Accounting Assignment Help

PROBLEM 3B -1B

Howard Li owns 100% of the stock of two California Corporations, NorCal and SoCal. In 20X7, SoCal paid Howard total compensation of $5,000,000. This $5,000,000 was deducted from the tax return filed by SoCal. Howard reported $5,000,000 as compensation income in his 20X7 individual tax return. It is possible that a portion of this compensation is unreasonable. An IRS prepared analysis concludes that $1,000,000 is reasonable compensation in this situation. Accumulated earnings and profits of SoCal at the beginning of 2007 was $7,000,000. The current earnings and profits of SoCal, including the events described in this problem (as reported on tax returns as filed), were $4,500,000.

WHAT ADJUSTMENTS COULD BE MADE TO THE INCOME, DEDUCTION, BASIS, AND EARNINGS AND PROFITS OF THE PARTIES?

PROBLEM 3B -1C

Howard Li owns 100% of the stock of two California Corporations, NorCal and SoCal.. In 20×7, NorCal used a portion of a building owned by SoCal under a month-to-month rental agreement. The monthly rent is $10,000. An arm’s length rent would be $30,000 / month. The tax return filed by NorCal includes $120,000 (12 months times $10,000) of the deduction for the rent paid. The tax return filed by SoCal includes $120,000 of income for the rent received.

WHAT ADJUSTMENTS COULD BE MADE TO THE INCOME, DEDUCTION, BASIS, AND EARNINGS AND PROFITS OF THE PARTIES?

PROBLEM 3C-1D

X corporation is publicly traded with only common stock issued and outstanding. X Corporation has $10,000,000 of earnings and profits. X corporation’s stock is currently trading for $110 /share. X Corporation declares a three-for-one stock split with each shareholder receiving a stock certificate for additional shares in an amount equal to twice the amount of stock currently owned. A currently owns 100 shares of X Corporation with an adjusted basis of $9,000. A receives a new stock certificate for an additional 200 shares. WHAT ARE THE TAX CONSEQUENCES TO A?

SUPPLEMENTAL PROBLEM 5


Individual A owns 100 shares of Corporation X common stock with a basis of $300.  On July 1, 2021, Corporation X makes a dividend of 1 share of preferred stock for each share of common stock.  After the distribution, each share of common stock has a value of $10, and each share of preferred stock has a value of $5.  X has E&P such that if the distribution of preferred stock were taxable, it would be fully taxable as a dividend.

On July 1, 2023, A sells the 100 shares of preferred stock for $700 to an unrelated person and keeps the 100 shares of common stock. 

WHAT ARE THE TAX CONSEQUENCES OF A’s SALE OF THE PREFERRED STOCK IN 2023?

 

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