Which of the following is not a requirement for a corporation
to elect S corporation status (Subchapter S)?
(a) The requirement is to determine which is not a requirement
for a corporation to elect S corporation status. An S
corporation must generally have only one class of stock, be a
domestic corporation, and confine shareholders to individuals,
estates, and certain trusts. An S corporation need not be a member
of a controlled group.
Brooke, Inc., an S corporation, was organized on January 2,
2012, with two equal stockholders who materially participate in
the S corporation’s business. Each stockholder invested $5,000
in Brooke’s capital stock, and each loaned $15,000 to the corporation.
Brooke then borrowed $60,000 from a bank for working
capital. Brooke sustained an operating loss of $90,000 for the
year ended December 31, 2012. How much of this loss can each
stockholder claim on his 2012 income tax return?
(b) The requirement is to determine the amount of loss
from an S corporation that can be deducted by each of two equal
shareholders. An S corporation loss is passed through to shareholders and is deductible to the extent of a shareholder’s basis for
stock plus the basis for any debt owed the shareholder by the
corporation. Here, each shareholder’s allocated loss of $45,000
($90,000 ??2) is deductible to the extent of stock basis of $5,000
plus debt basis of $15,000, or $20,000. The remainder of the loss
($25,000 for each shareholder) can be carried forward indefinitely
by each shareholder and deducted when there is basis to
Jaxson Corp. has 200,000 shares of voting common stock
issued and outstanding. King Corp. has decided to acquire 90%
of Jaxson’s voting common stock solely in exchange for 50% of its
voting common stock and retain Jaxson as a subsidiary after the
transaction. Which of the following statements is true?
(b) The requirement is to determine the correct statement
regarding King Corp.’s acquisition of 90% of Jaxson Corp.’s
voting common stock solely in exchange for 50% of King Corp.’s
voting common stock. The acquisition by one corporation, in
exchange solely for part of its voting stock, of stock of another
corporation qualifies as a tax-free type B reorganization if immediately
after the acquisition, the acquiring corporation is in control
of the acquired corporation. The term control means the
ownership of at least 80% of the acquired corporation’s stock.
Since King Corp. will use solely its voting stock to acquire 90% of
Jaxson Corp. the acquisition will qualify as a tax-free type B reorganization.
Answer (c) is incorrect because there is no requirement
concerning the minimum percentage of King Corp. stock
that must be used. Answer (d) is incorrect because a type B reorganization
involves the acquisition of stock, not assets.
Ace Corp. and Bate Corp. combine in a qualifying
reorganization and form Carr Corp., the only surviving corporation.
This reorganization is tax-free to the
Shareholders . . . . Corporations
(a) The requirement is to determine whether a qualifying
reorganization is tax-free to the corporations and their
shareholders. Corporate reorganizations are generally nontaxable.
As a result, a corporation will not recognize gain or loss on
the transfer of its assets, and shareholders do not recognize gain
or loss when they exchange stock and securities in parties to the
reorganization. Here, Ace and Bate combine and form Carr, the
only surviving corporation. This qualifies as a consolidation
(Type A reorganization) and is tax-free to Ace and Bate on the
transfer of their assets to Carr, and also is tax-free to the shareholders
when they exchange their Ace and Bate stock for Carr
stock. Similarly, the reorganization is tax-free to Carr when it
issues its shares to acquire the Ace and Bate assets.
In a type B reorganization, as defined by the Internal Revenue
I. Stock of the target corporation is acquired solely for the
voting stock of either the acquiring corporation or its parent.
II. Acquiring corporation must have control of the target
corporation immediately after the acquisition.
(c) The requirement is to determine whether the statements
are applicable to type B reorganizations. In a type B reorganization,
the acquiring corporation must use solely voting
stock to acquire control of the target corporation immediately
after the acquisition. The stock that is used to make the acquisition
can be solely voting stock of the acquiring corporation, or
solely voting stock of the parent corporation that is in control of
the acquiring corporation, but not both. If a subsidiary uses its
parent’s stock to make the acquisition, the target corporation
becomes a second-tier subsidiary of the parent corporation.
Pursuant to a plan of corporate reorganization adopted in
July 2012, Gow exchanged 500 shares of Lad Corp. common
stock that he had bought in January 2009 at a cost of $5,000 for
100 shares of Rook Corp. common stock having a fair market
value of $6,000. Gow’s recognized gain on this exchange was
(d) The requirement is to determine Gow’s recognized
gain resulting from the exchange of Lad Corp. stock for Rook
Corp. stock pursuant to a plan of corporate reorganization. No
gain or loss is recognized to a shareholder if stock in one party to
a reorganization (Lad Corp.) is exchanged solely for stock in
another corporation (Rook Corp.) that is a party to the reorganization.
Which one of the following is a corporate reorganization as
defined in the Internal Revenue Code?
(a) The requirement is to determine the item that is
defined in the Internal Revenue Code as a corporate reorganization.
Corporate reorganizations generally receive nonrecognition
treatment. Sec. 368 of the Internal Revenue Code defines
seven types of reorganization, one of which is listed. An “F” reorganization
is a mere change in identity, form, or place of organization
of one corporation. A stock redemption is not a reorganization
but instead results in dividend treatment or qualifies for
exchange treatment. A change of depreciation method or inventory
method is a change of an accounting method.
With regard to corporate reorganizations, which one of the
following statements is correct?
(c) The requirement is to determine the correct statement
concerning corporate reorganizations. Answer (b) is incorrect
because the reorganization provisions do provide for tax-free
treatment for certain corporate transactions. Specifically, shareholders
will not recognize gain or loss when they exchange stock
or securities in a corporation that is a party to a reorganization
solely for stock or securities in such corporation, or in another
corporation that is also a party to the reorganization. Thus, securities
in corporations not parties to the reorganization are always
treated as “boot.” Answer (d) is incorrect because the term “a
party to the reorganization” includes a corporation resulting from
the reorganization (i.e., the consolidated company). Answer (a)
is incorrect because a mere change in identity, form, or place of
organization of one corporation qualifies as a Type F reorganization.
Which one of the following is not a corporate reorganization
as defined in the Internal Revenue Code?
(a) The requirement is to determine which is not a
corporate reorganization. A corporate reorganization is specifically
defined in Sec. 368 of the Internal Revenue Code. Sec. 368
defines seven types of reorganization, of which 3 are present in
this item: Type A, a statutory merger; Type E, a recapitalization;
and, Type F, a mere change in identity, form, or place of organization.
Answer (a), a stock redemption, is the correct answer
because it is not a reorganization as defined by Sec. 368 of the
Claudio Corporation and Stellar Corporation both report
on a calendar-year basis. Claudio merged into Stellar on June 30,
2012. Claudio had an allowable net operating loss carryover of
$270,000. Stellar’s taxable income for the year ended December
31, 2012, was $360,000 before consideration of Claudio’s net
operating loss carryover. Claudio’s fair market value before the
merger was $1,500,000. The federal long-term tax-exempt rate is
3%. As a result of the merger, Claudio’s former shareholders own
10% of Stellar’s outstanding stock. How much of Claudio’s net
operating loss carryover can be used to offset Stellar’s 2012 taxable
(a) The requirement is to determine the amount of
Claudio’s NOL carryover that can be used to offset Stellar’s 2012
taxable income. The amount of Claudio’s NOL ($270,000) that
can be utilized by Stellar for 2012 is limited by Sec. 381 to the
taxable income of Stellar for its full taxable year (before a NOL
deduction) multiplied by the fraction
Days after acquisition date
Total days in the tax table year
This limitation is 184/366 days × $360,000 = $180,984. Additionally,
since there was a more than fifty percentage point
change in the ownership of Claudio, Sec. 382 limits the amount
of Claudio’s NOL carryover that can be utilized by Stellar to the
fair market value of Claudio multiplied by the federal long-term
tax-exempt rate. $1,500,000 × 3% = $45,000. However, for purposes
of applying this limitation for the year of acquisition, the
limitation amount is only available to the extent allocable to the
days in Stellar’s taxable year after the acquisition date.
$45,000 × 184/366 days = $22,623
The remainder of Claudio’s NOL ($270,000 – $22,623 =
$247,377) can be carried forward and used to offset Stellar’s
taxable income (subject to the Sec. 382 limitation) in carryforward