Question & Answer

Golf Corp. (GC), a calendar-year, accrual-method corporation, held its directors’ meeting on December 15 of year 1. During the meeting, the board of directors authorized GC to pay a $75,000 charitable contribution to the World Golf Foundation, a qualifying charity. 

In 2024, SML Corp. reported taxable income of $100,000 before any NOL deductions. SML has a $170,000 NOL carryover that originated in 2017 and a $90,000 NOL carryover that originated in 2023. What is SML’s 2024 taxable income after the NOL deduction? What NOLs can SML carryover to 2025?

WCC Corp. has a $100,000 net operating loss carryover into 2024. Assume that it reported $75,000 of taxable income in 2024 (before the net operating loss deduction) and $30,000 of taxable income in 2025 (before the net operating loss deduction).

What book-tax differences in year 1 and year 2 associated with its capital gains and losses would DEF Inc. report in the following alternative scenarios?  Identify each book-tax difference as favorable or unfavorable and as permanent or temporary.

a.  In year 1, DEF recognized a loss of $15,000 on land that it had held for investment.  In year 1, it also recognized a $30,000 gain on equipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $20,000.  DEF had deducted $40,000 of tax depreciation on the equipment. In year 2, DEF recognized a capital loss of $2,000.

What book-tax differences in year 1 and year 2 associated with its capital gains and losses would ABD Inc. report in the following alternative scenarios? Identify each book-tax difference as favorable or unfavorable and as permanent or temporary.

On January 1, year 1, ABC Inc. issued 5,000 stock options with an estimated value of $10 per option. Each option entitles the owner to purchase one share of ABC stock for $25 a share (the per-share price of ABC stock on January 1, year 1). Assume the options vest on December 31, year 1, and that all 5,000 stock options were exercised on the vesting date when the stock was valued at $31 per share. Identify ABC’s tax deduction and book-tax difference associated with the stock options under the following alternative scenarios:

On July 1 of year 1, Riverside Corp. (RC), a calendar-year taxpayer, acquired the assets of another business in a taxable acquisition. When the purchase price was allocated to the assets purchased, RC determined it had purchased $1,200,000 of goodwill for both book and tax purposes.  At the end of year 1, the auditors for RC determined that the goodwill had not been impaired during the year.  In year 2, however, the auditors concluded that $200,000 of the goodwill had been impaired, and they required RC to write down the goodwill by $200,000 for book purposes.  

On its year 1 financial statements, Seatax Corporation, an accrual-method taxpayer, reported federal income tax expense of $570,000.  On its year 1 tax return, it reported a tax liability of $650,000. During year 1, Seatax made estimated tax payments of $700,000. What book-tax difference, if any, associated with its federal income tax expense should Seatax have reported when computing its year 1 taxable income?  Is the difference favorable or unfavorable?  Is it temporary or permanent?

ELS Corporation reported gross receipts for 2021-2023 for Scenarios A, B, and C as follows: 

LNS Corporation reports book income of $2,000,000. Included in the $2,000,000 is $15,000 of tax-exempt interest income. LNS reports $1,345,000 in ordinary and necessary business expenses.  What is LNS Corporation’s taxable income for the year?

Breslin Inc. made a capital contribution of investment property to its 100 percent-owned subsidiary, Crisler Company. The investment property had a fair market value of $3,000,000 and a tax basis to Breslin of $2,225,000.

Ron and Hermione formed Wizard Corporation on January 2. Ron contributed cash of $200,000 in return for 50 percent of the corporation’s stock. Hermione contributed a building and land with the following fair market values and tax bases in return for 50 percent of the corporation’s stock:

    FMV    Adjusted tax basis

Building      75,000          20,000

Land    175,000          80,000

Total$  250,000$      100,000

To equalize the exchange, Wizard Corporation paid Hermione $50,000 in addition to her stock.

Jekyll and Hyde formed a corporation (Halloween Inc.) on October 31 to develop a drug to address spilt personalities. Jekyll will contribute a patented formula valued at $200,000 in return for 50 percent of the stock in the corporation. Hyde will contribute an experimental formula worth $120,000 and medical services in exchange for the remaining stock.  Jekyll’s tax basis in the patented formula is $125,000, whereas Hyde has a basis of $15,000 in his experimental formula.  

When incorporating Spotfree, a cleaning company, Jayne transferred accounts receivable (fair market value $20,000 and $0 tax basis) and $12,000 of accounts payable from her cash-method sole proprietorship to Spotfree in exchange for Spotfree stock valued at $8,000. Assume the transfer qualifies under §351.

a. What are the amount and character of the gain Jayne must recognize on the exchange? 

b. What is Jayne's basis in the Spotfree stock she received in the exchange?

Johanne transferred investment property to S&J Corporation in exchange for 60 percent of the S&J Corporation stock (60 shares valued at $115,000). The property's fair market value was $190,000 and its tax basis to Johanne was $60,000. The investment property was subject to a $75,000 mortgage that S&J Corporation assumed on the transfer (not treated as boot).  

a. Assuming the transfer qualifies under §351, what are the amount and character of the gain Johanne must recognize on the exchange? 

b. What is Johanne's tax basis in the S&J stock he received in the exchange?

c. Assume that in addition to the investment property, Johanne transferred inventory with a fair market value of $30,000 and a tax basis of $20,000 for additional S&J Corporation stock. What are the amount and character of gain Johanne must recognize on the exchange of the investment property and inventory for stock?

d. Assuming the facts in part (c), what is Johanne's basis in the S&J stock he received in the exchange?

e. Assume the original facts except that the liability assumed by S&J Corporation would give rise to a deduction when paid. What are the amount and character of gain Johanne must recognize on the exchange?

f. Assuming the facts in part (e), what is Johanne's basis in the S&J stock he received in the exchange?

In forming Parts Inc. as a corporation, Candice transferred inventory to Parts Inc. in exchange for 30 percent of the corporation's stock (60 shares valued at $130,000). The inventory's fair market value was $147,000 and its tax basis to Candice was $75,000. The inventory was subject to a $17,000 liability that Parts Inc. assumed on the transfer. Candice borrowed the $17,000 from the bank (using the inventory as collateral) shortly before transferring the inventory to Parts Inc., and she used the loan proceeds to pay for a family vacation to Europe. 

a. Assuming the transfer qualifies under §351 and that the liability has a tax-avoidance purpose, what gain or loss will Candice recognize on the transfer? 

b. Assuming the transfer qualifies under §351  and that the liability has a tax-avoidance purpose, what is Candice's basis in the stock she received in the exchange?

c. Suppose the liability does not have a tax-avoidance purpose. What gain will Candice recognize on the transfer? 

d. Assuming the liability does not have a tax-avoidance purpose,  what is Candice's basis in the stock she received in the exchange?

Jorge contributed land he held as an investment (fair market value $120,000; basis $55,000) and inventory (fair market value $80,000; basis $75,000) to ABC Corporation in exchange for 50 percent of the ABC stock (50 shares valued at $160,000) and $40,000 cash in a qualifying §351 exchange.  

a. What amount of gain does Jorge recognize on the exchange? What is the character of the gain? What would be Jorge's tax basis in his ABC stock after the exchange?

b. Assume the same facts except that Jorge received $40,000 of business property from ABC instead of $40,000 cash. What are the amount and character of gain Jorge would recognize on the exchange?

c. Assume the original facts in this problem except that the inventory had a tax basis of $90,000 so that Jorge realized a $10,000 loss on the inventory (he still realized a $65,000 gain on the land). How much gain or loss would he recognize on the exchange?  

Jasmine transferred land she held as an investment (fair market value $140,000; basis $110,000) in exchange for 50 percent of Kandy Corporation stock (40 shares valued at $100,000) and $40,000 cash in a qualifying §351 exchange. What are the amount and character of gain Jasmine recognizes on the transfer?

Koyuki transferred investment property she has owned for six years to XYZ Corporation in exchange for 40 percent of the corporation's stock (40 shares valued at $160,000) at the time XYZ was incorporated. The property's tax basis was $90,000 and its fair market value was $160,000. Assume the transfer qualifies under §351. 

a. What gain or loss does Koyuki recognize on the transfer?  

b. What is her basis in the stock she received in the exchange?  

c. What is her holding period in the stock?

Robert and Keisha invited Bijan to join them in forming Aero, a plane-chartering company, as a corporation. Bijan did not want to join at the time and declined their invitation. More than a year later, Bijan changed his mind and transferred appreciated property to Aero in exchange for 45 percent of Aero stock. Is Bijan required to recognize his realized gain on the transaction? 

Sam and Devon agree to go into business together selling college-licensed clothing. According to the agreement, Sam will contribute inventory valued at $100,000 in return for 80 percent of the stock in the corporation. Sam’s tax basis in the inventory is $60,000. Devon will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualified as organizational expenditures).  The accounting services are valued at $25,000.

Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market values and adjusted tax bases.

    FMV       Adjusted Tax Basis

Inventory$    20,000$        10,000

Building    150,000        100,000

Land    230,000        300,000

Total$  400,000$      410,000

The corporation also assumed a mortgage (liability) of $100,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $300,000. The transaction met the requirements to be tax-deferred under §351.

Ivan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market values and adjusted tax bases.

    FMV    Adjusted Tax Basis

Inventory$    10,000$  15,000

Building      50,000    40,000

Land      60,000    30,000

Total$  120,000$  85,000

The fair market value of the corporation’s stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Ivan. The transaction met the requirements to be tax-deferred under §351.

Carla incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market values and adjusted tax bases.

    FMV    Adjusted Tax Basis

Inventory$    20,000$        10,000

Building    150,000        100,000

Land    250,000        300,000

Total$  420,000$      410,000

Ramon incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market values and adjusted tax-adjusted bases.

    FMV                    Adjusted Tax Basis

Inventory$    10,000$         4,000

Building      50,000         30,000

Land    100,000         50,000

Total$  160,000$       84,000

The fair market value of the corporation’s stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Ramon.

a. What amount of gain or loss does Ramon realize on the transfer of the property to his corporation?