SOLUTIONS MANUAL and TEST BANK 2013 Corporations Partnerships Trusts. 

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Contents of Appendix E

Chapter 2
Problem 1 – Pet Kingdom – Form 1120 Corporate Tax Return E-1
Problem 2 – By the Numbers – Form 1120 Corporate Tax Return E-15
Chapter 9
Problem 1 – Fleming Products – Form 1118 E-23
Problem 2 – Cotton Export, Inc. – Form 1118 E-26
Chapter 10
Problem 1 – Rock the Ages – Form 1065 tax return E-28
Problem 2 – Branto, LLC – Form 1065 return E-38
Chapter 12
Problem 1 – Chocolat, Inc – Form 1120S E-55
Problem 2 – Textiles, Inc. – Form 1120S E-62
Chapter 18
Problem 1 – Daniel and Lisa Ward – Form 709 tax returns E-72
Problem 2 – Rachel Keating – Form 709 tax return E-81
Problem 3 – Pam Butler – Form 706 Tax Return E-85
Chapter 20
Problem 1 – Blue Trust – Form 1041 tax return E-99
Problem 2 – Green – Form 1041 tax return E-103

CHAPTER 4 Corporations: Organization and Capital Structure

1. LO.1 In terms of justification and effect, § 351 (transfer to a controlled corporation) and § 1031 (like-kind exchange) are much alike. Explain.

2. LO.1 Under what circumstances will gain and/or loss be recognized on a § 351 transfer?

3. LO.1 What does “property” include for purposes of § 351?

4. LO.1 Does “stock” include stock rights and stock warrants under § 351? Does it include preferred stock?

5. LO.1 Does the receipt of a 10-year note in exchange for the transfer of appreciated property to a controlled corporation cause recognition of gain? Explain.

6. LO.1 What is the control requirement of § 351? Describe the effect of the following in satisfying this requirement:

a. A shareholder renders only services to the corporation for stock. b. A shareholder renders services and transfers property to the corporation for stock. c. A shareholder has only momentary control after the transfer. d. A long period of time elapses between the transfers of property by different shareholders.

7. LO.1 Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.” Nancy formed the business in 1997 as a sole proprietorship, and it has been very successful. Assets have a fair market value of $450,000 and a basis of $180,000. On the advice of their tax accountant, Nancy decides to incorporate “The Perfect Cat.” Because of Kathleen’s participation, Nancy would like her to receive shares in the corporation. What are the relevant tax issues?

8. LO.1, 2, 7 Four friends plan to form a corporation for purposes of constructing a shopping center. Charlie will be contributing the land for the project and wants more security than shareholder status provides. He is contemplating two possibilities: receive corporate bonds for his land or take out a mortgage on the land before transferring it to the corporation. Comment on the choices Charlie is considering. What alternatives can you suggest?

9. LO.1 Bruce and Joyce form Warbler Corporation by transferring appreciated property in exchange for 50 shares each of Warbler stock. If Bruce donates his shares to a qualified charity immediately after the exchange, does this make the incorporation taxable? Explain.

10. LO.1 Should a transferor who receives stock for both property and services be included in the control group in determining whether an exchange meets the requirement of § 351? Explain.

11. LO.1 At a point when Robin Corporation has been in existence for six years, shareholder Ted transfers real estate (adjusted basis of $20,000 and fair market value of $100,000) to the corporation for additional stock. At the same time, Peggy, the other shareholder, acquires one share of stock for cash. After the two transfers, the percentages of stock ownership are as follows: 79% by Ted and 21% by Peggy.

a. What were the parties trying to accomplish? b. Will it work? Explain.

12. LO.2 How does the transfer of mortgaged property to a controlled corporation affect the transferor-shareholder’s basis in stock received? Assume that no gain is recognized on the transfer.

13. LO.2 Before incorporating her apartment rental business, Libbie takes out second mortgages on several of the units. She uses the mortgage proceeds to make capital improvements to the units. Along with all of the rental units, Libbie transfers the mortgages to the newly formed corporation in return for all of its stock. Discuss the tax consequences of these procedures.

  14. LO.2 If both § 357(b) and § 357(c) apply to a transfer of property to a corporation under § 351, which provision takes precedence?

15. LO.3 Discuss how each of the following affects the calculation of the basis of stock received by a shareholder in a § 351 transfer:

a. The transfer of a liability to the corporation along with property. b. Property that has been transferred has built-in losses. c. The basis in the property transferred to the corporation. d. The receipt of “other property” (i.e., boot) in addition to stock.

16. LO.3 Identify a situation when a corporation can deduct the value of the stock it issues for the rendition of services. Identify a situation when a deduction is not available.

17. LO.3 In a § 351 transfer, Jorge transfers appreciated property to Bluebird Corporation in exchange for Bluebird stock.

a. What is Bluebird’s holding period for the property it received from Jorge? b. What is Jorge’s holding period for the Bluebird stock?

18. LO.4 A corporation acquires property as a contribution to capital from a shareholder and from a nonshareholder. Are the rules pertaining to the property’s basis the same? Explain.

19. LO.5 In structuring the capitalization of a corporation, what are the advantages and disadvantages of utilizing debt rather than equity?

20. LO.5 In determining whether debt of a corporation should be reclassified as stock, comment on the relevance of the following:

a. The loan is on open account. b. The loan is payable on demand. c. The corporation does not make timely repayments. d. Payments are contingent on earnings. e. The loans are in the same proportion as the shareholdings, and the corporation uses the funds to purchase a new building. f. The corporation’s debt-equity ratio is 5:1.

21. LO.6 Assuming that § 1244 does not apply, what is the tax treatment of stock that has become worthless?

22. LO.6 Under what circumstances, if any, may a shareholder deduct a business bad debt on a loan made to the corporation?

23. LO.6 Four years ago Nelson purchased stock in Black Corporation for $37,000. The stock has a current value of $5,000. Nelson needs to decide which of the following alternatives to pursue. Determine the tax effect of each.

a. Without selling the stock, Nelson deducts $32,000 for the partial worthlessness of the Black Corporation investment. b. Nelson sells the stock to his aunt for $5,000 and deducts a $32,000 long-term capital loss. c. Nelson sells the stock to a third party and deducts an ordinary loss. d. Nelson sells the stock to his mother for $5,000 and deducts a $32,000 long-term capital loss. e. Nelson sells the stock to a third party and deducts a $32,000 long-term capital loss.

24. LO.1, 7 Keith’s sole proprietorship holds assets that, if sold, would yield a gain of $100,000. It also owns assets that would yield a loss of $30,000. Keith incorporates his business using only the gain assets. Two days later Keith sells the loss assets to the newly formed corporation. What is Keith trying to accomplish? Will he be successful? Explain.

25. LO.7 Sarah incorporates her small business but does not transfer the machinery and equipment the business uses to the corporation. Subsequently, the machinery and equipment are leased to the corporation for an annual rent. What tax reasons might Sarah have for not transferring the machinery and equipment to the corporation when the business was incorporated?

26. LO.1, 3 Elizabeth, Rod, June, and Whit form Zelcova Corporation with the following consideration: Consideration Transferred Basis to Transferor Fair Market Value Number of Shares Issued From Elizabeth— Personal services rendered to Zelcova Corporation $ –0– $ 30,000 30 From Rod— Equipment 345,000 300,000 300 From June— Unrealized accounts receivable –0– 150,000 130* From Whit— Land and building 210,000 450,000 Mortgage on land and building 300,000 300,000 150 *June receives $20,000 in cash in addition to the 130 shares. Zelcova Corporation assumes the mortgage transferred by Whit. The value of each share of Zelcova stock is $1,000. As to these transactions, provide the following information:

a. Elizabeth’s recognized gain, income, or loss. Identify the nature of any such gain, income, or loss.
b. Elizabeth’s basis in the Zelcova stock.
c. Rod’s recognized gain or loss. Identify the nature of any such gain or loss.
d. Rod’s basis in the Zelcova stock. What election may Rod consider making as to his stock basis because the property he contributes to Zelcova has a built-in loss?
e. Zelcova Corporation’s basis in the equipment. What is the impact to Zelcova if Rod makes the election noted in part (d) above?
f. June’s recognized gain or loss. Identify the nature of any such gain or loss.
g. June’s basis in the Zelcova stock.
h. Zelcova Corporation’s basis in the unrealized receivables.
i. Whit’s recognized gain or loss. Identify the nature of any such gain or loss.
j. Whit’s basis in the Zelcova stock.
k. Zelcova Corporation’s basis in the land and building.

27. LO.1, 3 Ron and Gail form Maple Corporation with the following consideration: Consideration Transferred Basis to Transferor Fair Market Value Number of Shares Issued From Ron—

Cash $ 50,000 $ 50,000 Installment obligation 140,000 250,000 30 From Gail— Cash 150,000 150,000 Equipment 125,000 250,000 Patent 10,000 300,000 70 The installment obligation has a face amount of $250,000 and was acquired last year from the sale of land held for investment purposes (adjusted basis of $140,000). As to these transactions, provide the following information:

a. Ron’s recognized gain or loss. b. Ron’s basis in the Maple Corporation stock. c. Maple Corporation’s basis in the installment obligation. d. Gail’s recognized gain or loss. e. Gail’s basis in the Maple Corporation stock. f. Maple Corporation’s basis in the equipment and the patent. g. How would your answers to the preceding questions change if Ron received common stock and Gail received preferred stock? h. How would your answers change if Gail was a partnership?

28. LO.1, 7 Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exchanges his property (basis of $70,000 and value of $500,000) for 500 shares in Starling. On May 10, Clyde transfers his property (basis of $90,000 and value of $350,000) for 350 shares in Starling.

a. If the three exchanges are part of a prearranged plan, what gain will each of the parties recognize on the exchanges? b. Assume that Jane and Jon exchanged their property for stock four years ago, while Clyde transfers his property for 350 shares in the current year. Clyde’s transfer is not part of a prearranged plan with Jane and Jon to incorporate their businesses. What gain will Clyde recognize on the transfer? c. Returning to the original facts, if the property that Clyde contributes has a basis of $490,000 (instead of $90,000), how might the parties otherwise structure the transaction?

29. LO.1 Michael Robertson (1635 Maple Street, Syracuse, NY 13201) exchanges property (basis of $200,000 and fair market value of $850,000) for 75% of the stock of Red Corporation. The other 25% is owned by Sarah Mitchell, who acquired her stock several years ago. You represent Michael, who asks whether he must report gain on the transfer. Prepare a letter to Michael and a memorandum for the tax files documenting your response.

30. LO.1 Dan and Patricia form Crane Corporation. Dan transfers land (worth $200,000, basis of $60,000) for 50% of the stock in Crane. Patricia transfers machinery (worth $150,000, adjusted basis of $30,000) and provides services worth $50,000 for 50% of the stock.

a. Will the transfers qualify under § 351? Explain. b. What are the tax consequences to Dan and Patricia? c. What is Crane Corporation’s basis in the land and the machinery?

31. LO.1 Juan organized Teal Corporation 10 years ago. He contributed property worth $1 million (basis of $200,000) for 2,000 shares of stock in Teal (representing 100% ownership). Juan later gave each of his children, Julie and Rachel, 500 shares of the stock. In the current year, Juan transfers property worth $400,000 (basis of $150,000) to Teal for 500 more of its shares. What gain, if any, will Juan recognize on the transfer?

32. LO.1, 3 Ann and Bob form Robin Corporation. Ann transfers property worth $420,000 (basis of $150,000) for 70 shares in Robin Corporation. Bob receives 30 shares for property worth $165,000 (basis of $30,000) and for legal services (worth $15,000) in organizing the corporation.

a. What gain or income, if any, will the parties recognize on the transfer? b. What basis do Ann and Bob have in the stock in Robin Corporation? c. What is Robin Corporation’s basis in the property and services it received from Ann and Bob?

33. LO.1, 3 Assume in Problem 32 that the property Bob transfers to Robin Corporation is worth $15,000 (basis of $3,000) and that his services in organizing the corporation are worth $165,000. What are the tax consequences to Ann, Bob, and Robin Corporation?

34. LO.3 Kim is an employee of Azure Corporation. In the current year, she receives a salary of $30,000 and is given 10 shares of Azure stock for services she renders to the corporation. The shares in Azure Corporation are worth $1,000 each. For tax purposes, how will Kim treat the receipt of the 10 shares? What is Azure Corporation’s total compensation deduction for Kim’s services?

35. LO.1, 7 Rhonda Johnson owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel Powell, have decided that additional contributions of capital are needed if Peach is to remain successful in its competitive industry. The two shareholders have agreed that Rhonda will contribute assets having a value of $200,000 (adjusted basis of $15,000) in exchange for additional shares of stock. After the transaction, Rhonda will hold 75% of Peach Corporation and Rachel’s interest will fall to 25%.

a. What gain is realized on the transaction? How much of the gain will be recognized? b. Rhonda is not satisfied with the transaction as proposed. How would the consequences change if Rachel agrees to transfer $1,000 of cash in exchange for additional stock? In this case, Rhonda will own slightly less than 75% of Peach and Rachel’s interest will be slightly more than 25%. c. If Rhonda still is not satisfied with the result, what should be done to avoid any gain recognition?

36. LO.1, 2, 3 Adam transfers property with an adjusted basis of $50,000 (fair market value of $400,000) to Swift Corporation for 90% of the stock. The property is subject to a liability of $60,000, which Swift assumes.

a. What is the basis of the Swift stock to Adam? b. What is the basis of the property to Swift Corporation?

37. LO.1, 2, 3 Four years ago Gene exchanged commercial real estate worth $1.5 million (basis of $300,000) and subject to a mortgage of $200,000 for land worth $1.15 million, subject to a mortgage of $150,000, and cash of $300,000. In the current year, Gene transfers the land he received in the exchange to newly formed Bronze Corporation for all of its stock. Bronze Corporation assumes the original mortgage on the land, current face amount of $100,000, and a second mortgage, face amount of $20,000. Gene had placed the second mortgage on the land to secure the purchase of some equipment that he used in this business. What are the tax issues?

38. LO.1, 2, 3 David organizes White Corporation with a transfer of land (basis of $200,000, fair market value of $600,000) that is subject to a mortgage of $150,000. A month before the incorporation, David borrowed $100,000 for personal purposes and gave the bank a lien on the land. White Corporation issues stock worth $350,000 to David and assumes the mortgage of $150,000 and the personal loan of $100,000. What are the tax consequences of the incorporation to David and to White Corporation?

39. LO.1, 3 Michael transfers the following assets to Peach Corporation in exchange for all of its stock. (Assume that neither Michael nor Peach plans to make any special tax elections at the time of incorporation.) Assets Michael’s Adjusted Basis Fair Market Value Inventory $ 85,000 $100,000 Equipment 160,000 120,000 Trucks 150,000 130,000

a. What is Michael’s recognized gain or loss? b. What is Michael’s basis in the stock? c. What is Peach’s basis in the inventory, equipment, and trucks? d. If Michael has no intentions of selling his Peach stock for at least 15 years, what action would you recommend that Michael and Peach Corporation consider? How does this change the previous answers?

40. LO.1, 2, 3 Fay, a sole proprietor, is engaged in a cash basis service business. In the current year, she incorporates the business to form Robin Corporation. She transfers assets with a basis of $400,000 (fair market value of $1.2 million), a bank loan of $360,000 (which Robin assumes), and $80,000 in trade payables in return for all of Robin’s stock. What are the tax consequences of the incorporation of the business?

41. LO.1, 3 Alice and Jane form Osprey Corporation. Alice transfers property, basis of $25,000 and value of $200,000, for 50 shares in Osprey Corporation. Jane transfers property, basis of $50,000 and value of $165,000, and agrees to serve as manager of Osprey for one year; in return, Jane receives 50 shares in Osprey. The value of Jane’s services to Osprey is $35,000.

a. What gain or income do Alice and Jane recognize on the exchange? b. What is Osprey Corporation’s basis in the property transferred by Alice and Jane? How does Osprey treat the value of the services that Jane renders?

42. LO.1, 3 Assume in Problem 41 that Jane receives the 50 shares of Osprey Corporation stock in consideration for the appreciated property and for the provision of accounting services in organizing the corporation. The value of Jane’s services is $35,000.

a. What gain or income does Jane recognize? b. What is Osprey Corporation’s basis in the property transferred by Jane? How does Osprey treat the value of the services that Jane renders?

43. LO.1, 3 On January 6, 2012, Donna transferred machinery worth $100,000 (basis of $30,000) to a controlled corporation, Jay, in a transfer that qualified under § 351. Donna had deducted depreciation on the machinery in the amount of $80,000 when she held the machinery for use in her proprietorship. On November 16, 2012, Jay Corporation sells the machinery for $95,000. What are the tax consequences to Donna and to Jay Corporation on the sale of the machinery?

44. LO.4 Red Corporation wants to set up a manufacturing facility in a midwestern state. After considerable negotiations with a small town in Ohio, Red accepts the following offer: land (fair market value of $3 million) and cash of $1 million.

a. How much gain or income, if any, must Red Corporation recognize? b. What basis will Red Corporation have in the land? c. Within one year of the contribution, Red constructs a building for $800,000 and purchases inventory for $200,000. What basis will Red Corporation have in each of those assets?

45. LO.5, 6 Emily Patrick (36 Paradise Road, Northampton, MA 01060) formed Teal Corporation a number of years ago with an investment of $200,000 cash, for which she received $20,000 in stock and $180,000 in bonds bearing interest of 8% and maturing in nine years. Several years later Emily lent the corporation an additional $50,000 on open account. In the current year, Teal Corporation becomes insolvent and is declared bankrupt. During the corporation’s existence, Emily was paid an annual salary of $60,000. Write a letter to Emily in which you explain how she would treat her losses for tax purposes.

46. LO.5, 6 Stock in Jaybird Corporation (555 Industry Lane, Pueblo, CO 81001) is held equally by Vera, Wade, and Wes. Jaybird seeks additional capital in the amount of $900,000 to construct a building. Vera, Wade, and Wes each propose to lend Jaybird Corporation $300,000, taking from Jaybird a $300,000 four-year note with interest payable annually at two points below the prime rate. Jaybird Corporation has current taxable income of $2 million. You represent Jaybird Corporation. Jaybird’s president, Steve Ferguson, asks you how the payments on the notes might be treated for tax purposes. Prepare a letter to Ferguson and a memo for your tax files where you document your conclusions.

47. LO.6 Sam, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244 at a cost of $100,000 three years ago. He sells the stock for $10,000 in the current tax year.

a. How will the loss be treated for tax purposes? b. Assume instead that Sam sold the stock to his sister, Kara, a few months after it was acquired for $100,000 (its fair market value). If Kara sells the stock for $60,000 in the current year, how should she treat the loss for tax purposes?

48. LO.6 Three years ago and at a cost of $40,000, Paul Sanders acquired stock in a corporation that qualified as a small business corporation under § 1244. A few months after he acquired the stock, when it was still worth $40,000, he gave it to his brother, Mike Sanders. Mike, who is married and files a joint return, sells the stock for $25,000 in the current tax year. Mike asks you, his tax adviser, how the sale will be treated for tax purposes. Prepare a letter to your client and a memo for the file. Mike’s address is 10 Hunt Wood Drive, Hadley, PA 16130.

49. LO.6 Susan transfers property (basis of $50,000 and fair market value of $25,000) to Thrush Corporation in exchange for shares of § 1244 stock. (Assume that the transfer qualifies under § 351.)

a. What is the basis of the stock to Susan? (Susan and Thrush do not make an election to reduce her stock basis.) b. What is the basis of the stock to Susan for purposes of § 1244? c. If Susan sells the stock for $20,000 two years later, how will the loss be treated for tax purposes?

50. LO.5, 7 Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The corporation’s assets have a tax basis of $50,000 and a fair market value of $600,000. In the current year, Frank and Cora each loan Purple Corporation $150,000. The notes to Frank and Cora bear interest of 8% per annum. Mitch leases equipment to Purple Corporation for an annual rental of $12,000. Discuss whether the shareholder loans from Frank and Cora might be reclassified as equity. Consider in your discussion whether Purple Corporation has an acceptable debt-equity ratio. R E S E A R C H P R O B L E M S

Research Problem 1. Lynn Jones, Shawn, Walt, and Donna are trying to decide whether they should organize a corporation and transfer their shares of stock in several corporations to this new corporation. All of their shares are listed on the New York Stock Exchange and are readily marketable. Lynn would transfer shares in Brown Corporation; Shawn would transfer stock in Rust Corporation; Walt would transfer stock in White Corporation; and Donna would transfer stock in several corporations. The stock would be held by the newly formed corporation for investment purposes. Lynn asks you, her tax adviser, whether she would have gain on the transfer of her substantially appreciated shares in Brown Corporation if she transfers the shares to a newly formed corporation. She also asks whether there will be tax consequences if she, Shawn, Walt, and Donna form a partnership, rather than a corporation, to which they would transfer their readily marketable stock. Your input will be critical as they make their decision. Prepare a letter to the client, Lynn Jones, and a memo for the firm’s files. Lynn’s address is 1540 Maxwell Avenue, Highland, KY 41099.

Research Problem 2. Joel has operated his business as a sole proprietorship for many years but has decided to incorporate the business to limit his exposure to personal liability. The balance sheet of his business is as follows: Adjusted Basis Fair Market Value Assets: Cash $ 50,000 $ 50,000 Accounts receivable 40,000 40,000 Inventory 30,000 60,000 Fixed assets 10,000 200,000 $130,000 $ 350,000 Liabilities: Trade accounts payable $ 25,000 $ 25,000 Notes payable 175,000 175,000 Owner’s equity (70,000) 150,000 $130,000 $ 350,000 One problem with this plan is that the liabilities of Joel’s sole proprietorship exceed the basis of the assets to be transferred to the corporation by $70,000 ($200,000 − $130,000). Therefore, Joel would be required to recognize a gain of $70,000. He is not pleased with this result and asks you about the effect of drawing up a $70,000 note that he would transfer to the corporation. Would the note, which promises a future payment to the corporation of $70,000, enable Joel to avoid recognition of the gain? Explain. Partial list of research aids: § 357(c).

Research Problem 3. Tim is a real estate broker who specializes in commercial real estate. Although he usually buys and sells on behalf of others, he also maintains a portfolio of property of his own. He holds this property, mainly unimproved land, either as an investment or for sale to others. In early 2011, Irene and Al contact Tim regarding a tract of land located just outside the city limits. Tim bought the property, which is known as the Moore farm, several years ago for $600,000. At that time, no one knew that it was located on a geological fault line. Irene, a well-known architect, and Al, a building contractor, want Tim to join them in developing the property for residential use. They are aware of the fault line but believe that they can circumvent the problem by using newly developed design and construction technology. Because of the geological flaw, however, they regard the Moore farm as being worth only $450,000. Their intent is to organize a corporation to build the housing project, and each party will receive stock commensurate to the property or services contributed. After consulting his tax adviser, Tim agrees to join the venture if certain modifications to the proposed arrangement are made. The transfer of the land would be structured as a sale to the corporation. Instead of receiving stock, Tim would receive a note from the corporation. The note would be interest-bearing and be due in five years. The maturity value of the note would be $450,000—the amount that even Tim concedes is the fair market value of the Moore farm. What income tax consequences ensue from Tim’s suggested approach? Compare this result with what would happen if Tim merely transferred the Moore farm in return for stock in the new corporation.

Research Problem 4. Sarah is the sole owner of Bluegrass Corporation. The basis and value of her stock investment in Bluegrass are approximately $100,000. In addition, she manages Bluegrass’s operations on a full-time basis and pays herself an annual salary of $40,000. Because of a recent downturn in business, she needs to put an additional $80,000 into her corporation to help meet short-term cash-flow needs (e.g., inventory costs, salaries, and administrative expenses). Sarah believes that the $80,000 transfer can be structured in one of three ways: as a capital contribution, as a loan made to protect her stock investment, or as a loan intended to protect her job. From a tax perspective, which alternative would be preferable in the event that Bluegrass’s economic slide worsens and bankruptcy results? Explain your answer. Partial list of research aids: Kenneth W. Graves, 87 TCM 1409, T.C.Memo. 2004–140.

Research Problem 5. Identify two publicly traded corporations that have issued more than one class of stock to their shareholders. Was the issuance of the additional classes of stock part of the original incorporation, or did it occur later? Determine the rationale for the corporations’ actions.

Research Problem 6. Have the provisions of § 1202, which relate to qualified small business stock, been widely used since their enactment? What leads you to this conclusion? What rationale did Congress provide as a justification for the provision’s enactment? What justification was offered for increasing the exclusion percentage in 2009 and 2010? Evaluate recent Obama administration budget proposals that would make the 100 percent exclusion permanent.

Research Problem 7. Owners and financiers of businesses often have reasons to structure their investments as either debt or equity. Locate the July 11, 2011, report prepared by the Staff of the Joint Committee on Taxation that contains a discussion of the taxation of business debt. Summarize for your professor its conclusion on the (1) tax incentives for debt, (2) tax incentives for equity, and (3) incentives to create hybrid instruments.