CORPORATE TAXATION - J.D. LAW 6610 SYLLABUS Taxation JD... · CORPORATE TAXATION - J.D. LAW 6610 SYLLABUS Fall 2016 Professor Martin J. McMahon Tuesday - Thursday, 10:00 A.M., Class

CORPORATE TAXATION - J.D.LAW 6610

SYLLABUS

Fall 2016 Professor Martin J. McMahonTuesday - Thursday, 10:00 A.M., Class Room 283 Office: Room 312FOffice hours: Tues., Thurs., 11:00 A.M. - noon Tel: (352) 273-0931

and by appointment e-mail: [email protected]

Required Texts

(1) McMahon, Simmons & McDaniel, FEDERAL INCOME TAXATION OF

CORPORATIONS, 4TH ED. (Foundation Press 2014)

(2) McMahon & Simmons, STUDY PROBLEMS FOR FEDERAL INCOME TAXATION OF

CORPORATIONS, 4TH ED. (Foundation Press 2014).

(3) McMahon, Simmons & McDaniel, 2016 UPDATE TO FEDERAL INCOME TAXATION

OF CORPORATIONS, 4TH ED. To be provided by Instructor in PDF.(4) Lathrope, 2017 Edition, Selected Federal Taxation Statutes and Regulations

(West, 2017)

COVERAGE

The primary focus of this course is the structure of Subchapter C of the Internal RevenueCode, which provides the rules governing taxation of transactions between corporations and theirshareholders --- formation, dividends, redemptions, liquidations, and reorganizations, andSubchapter S, providing special elective rules for certain corporations. This course will cover therelevant Code sections, the Regulations thereunder, and judicial and administrative interpretations of the Code and Regulations.

CLASS PREPARATION

All reading assignments in the text automatically include careful study of all sections ofthe Internal Revenue Code and Regulations cited at the beginning of the assigned Chaptersections throughout the text. Always work from the professional edition of the Code andRegulations; do not ever work from edited student versions of the Code and Regulations. Youshould also prepare in advance in writing your analysis of all assigned study problems,including citations to relevant authority and any necessary calculations, that are coordinated tothe assigned reading. We will cover as many of the problems as we can in class, but there is noguarantee that we will have the time to examine the answer to every question in detail. The levelof preparation of answers to the problems determines the extent to which we have time toexamine them in class. You are expected to be prepared every day and actively to participate inclass discussion. Adequate preparation and class discussion requires that you be preparedspecifically to discuss the application of the law to the particular facts of the study problems. It is

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Corporate Taxation JD Fall 2016 McMahon

my practice randomly to call on students as well as to accept volunteer answers. It is importantthat you be prepared to discuss in detail your proposed solutions to the discussion problems. Without that participation, I cannot adequately judge how well the members of the class aremastering the material and thus cannot judge how quickly or slowly to proceed and what issuesneed to be examined more thoroughly.

I recommend that everyone join a study group within which you can compare yourtentative answers to the problems and refine them. If you are still struggling to understand thematerial after the relevant class, come see me in my office.

QUESTIONS AND OFFICE HOURS

On most days I will stay after class if I can to answer questions. You may ask questionsabout any material that we have covered to date. I have regular office hours, and in addition amavailable almost anytime on a drop-in basis or by appointment. If you want to schedule anappointment, please e-mail me. Do not e-mail me substantive questions to be answered by e-mail. If you do, I will respond that you should come see me. I find it far, far more productive todiscuss questions face-to-face.

EVALUATION

Grades will be assigned primarily on the basis of a take-home final examination that willbe distributed in hard copy through the Office of Student Affairs on Friday, Dec. 2 and whichwill be due on Monday, December 5, 2016. The law school policy on delays in taking exams canbe found at: http://www.law.ufl.edu/students/policies.shtml#12. Grades will follow the UFGrading System. See http://www.registrar.ufl.edu/catalog/policies/regulationgrades.html. The format of the examination will be problem solving essays and your response will be limitedto16 typewritten pages. The final examination will be graded anonymously. The grade will bebased on the demonstrated understanding of the principles of law covered in materials and inclass and their application according to the course objectives section of this syllabus. Little creditwill be given for merely reciting rules of law or spotting issues. Your answer must bespecifically directed to the facts and the question that you have been asked and should resolve theissues and explain the legal reasoning underlying your resolution of the issues. The organization,clarity, grammar (including sentence structure), and the proper use of terms of art in your answeralso affect the grade. The grade achieved on the examination can be raised one grade levels (e.g.from B to B+) as a result of continuous active voluntary participation in class discussiondemonstrating familiarity with the assigned materials. Quality is as important as quantity. Yourgrade or the examination can be similarly lowered as a result of repeated poor class participationdemonstrating lack of familiarity with the assigned materials. Grades also will be adjusted forunexcused absences. A copy of a prior final examination is attached to give you an idea of thenature of the format and level of complexity of the questions that will be asked, as well as someidea of the level of comprehensiveness. The exact focus of the examination questions changesfrom year-to-year. Please note that I do not provide sample answers to the sample exam andI do not review or discuss with students their proposed answers to the sample examination. It is a “sample” examination, not a “practice” examination.

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http://www.law.ufl.edu/students/policies.shtml#12.

ATTENDANCE

Regular and punctual attendance at classes is required. I do take attendance by recordingit on the seating chart. Any student with more than five unexcused absences will be excludedfrom the examination. Please e-mail me to request an excused absence or to explain anabsence. Recognized religious holidays are automatically excused absences. All I ask is thatyou e-mail me in advance a list of the holidays on which you will be absent for religiousobservances. Please arrive at class on time and remain seated for the entire class. If you expectto arrive late, or need to leave early, or expect to have to leave during the class and return, pleaseadvise me ahead of time by e-mail.

ELECTRONIC DEVICES

You may use notebook computers to access your own notes on your computer hard driveand to take note during class. No other use of a notebook computer is permitted. You may notaccess any programs or the internet for any purpose other than to read your notes or take notesconcerning this class. That said, I strongly recommend against using computers in class. Thepoint of the class session is to critically discuss in real time the ideas in the material,evaluate the points made by other people in the class, and solve the problems, not to recorda transcript of what I or others might say. Turn off all cellular telephones during class. If youhave a special reason that someone might need to contact you during class hours (e.g, pregnantspouse, ill relative), you may keep your phone on as long as the ringer is off and it is set tovibrate. Please warn me in advance that you might be receiving a call and need to leave.

STATEMENT RELATED TO ACCOMMODATIONS FOR STUDENTS WITHDISABILITIES

Students requesting classroom accommodation must first register with the Office ofDisability Resources. The UF Office of Disability Resources will provide documentation to thestudent who must then provide this documentation to the Law School Office of Student Affairswhen requesting accommodation.

RESCHEDULED CLASSES

Several scheduled classes will be rescheduled. Classes that are certain to be rescheduledinclude: Tuesday, Sept. 20; Wednesday, Sept 21; Thursday, Sept. 22; and Thursday, Oct. 13.Make-up classes for the above cancellations will be in Room 283 (our normal room) from noon -12:50 of the following Mondays: Sept. 12, Sept. 26, Oct. 10, and Oct 24.

COURSE OBJECTIVES

1. Learn to carefully read the Code and Regulations. Precision counts.a. Pay attention to each and every word and punctuation mark.

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! If you don’t understand a Code section the first time, reread it carefully ,as many times as necessary, until its meaning become clear. If you stilldon’t understand it after preparing and attending class, ask your instructorfor help.

b. Recognize that most sections of the Code are either (1) definitions or (2) “if ... then...” rules. The Code never “permits” or “prohibits” a taxpayer from engaging in anyparticular transaction (apart from defining specified tax crimes). The Code merelyprescribes the tax results that follow from the transaction, whether or not it is legal(or civilly actionable) under state, of non-tax federal, law.

c. Understand that some sections of the Code are so complicated that you may needto know what they purport to do before you read them. The best primary source ofthis information is legislative history, i.e., Congressional Committee Reports andStaff of the Joint Committee General Explanations of Tax Legislation [Bluebooks]. They are invaluable guides in interpreting the statutory language. Your casebookand other course materials provides excerpts from the various legislative historymaterials for many Code sections.

d. Learn to apply the rules precisely as expressed in the Code and Regulations, notparaphrased generalizations or short-cuts.

! Although short-cuts and rules of thumb often produce correct answers ina majority of their applications, they also often produce incorrect answers,particularly in counter-intuitive fact patterns. For example, a rule of thumbthat provides a shortcut when applying a statutory formula to a transactioninvolving appreciated property might not work if the property is depreciatedin value.

e. Tax law is not horseshoes. Code sections are not applied on a “close enough”principle.

2. Learn the vocabulary, i.e., “tax jargon,” and use it precisely and accurately.a. Rely on the terminology and words of the Code and Regulations. Do not make up

your own terms of art. Even though they may help you remember a concept or arule, your use of them will tend to confuse others or misconvey your analysis.

b. Use the correct word in the correct context, for example, income items that are notincluded in gross income are “excluded,” not “deducted,” and payments that aresubtracted in computing taxable income are “deducted,” not “excluded,” “realized”gain or loss is different than “recognized” gain or loss.

c. Do not use mutually inconsistent terms simultaneously, for example, “deductible asa capital expense.”

3. Lean to apply the law to the particular facts.a. Understand the facts of any particular problem. Figure out what happened – e.g.,

who paid what to whom and why – before trying to apply the tax law. (1) Pay attention to and consider the relevance of each and every fact. Learn to

sort the relevant from irrelevant facts.(2) Learn how to graphically depict transactions to more easily understand the

nature and economics of the transaction. b. Understand that in multi-party transactions different sections of the Code and

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Regulations may apply to different parties. Do not confuse the parties or therespective rules that apply to them.

c. Remember that the treatment of one party to a transaction is not alwayssymmetrical to that of another. For example, a payee does not necessarily haveexempt income merely because the payor is denied a deduction, and the buyer’sbasis for property is not necessarily the exact same amount as the seller’s amountrealized.

4. Learn to explain the precise reason, applying the Code, Regulations, and relevant case lawand Revenue Rulings for each and every answer to each and every issue presented by anyfact pattern. Remember that “public policy” considerations that are often applied in otherareas of the law are less significant in resolving tax issues. For example, deductions arenot generally disallowed simply because they are incurred to further an illegal activity.

5. Learn how to distinguish situations that have a single clear answer from those in which theanswer is ambiguous. a. Answer questions that have clear answers directly.b. If a question does not have a single clearly correct answer, articulate all of the

arguments for and against each possible resolution and weight them in order of thelikelihood of application. In such a case attempt to ascertain the answer that ismore likely than not the correct answer and be prepared to support your conclusion.

c. Don’t make frivolous arguments or make it sound like there are arguments bothways when there are not.

6. Understand that the IRS is not Darth Vader. The IRS does not automatically take an “anti-taxpayer” position in every factual situation. For example, the IRS does not seek toinclude in gross income items that clearly are excluded by the Code, Regulations, or caselaw, and it does not seek to disallow deductions that clearly are allowed by the Code andRegulations. Nor does the IRS take positions contrary to the Regulations, RevenueRulings, or Supreme Court cases. It does, of course, argue the government’s side in caseswhere the law is unclear.

7. Learn to recognize that there may be situations in which you do not have sufficient facts togive a definitive answer, but learn not to be too hasty in concluding that you needadditional facts. In such cases, ask for additional facts or provide an answer for each ofthe possible alternative scenarios.

8. Understand that all of the facts in their totality must be considered simultaneously todetermine the correct answer or best arguments. Consider all of the relevant facts beforereaching a conclusion.

9. Understand that descriptions of the facts, whether in problems or as explained by clientsmay use a word in its colloquial sense when the word has a different (often narrower)meaning as a legal term of art. Remember that the same word can have different meaningsin different doctrinal areas of law, and that different words used in different doctrinal areasof law can be synonyms for analogous legal conclusions.

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10. Learn how to integrate rules from different Code sections and Regulations sections todetermine:a. Their interaction,b. Which section controls if they conflict – remember particularly that capitalization

trumps deductibility, i.e., an expense described in a deduction section mustnevertheless be capitalized in many instances,

c. Whether the principles developed under one Code (or Regulations) section can beapplied by analogy to interpret another section, even though the sections neitherinteract nor conflict.

ASSIGNMENTS

INSTRUCTIONS:

(1) The following assignments reflect the order of coverage. Some assignments willrequire more than one class session, but unless instructed otherwise, go on to a new assignmentfor the next class. Even if it will take more than one day to complete an assignment, you areexpected to prepare the entire assignment before the first class (unless otherwise instructed at theend of the prior class) and to refresh your recollection for subsequent classes. Unless otherwiseinstructed, no matter where we have left off, for each class session prepare the next assignment.

(2) All assignments include study (i.e., careful reading) of the Code and Regulationssections cited at the beginning of each Section of the text. Code and Regulations sections citedwithin the assigned text also should be examined.

(3) All assignments include advance detailed preparation of the assigned related StudyProblems.

Assignment Text

1 Corporation Income Tax 1-8 Definition of “Corporation” 18-25 (through item 2.3).

PROBLEMS: § 2.A., 1 & 2(b)

2 Regard of the Corporate Entity 27-51; PROBLEMS: All& Reallocation of Income

3 Corporate Formation: Basic Principles 53-69; PROBLEMS: §1.A., 1 & 2; §1.B., 1

4 Corporate Formation: Receipt of Boot 69-78; PROBLEMS: 1(a) - (c)(1)

5 Assumption of Liabilities (part 1) 78-95; PROBLEMS: All except §2.B.(1), 3

6 Assumption of Liabilities (part 2) 95-103; PROBLEMS: All

7 The Control Requirement 104-117; PROBLEMS: All

8 Receipt of Stock for Services 117 - 120; PROBLEMS: All

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9 Corporate Capital Structure 121-149 (through item 6.2), 151-52 (item 8); PROBLEMS: 1

10 Deductions for Lost Investments 152-161 (through item. 3.1); PROBLEMS:2

11 Dividends Generally 177-180 (omit item 3.5, p 194-95; 183-196;223-224 (introductory material for § 5); 226-228 (items 3.1 & 3.2); PROBLEMS: 1-4

12 Dividends in Kind 197- 203 (through item 5); PROBLEMS: All(except omit 2(c), 3(b) & 6)

13 Disguised Dividends 204-223; PROBLEMS: 2, 4 & 6

14 Redemptions (pt. 1) 231-242 (omit items 4 & 5 pp. 234-35);PROBLEMS: §1, 1(a); § 2, 1, 2, 4(a), 5, 6-8

15 Redemptions (pt. 2) 242-250; PROBLEMS: 1, 2(a), (b)(1),(b)(3), 4(a)-(d), 6

16 Redemptions (pt. 3) 250-261; PROBLEMS: All

17 Partial Liquidations 261-271 (through item 7.2); PROBLEMS:All (except omit 1(c)(2) & (d)(3), (f)(1)

18 Stock Dividends skim 291-296; study 296-309; 309-310, 317-323; PROBLEMS: § 1, 1-5, 10, § 2, 1(a)(1)-(3), (b)(1).

19 Corporate Liquidations 325-340 (omit item 4, p. 334 & item 2, pp337-38, item 4 & 5, p. 340); PROBLEMS:1(a)-(c), 2(a)-(c), 4-7

20 Subsidiary Liquidations 342-352 (through item 7.); PROBLEMS: 1,2(a) & (b), 3, 4

21 Subchapter S (pt. 1) 355 -376; PROBLEMS: §2.A., 1(a)-(c),2(a); § 2.B., 1(a)-(c), (2)(a)(1), §2.C. 1(a),§2.D., 1(a)-(c)

22 Subchapter S (pt. 2) 376- 393; PROBLEMS: All

23 Subchapter S (pt. 3) 405-411; PROBLEMS: All

24 Subchapter S (pt. 4) 411-422; skim 422-425; § 5.A., 1, § 5.C., All

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25 Consolidated Returns 438 - 455 (through item 5.2.2);PROBLEMS: 1(a(1), 2, 3, 4, 5(a), 6, 7

26 Taxable Acquisitions: Assets 467-481; PROBLEMS: Intro, 1.; §1,1 & 2.

27 Taxable Acquisitions: Stock 481-494; PROBLEMS: 4, 5

28 Introduction to Reorganizations skim 525-528; study 528-539; PROBLEMS:All

29 Continuity of Interest 539-564; PROBLEMS: §B(1), 1 & 2, 4;§B(2), 1&2

30 Judicial Limitations 573-598; PROBLEMS: All

31 Treatment of Parties to a Merger 599-606 (through item 3); 612-613;PROBLEMS: §E(1), 1(a)-(f), 2(a); §E(2), 1& 2

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UNIVERSITY OF FLORIDACOLLEGE OF LAW

LAW 6610 — CORPORATE TAXATION (J.D.)

FINAL EXAMINATION Professor McMahonDecember 8, 2006

TAKE-HOME EXAM

DUE: 1:00 P.M., Wednesday, December 20, 2006.Return to: Graduate Tax Office, Room 320.

INSTRUCTIONS

1. This is a take home examination. Your answers must be printed in type. Your answersshould not exceed 18 pages (using a font no smaller than 12 point) of standard 8 ½ x 11 inchpaper, double spaced with one inch margins, if you need that much. You may single space tabularcomputations. Number your pages. Staple your answer together.

2. Put your exam number on each page of your answer; do not put your name anywhere onthe answer.

3. You must return the examination answer to the Graduate Tax Office, Room 320. Unless you hand your examination personally to an administrative assistant so that your name canbe checked-off on the class roll as having returned the examination, there will be no evidence thatyou turned in your examination in the event that it cannot be located. If your examination cannotbe found, failure to check in the return of your examination raises the presumption that it was notturned in.

4. The examination consists of five questions of approximately equal weight. That does notnecessarily mean that the length of the answers can or should be expected to be equal, nor does itmean that the questions are of equal complexity.

5. Because this is a take home examination, little credit will be given for merely recitingrules of law or spotting issues. Your answer must be specifically directed to the facts and thequestion that you have been asked. Credit will be subtracted for irrelevancies. Do not repeat thefacts without integrating them into analysis or restate rules of law without integrating them intoanalysis. If you do so, it is very likely that you will not be able to answer the questions within thepage limitation. Where numerical answers are called for, it is imperative that you explain yourstatutory analysis as well as giving the numerical answer.

6. (a) Any person who is an individual is designated by a single letter, e.g., A, B, C, D, E,etc. Any person that is a corporation, partnership, or other entity is specifically identifiedas such. (b) Assume that all individuals use the cash method and calendar year and allcorporations use the accrual method and calendar year.(c) All taxpayers are unrelated unless the facts indicate otherwise.

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(d) No elections have been made unless expressly stated in the facts.(e) All corporations are U.S. corporations and all individuals are U.S. citizens, unlessthe facts indicate otherwise.(f) If it is necessary to compute corporate income tax under §11, assume a 35 % flatrate. The amount of corporate tax due is not required as part of the answer unless theamount of income tax owed by the corporation affects some other aspect of the answer. Ifit is necessary to compute the amount of an individual’s income tax liability to answer aquestion, assume that for ordinary income the individual is in the highest marginal ratebracket, but take into account any preferential rates that might apply. The amount ofindividual tax due is not required as part of the answer unless the amount of income taxowed by the individual affects some other aspect of the answer.(g) If necessary, assume that the applicable tax exempt federal rate is 5%(h) Assume that the statutory law and regulations in effect for all years correspond tocurrent law.(i) If you find it necessary to assume a fact, make only necessary assumptions that areas reasonably consistent with the stated facts as possible. Clearly state your assumptions,and the reasons for making them.

7. In writing your answers, observe the following rules:(a) Answer questions in complete grammatical sentences.(b) Do not use any nonstandard abbreviations.(c) Use a section sign — § — for citations to the Code and Regulations unless the

Code section reference begins a sentence.(d) Remember that the subsections of the Code and Regulations have parentheses

around the letters and numbers. If you omit the parentheses, your citation isincorrect.

(e) If the specific question asks you to describe the tax consequences only for aparticular party (or parties) or focuses on one or more, but not all of the issuesraised by the facts, limit your answer as directed.

8. You may consult only the Code and the Regulations, your case book, any materialsdistributed by the instructor, your class notes and any other notes that you may have preparedbefore receiving the examination. All of any outline jointly prepared by a study group in whichyou have actively and materially participated is treated as materials that you have prepared eventhough you may not personally have authored particular portions of the outline. No othermaterials are permitted to be used in answering this examination. You may not use any materialsfrom the law library, commercial study aids, outlines prepared by another student or a study groupin which you did not actively and materially participate.

9. This examination answer is to be solely your own work. There is to be noconsultation with or receipt of assistance in any form from any other person.

GOOD LUCK and HAPPY HOLIDAYS

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I.(20%)

A, B, and C are talented computer engineers, who propose to form a new corporation,Millennial Computers, Inc. (MCI) to produce and market off-the-shelf software and computerperipherals (hardware). A owns the copyright on two programs, Doors Millennium™, anoperating system, and Stylus 2000™, a word processing program. Five years ago A purchasedthe original source code for Doors Millennium from its creator for $15,000; after amortizationdeductions, its adjusted basis is now $10,000. Over the past several year A has devoted countlesshours to improving the Doors Millennium™ program, to the point where MegaSoft, the world’slargest software company recently offered to purchase it for $300,000. (MegaSoft, of course,simply wanted to obtain the program to keep it off the market and protect the market share of itsown operating program, Gates 2006®, and now that A has rejected the offer, A expects thatMegaSoft will try, and very likely may succeed in driving the fledgling MCI out of businessbefore the new company ever turns a profit.) A developed Stylus 2000 entirely though A’spersonal efforts, as an offshoot of the work improving Doors Millennium™. B, who recently lefta position at Orange Computer Corp., owns a patent, which was wholly self-developed (and towhich B has clear ownership), on a revolutionary new hardware component that is ofindeterminate value. C, a recent Cal Tech graduate, who will leave a job at Worldwide BusinessMachines, Inc. to join MCI, brings nothing to the table but C’s tremendous engineering talents.

The plan is for A to contribute the Doors Millennium™, and Stylus 2000™ copyrightsto MCI in exchange for 100 shares of voting common stock. B will contribute the hardwarepatent, which still needs some refinement before production starts, plus B’s notebook on potentialimprovements, in exchange for 50 shares of voting common stock. If B’s continuing post-contribution work on improving the patent results in an additional patent on an improvedcomponent, B will receive an additional 50 shares of voting common stock. C will receive 50shares of voting common stock in exchange for entering into a 5 year contract as chief of softwaredevelopment for MCI at a salary of $100,000 per year. To assure that C does not jump to acompetitor during that period, C’s stock certificates will be held in escrow (by the Last NationalBank & Trust Co.) until the fifth anniversary of C’s employment, when they will be delivered toC. If C quits before the end of the five-year period, he gets no stock. Nevertheless, in the interim,C will have the right to vote the stock, will receive dividends on the stock, if declared, and will beentitled to the sales proceeds from the 50 shares if MCI is acquired by another company in a take-over during that period. C plans to make a §83(b) election.

Because A, B, and C are short of cash, MCI will finance its start-up by issuing 1000 sharesof nonvoting participating $2,000 par value preferred stock, with a 6% annual preferred dividendbefore participation, to Meryl Lynch, a venture capitalist, in exchange for $2,000,000 of cash.

What will be the tax consequences to the parties if MCI is formed exactly as described?

II.(20%)

Explain the theoretical rationale for §§ 357(a), 357(c), and 358(d). Illustrate yourexplanation by applying the sections to the formation by D, E, and F of X Corporation (which youshould assume, under the relevant Code sections, may report on the cash rather than accrualmethod) in which each shareholder makes the following contributions. D contributes cash-

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method accounts receivable of $120,000 with the corporation assuming $60,000 of D’s cash-method accounts payable. E contributes Blackacre with a basis of $70,000 and a fair market valueof $110,000, subject to a nonrecourse mortgage debt of $50,000, subject to which X Corporationtakes the property. F contributes Whiteacre with a basis of $10,000 and a fair market value of$90,000, subject to a $30,000 recourse mortgage debt, which X Corporation assumes. Each of D,E, and F receives an equal number of shares of common stock of X Corporation. Be certain toexplain the theoretical reason underlying the mechanical rules of §§357(a), 357(c), and 358(d)as well as the numerical answers.

III.(20%)

G owned 60 % of the stock of Y Corporation; the other 40% was owned by H, who wasunrelated to G. In 2004, when it had accumulated earnings and profits of $200,000, YCorporation granted to Z Corporation, all of the stock of which was owned by G’s child, I (whoowned no stock of Y Corporation), an option to purchase Greenacres (a parcel of undevelopedland) for $150,000. At that time it was rumored that WaliMart might come, but exactly when®

was uncertain. The option was exercisable any time during the next ten years. Z Corporationpaid Y Corporation $10 for the option. In 2004, the fair market value of Greenacres wassomewhere between $100,000 and $200,000, but there were no comparable sales or optionscontemporaneously granted by person to any other person with respect to property similar toGreenaces. Y Corporation had purchased Greenacres from an unrelated party in 1994 for $20,000. In February, 2006, Z Corporation exercised the option; upon exercise of the option, Z Corporationpaid Y Corporation $150,000 and received title to Greenacres. Immediately upon exercise of theoption, Z Corporation. sold Greenacres to WaliMart for $500,000. At that time Y Corporation®

had $450,000 of accumulated earnings and profits. At all relevant times, Z Corp. had a valid§1362 election in effect. What are the tax consequences of these transactions?

IV.(20%)

As of January 1, 2006, Q Corporation had 100 shares of voting common stockoutstanding. L owned 50 shares; L’s basis for the stock was $700,000. N, who is L’s child owned40 shares. The other 10 shares were owned by W Corporation. W Corporation had 10 shares ofvoting common stock outstanding; five shares of W Corporation were owned by L, and five shareswere owned by L’s grandchild, M. Q Corporation had no other shareholders. Q Corporation hasowned and operated Blackacre, Whiteacre, and Brownacre, all of which are unimproved gravelpublic parking lots near the Enormous State University campus, since 1988. On January 1, 2006,Q Corporation and L engaged in a transaction in which Q Corporation transferred Blackacre,which had a fair market value of $600,000 and a basis of $150,000, to L in exchange for all 50 ofL’s shares of Q Corporation stock. Blackacre was subject to $100,000 mortgage debt, which Lassumed. ( At that time each of Whiteacre and Brownacre were worth $250,000 and QCorporation had no other assets.) After the redemption, L moved to Tahiti and took up painting. As of January 1, 2006, Q Corporation had accumulated earnings and profits of $300,000. During2006, Q Corporation realized an additional $50,000 of earnings and profits from business

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operations. What is the amount and character of the income, gain, deduction, or loss recognizedby L and by Q Corporation?

V.(20%)

J owned 60 percent of the common stock of Z Corporation. J’s basis for the stock as ofJanuary 1, 2006 was $1,300,000. K owned 40 percent of the common stock of Z Corporation; K’sbasis for the stock as of January 1, 2006 was $40,000. At that time Z Corporation hadaccumulated earnings and profits of $300,000. Z Corporation was engaged in the business ofcarrying seagoing passengers for hire. On January 2, 2006, without following any corporateformalities under relevant state statutes, Z Corporation transferred all of its assets to J and K. Itdistributed one of its two boats, the TITANIC, which was a cruise ship, and $400,000 of cash to J,and the other of its two boats, the POSEIDON, which was a ferryboat, to K. The TITANIC’s fairmarket value was $1,100,000 and it had a basis in Z Corporation’s hands of $200,000. TheTITANIC was subject to a $300,000 purchase money indebtedness lien, subject to which J took thetitle and which J expressly assumed. The POSEIDON’s fair market value was $800,000 and it had abasis in Z Corporation’s hands of $1,700,000. Both of these vessels were purchased for cash fouryears ago. Z Corporation had no other assets. On January 3, 2006, as previously agreed upon, Jand K exchanged the POSEIDON and TITANIC, with J ending up with the POSEIDON and K endingup with the TITANIC. Thereafter J operated the POSEIDON as a ferryboat, and K operated theTITANIC as a cruise ship. What are the tax consequences to the parties?

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Documents

CORPORATE TAXATION - J.D. LAW 6610 SYLLABUS Taxation JD... · CORPORATE TAXATION - J.D. LAW 6610 SYLLABUS Fall 2016 Professor Martin J. McMahon Tuesday - Thursday, 10:00 A.M., Class