work)

Without 351
Realized gain/income
From Ann:
Personal services rendered
to Olive Corporation $ - $ -

From Bob:
Installment obligation $ - $ -
Inventory $ - $ -
Secret process $ - $ -

With 351

1) Transfer of qualified property

2) In exchange for qualified stock
3) Transferor(s) own 80% or more subsequently

From Ann:
Personal services rendered
to Olive Corporation $ - $ -

From Bob:
Installment obligation $ - $ -
Inventory $ - $ -
Secret process $ - $ -
 Number of
Shares Issued

200

800

ll as the corporation when

Shareholders Corp
Shares Ordinary Capital Tax basis Tax basis
income gain shares assets

0 - Capitalized or expensed

$ -
$ -
0 $ -

Shareholders Corp
Ordinary Capital Tax basis Tax basis
income gain shares assets

0 - - - Capitalized or expensed

- - - $ -
- - - $ -
0 - - - $ -
or expensed

or expensed
Question 2

Ann and Bob form Olive Corporation with the transfer of the following consideration:

Consideration Transferred
Basis to Fair Market
Transferor Value
From Ann:
Personal services rendered
to Olive Corporation $ - $ 20,000

From Bob:
Installment obligation $ 5,000 $ 40,000
Inventory $ 10,000 $ 30,000
Secret process $ - $ 10,000

Q. What are the federal income tax consequences to each of Ann and Bob as well as the corporation wh
transferring both with and without Section 351? (Show your work)

Without 351
Realized gain/income
From Ann:
Personal services rendered
to Olive Corporation $ - $ 20,000

From Bob:
Installment obligation $ 5,000 $ 40,000
Inventory $ 10,000 $ 30,000
Secret process $ - $ 10,000

With 351

1) Transfer of qualified property

2) In exchange for qualified stock
3) Transferor(s) own 80% or more subsequently

From Ann:
Personal services rendered
to Olive Corporation $ - $ 20,000

From Bob:
Installment obligation $ 5,000 $ 40,000
Inventory $ 10,000 $ 30,000
Secret process $ - $ 10,000
 Number of
Shares Issued

200

800

ll as the corporation when

Shareholders Corp
Shares Ordinary Capital Tax basis Tax basis
income gain shares assets

200 20,000 - 20,000 20,000 Capitalized or expensed

35,000 $ 40,000
20,000 $ 30,000
800 10,000 80,000 $ 10,000

Shareholders Corp
Ordinary Capital Tax basis Tax basis
income gain shares assets

200 20,000 20,000 20,000 Capitalized or expensed

- - $ 5,000
- - $ 10,000
800 - - 15,000 $ -
or expensed

or expensed
Question 3

On January 1 of the current year, Black Corporation has accumulated E&P of $10,000.
Current E&P for the year amounts to $30,000. Megan and Matt are sole equal shareholders
of Black from January 1 to July 31 and each have basis of $15,000 in the shares. On August 1,
Megan sells all of her stock to Helen for $20,000. Black makes two distributions to the
shareholders during the year: $40,000 to Megan and Matt ($20,000 each) on July 1 and
$40,000 to Matt and Helen ($20,000 each) on December 1. Current and accumulated E&P are
applied to the two distributions as follows:

Q. What are the federal income tax consequences to each of Megan, Matt and Helen
for each of the transactions above? (Show your work)

Answer:
Distributions can be: 1) Taxable dividend, then
2) Return of capital (to extent of basis), then
3) Capital gain

Source of Distribution

Current Accumulated Return of

E&P E&P Capital
July 1 distribution ($40,000) $ - $ - $ -
December 1 distribution ($40,000) $ - $ - $ -

Matt Megan Helen

July 1
Dividend - - -
ROC - - -
Cap Gain - - -
Basis - - -

August 1
Cap Gain/Loss - -
Basis - -

Dec 1
Dividend - - -
ROC - - -
Cap Gain - - -
Basis - - -
 areholders
. On August 1,

ated E&P are

Question 3

On January 1 of the current year, Black Corporation has accumulated E&P of $10,000.
Current E&P for the year amounts to $30,000. Megan and Matt are sole equal shareholders
of Black from January 1 to July 31 and each have basis of $15,000 in the shares. On August 1,
Megan sells all of her stock to Helen for $20,000. Black makes two distributions to the
shareholders during the year: $40,000 to Megan and Matt ($20,000 each) on July 1 and
$40,000 to Matt and Helen ($20,000 each) on December 1. Current and accumulated E&P are
applied to the two distributions as follows:

Q. What are the federal income tax consequences to each of Megan, Matt and Helen
for each of the transactions above? (Show your work)

Answer:
Distributions can be: 1) Taxable dividend, then
2) Return of capital (to extent of basis), then
3) Capital gain

Source of Distribution

Current Accumulated Return of

E&P E&P Capital
July 1 distribution ($40,000) $ 15,000 $ 10,000 $ 15,000
December 1 distribution ($40,000) $ 15,000 $ - $ 25,000

Matt Megan Helen

July 1
Dividend 12,500 12,500 -
ROC 7,500 7,500 -
Cap Gain - - -
Basis 7,500 7,500 -

August 1
Cap Gain/Loss 12,500 -
Basis - 20,000

Dec 1
Dividend 7,500 - 7,500
ROC 7,500 - 12,500
Cap Gain 5,000 - -
Basis - - 7,500
 areholders
. On August 1,

ated E&P are

Question 4

Crimson, Inc. and Indigo, Inc. are equal partners in CI Partnership. Crimson uses
the calendar year, and Indigo uses a fiscal year ending August 31.

Q. What is the required tax year of CI Partnership? (Show your work including the
order in which required tax year rules should be applied).

Answer:

1) Must use the same year as the majority partners (partners that own together 50% or more)
2) Must use the same year as the principal partners (partners that own together 5% or more)
3) Must use the year with the least aggregate deferral

12/31 Weighted
Year end % Deferral Deferral
Crimson
Indigo
0

8/31
Weighted
Year end % Deferral Deferral
Crimson
Indigo
0

The required tax year of the partnership is [Date] since it results in the least aggregate deferral
of income to the partners.
er 50% or more)
er 5% or more)

ggregate deferral
Question 4

Crimson, Inc. and Indigo, Inc. are equal partners in CI Partnership. Crimson uses
the calendar year, and Indigo uses a fiscal year ending August 31.

Q. What is the required tax year of CI Partnership? (Show your work including the
order in which required tax year rules should be applied).

Answer:

1) Must use the same year as the majority partners (partners that own together 50% or more)
2) Must use the same year as the principal partners (partners that own together 5% or more)
3) Must use the year with the least aggregate deferral

12/31 Weighted
Year end % Deferral Deferral
Crimson 12/31 0.5 0 0
Indigo 08/31 0.5 8 4
4

8/31
Weighted
Year end % Deferral Deferral
Crimson 12/31 0.5 4 2
Indigo 08/31 0.5 0 0
2

The required tax year of the partnership is August 31 since it results in the least aggregate deferral
of income to the partners.
er 50% or more)
er 5% or more)

ast aggregate deferral

Question 5

Beachside Properties LLC had the following transactions during the year:

Sales revenue $ 2,000,000

Cost of sales 800,000
Salaries to employees 500,000
Cost recovery deductions 91,984
Utilities, supplies, and other expenses 128,016
Taxes and licenses (including payroll taxes) 60,000
Charitable contributions 6,000
Short-term capital gain 12,000
Net income from rental real estate 300,000
Qualified dividends received 4,000
Tax-exempt income (bond interest) 2,100
Payment of medical expenses on behalf
of partner Kyle 4,000
Distribution to Maria 20,000

Q. For each of th above transaction, identify whether it's a separate stated item
or net ordinary business income. If separately stated item, explain why.

Answer:

An item has to be separately stated if it impacts the partners' income, deduction, gain
or loss separate (results in a different impact to partners' tax liability).

Net Ordinary Business Income

Net ordinary business income $ - x partnership %

Separately Stated Item

x %

x %

x %

x %
x %
duction, gain

x partnership %
Question 5

Beachside Properties LLC had the following transactions during the year:

Sales revenue $ 2,000,000

Cost of sales 800,000
Salaries to employees 500,000
Cost recovery deductions 91,984
Utilities, supplies, and other expenses 128,016
Taxes and licenses (including payroll taxes) 60,000
Charitable contributions 6,000
Short-term capital gain 12,000
Net income from rental real estate 300,000
Qualified dividends received 4,000
Tax-exempt income (bond interest) 2,100
Payment of medical expenses on behalf
of partner Kyle 4,000

Q. For each of th above transaction, identify whether it's a separate stated item
or net ordinary business income. If separately stated item, explain why.

Answer:

An item has to be separately stated if it impacts the partners' income, deduction, gain
or loss separate (results in a different impact to partners' tax liability).

Net Ordinary Business Income

Sales revenue $ 2,000,000

Cost of sales 800,000
Salaries to employees 500,000
Cost recovery deductions 91,984
Utilities, supplies, and other expenses 128,016
Taxes and licenses (including payroll taxes) 60,000

Net ordinary business income $ 420,000 x partnership %

Separately Stated Item

Charitable contributions x % 6,000 Subject to taxpayer limitation. 50

Short-term capital gain x % 12,000 Can be offset with capital losses

Net income from rental real estate x % 300,000 Can be offset with passive losse

Qualified dividends received x % 4,000 Corporations can get DRD and i

Tax-exempt income (bond interest) x % 2,100 Must be added back in determin

Payment of medical expenses on behalf

of partner Kyle Kyle 4,000 Personal expense therefore trea

Distribution of cash to Maria Maria 20,000 Allocable only to Maria

duction, gain

x partnership %

Subject to taxpayer limitation. 50% of TI for individuals and 10% for corporations.

Can be offset with capital losses

Can be offset with passive losses

Corporations can get DRD and individuals get preferential rate (20%)
Must be added back in determining E&P

Personal expense therefore treated as a distribution only to Kyle

Allocable only to Maria

Question 6

Jim and Becky contribute property to form the JB Partnership. Jim contributes cash of
$30,000. Becky contributes land with an adusted basis and fair market value of $45,000,
subject to a liability of $15,000. The partnership borrows $50,000 to finance construction
of a building on the contributed land. At the end of the first year, the accrual basis partnership
owes $3,500 in trade accounts payable to various vendors. Assume no other operating
activities occurred and that Jim and Becky share equally the liabilities.

In the second year, th partnership generates $70,000 of taxable income from operations
and repays both the $50,000 construction loan and the $3,500 trade accounts payable.
At the end of the second year, the partnership distributes cash of $90,000 to Jim and
property with tax basis of $90,000 to Becky.

Q. What is the outside basis of Jim and Becky's interest in the partnership at the end of
year one and then at the end of year two? (Show your work)

Answer:

Jim Becky
Year 1

Cash contribution
Land
Land Liability

Liability increase
Land
Construction
A/P

Partnership basis - -

Year 2

Taxable income

Liability decrease
Construction
A/P

- -
Distributions

Cash
Property
Taxable gain to Jim
Adjustment to property basis
- -

Property basis for Becky -

s partnership
Question 6

Jim and Becky contribute property to form the JB Partnership. Jim contributes cash of
$30,000. Becky contributes land with an adusted basis and fair market value of $45,000,
subject to a liability of $15,000. The partnership borrows $50,000 to finance construction
of a building on the contributed land. At the end of the first year, the accrual basis partnership
owes $3,500 in trade accounts payable to various vendors. Assume no other operating
activities occurred and that Jim and Becky share equally the liabilities.

In the second year, th partnership generates $70,000 of taxable income from operations
and repays both the $50,000 construction loan and the $3,500 trade accounts payable.
At the end of the second year, the partnership distributes cash of $90,000 to Jim and
property with tax basis of $90,000 to Becky.

Q. What is the outside basis of Jim and Becky's interest in the partnership at the end of
year one and then at the end of year two? (Show your work)

Answer:

Jim Becky
Year 1

Cash contribution 30,000

Land 45,000
Land Liability (15,000)
30,000

Liability increase
Land 7,500 7,500
Construction 25,000 25,000
A/P 1,750 1,750

Partnership basis 64,250 64,250

Year 2

Taxable income 35,000 35,000

Liability decrease
Construction (25,000) (25,000)
A/P (1,750) (1,750)

72,500 72,500
Distributions

Cash (90,000)
Property (90,000)

(17,500) (17,500)
Taxable gain to Jim 17,500
Adjustment to property basis 17,500
- -

Property basis for Becky 72,500

s partnership