Jessica Schmitt

Income Tax 2 Chapter 5-6

5-44:
a. Gross income from the distribution = $140,000-$70,000 = $70,000
b.
$85,00
0

E&P at start of year

Taxable Income
Proceeds of term life
insurance
Federal income tax
Life insurance premium
Property distribution
Prior year installment sale
income

$320,00
0
$150,00
0
($112,0
00)
($4,500)
($220,0
00)
($16,00
0)

E&P after distribution

$117,5
00
$202,5
00

c. Tax basis for property = $140,000

d. If Petrel Corporation would have sold the property at the $140,000 fair market
value, they would have recognized a loss of $150,000, which would in turn
offset the taxable income. (150,000 x 39% =$58,500) Then adding up the tax
savings of $58,500, the sales proceeds of $140,000 and subtracting the
$70,000 loan balance, Petrel would have $128,500 to distribute to Juan. The
E&P calculation would be as follows:
E&P at start of year
Taxable Income (less
$150,000 loss)
Proceeds of term life
insurance
Federal income tax
Life insurance premium
Property distribution
Prior year installment sale
income
E&P after distribution

$85,00
0
$170,00
0
$150,00
0
($53,50
0)
($4,500)
($128,5
00)
($16,00
0)

$117,5
00
$202,5
00

Juan would recognize $128,500 in taxable dividends and Petrels E&P would
stay the same.

Research problem # 4:
TO: File
FROM: Jessica Schmitt
RE: E&P tax consequences of changing methods of accounting
Emerald Corporation is required to change its method of accounting for
Federal Income tax purposes, and the change will require adjustments to
income to be madke over three tax periods. The implication of this
adjustment would be as follows:
When computing a taxpayers taxable income for a given tax year, if that
method is different than the previous years, then you must take into account
the adjustments necessary in order to prevent amounts from being
duplicated of omitted. When there is a change in method of accounting,
income for the previous year must be determined under the old method of
accounting, and the income for the year of change and going forward must
be determined under the new method as if the new method had always been
used. For example, if a taxpayer uses the cash method and then changes to
accrual and has $120,000 of income earned but not yet received, and
$100,000 of expenses incurred but not yet paid, an adjustment of $20,000 is
required as a result of the change.
Also if the increase in taxable income for year of change exceeds $3,000 and
the taxpayer establishes their taxable income under the new method for one
of more years preceding the change, then the tax attributable to any such
increase in taxable income cannot be greater than the net increase in the
taxes which would result if the adjustments required were allocated to the
taxable year or years.
Research aids used:
Section 481(a)
Rev. Proc. 97-27, 1997-1 C.B. 680.
6-65:
a. The tax consequences of the distributions to Ivory Corporation would be
that they would not recognize any gain or loss under section 332 because
under that section a subsidiary corporation would not recognize a loss on

distributions to a minority shareholder. Likewise, Gold Corporation would

not recognize a gain or loss on the liquidation and would have a basis of
$80,000 in inventory. Imelda would recognize the following gain: $200,000
realized minus $175,000 basis in stock, or a gain of $25,000, and would
have a basis of $200,000 in the equipment.
b. The tax consequences to Ivory Corporation in this situation would again be
that they do not recognize and gain or loss in the distribution of cash and
equipment to Gold Corporation. They would however recognize a gain of
$120,000 ($200,000 fair market value minus $80,000 basis) on the
inventory distribution to Imelda. Gold Corporation again would not
recognize any gain or loss on the liquidation and would have a basis of
$350,000 in the equipment, and the basis of stock in Ivory would be gone.
Imeldas tax consequence would be the same as the last situation. She
would recognize a gain of $25,000 ($200,000 in the amount realized
minus $175,000 basis in stock) and would have a basis of $200,000 in the
inventory.