What are the tax consequences to the shareholders
Course:- Taxation
Reference No.:- EM13854645

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1. Assume that the only judicial precedents relating to a particular tax issue are as follows:



Tax Court

decided for the taxpayer

8th Circuit Court of Appeals

decided for the taxpayer (affirming the Tax Court)

U.S. District Court of E. Louisiana

decided for the taxpayer

5th Circuit Court of Appeals

decided for the government (reversing the U.S. District Court of E. Louisiana)


a. Discuss the precedential value of the foregoing decisions to your client, who is a California resident.

b. If your client, a Texas resident, litigates this particular issue in the Tax Court, how will the Court rule?     

2.   Joker Corporation owns 80% of Klue Corporation.  Joker Corporation also owns 45% of Lion Corporation and 45% of Mark Corporation.Klue Corporation owns 40% of Lion Corporation and 10% of Mark Corporation.

Required: Are any of the corporations members of a "controlled group"?  If yes, what type?

3. Brad, Otis, Wade and Andrea form Teal Corporation with the following investments:

                                                                                 Basis to                                             Shares

                                                                                 Transferor                    FMV                Issued

From Brad-

      Personal services rendered

      to Teal Corporation                                               $ -0-                          $30,000               30

From Otis-

      Equipment                                                           $345,000                     $300,000           270

From Wade-

      Cash                                                                     $60,000                       $60,000

      Unrealized accounts receivable                              -0-                              90,000               150

From Andrea-

      Land and building                                                  $210,000                     $450,000

      Mortgage on land and building                              300,000                       300,000             150

The mortgage transferred by Andrea is assumed by Teal Corporation.  The value of each share of Teal Corporation stock is $1,000.  Otis receives $30,000 cash in addition to the 270 shares.

Required: What are the tax consequences to each of the transferors and Teal Corporation as a result of the formation? 

4. Eric operates a drycleaning business as a sole proprietorship.  The business operates in a building that Eric owns.  Last year, he borrowed $150,000 by placing a mortgage on the building and the land on which the building sits.  He used the money for a downpayment on his personal residence and college expenses for his two children.  He now wants to incorporate his business and transfer the building and the mortgage to the new corporation along with other assets and some accounts payable.  The amount of the unpaid mortgage balance will not exceed Eric's adjusted basis for the land and building at the time he transfers it to the corporation.

Required: Explain to Eric the tax consequences of this proposed corporate formation.  You need not address the tax consequences to the Corporation.   

5. Laser Corporation owns three machines that it uses in its business.  It no longer needs two of these machines and is considering distributing them to its two shareholders as a property distribution. All three machines have a fair market valueof $40,000. The basis of each machine is as follows:

                        Machine A      $47,000

                        Machine B       $40,000

                        Machine C       $32,000


a. Explain fully the tax consequences of each proposed distribution to both the shareholder and Laser Corporation.  Assume sufficient E&P for all distributions.

b. What is your recommendation?         

6. Jackson Corporation is owned by three individuals: Annie, Betty, and Charlotte.  There is one class of voting common stock outstanding.  Annie owns 40 shares with a basis of $100 per share.  Betty owns 25 shares with a basis of $100 per share.  Charlotte owns 35 shares with a basis of $50 per share.  All of the shareholders have held their stock interests for over one year.  The fair market value of the common stock is $200 per share.  Jackson Corporation has E&P of $5,000.

Required: What are the tax consequences to the shareholders under each of the following alternative redemption transactions (ie. amount and character of any realized or recognized gain or loss and basis of any remaining shares)? For each transaction, be sure to discuss the applicability of §302(b)(1), (2), and (3).

a. Jackson redeems 10 shares from Annie for $200 per share.  All of the shareholders are unrelated. 

b. Jackson redeems all 25 of Betty's shares for $80 per share.  Betty is Annie's granddaughter.  Charlotte is unrelated to the other shareholders.

c. Jackson redeems 25 shares from Annie for $200 per share.  Charlotte is Annie's mother.  Betty is unrelated to the other shareholders.  Charlotte and Annie have been estranged due to a bitter feud for over 15 years.

d. Jackson redeems 10 shares from Betty for $200 per share.  Shortly thereafter, Jackson redeems 15 shares from Charlotte for $200 per share in an exchange that had been agreed to during the preceding year.  All of the shareholders are unrelated.  Discuss the tax consequences to Betty only.

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