16.1: John contributes land (value = $400,000, basis = $300,000, associated mortgage = $330,000) to the Durant Company in exchange for a 20% ownership interest, and $35,000 cash. What is John’s tax treatment if (a) Durant is a partnership and (b) Durant is an S corporation? What would your answer be if Durant is an S corporation, and other shareholders with an ownership interest of 65% are also involved in the exchange?
16.2: Beach Corporation elected S status for the current year. Beach owned some land at the beginning of the year, and at that time the land had a fair market value of $610,000. Beach had taxable income of $400,000 for the year. During the year Beach sold the land (sale price = $620,000, basis = $200,000) for a gain of $420,000. How much is the built-in gains tax?
16.3: Tip Corporation is a calendar-year S corporation with 10,000 shares outstanding, 2,000 of which are owned by Will and 8,000 of which are owned by Nancy. During the year Tip has ordinary business income of $540,000 and a long term capital gain of $230,000 from a transaction that occurred on April 3. On 11/1 Nancy sells Yolanda 3000 of her shares. How would the income be allocated to each shareholder?
16.4: Q Inc. is owned by L and R. Q Inc. is an S corporation, but in prior years it was a regular corporation and it has a remaining E&P balance from those prior years of $60,000. The corporation’s AAA balance at the beginning of the year was $35,000, and it reported taxable income of $42,000.
At the beginning of the year, L’s tax basis in her Q Inc. stock was $25,000. R’s tax basis in his Q Inc. stock (also at the beginning of the year) was only $10,000.
The corporation distributed $100,000 to its two shareholders this year ($50,000 each).
What portion of the distribution will be taxable to the shareholders as dividend income?
Will either shareholder recognize any capital gain on receipt of the distribution? What will be their remaining tax basis in their Q shares after accounting for the distribution?
In total, how much income and/or capital gain will each shareholder report on his or her individual income tax returns this year in connection with their investments in Q Inc.?
16.5: Shadow Inc. is an S corporation with a prior history as a regular corporation. At the beginning of the year, the company had AAA of $230,000 and E&P of $170,000. Schedule K of the company’s Form 1120S for the current year reported the following:
Ordinary business income (loss) (page 1, line 21)
Net section 1231 gain (loss)
Tax-exempt interest income
Distributions to shareholders
What is the balance in the company’s AAA account at the beginning of next year? (Assume the company did not elect to source distributions from E&P first).
How would your answer change if the company had distributed $240,000 to its shareholders rather than $24,000?
What if the company’s ordinary business income (loss) had been (18,000) rather than (118,000) and the company had distributed $240,000 to its shareholders?
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