Tax Homework help

Anonymous
timer Asked: Nov 19th, 2016

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Read the attached file and answer the questions.

TAX HOMEWORK Gail and John decide to form a new corporation called Titans Corporation. Gail transfer property with a basis of $25,000 and a current value of $200,000 in exchange for 50 shares of Titans Corporation. John transfers property with a basis of $50,000 and a current value of $165,000. John also will provide accounting and tax services to Titans Corporation. John receives 50 shares in the new Titans Corporation. The value of John’s services provided is $35,000. What gain or income do Gail and John recognize on the exchange? Gail: $25000 x 50= $1,250,000 Profit gained = $1,250,000- $200,000= = $1,050,000 Gail gains $1,050,000 John: $50,000 x 50= $ 2,500,000 Profit gained = $ 2,500,000 –( $165,000+ $35,000)= $2,300,000 John gains $2,300,000 What is Titan’s basis in the property transferred by Gail and John? = $25000+ $50000= $ 75000 How does Titan treat the value of the accounting services rendered by John? Titan will treat the accounting services rendered by John as professional services that will help in the growth and development of the company. B. Jerome Howard exchanges property with a basis of $300,000 and a fair market value of $900,000 for 70% of the stock of Stooges Corporation. The other 30% of the stock is owned by Jules White who acquired his stock several years ago. You are a CPA in private practice and Jerome comes to you and asks you whether he must report a gain on the transfer on his tax return. Please draft a letter to your client Jerome and an associated memo to the tax files with documentation for your response. Your memo to the files should incorporate the following sections: FACTS ISSUES LAW & ANALYSIS CONCLUSION a.) Letter PRIVATE PRACTICE CORPERATION, P.O BOX, 56482-100022 NEY YORK. 26/10/2016. To: Jerome Howard, Stooges Corporation, P.O BOX, 00645-012564, New York. Dear Sir, RE: GAIN REPORT ON THE TRANSFER OF YOUR TAX RETURN Concerning your request, I hereby notify you that you should be prepared\ to handle any situation that may come your way. Considering the fact that it is difficult to predict whether you will get a gain or a loss on your exchange since you are new with the value of the market conditions. Therefore, I advise you to take that into consideration as Jules White who acquired his stock several years ago is concerned. In case you have a question please feel free to contact me. Yours Sincerely, Brain Jonnes, CPA, PRIVATE PRACTICE. b.) Memo TO: File From: Brain Jonnes RE: Jerome Howard (Tax Year 2016) Facts Jerome Howard is a citizen of this country and our client at private practice corperation. For the purpose of business expansion, Jerome Howard exchanges property with a basis of $300,000 and a fair market value of $900,000 for 70% of the stock of Stooges Corporation. At first, Jerome Howard was undecided and he wondered whether he had made a right decision engaging in such an exchange business. Though he undergone a loss at first but after sometime he started making a gain in the exchange of his property and that is when he realized the value of making a step to start that idea of exchanging his property with Stooges Corporation. Analysis According to the market trends, It is difficult to determine whether there will be a gain or a loss in the shares owned by Jerome Howard. But people always start making prolonged profits after a short period when they have learned the market tricks. Also a loss on exchange is not deductible for owners who directly or indirectly own more than 50% of the stock. Issue and Conclusion Must Jerome Howard report a gain or a loss on the transfer on his tax return.? Yes, it is important to be prepared for a loss at first time due to lack of enough knowledge of the market trends, but you should be sure of prolonged profits after you have studied the market conditions C. 1. Some say that the Tax Code favors the use of debt over equity when capitalizing a corporation. Please state whether or not you agree with this proposition and fully explain your rationale. I agree with this proportion in that tax code is easy to call for and tough to do. The differences over tax policy divides the electorate since taxes involve difficult policy trade-offs between encouraging growth and ensuring equity and many businesses and families have arranged their finances around existing tax code. 2. Please state whether or not you agree with the assertion that in terms of justification and effect, Section 351 incorporations and Section 1031 like-kind exchanges are much alike. I don’t agree with the fact that in terms of justification and effect, Section 351 incorporations and Section 1031 like-kind exchanges are much alike because Under section 351, no loss or gain is recognized provided you receive only stock in exchange for property and you become in control of the corporation immediately after the exchange. While in section 1031, it allows an investor to sell an investment property and purchase a replacement investment property and you can defer the capital gain liability.

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