Corp. & Part. Tax Problem 2

Problem Set 2

In each case, assume that X is a business entity with three equal owners, R, S and T. R, S and T each contribute $10,000 cash to X to form the entity.

What are the tax consequences to X, R, S and T of each of the following fact patterns? For R, S and T, consider the effects on the basis of their ownership interests as well as the amount, character and timing of any income they have. In each case, address each of the following scenarios:

Scenario A. X is a C corporation (or an "association").

Scenario B. X is an S corporation.

Scenario C. X is a partnership, or an LLC taxed as a partnership.

Problem 2.1. For the first year of its operation, X has a pre-tax operating profit (and taxable income) of $15,000. On the last day of the year, X pays R, S and T a distribution on equity (that is, a dividend in Scenarios A and B, a partnership distribution in Scenario C) of $5,000 each. What if X's taxable income was all long-term capital gain?

Problem 2.2. Same as Problem 2.1, except that the distributions to R, S and T are $8,000 each.

Problem 2.3. Same as Problem 2.1, except that the distributions to R, S and T are $2,500 each.

Problem 2.4. Same as Problem 2.1, except that X makes no distributions on its equity; however, it distributes $5,000 of its pre-tax income to each of R, S and T as compensation for personal services.

Problem 2.5. For the first year of its operation, X has a pre-tax operating loss of $15,000.

Problem 2.6. For its first year, X's gross income and deductions from operations happen to offset each other exactly. At the end of the year, X distributes Blackacre, a parcel of real estate, one-third each to R, S and T as tenants in common. The distribution is on equity (that is, a dividend in Scenarios A and B, a partnership distribution in Scenario C). The fair market value of Blackacre at the time of the distribution is $15,000; assume that the value received by the three owners is $5,000 each. X's adjusted basis in Blackacre (which it purchased from a third party a few months earlier) immediately before the distribution is $12,000. (Consider what R, S and T's basis in Blackacre is.)

Study Materials for Problem Set 2

Scenario A (C corporations): I.R.C. §§ 11, 162(a)(1), 172, 301, 311, 312, 316(a), 317(a).

Scenario B (S corporations): I.R.C. §§ 1363, 1366, 1367, 1368, 1371.

Scenario C (partnerships): I.R.C. §§ 701, 702, 704, 705, 707(a), 707(c), 731, 732, 733.

Study Guide Reading

For those using the Black Letter study guide (optional), this material is covered in Chapter VI (pages 163-182); Chapter XV(D) and XV(E) (pages 391-411); and Chapter XVII (pages 437-510).

Created by: bojack@lclark.edu
Update: 10 Jan 08
Expires: 31 Aug 08