5 word problems
Problem 1: (20 points) 1) In 2005, Ruth transfers land with a FMV of $100,000 and an adjusted basis of $20,000 in exchange for 100% interest in Ruthie, Inc., a C-corporation. The land had a $40,000 mortgage which was assumed by the corporation. a) Does Ruth recognize gain, loss, or income from the transfer of the land to Ruthie, Inc.? b) What is the basis of Ruth’s stock in Ruthie, Inc.? c) What basis does Ruthie, Inc. have in the land? 2) At the end of 2022 (before the Dec. 31 distribution), Ruth has a stock basis of $30,000 and Ruthie, Inc. has a deficit in current E&P of $(2,000) and a deficit in accumulated E&P of ($180,000). On December 31, 2022, the corporation distributes another parcel of land with a fair market value of $90,000 and an adjusted basis of $50,000. Assume that Ruth is in the 37% tax bracket and that she does not have any other capital transactions. a) How much tax (if any) does Ruth owe from the distribution of this equipment? b) What is Ruth’s basis in her Ruthie, Inc. stock following this distribution? Problem 2: (20 points) Eve and Jonah decided to form EJ Partnership on Jan. 3, 2022. Eve and Jonah will share gain/losses and income 50/50. Eve contributed a parcel of land in exchange for a 50% share of the partnership’s income and loss. At the time of contribution, the asset had an adjusted basis of $60,000 and a fair market value of $100,000. This property was encumbered by a $40,000 mortgage which was assumed by the partnership. Jonah contributed cash of $60,000. a). Does Eve recognize gain or loss on this transaction? b). What is Eve’s outside basis in the partnership? c). Does Jonah recognize gain or loss on this transaction? d). what is Jonah’s outside basis in the partnership? On February 1, 2024, the partnership sells the land originally contributed by Eve in 2022 for $130,000. a) What is the total amount of gain the partnership would report on Schedule K from the sale of this asset? b) How much gain from the sale of this asset will be allocated to Eve? c) How much gain from the sale of this asset will be allocated to Jonah? Problem 3: (20 points) In the beginning of 2022, LGL, Inc., an S-corporation, has the following balances: accumulated adjustments account (AAA) of $10,000, accumulated earnings and profits (AEP) of $8,000, and basis of $40,000. During 2022, LGL has an operating loss of $(2,000) and a long-term capital gain of $6,000. LGL, Inc. distributes $20,000 of cash to its Hortense, the sole shareholder, who is in the 37% tax bracket. a). What are the tax consequences to Hortense as a result of this distribution? b). What are the ending balances in AAA and AEP? What is Hortense’s ending stock basis? c). You are meeting with Hortense to discuss the tax results for her LGL in 2022. Hortense says, “Well, I don’t fully understand this S corp stuff, but I do know that the $20,000 cash I received as a distribution is not subject to tax.” How would you respond to Hortense? Problem 4: (20 Points) John and Janie are married taxpayers. In 2022, they will file a joint return and will take the $25,900 standard deduction. John is the owner of Fleet Feet, a shoe store in Running, New Jersey. Fleet Feet, which John operates as sole proprietorship, had qualified business income of $500,000 in 2022. He paid $50,000 in w-2 wages (note: these wages are included in determining the $500,000 of qualified business income). In addition, the unadjusted basis in assets was $1,000,000 (this amount included the building and retail fixtures). Janie is general counsel for a small corporation. John and Janie’s gross income (excluding the $500,000 from Fleet Feet) was $300,000 1. Determine John and Janie’s taxable income in 2022. 2. Assume that instead of owning and operating Fleet Feet, John was a CPA earning $500,000. He paid w-2 wages of $50,000 and the unadjusted basis of his computers and office furnishings was $600,000. They continue to take the $25,900 standard deduction rather than itemize. Under this scenario, what is John and Janie’s taxable income in 2022. Problem 5: (20 points) Chrissy, a shareholder in Sophisticated Designs, Inc., (a C corporation), would like to sell 1000 of her shares of stock in Sophisticated Designs. Since Sophisticated Designs is not traded on an exchange, the only way to sell is the stock is by having Sophisticated Designs redeem the stock. The fair market value of the 1000 shares of stock is $300,000. Chrissy purchased the stock 10 years ago for $100/share. Sophisticated Designs has E&P of $700,000. The corporate stock in Sophisticated Designs is held as follows: · Chrissy2,000 shares · Jennifer (Chrissy’s sister)2,000 shares · Katherine (Chrissy’s mother)2,000 shares · CJKL Partnerships (Chrissy has a 25% interest)2,000 shares · Other Corporation (Chrissy has a 40% interest) 2,000 shares 10,000 shares 1. Will this redemption of 1000 shares of Chrissy’s stock be treated as a qualified stock redemption or will it be treated as a distribution? Support your answer with calculations. 1. How much tax must Chrissy pay if this transaction is treated as a qualified stock redemption? Chrissy is an individual in the 37% tax bracket. 1. How much tax must Chrissy pay if this transaction is treated as a distribution (i.e. this transaction is NOT a qualified stock redemption)? (Chrissy does not have any additional capital transactions). 1. Since Chrissy is still in the planning stage, what are your recommendations?