Question 1. Josephine was granted 1,000 shares of restricted stock when she started working at Holly Co. At that time, the stock price was $11 per share. The restricted shares vest in two years. Josephine did not make an election under Sec. 83(b) with respect to the restricted stock. On the vesting date, the stock price was $20.
Three years after being granted the restricted stock and one year after the shares vested, Josephine sold all her shares for $24 per share. Josephine’s marginal tax rate on ordinary income is 32 percent, and her rate on income taxed at a preferential rate is 15 percent.
How much tax must Josephine pay related to the restricted stock on the following dates?
Grant date –
Vest date –
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Sale date –
What is the amount and date of Holly’s tax deduction with respect to the restricted stock?………..
Question 2. Leah was granted 1,000 shares of restricted stock when she started working at Longleaf Co. At that time, the stock price was $11 per share. The restricted shares vest in two years. Leah did make an election under Sec. 83(b) with respect to the restricted stock. On the vesting date, the stock price was $20. Three years after being granted the restricted stock and one year after the shares vested, Leah sold all her shares for $24 per share. Leah’s marginal tax rate on ordinary income is 32 percent, and her rate on income taxed at a preferential rate is 15 percent.
How much tax must Leah pay related to the restricted stock on the following dates?
Grant date
Vest date –
Sale date –
What is the amount and date of Longleaf’s tax deduction with respect to the restricted stock?
Was it a good idea for Leah to make the Sec. 83(b) election here? Why or why not?
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Question 3
Acacia Corp. owns all the stock of Sweetbay Inc. and Yaupon Corp. The three corporations file consolidated tax returns on a calendar year basis. Sweetbay owns property it purchased for $50,000 several years ago. In 2024, Sweetbay sells the property to Yaupon for $70,000. In 2028, Yaupon sells the property to an unrelated third party for $100,000.
What is the intercompany item, the corresponding item, and the recomputed corresponding item for this intercompany transaction?
In what year(s) are Sweetbay’s and Yaupon’s gains or losses included in consolidated taxable income?
If Acacia sells all its Yaupon stock to an unrelated third party in 2026, in what year is Sweetbay’s gain or loss included in consolidated taxable income?…
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Question 4. Cypress Corp. owns all of Elm Corp’s stock. Both corporations use the accrual method of accounting, and they file a consolidated tax return. Elm provides property management services to Cypress. In so doing, Elm charges Cypress $80,000 for the services and incurs $50,000 of expenses to provide them.
How does this transaction affect the group’s consolidated taxable income?
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Question 5. Maple Corp. and Pine Corp. file a consolidated tax return. In 2024, Maple began selling inventory items to Pine. Maple and Pine use the first-in, first-out (FIFO) inventory method. Maple’s profits on its 2024 inventory sales to Pine are $100,000. Pine’s sales to third parties during 2024 include inventory items that Maple sells to Pine during 2024 for a $35,000 profit; Pine sells these inventory items to third parties for a $20,000 profit. Pine’s inventory at the end of 2024 includes items that Maple sells to Pine for a $65,000 profit. Pine is deemed to sell these to third parties during 2025 due to its use of the FIFO method and realizes a $50,000 profit on their sale.
Maple’s profits on its 2025 inventory sales to Pine are $200,000. Pine’s sales to third parties during 2025 include items that Maple sells to Pine during 2025 for a $110,000 profit. Pine sells these inventory items to third parties for an $80,000 profit. Pine’s inventory at the end of 2025 includes items that Maple sells to Pine for a $90,000 profit.
The group’s consolidated taxable income (before taking into account any adjustments for profits on intercompany inventory sales) is $120,000 in 2024 and $330,000 in 2025. For simplicity, assume Maple and Pine have no other transactions in these two years.
What is the group’s consolidated taxable income for 2024?
What is the group’s consolidated taxable income for 2025?
Question 6. Maple Corp. and Pine Corp. file a consolidated tax return. In 2024, Maple began selling inventory items to Pine. Maple and Pine use the first-in, first-out (FIFO) inventory method. Maple’s profits on its 2024 inventory sales to Pine are $100,000. Pine’s sales to third parties during 2024 include inventory items that Maple sells to Pine during 2024 for a $35,000 profit; Pine sells these inventory items to third parties for a $20,000 profit. Pine’s inventory at the end of 2024 includes items that Maple sells to Pine for a $65,000 profit. Pine is deemed to sell these to third parties during 2025 due to its use of the FIFO method and realizes a $50,000 profit on their sale.
Maple’s profits on its 2025 inventory sales to Pine are $200,000. Pine’s sales to third parties during 2025 include items that Maple sells to Pine during 2025 for a $110,000 profit. Pine sells these inventory items to third parties for an $80,000 profit. Pine’s inventory at the end of 2025 includes items that Maple sells to Pine for a $90,000 profit.
The group’s consolidated taxable income (before taking into account any adjustments for profits on intercompany inventory sales) is $120,000 in 2024 and $330,000 in 2025. For simplicity, assume Maple and Pine have no other transactions in these two years.
What is the group’s consolidated taxable income for 2024?
What is the group’s consolidated taxable income for 2025?
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Question 7. Fringetree Inc. and Gumbo Corp. are an affiliated group that has filed separate tax returns prior to this year. The corporations report the following amounts this year:
Transaction Fringetree. Grumbo Total
Long-tererm capital gains 60,000 30,000 90,000
Long-tererm capital losses (20,000) (70,000) (90,000)
Other separate taxable income 50,000 40,000 90,000
Fringetree’s long-term capital gains of 60,000 include a $10,000 gain on land it sold to Gumbo this year. Gumbo had not sold the land by the end of this year. The corporations have no other intercompany transactions and no capital loss carryovers.
What is the group’s taxable income this year if the corporations elect to file a consolidated tax return?
How much less is this amount than the combined taxable incomes of Fringetree and Gumbo if the corporations filed separate tax returns this year? (in other words, how much lower is taxable income if the corporations elect to file a consolidated tax return?)
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Question 8. Sparkleberry reports the following operating results for the current year:
Taxable income =$400,000
Federal income taxes = $84,000
Dividends paid in October of the current yea = $20,000
Dividends paid in March of the following year = $35,000
NOL carryover from last year deducted in the current year = $50,000
Net capital gain = $45,000
Dividends received from 10%-owned domestic corporation $30,000
Sparkleberry Corp. is a manufacturing business with a compelling need to accumulate earnings. On January 1, its accumulated E&P balance is $300,000.
Current year E&P is $300,000 before the dividend payments. Sparkleberry believes it can justify retaining $180,000 of current E&P to meet the reasonable needs of its business.
What is Sparkleberry’s accumulated taxable income and accumulated earnings tax liability?
Assume the IRS has challenged Sparkleberry’s assertion that it can justify retaining $180,000 of current E&P. Briefly discuss how Sparkleberry can support the amount it is trying to justify (be süre to provide examples).
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