Question & Answer

Cougar Corporation is owned equally by Cat Stevens and a partnership that is owned equally by Cat’s father and two unrelated individuals. Cat and the partnership each owns 3,000 shares in Cougar. Cat wants to reduce his ownership in the company, and it is decided that Cougar will redeem 1,500 of his shares for $25,000 per share. Cat’s tax basis in each share is $5,000. What are the income tax consequences to Cat as a result of the stock redemption, assuming the company has earnings and profits of $10 million? 

Limited Brands recently repurchased 68,965,000 of its shares, paying $29 per share. The total number of shares outstanding before the redemption was 473,223,066. The total number of shares outstanding after the redemption was 404,258,066. Assume your client owned 20,000 shares of stock in Limited Brands. What is the minimum number of shares your client must tender to receive exchange treatment under the “substantially disproportionate with respect to the shareholder” change-in-ownership rules? 

Assume the same facts as in the previous problem, and that Nancy would like to have Alfonzo stay on as a consultant after all of his shares are redeemed. She would pay him a modest amount of $500 per month. Nancy wants to know if there is any de minimis rule such that Alfonso would not be treated as having retained a prohibited interest in the company because he is receiving such a small amount of money. Consult Lynch v. Comm’r, 801 F.2d 1176 (9th Cir. 1986), reversing 83 TC 597 (1984); Seda v. Comm’r, 82 TC 484 (1984); and Cerone v. Comm’r, 87 TC 1 (1986). 

Boots Inc. is owned equally by Alfonso and his daughter Nancy, each of whom holds 1,000 shares in Boots. Alfonso wants to retire from the company, and it is decided that Boots will redeem all 1,000 of Alfonso’s shares for $25,000 per share on December 31 of this year. Alfonso’s tax basis in each share is $500. Boots Inc. has current E&P of $1,000,000 and accumulated E&P of $5,000,000. 

Assume the same facts as in the previous problem but that Betty and Barney are not getting along and have separated due to marital discord (although they are not legally separated). In fact, they cannot even stand to talk to each other anymore and communicate only through their accountant. Betty wants to argue that she should not be treated as owning any of Barney’s stock in Bedrock because of their hostility towards each other. Can family hostility be used as an argument to void the family attribution rules?  Consult Rev. Rul. 80-26; Robin Haft Trust v. Comm’r, 510 F.2d 43 (1st Cir. 1975); 

Bedrock Inc. is owned equally by Barney and his spouse Betty, each of whom holds 1,000 shares in the company. Betty wants to reduce her ownership in the company, and it is decided that the company will redeem 500 of her shares for $25,000 per share on December 31 of this year. Betty’s tax basis in each share is $5,000. Bedrock has current E&P of $10,000,000 and accumulated E&P of $50,000,000. 

Acme Corporation has 1,000 shares outstanding. Joan and Bill are married, and they each own 20 shares of Acme. Joan and Bill’s daughter, Shirley, also owns 20 shares of Acme.  Joan is an equal partner with Jeri in the J&J partnership, and this partnership owns 60 shares of Acme. Jeri is not related to Joan or Bill. How many shares of Acme is Shirley deemed to own under the stock attribution rules?

1. Draw Kate’s and Simon’s demand curves for potatoes on one diagram. Note that you will use the same vertical scale as in Figure 2.1, but you will need a quite different horizontal scale.

2. At what price is their demand the same?

3. What explanations could there be for the quite different shapes of their two demand curves?

4. Assume that Kate and Simon are the only two consumers in the market. Show how the market demand curve can be derived from their individual demand curves.

Assume that there are 200 consumers in the market. Of these, 100 have schedules like Kate’s and 100 have schedules like Simon’s. What would be the total market demand schedule for potatoes now?                               

1. How much would be demanded at a price of 30p per kilogram?

2. Assuming that demand does not change from month to month, plot the annual market demand for potatoes.

Which of the following are positive statements and which are normative?

(a)  Cutting the higher rates of income tax will redistribute incomes from the poor to the rich.

(b)  It is wrong that inflation should be reduced if this means that there will be higher unemployment.

(c)  It is incorrect to state that putting up interest rates will reduce inflation.

(d)  The government should introduce road pricing to address the issue of congestion.

(e)  Current government policies should be aimed at reducing the deficit rather than stimulating growth.

(Threshold Concept 2) 1. Would you ever swap things with friends if both of you did not gain? Explain your answer.

(Threshold Concept 2) 2. Give one or two examples of involuntary (i.e. compulsory) economic interaction where one side gains but the other loses.

(Threshold Concept 3) 1. If global warming affects all of us adversely, why in a purely market economy would individuals and firms continue with activities that contribute towards global warming?

(Threshold Concept 3) 2. In what ways do your own consumption patterns adversely affect other people?

Are different factor markets similarly interdependent? What would happen if the price of capital equipment rose?

Summarise this last paragraph using symbols like those in Figure 1.7.

1. Why do the prices of fresh vegetables fall when they are in season? Could an individual farmer prevent the price falling?

2. If you were the manager of a supermarket, how would you set about deciding what prices to charge for food approaching its sell-by date?

3. Demand for downloaded music has grown rapidly, yet the prices of downloads have fallen. Why?

Can you think of any examples where prices and wages do not adjust very rapidly to a shortage or surplus? For what reasons might they not do so?

Try using the same type of analysis in the labour market to show what will happen if there is an increase in demand for labour. What is the ‘price’ of labour?

How do you think the positions of these eight countries will change over the next decade?

Will economic growth always involve a parallel outward shift of the production possibility curve?

3. Under what circumstances would the production possibility curve be

(a) a straight line;

(b) bowed in toward the origin? Are these circumstances ever likely?

1. What is the opportunity cost of the seventh million units of clothing?

2. If the country moves upward along the curve and produces more food, does this also involve increasing opportunity costs?

Would it be desirable to have total equality in an economy, so that everyone receives the same share of resources?

How would the principle of weighing up marginal costs and benefits apply to a worker deciding how much overtime to work in a given week?

Assume that you are looking for a job and are offered two. One is more enjoyable, but pays less. How would you make a rational choice between the two jobs?

(Threshold Concept 1) 1. Think of three things you did last week. What was opportunity cost of each one?

(Threshold Concept 1) 2. Assume that a supermarket has some fish that has reached its sell-by date. It was originally priced at £10, but yesterday was marked down to £5 ‘for quick sale’. It is now the end of the day and it still has not been sold. The supermarket is about to close and there is no one in the store that wants fish. What is the opportunity cost for the store of throwing the fish away?

Which of the following are macroeconomic issues, which are microeconomic ones and which could be either depending on the context?

               (a)  Inflation.

               (b)  Low wages in certain sectors.

               (c)  The rate of exchange between the pound and the euro.

               (d)  Why the prices of fresh fruit and vegetables fluctuate more than those of cars.

               (e)  The rate of economic growth this year compared with last year.

               (f)   The decline of traditional manufacturing industries.

               (g)  Immigration of workers