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
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
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:
- 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, Stephan 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, Stephan 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.