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CHAPTER 4 Corporations Organization and Capital Structure 4-35

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					                                                          CHAPTER 4 Corporations: Organization and Capital Structure             4-35

bankrupt. During the corporation's existence, Emily was paid an annual salary of$60,000.
Write a letter to Emily in which you explain how she would treat her losses for tax purposes.

LO.5, 6 Stock in Jaybird Corporation (555 Industry Lane, Pueblo, CO 81001) is held                COMMUNICATIONS
equally by Vera, Wade, and Wes. Jaybird seeks additional capital in the amount of
$900,000 to construct a building. Vera, Wade, and Wes each propose to lend Jaybird
Corporation $300,000, taking from Jaybird a $300,000 four-year note with interest
payable annually at two points below the prime rate. Jaybird Corporation has current
taxable income of $2 million. You represent Jaybird Corporation. Jaybird's president,
Steve Ferguson, asks you how the payments on the notes might be treated for tax
purposes. Prepare a letter to Ferguson and a memo to your tax files where you document
your conclusions.

LO.6 Sam, a single taxpayer, acquired stock in a corporation that qualified as a small
business corporation under § 1244, at a cost of $100,000 three years ago. He sells the
stock for $10,000 in the current tax year.
a. How will the loss be treated for tax purposes?
b. Assume instead that Sam sold the stock to his sister, Kara, a few months after it was
     acquired for $100,000 (its fair market value). IfKara sells the stock for $60,000 in the
     current year, how should she treat the loss for tax purposes?

LO.6 Three years ago and at a cost of $40,000, Paul Sanders acquired stock in a                   COMMUNICATIONS
corporation that qualified as a small business corporation (under § 1244). A few months
after he acquired the stock, when it was still worth $40,000, he gave it to his brother, Mike
Sanders. Mike, who is married and files a joint return, sells the stock for $25,000 in the
current tax year. Mike asks you, his tax adviser, how the sale will be treated for tax
purposes. Prepare a letter to your client and a memo to the file. Mike's address is 10 Hunt
Wood Drive, Hadley, PA 16130.

LO.6 Susan transfers property (basis of $50,000 and fair market value of $25,000) to
Thrush Corporation in exchange for shares of § 1244 stock. (Assume the transfer
qualifies under § 351.)
a. What is the basis of the stock to Susan? (Susan and Thrush do not make an election
     to reduce her stock basis.)
b. What is the basis of the stock to Susan for purposes of § 1244?
c. If Susan sells the stock for $20,000 two years later, how will the loss be treated for tax
     purposes?

LO.5, 7 Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The                   DECISION       MAKING
corporation's assets have a tax basis of $50,000 and a fair market value of $600,000. In the
current year, Frank and Cora each loan Purple Corporation $150,000. The notes to
Frank and Cora bear interest of 8% per annum. Mitch leases equipment to Purple
Corporation for an annual rental of $12,000. Discuss whether the shareholder loans from
Frank and Cora might be reclassified as equity. Consider in your discussion whether
Purple Corporation has an acceptable debt-equity ratio.




 : Solutions to Research Problems can be prepared by using the Checkpoint'"                             THOMSON     REUTERS
   t Edition online research product, which is available to accompany this text. It is             Checkpoint" Student Edition
possible to prepare solutions to the Research Problems by using tax research mate-
found in a standard tax library.

       Problem 1. Lynn Jones, Shawn, Walt, and Donna are trying to decide whether they             DECISION       MAKING
     d organize a corporation and transfer their shares of stock in several corporations to
  new corporation. All their shares are listed on the New York Stock Exchange and are              COMMUNICATIONS
   . y marketable. Lynn would transfer shares in Brown Corporation; Shawn would
     er stock in Rust Corporation; Walt would transfer stock in White Corporation; and
       would transfer stock in several corporations. The stock would be held by the newly
    ed corporation for investment purposes. Lynn asks you, her tax adviser, if she would
    gain on the transfer of her substantially appreciated shares in Brown Corporation if
  transfers the shares to a newly formed corporation. She also asks whether there will be

				
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