Taxes: Corporate: Sec. S Oc

618 MODULE 36· TAXES: CORPORATE
transferred to a corporation solely in exchange for stock, if nary loss from the sale or exchange of small business corpo-
immediately after the transfer, the transferor is in control of ration stock. Since Nancy acquired her stock in a tax-free
the corporation. For purposes of determining whether con- asset transfer under Sec. 351, her stock's basis is $80,000
sideration other than stock (boot) has been received, the and the sale of the stock for $35,000 results in a loss of
assumption of liabilities by the transferee corporation is not $45,000. However, because the property that Nancy trans-
to be 'treated as the receipt of money or other property by the ferred in exchange for the stock had an adjusted basis
transferor. Thus, Rela Associates recognizes no gain or loss ($80,000) in excess of its fair market value ($60,000), the
on the transfer of its assets and liabilities to a newly formed stock's basis must be reduced by the excess ($20,000) for
corporation in return for all of the corporation's stock. purposes of determining the amount that can be treated as an
Also note that no gain or loss will be recognized by ordinary loss. Thus, the amount of ordinary loss is limited
Rela Associates on the distribution of the corporation's stock to $60,000 - $35,000 :: $25,000, with the remaining loss
to its partners in liquidation, and no gain or loss will be rec- ($45,000 - $25,000 :: $20,000) treated as a capital loss.
ognized by the partners when they receive the corporation's C.1. Filing and Payment of Tax
stock in liquidation of their partnership interests.
12. (d) The requirement is to determine the correct
7. (d) The requirement is to determine the taxable in-
statement concerning the imposition of a civil fraud penalty
come to Rogers and the basis of her stock. Since services on acorporation, If part of a tax. underpayment is the result
are excluded from the definition of "property," Rogers' offraud, a fraud penalty equal to 75% of the portion of the
transfer does not fall under the nonrecognition provision of underpayment attributable to fraud will be assessed. Fraud
Sec. 351. Rogers must report $10,000 of compensation in- differs from simple, honest mistakes and negligence. Fraud
come and the basis for the stock is $10,000, the amount re- involves a taxpayer's actual, deliberate, or intentional
ported as income. wrongdoing with the specific purpose to evade a tax be-
B. Sec. 1244 Stock lieved to be owing. Examples of conduct from which fraud
may be inferred include keeping a double set of books;
8. (a) The requirement is to determine the amount of making false entries or alterations, false invoices or docu-
ordinary loss that Jackson can deduct as a result of the ments; destroying books or records; and, concealing assets
worthlessness of the Bean Corp. stock that he inherited from or covering up sources of income. Answers (a) (b), and (c)
his parents. Sec. 1244 permits a shareholder to deduct an are incorrect because omitting income as a result of inade-
ordinary loss of up to $50,000 per year ($100,000 if married quate recordkeeping, erroneously failing to report income,
filing jointly) if qualifying stock is sold, exchanged, or be- and filing an incomplete return with a statement attached
comes worthless. The qualifying stock must have been is- making clear that the return is incomplete, do not constitute
sued in exchange for money or other property and must have deliberate actions with, the specific intent of evading tax.
been issued to the individual or partnership sustaining the
loss. Ordinary loss treatment is not available if the share- 13. (a) The requirement is to determine whether Bass
holder sustaining the loss was not the original holder of the Corp. has to pay interest on the $400 tax payment made in
stock. As a result, an individual who acquires stock by pur- 20Q9 and/or a tax delinquency penalty. A corporation is
chase, gift, or inheritance from another shareholder is not generally required to make estimated tax payments and to
entitled to ordinary loss treatment. Since Jackson inherited pay all of its remaining tax liability on or before the original
the Bean stock from his parents, Jackson does not qualify for due date of its tax return. Filing for an extension of time to
ordinary loss treatment and his $25,000 loss will be recog- file the tax return does not extend the'time to pay the tax
nized as a long-term capital loss. liability. If any amount of tax is not paid by the original due
date, interest must be paid from the due date until the tax is
9. (c) The requirement is to determine which statement
paid. Additionally, a failure-to-pay tax delinquency penalty
is not a requirement for stock to qualify as Sec. 1244 small will be owed if the amount of tax paid by the original due
business corporation stock. To qualify as Sec. 1244 small date of the return is less than 90% of the tax shown on the
business corporation stock, the stock must be issued by a return. The failure-to-pay penalty is imposed at a rate of
domestic corporation to an individual or partnership in ex- 0.5% per month (or fraction thereof), with a maximum pen-
change for money or property (other than stock or securi- alty of 25%. The penalty is imposed on the amount of un-
ties). Any type of stock can qualify, whether common or paid tax at the beginning of the month for which the penalty
preferred, voting or nonvoting. is being computed. Bass Corp. is not subject to the failure-
10. (b) The requirement is to determine the character of to-pay delinquency penalty because it paid in 95% of the
Dinah's recognized loss from the sale of Sec. 1244 stock to total tax shown on its return by the original due date of the
be reported on her joint income tax return for 2009. Sec. return.
1244 permits an individual to deduct an ordinary loss on the 14. (b) The requirement is to determine whether Edge
sale or worthlessness of stock. The amount of ordinary loss Corp. could compute its first quarter 2009 estimated income
deduction is annually limited to $50,000 ($100,000 for a tax payment using the annualized income method and/or the
married taxpayer filing ajoint return), with any excess loss preceding year method. A corporation generally must pay
treated as a capital loss. Since Dinah is married filing a joint four installments of estimated tax, each equal to 25% of its
return, her ordinary loss is limited to $100,000, with the required annual payment. A penalty for the underpayment
remaining $25,000 recognized as a capital loss. . of estimated taxes can be avoided if a corporation's quar-
11. (c) The requirement is to determine the amount and terly estimated payments are at least equal to the least of
(l) 100% of the tax shown on the current year's tax return,
character of Nancy's recognized loss resulting from the sale
(2) 100% of the tax that would be due by placing the current
of Sec. 1244 stock for $35,000 in 2009. Sec. 1244 permits a
year's income for specified monthly periods on an annual-
single individual to annually deduct up to $50,000 of ordi-

Taxes: Corporate: Sec. S Oc

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618 MODULE 36· TAXES: CORPORATE

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