Solved by verified expert :385. CHAPTER
4—CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que85
Stock in Merlin Corporation is held equally by Jane, Eve, and Fred. Merlin
seeks additional capital to buy a valuable tract of land that will cost
$6,000,000. Jane, Eve, and Fred propose to loan Merlin $2,000,000 each, taking
from Merlin a $2,000,000 ten-year note with interest payable annually at five
points above the prime rate. Merlin Corporation has current taxable income of
$7,000,000. How are the payments on the notes treated for tax purposes?
386. CHAPTER
4—CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que86
Linda formed Pink Corporation with an investment of $200,000 cash, for which
she received $20,000 in stock and $180,000 in 5% interest-bearing bonds
maturing in ten years. A few years later Linda loaned Pink an additional
$40,000 on open account. Pink becomes insolvent in the current year and is
adjudged bankrupt. Linda was the president of Pink Corporation and was paid an
annual salary of $35,000 for the past three years. Linda has no other
employment. How will Linda treat her losses for tax purposes?
387. CHAPTER
4—CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que87
Five years ago, Joe, a single taxpayer, acquired stock in a corporation that
qualified as a small business corporation under § 1244, at a cost of $55,000.
Joe wants to give his son, Jake, $15,000 to help finance Jake’s college education.
The stock is currently worth $15,000. Joe is considering selling the stock in
the current year for $15,000 and giving the cash to Jake. As an alternative,
Joe could give the stock to Jake and let Jake sell it for $15,000. Which
alternative should Joe choose?
388. CHAPTER
4—CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que88
In 2004, Donna transferred assets (basis of $300,000 and fair market value of
$250,000) to Egret Corporation in return for 200 shares of § 1244 stock. Due to
§ 351, the transfer was nontaxable; therefore, Donna’s basis in the Egret stock
is $300,000. In 2005, Donna sells 100 of these shares to Walter (a family
friend) for $100,000. In 2011, Egret Corporation files for bankruptcy, and its
stock becomes worthless.
a.
How much loss may Donna recognize in 2005 and 2011? What is
the nature of this loss? [Note: Donna is married and always files a joint
return.]
b.
How much loss may Walter (a single taxpayer) recognize in
2011, and what is the nature of such loss?
389. CHAPTER
4—CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que89
What is the rationale underlying the tax deferral treatment available under §
351?
