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Chris owns 70 percent of ABC Corporation. ABC Corporation had acquired land known as Parcel A in 1984 for $68,000 and held Parcel A for investment purposes. During the current taxable year, ABC Corporation sold Parcel A to Chris for $65,000 which amount was equal to the fair market value of Parcel A. Shortly after receiving Parcel A, Chris sold Parcel A to his friend from college for $73,000. How much gain or loss is realized and recognized by the respective parties as a result of each of the sales? A. ABC Corporation realized a loss of $3,000 and recognized a loss of $3,000 on the distribution; Chris realized a gain of $8,000 and recognized a gain of 8,000 on the sale. B. ABC Corporation realized a loss of $3,000 and recognized a loss of 3,000 on the distribution; Chris realized a gain of $5,000 and recognized a gain of $5,000. C. ABC Corporation realized a loss of $3,000 and recognized a loss of 0; Chris realized a gain of $8,000 and recognized a gain of $5,000. D. ABC Corporation realized a loss of $3,000 and recognized a loss of 0; Chris realized a gain of $5,000 and recognized a gain of$5,000. Question 2 For the current taxable year, HIJ Inc. had gross receipts from operations of $230,000, operating and other expenses of $310,000, and $120,000 of dividends that it received from a 45 percent-owned domestic corporation. For the current taxable year, HIJ Inc. has taxable income or a net operating loss of what amount? A. $8,000 taxable income. B. $40,000 taxable income. C. $56,000 net operating loss. D. $80,000 net operating loss. Question 3 NOP Inc. had the following income and expenses during the current taxable year. Its income from operations was $250,000, its expenses from operations were $120,000, its dividends received (from a 30 percent-owned corporation)) were $80,000, and it made cash charitable contributions of $30,000 How much is NOP Inc.’s charitable contribution deduction for the current taxable year? A. $14,600. B. $21,000. C. $26,000. D. $30,000. Question 4 For the current taxable year, RST Inc.’s gross income from operations was $1,000,000 and its expenses from operations were $1,500,000. RST Inc. also received a $600,000 dividend from a 10 percent-owned corporation. How much is RST Inc.’s dividends-received deduction? A. 0. B. $70,000. C. $320,000. D. $420,000. Question 5 Books and Toys Corporation, a calendar year corporation, had a net operating loss of $50,000 for 2011. Books and Toys Corporation made a proper election to forego the carryback period. For 2012, Books and Toys Corporation correctly deducted $40,000 of the 2011 loss. Books and Toys Corporation will lose the remaining $10,000 of the loss if the loss cannot be deducted by the end of which tax year? A. 2018. B. 2021. C. 2026. D. 2031. Question 6 LMN Inc. liquidated. As part of the liquidation, one shareholder, Larry, who owned 30 percent of the stock of LMN Inc., received as a distribution in exchange for all of his stock in the corporation, inventory worth $90,000 that had a basis to the corporation of $70,000. How much gain was recognized by LMN Inc. as a result of this liquidating distribution and what was the character of the gain? A. $0 gain. B. $20,000 capital gain. C. $20,000 ordinary income. D. $20,000 Section 1231 gain. Question 7 Ben and John formed BCD Inc., a corporation, in 2011. Ben received 80% of the voting common stock, the only class of stock and John received the remaining 20% of the stock. In 2012, Ben transferred additional property to BCD Inc. The property had an adjusted basis to Ben of $40,000 and a fair market value of $50,000 on the date of the transfer. On the same day, and in exchange for the property he transferred to BCD Inc., Ben received cash of $15,000 and additional stock worth $35,000. How much gain was recognized by Ben as a result of this transaction? A. 0. B. $10,000. C. $15,000. D. $25,000. Question 8 Sue transferred a building to her newly formed corporation, RSTU Inc. The building had an adjusted basis to Sue of $75,000 and a fair market value of $150,000 on the date of the transfer. The building was encumbered by a mortgage of $100,000, which RSTU Inc. assumed. On the same day, and in exchange for the building she transferred to RSTU Inc., Sue received 100 percent of RSTU Inc.’s only class of stock. The fair market value of the stock at the date of transfer was $50,000. How much gain was recognized by Sue as a result of this transaction? A. 0. B. $25,000. C. $50,000. D. $75,000. Question 9 Bob created MNO Inc. several years ago and has owned all 10 outstanding shares of MNO Inc. since the creation of MNO Inc. The fair market value of those shares is now $50,000. Bob’s friend, Lee, owns a building having a fair market value of $80,000 and an adjusted basis to Lee of $20,000. The building is encumbered by a $30,000 mortgage. Earlier this month, Bob and Lee discussed Lee’s becoming involved in the business of MNO Inc., and as a result of these discussions, Lee transferred the building to MNO Inc. and in exchange for the building, MNO Inc. transferred to Lee 10 shares of authorized but not previously issued stock of MNO Inc. After the transaction there were 20 shares of stock issued and outstanding. How much gain was realized and recognized by Lee as a result of this transaction? A. $30,000 of gain was realized and recognized. B. $30,000 of gain was realized,0 of which was recognized. C. $60,000 of gain was realized, $10,000 of which was recognized. D. $60,000 of gain was realized and recognized. Question 10 Al owned all of the outstanding stock of ABC Corporation. Al transferred a building, cash, and IBM stock to ABC Corporation. The adjusted basis and the fair market value of the assets transferred to ABC Corporation, and the amount remaining on the mortgage on the building transferred, were as follows. A building was transferred by Al to ABC Corporation that had an adjusted basis to Al of $20,000, a fair market value of $50,000, and a mortgage of $40,000, that was assumed by the corporation, cash in the amount of $10,000 was transferred, and IBM stock with an adjusted basis to Al of $15,000 and a fair market value of $12,000. In exchange for the assets transferred to ABC Corporation, Al received additional stock of ABC Corporation. How much gain did Al recognize as a result of this transaction? A. 0. B. $10,000. C. $20,000. D. $27,000. Question 11 Fact Pattern for Questions 11 and 12: Sandra owned a rental apartment building in her sole name for four years. After her business advisors suggested that she conduct her rental activity in corporate form, she promptly transferred the apartment building to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the apartment building. At the time of the transfer of the apartment building to ABC Rental Corporation, Sandra’s adjusted basis in the building was $50,000, the fair market value of the building was $150,000, the building was subject to a mortgage of $70,000 which ABC Rental Corporation assumed, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. As a result of the transaction, how much gain was recognized by Sandra and what was the character of the gain? A. 0 gain. B. $12,000 gain, all of which was ordinary income. C. $20,000 gain, at least $12,000 of which was ordinary income. D. $30,000 gain, at least $12,000 of which was ordinary income. Question 12 Fact Pattern for Questions 11 and 12: Sandra owned a rental apartment building in her sole name for four years. After her business advisors suggested that she conduct her rental activity in corporate form, she promptly transferred the apartment building to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the apartment building. At the time of the transfer of the apartment building to ABC Rental Corporation, Sandra’s adjusted basis in the building was $50,000, the fair market value of the building was $150,000, the building was subject to a mortgage of $70,000 which ABC Rental Corporation assumed, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. As a result of the transaction, what is the corporation’s basis in the building? A. $50,000. B. $70,000. C. $150,000. D. $170,000. Question 13 Larry formed Sleuth Corporation in order to incorporate the detective agency business that he had been operating for several years as a sole proprietorship. Larry transferred to Sleuth Corporation the detective agency’s accounts receivable with an adjusted basis to Larry of $0 and a fair market value of $6,000, and the office condominium that Larry owned outright and from which he had operated the detective agency that had an adjusted basis to Larry of $30,000, a fair market value of $62,000, and as to which there was a mortgage payable of $34,000, which was assumed by the corporation. Also transferred to the corporation were accounts payable in the amount of $3,000. In exchange for the assets transferred, Larry received 100 percent of the stock of the corporation. Which of the following statements regarding the tax consequences of the transaction is accurate? A. Larry recognized $4,000 of his realized gain. B. Larry recognized $7,000 of his realized gain. C. The corporation’s basis in the condominium it received from Larry is $30,000. D. Larry recognized $6,000 of ordinary income upon the assignment of receivables. Question 14 ABC Inc. had current earnings and profits of $50,000 when it distributed to an individual shareholder land that the corporation held as an investment. On the date the land was distributed, ABC Inc.’s adjusted basis in the land was $10,000, the fair market value of the land was $50,000, and the land was encumbered by a $30,000 mortgage, which liability was assumed by the shareholder. There were no other transactions that might affect ABC Inc.’s earnings and profits for the year. What was the amount of ABC Inc.’s earning and profits at the end of the year? A. $30,000. B. $50,000. C. $60,000. D. $70,000. Question 15 EFG Inc. distributed land to an individual shareholder in a nonliquidating distribution. On the date the land was distributed, EFG Inc.’s adjusted basis in the land was $20,000, the fair market value of the land was $75,000, and the land was encumbered by a $35,000 mortgage, which liability was assumed by the shareholder. The corporation’s earnings and profits were $300,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporation’s earnings and profits. As a result of the distribution, how much is the amount of dividend income to the shareholder, and what is the shareholder’s basis in the distributed property? A. Dividend income of $20,000 and basis of $20,000. B. Dividend income of $40,000 and basis of $20,000. C. Dividend income of $40,000 and basis of $40,000. D. Dividend income of $40,000 and basis of $75,000. Question 16 XYZ Corporation distributed land Jim, its sole shareholder, in a liquidating distribution. At the time of the distribution, the land had a fair market value of $120,000 and XYZ Corporation’s adjusted basis in the land was $100,000. The land was encumbered by a $140,000 mortgage, which mortgage was assumed by the shareholder. How much gain did XYZ Corporation recognize as a result of the distribution? A. 0. B. $20,000. C. $40,000. D. $100,000. Question 17 FAS Inc. had one class of stock outstanding. The one class of stock was owned 50 percent by Fred and 25 percent by each of Fred’s two sons. In the current taxable year, FAS Inc. redeemed 25 percent of Fred’s 50 percent, and in exchange for the stock, FAS Inc. distributed to Fred a building that had an adjusted basis to FAS Inc. of $10,000 and a fair market value of $50,000. Assume that FAS Inc.’s current earnings and profits were $200,000, there were no accumulated earnings and profits, and Fred’s total basis in his stock before the redemption was $20,000. What is Fred’s basis in his remaining stock after the redemption, and what is his basis in the building distributed to him? A. Stock basis: $10,000; building basis: $10,000. B. Stock basis: $10,000; building basis: $50,000. C. Stock basis: $20,000; building basis: $10,000. D. Stock basis: $20,000; building basis: $50,000. Question 18 A tract of land was distributed by MNO Inc. to its sole shareholder, Martha, as a dividend. At the time of the distribution, MNO Inc.’s adjusted basis in the land was $40,000, the fair market value of the land was $80,000, and the land was encumbered by a $55,000 mortgage. Which of the following statements is true? A. The net adjustment to MNO Inc.’s earnings and profits is an increase of $15,000, (the excess of the liability over the adjusted basis in the land). B. The net adjustment to MNO Inc.’s earnings and profits is an increase of $40,000, (that is, equal to the amount of gain realized by the corporation). C. The corporation’s realized gain of $40,000 is recognized to the extent of the $15,000, (the excess of the liability over adjusted basis in the land). D. The shareholder’s basis in the land distributed by the corporation to the shareholder is $80,000, (which is the fair market value of the land). Question 19 XYZ Corporation distributed to its shareholders a total of $30,000 in cash plus property that had a fair market value of $80,000 and a basis of $60,000. The corporation’s earnings and profits were $100,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporation’s earnings and profits. How much was the total dividend income received by the shareholders as a result of the distributions made by XYZ Corporation? A. $50,000. B. $90,000. C. $100,000. D. $110,000. Question 20 MJJM Inc. has four equal shareholders who are unrelated. Each shareholder owns 300 shares of the common stock of MJJM Inc. representing all of the stock of MJJM Inc. During the taxable year, as part of a single transaction, MJJM Inc. redeemed stock from three of the shareholders. Specifically, MJJM Inc. redeemed 150 shares from Michael, 75 shares from Joseph, and 40 shares from John. The redemption was substantially disproportionate for: A. Michael and Joseph. B. Michael and John. C. Joseph only. D. Michael only. Question 21 Fact Pattern for Questions 21 and 22. EFG, Inc. is a calendar year corporation. EFG, Inc. had current earnings and profits of $100,000 and no accumulated earnings and profits when it distributed a total of $160,000, as a nonliquidating distribution, to its two equal shareholders, Jane and Joe. On the date of the cash distribution, Jane’s basis in her EFG, Inc. stock was $10,000 and Joe’s basis in his EFG, Inc. stock was $35,000. How much is includible by Jane in her gross income for the current taxable year with respect to the distribution to her? A. $50,000 dividend income and 0 capital gain. B. $80,000 dividend income and 0 capital gain. C. 0 dividend income and $70,000 capital gain. D. $50,000 dividend income and $20,000 capital gain. Question 22 Fact Pattern for Questions 21 and 22. EFG, Inc. is a calendar year corporation. EFG, Inc. had current earnings and profits of $100,000 and no accumulated earnings and profits when it distributed a total of $160,000 to its two equal shareholders, Jane and Joe. On the date of the cash distribution, Jane’s basis in her EFG, Inc. stock was $10,000 and Joe’s basis in his EFG, Inc. stock was $35,000. What is Joe’s adjusted basis in his EFG, Inc. stock after the distribution? A. $0. B. $5,000. C. $15,000. D. $35,000. Question 23 Mary received a liquidating distribution from ABC Corporation as part of the redemption of all of the ABC Corporation’s stock and the complete liquidation of ABC Corporation. Mary’s basis for her ABC Corporation stock was $10,000. In exchange for her stock, Mary received a payment of $15,000 and property that had an adjusted basis to ABC Corporation of $10,000, a fair market value of $25,000, and that was encumbered by a $12,000 mortgage which Mary assumed. How much gain did Mary recognize as a result of this transaction? A. $3,000. B. $18,000. C. $30,000. D. $42,000. E. None of the above. Question 24 Ann and Irene form AIB Corporation transferring their respective business assets to AIB Corporation. Ann exchanges her property with a basis to Ann of $100,000 and fair market value of $400,000 for 200 shares in AIB Corporation on March 1, 2009. Irene exchanges her property with a basis of $140,000 and fair market value of $600,000 for 300 shares in AIB Corporation on April 11, 2009. Bob transfers his property with a basis of $250,000 and fair market value of $1,000,000 for 500 shares in AIB Corporation on May 15, 2011. Bob’s transfer is not part of Ann and Irene’s plan to incorporate their businesses. What gain, if any, will Bob recognize on the transfer? A. $0. B. $250,000. C. $750,000. D. $1,000,000. Question 25 Tom and George form T and G Corporation. Tom transfers machinery worth $100,000 with a basis to Tom of $40,000, while George transfers land worth $90,000 with a basis to George of $20,000 and services rendered in organizing the corporation worth $10,000. Each is issued 25 shares in T and G Corporation. With respect to the transfers: A. Tom has no recognized gain; George recognizes gain/income of $80,000. B. Neither Tom nor George recognizes gain or income. C. T and G Corporation has a basis of $30,000 in the land. D. George has a basis of $30,000 in the shares of T & G Corporation. Question 26 The stock of Kenny Corp. is owned equally by two brothers. During 2008, they transferred land (which had a basis of $300,000 and a fair market value of $320,000) as a contribution to capital to Kenny Corp. During September, 2012, Kenny Corp. adopted a plan of complete liquidation and subsequently made a pro rata distribution of land back to the brothers. At the time of the liquidating distribution, the land had a fair market value of $180,000. What amount of loss can be recognized by Kenny Corp. on the distribution of land? A. $0. B. $20,000. C. $120,000. D. $140,000. Question 27 Henry, Emmy, and Frannie, unrelated individuals, own all of the stock in New Corporation with earnings and profits of $1,200,000 as follows: Henry own 1,300 shares; Emmy owns 400 shares; and Frannie owns 300 shares. New Corporation redeems 300 of Henry’s shares with a basis of $60,000 for $450,000. With respect to the distribution in redemption of the stock: A. Henry has a capital gain of $390,000. B. Henry has dividend income of $450,000. C. Henry has dividend income of $390,000. D. Henry has a capital gain of $450,000. Question 28 Lucinda owns 1,100 shares of Old Corporation stock at a time when Old Corporation has 2,000 shares of stock outstanding. The remaining shareholders are unrelated to Lucinda. The corporation redeems 400 shares from Lucinda. Does the transaction qualify as substantially disproportionate redemption as to Lucinda? A. We do not have sufficient information. B. No. C. Yes. D. This is not a transaction that could qualify for sale or exchange treatment. Question 29 Helen, Greg, and Wanda own the stock in HGW Corporation with earnings and profits of $900,000 as follows: Helen, 600 shares; Greg, 400 shares; and Wanda, 1,000 shares. Greg is Helen’s son, and Wanda is Helen’s sister. HGW Corporation redeems 400 of Helen’s shares with a basis of $55,000 for $240,000. Helen purchased the stock three years ago as an investment. With respect to the stock redemption, Helen has: A. Dividend income of $185,000. B. Dividend income of $240,000. C. Long-term capital gain of $185,000. D. Long-term capital gain of $240,000. Question 30 JKL Corporation has earnings and profits of $800,000 and has 1,000 shares of stock outstanding. That stock is held 550 shares by Anna and 450 shares by Ellen, who are unrelated individuals. JKL Corporation redeems 200 of Anna’s shares for $1,000 per share. Anna paid $300 per share for her JKL Corporation stock nine years ago. Which of the following statements is correct with respect to the stock redemption? A. Anna has dividend income of $200,000. B. Anna has a long-term capital gain of $140,000. C. Anna’s basis in her remaining 350 shares is $60,000. D. JKL Corporation reduces its E & P by $200,000. Question 31 Evan transferred real estate to a corporation in a Code Section 351 transaction. The real estate was a capital asset in Evan’s hands and will also be a capital asset when held by the corporation. Evan’s basis in the real estate was $10,000 and the value of the real estate was $8,000 on the date of the transfer. If Evan received $2,000 in cash and 100 shares of stock from the corporation in exchange for the real estate, the resulting bases for Evan’s stock and the corporations real estate are: A. Evan’s stock basis is $8,000; Corporation’s basis in the real estate is $8,000 B. Evan’s stock basis is $10,000; Corporation’s basis in the real estate is $10,000 C. Evan’s stock basis is $10,000; Corporation’s basis in the real estate is $8,000 D. Evan’s stock basis is $6,000; Corporation’s basis in the real estate is $12,000 Question 32 MNOP, Inc. redeemed 100 shares of Julia’s shares. The redemption did not satisfy all the requirements and thus was treated as a dividend for tax purposes. Julia’s basis in the 100 shares redeemed: A. Disappears forever. B. Transfers to her remaining shares in MNOP Inc. C. Reduces her dividend income by her adjusted basis in the shares. D. None of the above. Question 33 Pursuant to a plan of corporate reorganization which qualified as an A reorganization, Lou received one share of stock of X Corporation worth $65 and cash of $20 in exchange for a share of stock in Y Corporation with a $95 basis to Lou. What is Lou’s recognized gain or loss on this exchange? A. 0. B. $10 loss. C. $10 gain. D. $20 gain. Question 34 Pursuant to a plan of corporate reorganization, Pat exchanged 1,000 shares of Stream Corporation stock that she had purchased for $60,000, for 1,200 shares of Creek Corporation voting stock having a fair market value of $70,000, and $10,000 in cash. What is Pat’s recognized gain on the exchange, and what is her basis in the Creek Corporation’s stock? A. $10,000 gain; $60,000 basis. B. $10,000 gain; $70,000 basis. C. $20,000 gain; $60,000 basis. D. $20,000 gain; $70,000 basis. Question 35 Which of the following statements is true concerning all types of tax-free corporate reorganizations? A. Assets are transferred from one corporation to another. B. Stock is exchanged between the shareholders of at least two corporations. C. Liabilities that are assumed when cash is also used as consideration will always be treated as boot. D. None of the above statements is true. Question 36 Dick, Bev and Mollie form Murphy Corporation. Dick transfers land worth $80,000 (adjusted basis is $25,000) for 80 shares, Mollie transfers $40,000 cash for 40 shares and Bev transfers equipment worth $40,000 (adjusted basis is $16,000) and $40,000 of services for 80 shares. Bev’s tax consequences are: A. $64,000 recognized gain; basis in 80 shares of $80,000 B. $40,000 recognized gain; basis in 80 shares of $56,000 C. $24,000 recognized gain; basis in 80 shares of $40,000 D. $0 recognized gain; basis in 80 shares of $16,000 Question 37 Best Company, Inc. had gross receipts of $400,000, cost of goods sold of $110,000, other expenses of $100,000 and a $90,000 net capital loss. Its taxable income is: A. $210,000. B. $200,000. C. $190,000. D. $100,000. Question 38 Smith owns 85 percent of Smith Sisters Company, Inc. On March 8, 2012, she contributed land to the firm. Her adjusted basis in the land was $60,000 and its fair market value on March 8 was $140,000. Smith did not receive anything in return for the contribution. As a result of this transaction, Smith Sisters Company, Inc. will: A. recognize a gain of $80,000 and will take a basis in the land of $80,000. B. recognize a gain of $140,000 and will take a basis in the land of $140,000. C. not recognize a gain and will take a basis in the land of $60,000. D. not recognize a gain and will take a basis in the land of $140,000. Question 39 Jessica owns 60 percent of Hudson Company, Inc. The firm needs some assets and all of the shareholders are considering contributing assets in a prearranged plan that would qualify all of them for Code Section 351 treatment. There has been no agreement among the parties as to the assets each would contribute, but it has been agreed that the fair market value of the assets contributed by each of them will be $150,000. Jessica is considering contributing 100 shares of XYZ Company, Inc. stock. Her basis in the shares is $200,000 and their fair market value is $150,000. Jessica is uncertain about the transaction. She is also considering selling the shares and contributing cash. Which of the following statements is correct? A. If Jessica contributes the shares, then she will be able to recognize a $50,000 loss. B. If Jessica sells the shares to Hudson Company, Inc. then she will be able to recognize $50,000 loss. C. If Jessica sells the shares on a national stock exchange and contributes $150,000 of cash to Hudson Company, Inc. she will be able to recognize a $50,000 loss. D. None of the above is correct. Question 40 A “C” corporation must do which of the following with respect to its taxable year? A. The corporation must select a calendar year. B. The corporation must select a fiscal year if it has a business reason for selection. C. The corporation may select a calendar year or fiscal, regardless of the reason for selection. D. The corporation must select a year that is the same as its major shareholders. Question 41 Paula receives a liquidating distribution from Pell Corporation as part of a redemption of all of its stock. Paula’s basis for her Pell stock is $10,000. In exchange for her stock, Paula receives property with an $8,000 basis and a $15,000 fair market value that is subject to a $2,000 mortgage, and also receives cash of $5,000. How much is Paula’s recognized gain? A. $12,000. B. $10,000. C. $8,000. D. $0. Question 42 Trusty Company, Inc. had accumulated E&P of $26,000 on January 1, 2012. Its current E&P for 2012 was negative $21,960 (that is, a deficit). On April 28, 2012, it distributed $20,000 to its shareholders. Assuming that the exact date of the loss is not known, the distribution is treated as: A. $8,920 dividend and $11,080 return on capital. B. $20,000 dividend. C. $20,000 return of capital. D. $16,000 dividend and $4,000 return of capital. Question 43 Ellen sells her Section 306 stock during the year for $16,000. Her basis in the stock was $2,000. In 2006, when she received the stock, its fair market value was $12,000 and the corporation’s earnings and profits were $10,000. Assuming that Ellen retains her common stock, the result of the sale is: A. $14,000 ordinary (dividend) income. B. $14,000 long-term capital gain. C. $10,000 ordinary (dividend) income and $4,000 long- term capital gain. D. $12,000 ordinary (dividend) income and $2,000 long-term capital gain. Question 44 Babb Corporation owns 80 percent of Atley Corporation’s stock and Linda owns the remaining 20 percent of Atley’s stock. Babb Corporation’s basis for its Atley stock is $300,000 and Linda’s Atley stock has a basis of $80,000. Pursuant to a plan of complete liquidation of Atley Corporation, Babb Corporation receives property with a $400,000 adjusted basis and a $480,000 fair market value, and Linda receives property with a $130,000 adjusted basis and a $120,000 fair market value. The bases of the properties to Babb Corporation and Linda are: A. Babb: $480,000; Linda: $120,000. B. Babb: $400,000; Linda: $130,000. C. Babb: $300,000; Linda: $80,000. D. Babb: $400,000; Linda: $120,000. Question 45 The following statements regarding a corporation’s liquidating distribution of loss assets to shareholders are all false, except: A. The liquidating corporation cannot recognize a loss on a liquidating distribution. B. A loss can be recognized on a subsidiary liquidating distribution to which Code Section 332 applies. C. The liquidating corporation cannot recognize a loss on a distribution to a shareholder who is a “related taxpayer.” D. The general rule is that all losses are realized and recognized, subject to some exceptions. Question 46 ABC Corporation made cash contributions of $35,000 to charitable organizations in 2012. ABC Corporation had taxable income of $280,000 without taking into account its charitable contributions for the taxable year ended December 31, 2012, but after deducting a dividends-received deduction of $34,000. What amount, if any, can ABC Corporation deduct as charitable contributions for 2012? A. $32,000 B. $31,400 C. $35,000 D. 0 Question 47 Jack transferred property with an adjusted basis of $45,000 to JKL Corporation. There was a $35,000 mortgage on the property. In exchange for the transferred property, Jack received stock with a fair market value of $65,000 and $25,000 cash, and the corporation assumed the liability on the property. How much gain is recognized by Jack? A. $0 B. $20,000 C. $25,000 D. $35,000 Question 48 Jack transferred to JKL Corporation, real property that had an adjusted basis to Jack of $45,000. There was a $35,000 mortgage on the property. In exchange for the transferred property, Jack received stock with a fair market value of $65,000 and $25,000 cash, and the corporation assumed the liability on the property. What is Jack’s basis in the stock he received? A. $0 B. $20,000 C. $25,000 D. $45,000 Question 49 Jack transferred property with an adjusted basis of $45,000 to JKL Corporation. There was a $35,000 mortgage on the property. In exchange for the transferred property, Jack received all of the stock of the corporation that had a fair market value of $70,000 and cash of $25,000, and the corporation assumed the liability on the property. What is JKL Corporations’ basis in the property transferred to it by Jack? A. $45,000 B. $65,000 C. $70,000 D. $90,000 Question 50 Jack and Jill each own one-half of the stock of JJ Corporation, which corporation has earnings and profits of $15,000. JJ Corporation distributed to its two shareholders property with a total fair market value of $24,000 and an adjusted basis to the corporation of $24,000. The amount taxable to each shareholder as a dividend is A. $0 B. $7,500 C. $12,000 D. $15,000 Extra Credit (Maximum of 20 points). The following 20 questions are extra credit. Each correct answer is worth one point. You will not lose credit on the regular portion of Test One for wrong answers on the extra credit portion. The answer sheet for the extra credit is the second page of the answer sheet for Test One. If you choose to do the extra credit question, your answers are due by 11 p.m. on February 15. 1. Future, Inc. reported the following results for the year: Net income per books $110,000 Federal income taxes 36,170 Life insurance proceeds on key employee 15,000 Tax-exempt interest income 13,000 Net capital loss 25,000 Future’s taxable income for the year was: a. $123,170 b. $143,170 c. $72,000 d. $135,000 e. $107,000 2. Schedule M-3 is used to reconcile: a. uncertain tax positions b. U.S. GAAP and IFRS differences c. Schedule M-1 and Schedule M-2 differences d. Book income and taxable income differences 3. Assume corporate tax rates are a constant 35%. Elco started operations at the beginning of this year. Its book income is $10 million and its taxable income is $13 million. The difference will give rise to a. deferred tax liability of $1,050,000 b. deferred tax asset of $1,050,000 c. income taxes payable of $3,500,000 d. income tax expense of $4,550,000 4. Which of the following items are eligible for immediate expensing and 180-month amortization? (1.) Fee to CPA to handle Subchapter S election (2.) Refreshments served at organizational meetings (3.) Underwriting commission (4.) Legal fees in connection with incorporation (5.) Recording fees upon transfer of assets to corporation a. (2), (4), and (5) b. (1), (2), and (5) c. (1), (2), (3), (4), and (5) d. (1), (2), and (4) 5. When comparing corporate and individual taxation the following statements are true, except: a. Individuals have exemptions and a standard deduction, corporations do not. b. Both types of taxpayers have percentage limitations on the charitable contribution deduction, coupled with a carryover of the excess contribution. c. All taxpayers may carry net operating losses back two years, forward 20. d. Both corporate and individual taxpayers may have a long-term capital loss carryforward. 6. Algernon transferred the following to his controlled corporation in exchange for stock: Basis Value Amount Remaining on Mortgage Building $20,000 $50,000 Mortgage on the building $40,000 Cash 10,000 10,000 IBM stock 15,000 12,000 Algernon must recognize a gain of: a. $20,000 b. $0 c. $10,000 d. $27,000 7. Minerva, Inc. has one class of stock, owned 20 percent by Mr. Peters, 20 percent by Mrs. Peters, 15 percent by Mrs. Peters’s brother, 10 percent by Mr. & Mrs. Peters’ grandchild, and 35 percent by an irrevocable trust with Mrs. Peters’ son from a previous marriage as beneficiary. Mr. and Mrs. Peters own the following percentage of Minerva, Inc. directly and constructively: a. Mr. Peters: 50%; Mrs. Peters: 100% b. Mr. Peters: 50%; Mrs. Peters: 85% c. Mr. Peters: 65%; Mrs. Peters: 85% d. Mr. Peters: 65%; Mrs. Peters: 100% 8. Harold owns 100 percent of Clawson Company. Clawson’s E&P is $500,000. Harold needs to withdraw $100,000 from the company. Which of the following transactions might be reclassified as a constructive (disguised) dividend? a. $100,000 bonus; Harold’s compensation (before the bonus) is $350,000, relatively equal to what other presidents of similarly sized companies earn. b. $100,000 in return for a promissory note from Harold, due upon demand but not having a fixed due date. c. $100,000 in return for property Harold would lease to the corporation. d. $100,000 gift from the corporation to Harold. e. All of the above. 9. Cookies Corporation distributed land to its sole shareholder. On the date of distribution, the land had a fair market value of $85,000 and an adjusted basis to Cookies of $42,000. What is the amount of Cookies’ gain on the distribution? a. $0 b. $42,000 c. $43,000 d. $85,000 10. Jennifer owns 1,000 shares of Ernie Company. Her adjusted basis in the shares is $100,000. Ernie Company has no earnings and profits. It made a cash distribution to its shareholders, of which Jennifer received $60,000. The result of this distribution to Jennifer is: a. Jennifer must recognize a $40,000 loss and has a zero basis in the stock b. Jennifer must recognize $60,000 dividend income and her basis in the stock does not change c. Jennifer has no recognized gain or loss and her basis in the shares is reduced to $40,000 d. None of the above 11. Tugboats Corporation, a calendar year corporation that began doing business on January 1, 2007, had $35,000 in accumulated earnings and profits on January 1, 2013. Tugboats had an operating loss of $60,000 for the first six months of 2013, but had $10,000 in earnings for the entire year. Tugboats made a distribution of $25,000 cash to its stockholders on April 1, 2013. What is the amount of Tugboat’s accumulated earnings and profits on January 1, 2014? a. $0 b. $10,000 c. $20,000 d. $45,000 12. Jones owns 100 percent of X Corporation. X Corporation’s overall marginal tax rate is 35 percent. Jones’ overall marginal tax rate is 30 percent. Jones needs $40,000 from the firm. The firm has decided that it either will declare a dividend of $40,000 or will pay Jones a performance-based bonus of $40,000. a. Overall, it is best if the firm declares the dividend b. Overall, it is best if the firm pays a bonus c. Overall, both parties should be indifferent regarding what form the distribution takes 13. The Trap Corporation liquidates. One shareholder, who owned 30 percent of the stock, receives for the stock, inventory worth $90,000 with a basis of $70,000. Trap Corporation will recognize: a. $20,000 of capital gain b. $20,000 of ordinary income c. $20,000 of Sec. 1231 gain d. No gain 14. Mark receives a liquidating distribution from Arosa Corporation as part of a redemption of all of its stock. Mark’s basis for his Arosa stock is $10,000. In exchange for his stock, Mark receives property with a $10,000 basis and a $25,000 fair market value that is subject to a $12,000 mortgage, and also receives cash of $15,000. What is Mark’s recognized gain? a. $42,000 b. $30,000 c. $18,000 d. $3,000 15. Prime Corporation liquidates its 80%-owned subsidiary, Bass Corp. Bass Corp. distributes land to its minority shareholder, Shirley, who owns 20% of the Bass Corp. stock. The land received by Shirley has a $55,000 FMV. The land was used in Bass Corp.’s business and has an adjusted basis of $50,000 and is subject to a $10,000 liability which is assumed by Shirley. Shirley’s basis in her stock is $25,000. What gain will Shirley and Bass Corp. recognize on the distribution of the land? Shirley Bass Corp. a. $20,000 gain $ 0 b. $20,000 gain $ 5,000 gain c. $30,000 gain $15,000 gain d. $30,000 gain $ 5,000 gain 16. The following statements about property distributions in complete liquidations with liabilities in excess of fair market value are all false, except: a. A loss may be recognized. b. The shareholder receives a basis in the property equal to the amount of liability. c. The distributor recognizes gain equal to the excess of liabilities over basis. d. Since liabilities exceed fair market value, no depreciation recapture will occur. 17. The stock of Hill Corp. is 60 percent owned by Joe and 40 percent owned by Joe’s brother, Bob. During 2012, Bob transferred land (basis of $300,000; FMV of $320,000) as a contribution to capital to Hill Corp. During March 2013, Hill Corp. adopted a plan of liquidation and subsequently made a pro rata distribution of the land back to the brothers. At the time of the liquidating distribution, the land had a FMV of $160,000. What amount of loss can be recognized by Hill Corp. on the distribution of land? a. $0 b. $16,000 c. $40,000 d. $60,000 18. Holly Wreath, a shareholder in the acquired corporation, turned in 100 shares of common stock with a basis of $4,200. In return she received voting convertible preferred stock worth $4,700 and a debenture with a face value of $1,000 and a value of $850. As a result, Holly must recognize a gain of: a. $1,350 b. $850 c. $800 d. $0 19. The “solely for voting stock” requirement in Type B reorganizations is met in all the following cases, except: a. The acquiring corporation agrees to assume the acquired corporation’s shareholders’ expenses but only if directly related to the acquisition. b. The acquired corporation, on the eve of the acquisition, redeems five percent of its shares for cash. c. The acquiring corporation pays cash in lieu of fractional shares resulting from the stock for stock exchange. d. The acquiring corporation assumes the acquired corporation’s legal expenses incurred in connection with the acquisition. 20. Kate owns all the stock in Warbler Corporation. Kate has a basis of $25,000 in the Warbler stock, which currently has a fair market value of $150,000. Warbler is merged into Wren Corporation. Kate receives Wren preferred stock worth $100,000 and common stock worth $50,000. Kate recognizes a gain of: a. $125,000 b. $100,000 c. $50,000 d. $0

Chris owns 70 percent of ABC Corporation. ABC Corporation had acquired land known as Parcel A in 1984 for $68,000 and held Parcel A for investment purposes. During the current taxable year, ABC Corporation sold Parcel A to Chris for $65,000 which amount was equal to the fair market value of Parcel A. Shortly after receiving Parcel A, Chris sold Parcel A to his friend from college for $73,000. How much gain or loss is realized and recognized by the respective parties as a result of each of the sales?

A. ABC Corporation realized a loss of $3,000 and recognized a loss of $3,000 on the distribution; Chris realized a gain of $8,000 and recognized a gain of 8,000 on the sale.

B. ABC Corporation realized a loss of $3,000 and recognized a loss of 3,000 on the distribution; Chris realized a gain of $5,000 and recognized a gain of $5,000.

C. ABC Corporation realized a loss of $3,000 and recognized a loss of 0; Chris realized a gain of $8,000 and recognized a gain of $5,000.

D. ABC Corporation realized a loss of $3,000 and recognized a loss of 0; Chris realized a gain of $5,000 and recognized a gain of$5,000.

Question 2

For the current taxable year, HIJ Inc. had gross receipts from operations of $230,000, operating and other expenses of $310,000, and $120,000 of dividends that it received from a 45 percent-owned domestic corporation. For the current taxable year, HIJ Inc. has taxable income or a net operating loss of what amount?

A. $8,000 taxable income.

B. $40,000 taxable income.

C. $56,000 net operating loss.

D. $80,000 net operating loss.

Question 3

NOP Inc. had the following income and expenses during the current taxable year. Its income from operations was $250,000, its expenses from operations were $120,000, its dividends received (from a 30 percent-owned corporation)) were $80,000, and it made cash charitable contributions of $30,000
How much is NOP Inc.’s charitable contribution deduction for the current taxable year?

A. $14,600.

B. $21,000.

C. $26,000.

D. $30,000.

Question 4

For the current taxable year, RST Inc.’s gross income from operations was $1,000,000 and its expenses from operations were $1,500,000. RST Inc. also received a $600,000 dividend from a 10 percent-owned corporation. How much is RST Inc.’s dividends-received deduction?

A. 0.

B. $70,000.

C. $320,000.

D. $420,000.

Question 5

Books and Toys Corporation, a calendar year corporation, had a net operating loss of $50,000 for 2011. Books and Toys Corporation made a proper election to forego the carryback period. For 2012, Books and Toys Corporation correctly deducted $40,000 of the 2011 loss. Books and Toys Corporation will lose the remaining $10,000 of the loss if the loss cannot be deducted by the end of which tax year?

A. 2018.

B. 2021.

C. 2026.

D. 2031.

Question 6

LMN Inc. liquidated. As part of the liquidation, one shareholder, Larry, who owned 30 percent of the stock of LMN Inc., received as a distribution in exchange for all of his stock in the corporation, inventory worth $90,000 that had a basis to the corporation of $70,000. How much gain was recognized by LMN Inc. as a result of this liquidating distribution and what was the character of the gain?

A. $0 gain.

B. $20,000 capital gain.

C. $20,000 ordinary income.

D. $20,000 Section 1231 gain.

Question 7

Ben and John formed BCD Inc., a corporation, in 2011. Ben received 80% of the voting common stock, the only class of stock and John received the remaining 20% of the stock. In 2012, Ben transferred additional property to BCD Inc. The property had an adjusted basis to Ben of $40,000 and a fair market value of $50,000 on the date of the transfer. On the same day, and in exchange for the property he transferred to BCD Inc., Ben received cash of $15,000 and additional stock worth $35,000. How much gain was recognized by Ben as a result of this transaction?

A. 0.

B. $10,000.

C. $15,000.

D. $25,000.

Question 8

Sue transferred a building to her newly formed corporation, RSTU Inc. The building had an adjusted basis to Sue of $75,000 and a fair market value of $150,000 on the date of the transfer. The building was encumbered by a mortgage of $100,000, which RSTU Inc. assumed. On the same day, and in exchange for the building she transferred to RSTU Inc., Sue received 100 percent of RSTU Inc.’s only class of stock. The fair market value of the stock at the date of transfer was $50,000. How much gain was recognized by Sue as a result of this transaction?

A. 0.

B. $25,000.

C. $50,000.

D. $75,000.

Question 9

Bob created MNO Inc. several years ago and has owned all 10 outstanding shares of MNO Inc. since the creation of MNO Inc. The fair market value of those shares is now $50,000. Bob’s friend, Lee, owns a building having a fair market value of $80,000 and an adjusted basis to Lee of $20,000. The building is encumbered by a $30,000 mortgage. Earlier this month, Bob and Lee discussed Lee’s becoming involved in the business of MNO Inc., and as a result of these discussions, Lee transferred the building to MNO Inc. and in exchange for the building, MNO Inc. transferred to Lee 10 shares of authorized but not previously issued stock of MNO Inc. After the transaction there were 20 shares of stock issued and outstanding. How much gain was realized and recognized by Lee as a result of this transaction?

A. $30,000 of gain was realized and recognized.

B. $30,000 of gain was realized,0 of which was recognized.

C. $60,000 of gain was realized, $10,000 of which was recognized.

D. $60,000 of gain was realized and recognized.

Question 10

Al owned all of the outstanding stock of ABC Corporation. Al transferred a building, cash, and IBM stock to ABC Corporation. The adjusted basis and the fair market value of the assets transferred to ABC Corporation, and the amount remaining on the mortgage on the building transferred, were as follows. A building was transferred by Al to ABC Corporation that had an adjusted basis to Al of $20,000, a fair market value of $50,000, and a mortgage of $40,000, that was assumed by the corporation, cash in the amount of $10,000 was transferred, and IBM stock with an adjusted basis to Al of $15,000 and a fair market value of $12,000. In exchange for the assets transferred to ABC Corporation, Al received additional stock of ABC Corporation. How much gain did Al recognize as a result of this transaction?

A. 0.

B. $10,000.

C. $20,000.

D. $27,000.

Question 11

Fact Pattern for Questions 11 and 12: Sandra owned a rental apartment building in her sole name for four years. After her business advisors suggested that she conduct her rental activity in corporate form, she promptly transferred the apartment building to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the apartment building. At the time of the transfer of the apartment building to ABC Rental Corporation, Sandra’s adjusted basis in the building was $50,000, the fair market value of the building was $150,000, the building was subject to a mortgage of $70,000 which ABC Rental Corporation assumed, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. As a result of the transaction, how much gain was recognized by Sandra and what was the character of the gain?

A. 0 gain.

B. $12,000 gain, all of which was ordinary income.

C. $20,000 gain, at least $12,000 of which was ordinary income.

D. $30,000 gain, at least $12,000 of which was ordinary income.

Question 12

Fact Pattern for Questions 11 and 12: Sandra owned a rental apartment building in her sole name for four years. After her business advisors suggested that she conduct her rental activity in corporate form, she promptly transferred the apartment building to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the apartment building. At the time of the transfer of the apartment building to ABC Rental Corporation, Sandra’s adjusted basis in the building was $50,000, the fair market value of the building was $150,000, the building was subject to a mortgage of $70,000 which ABC Rental Corporation assumed, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. As a result of the transaction, what is the corporation’s basis in the building?

A. $50,000.

B. $70,000.

C. $150,000.

D. $170,000.

Question 13

Larry formed Sleuth Corporation in order to incorporate the detective agency business that he had been operating for several years as a sole proprietorship. Larry transferred to Sleuth Corporation the detective agency’s accounts receivable with an adjusted basis to Larry of $0 and a fair market value of $6,000, and the office condominium that Larry owned outright and from which he had operated the detective agency that had an adjusted basis to Larry of $30,000, a fair market value of $62,000, and as to which there was a mortgage payable of $34,000, which was assumed by the corporation. Also transferred to the corporation were accounts payable in the amount of $3,000.
In exchange for the assets transferred, Larry received 100 percent of the stock of the corporation. Which of the following statements regarding the tax consequences of the transaction is accurate?

A. Larry recognized $4,000 of his realized gain.

B. Larry recognized $7,000 of his realized gain.

C. The corporation’s basis in the condominium it received from Larry is $30,000.

D. Larry recognized $6,000 of ordinary income upon the assignment of receivables.

Question 14

ABC Inc. had current earnings and profits of $50,000 when it distributed to an individual shareholder land that the corporation held as an investment. On the date the land was distributed, ABC Inc.’s adjusted basis in the land was $10,000, the fair market value of the land was $50,000, and the land was encumbered by a $30,000 mortgage, which liability was assumed by the shareholder. There were no other transactions that might affect ABC Inc.’s earnings and profits for the year. What was the amount of ABC Inc.’s earning and profits at the end of the year?

A. $30,000.

B. $50,000.

C. $60,000.

D. $70,000.

Question 15

EFG Inc. distributed land to an individual shareholder in a nonliquidating distribution. On the date the land was distributed, EFG Inc.’s adjusted basis in the land was $20,000, the fair market value of the land was $75,000, and the land was encumbered by a $35,000 mortgage, which liability was assumed by the shareholder. The corporation’s earnings and profits were $300,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporation’s earnings and profits. As a result of the distribution, how much is the amount of dividend income to the shareholder, and what is the shareholder’s basis in the distributed property?

A. Dividend income of $20,000 and basis of $20,000.

B. Dividend income of $40,000 and basis of $20,000.

C. Dividend income of $40,000 and basis of $40,000.

D. Dividend income of $40,000 and basis of $75,000.

Question 16

XYZ Corporation distributed land Jim, its sole shareholder, in a liquidating distribution. At the time of the distribution, the land had a fair market value of $120,000 and XYZ Corporation’s adjusted basis in the land was $100,000. The land was encumbered by a $140,000 mortgage, which mortgage was assumed by the shareholder. How much gain did XYZ Corporation recognize as a result of the distribution?

A. 0.

B. $20,000.

C. $40,000.

D. $100,000.

Question 17

FAS Inc. had one class of stock outstanding. The one class of stock was owned 50 percent by Fred and 25 percent by each of Fred’s two sons. In the current taxable year, FAS Inc. redeemed 25 percent of Fred’s 50 percent, and in exchange for the stock, FAS Inc. distributed to Fred a building that had an adjusted basis to FAS Inc. of $10,000 and a fair market value of $50,000. Assume that FAS Inc.’s current earnings and profits were $200,000, there were no accumulated earnings and profits, and Fred’s total basis in his stock before the redemption was $20,000. What is Fred’s basis in his remaining stock after the redemption, and what is his basis in the building distributed to him?

A. Stock basis: $10,000; building basis: $10,000.

B. Stock basis: $10,000; building basis: $50,000.

C. Stock basis: $20,000; building basis: $10,000.

D. Stock basis: $20,000; building basis: $50,000.

Question 18

A tract of land was distributed by MNO Inc. to its sole shareholder, Martha, as a dividend. At the time of the distribution, MNO Inc.’s adjusted basis in the land was $40,000, the fair market value of the land was $80,000, and the land was encumbered by a $55,000 mortgage. Which of the following statements is true?

A. The net adjustment to MNO Inc.’s earnings and profits is an increase of $15,000, (the excess of the liability over the adjusted basis in the land).

B. The net adjustment to MNO Inc.’s earnings and profits is an increase of $40,000, (that is, equal to the amount of gain realized by the corporation).

C. The corporation’s realized gain of $40,000 is recognized to the extent of the $15,000, (the excess of the liability over adjusted basis in the land).

D. The shareholder’s basis in the land distributed by the corporation to the shareholder is $80,000, (which is the fair market value of the land).

Question 19

XYZ Corporation distributed to its shareholders a total of $30,000 in cash plus property that had a fair market value of $80,000 and a basis of $60,000. The corporation’s earnings and profits were $100,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporation’s earnings and profits. How much was the total dividend income received by the shareholders as a result of the distributions made by XYZ Corporation?

A. $50,000.

B. $90,000.

C. $100,000.

D. $110,000.

Question 20

MJJM Inc. has four equal shareholders who are unrelated. Each shareholder owns 300 shares of the common stock of MJJM Inc. representing all of the stock of MJJM Inc. During the taxable year, as part of a single transaction, MJJM Inc. redeemed stock from three of the shareholders. Specifically, MJJM Inc. redeemed 150 shares from Michael, 75 shares from Joseph, and 40 shares from John. The redemption was substantially disproportionate for:

A. Michael and Joseph.

B. Michael and John.

C. Joseph only.

D. Michael only.

Question 21

Fact Pattern for Questions 21 and 22. EFG, Inc. is a calendar year corporation. EFG, Inc. had current earnings and profits of $100,000 and no accumulated earnings and profits when it distributed a total of $160,000, as a nonliquidating distribution, to its two equal shareholders, Jane and Joe. On the date of the cash distribution, Jane’s basis in her EFG, Inc. stock was $10,000 and Joe’s basis in his EFG, Inc. stock was $35,000. How much is includible by Jane in her gross income for the current taxable year with respect to the distribution to her?

A. $50,000 dividend income and 0 capital gain.
B. $80,000 dividend income and 0 capital gain.
C. 0 dividend income and $70,000 capital gain.
D. $50,000 dividend income and $20,000 capital gain.

Question 22

Fact Pattern for Questions 21 and 22. EFG, Inc. is a calendar year corporation. EFG, Inc. had current earnings and profits of $100,000 and no accumulated earnings and profits when it distributed a total of $160,000 to its two equal shareholders, Jane and Joe. On the date of the cash distribution, Jane’s basis in her EFG, Inc. stock was $10,000 and Joe’s basis in his EFG, Inc. stock was $35,000. What is Joe’s adjusted basis in his EFG, Inc. stock after the distribution?

A. $0.

B. $5,000.

C. $15,000.

D. $35,000.

Question 23

Mary received a liquidating distribution from ABC Corporation as part of the redemption of all of the ABC Corporation’s stock and the complete liquidation of ABC Corporation. Mary’s basis for her ABC Corporation stock was $10,000. In exchange for her stock, Mary received a payment of $15,000 and property that had an adjusted basis to ABC Corporation of $10,000, a fair market value of $25,000, and that was encumbered by a $12,000 mortgage which Mary assumed. How much gain did Mary recognize as a result of this transaction?

A. $3,000.

B. $18,000.

C. $30,000.

D. $42,000.

E. None of the above.

Question 24

Ann and Irene form AIB Corporation transferring their respective business assets to AIB Corporation. Ann exchanges her property with a basis to Ann of $100,000 and fair market value of $400,000 for 200 shares in AIB Corporation on March 1, 2009. Irene exchanges her property with a basis of $140,000 and fair market value of $600,000 for 300 shares in AIB Corporation on April 11, 2009. Bob transfers his property with a basis of $250,000 and fair market value of $1,000,000 for 500 shares in AIB Corporation on May 15, 2011. Bob’s transfer is not part of Ann and Irene’s plan to incorporate their businesses. What gain, if any, will Bob recognize on the transfer?

A. $0.

B. $250,000.

C. $750,000.

D. $1,000,000.

Question 25

Tom and George form T and G Corporation. Tom transfers machinery worth $100,000 with a basis to Tom of $40,000, while George transfers land worth $90,000 with a basis to George of $20,000 and services rendered in organizing the corporation worth $10,000. Each is issued 25 shares in T and G Corporation. With respect to the transfers:

A. Tom has no recognized gain; George recognizes gain/income of $80,000.
B. Neither Tom nor George recognizes gain or income.
C. T and G Corporation has a basis of $30,000 in the land.
D. George has a basis of $30,000 in the shares of T & G Corporation.

Question 26

The stock of Kenny Corp. is owned equally by two brothers. During 2008, they transferred land (which had a basis of $300,000 and a fair market value of $320,000) as a contribution to capital to Kenny Corp. During September, 2012, Kenny Corp. adopted a plan of complete liquidation and subsequently made a pro rata distribution of land back to the brothers. At the time of the liquidating distribution, the land had a fair market value of $180,000. What amount of loss can be recognized by Kenny Corp. on the distribution of land?

A. $0.
B. $20,000.
C. $120,000.
D. $140,000.

Question 27

Henry, Emmy, and Frannie, unrelated individuals, own all of the stock in New Corporation with earnings and profits of $1,200,000 as follows: Henry own 1,300 shares; Emmy owns 400 shares; and Frannie owns 300 shares. New Corporation redeems 300 of Henry’s shares with a basis of $60,000 for $450,000. With respect to the distribution in redemption of the stock:

A. Henry has a capital gain of $390,000.

B. Henry has dividend income of $450,000.

C. Henry has dividend income of $390,000.

D. Henry has a capital gain of $450,000.

Question 28

Lucinda owns 1,100 shares of Old Corporation stock at a time when Old Corporation has 2,000 shares of stock outstanding. The remaining shareholders are unrelated to Lucinda. The corporation redeems 400 shares from Lucinda. Does the transaction qualify as substantially disproportionate redemption as to Lucinda?

A. We do not have sufficient information.

B. No.

C. Yes.

D. This is not a transaction that could qualify for sale or exchange treatment.

Question 29

Helen, Greg, and Wanda own the stock in HGW Corporation with earnings and profits of $900,000 as follows: Helen, 600 shares; Greg, 400 shares; and Wanda, 1,000 shares. Greg is Helen’s son, and Wanda is Helen’s sister. HGW Corporation redeems 400 of Helen’s shares with a basis of $55,000 for $240,000. Helen purchased the stock three years ago as an investment. With respect to the stock redemption, Helen has:

A. Dividend income of $185,000.

B. Dividend income of $240,000.

C. Long-term capital gain of $185,000.

D. Long-term capital gain of $240,000.

Question 30

JKL Corporation has earnings and profits of $800,000 and has 1,000 shares of stock outstanding. That stock is held 550 shares by Anna and 450 shares by Ellen, who are unrelated individuals. JKL Corporation redeems 200 of Anna’s shares for $1,000 per share. Anna paid $300 per share for her JKL Corporation stock nine years ago. Which of the following statements is correct with respect to the stock redemption?

A. Anna has dividend income of $200,000.

B. Anna has a long-term capital gain of $140,000.

C. Anna’s basis in her remaining 350 shares is $60,000.

D. JKL Corporation reduces its E & P by $200,000.

Question 31

Evan transferred real estate to a corporation in a Code Section 351 transaction. The real estate was a capital asset in Evan’s hands and will also be a capital asset when held by the corporation. Evan’s basis in the real estate was $10,000 and the value of the real estate was $8,000 on the date of the transfer. If Evan received $2,000 in cash and 100 shares of stock from the corporation in exchange for the real estate, the resulting bases for Evan’s stock and the corporations real estate are:

A. Evan’s stock basis is $8,000; Corporation’s basis in the real estate is $8,000

B. Evan’s stock basis is $10,000; Corporation’s basis in the real estate is $10,000

C. Evan’s stock basis is $10,000; Corporation’s basis in the real estate is $8,000

D. Evan’s stock basis is $6,000; Corporation’s basis in the real estate is $12,000

Question 32

MNOP, Inc. redeemed 100 shares of Julia’s shares. The redemption did not satisfy all the requirements and thus was treated as a dividend for tax purposes. Julia’s basis in the 100 shares redeemed:

A. Disappears forever.

B. Transfers to her remaining shares in MNOP Inc.

C. Reduces her dividend income by her adjusted basis in the shares.

D. None of the above.

Question 33

Pursuant to a plan of corporate reorganization which qualified as an A reorganization, Lou received one share of stock of X Corporation worth $65 and cash of $20 in exchange for a share of stock in Y Corporation with a $95 basis to Lou. What is Lou’s recognized gain or loss on this exchange?

A. 0.

B. $10 loss.

C. $10 gain.

D. $20 gain.

Question 34

Pursuant to a plan of corporate reorganization, Pat exchanged 1,000 shares of Stream Corporation stock that she had purchased for $60,000, for 1,200 shares of Creek Corporation voting stock having a fair market value of $70,000, and $10,000 in cash. What is Pat’s recognized gain on the exchange, and what is her basis in the Creek Corporation’s stock?

A. $10,000 gain; $60,000 basis.

B. $10,000 gain; $70,000 basis.

C. $20,000 gain; $60,000 basis.

D. $20,000 gain; $70,000 basis.

Question 35

Which of the following statements is true concerning all types of tax-free corporate reorganizations?

A. Assets are transferred from one corporation to another.

B. Stock is exchanged between the shareholders of at least two corporations.

C. Liabilities that are assumed when cash is also used as consideration will always be treated as boot.

D. None of the above statements is true.

Question 36

Dick, Bev and Mollie form Murphy Corporation. Dick transfers land worth $80,000 (adjusted basis is $25,000) for 80 shares, Mollie transfers $40,000 cash for 40 shares and Bev transfers equipment worth $40,000 (adjusted basis is $16,000) and $40,000 of services for 80 shares. Bev’s tax consequences are:

A. $64,000 recognized gain; basis in 80 shares of $80,000

B. $40,000 recognized gain; basis in 80 shares of $56,000

C. $24,000 recognized gain; basis in 80 shares of $40,000

D. $0 recognized gain; basis in 80 shares of $16,000

Question 37

Best Company, Inc. had gross receipts of $400,000, cost of goods sold of $110,000, other expenses of $100,000 and a $90,000 net capital loss. Its taxable income is:

A. $210,000.

B. $200,000.

C. $190,000.

D. $100,000.

Question 38

Smith owns 85 percent of Smith Sisters Company, Inc. On March 8, 2012, she contributed land to the firm. Her adjusted basis in the land was $60,000 and its fair market value on March 8 was $140,000. Smith did not receive anything in return for the contribution. As a result of this transaction, Smith Sisters Company, Inc. will:

A. recognize a gain of $80,000 and will take a basis in the land of $80,000.

B. recognize a gain of $140,000 and will take a basis in the land of $140,000.

C. not recognize a gain and will take a basis in the land of $60,000.

D. not recognize a gain and will take a basis in the land of $140,000.

Question 39

Jessica owns 60 percent of Hudson Company, Inc. The firm needs some assets and all of the shareholders are considering contributing assets in a prearranged plan that would qualify all of them for Code Section 351 treatment. There has been no agreement among the parties as to the assets each would contribute, but it has been agreed that the fair market value of the assets contributed by each of them will be $150,000. Jessica is considering contributing 100 shares of XYZ Company, Inc. stock. Her basis in the shares is $200,000 and their fair market value is $150,000. Jessica is uncertain about the transaction. She is also considering selling the shares and contributing cash. Which of the following statements is correct?

A. If Jessica contributes the shares, then she will be able to recognize a $50,000 loss.

B. If Jessica sells the shares to Hudson Company, Inc. then she will be able to recognize $50,000 loss.

C. If Jessica sells the shares on a national stock exchange and contributes $150,000 of cash to Hudson Company, Inc. she will be able to recognize a $50,000 loss.

D. None of the above is correct.

Question 40

A “C” corporation must do which of the following with respect to its taxable year?

A. The corporation must select a calendar year.

B. The corporation must select a fiscal year if it has a business reason for selection.

C. The corporation may select a calendar year or fiscal, regardless of the reason for selection.

D. The corporation must select a year that is the same as its major shareholders.

Question 41

Paula receives a liquidating distribution from Pell Corporation as part of a redemption of all of its stock. Paula’s basis for her Pell stock is $10,000. In exchange for her stock, Paula receives property with an $8,000 basis and a $15,000 fair market value that is subject to a $2,000 mortgage, and also receives cash of $5,000. How much is Paula’s recognized gain?

A. $12,000.

B. $10,000.

C. $8,000.

D. $0.

Question 42

Trusty Company, Inc. had accumulated E&P of $26,000 on January 1, 2012. Its current E&P for 2012 was negative $21,960 (that is, a deficit). On April 28, 2012, it distributed $20,000 to its shareholders. Assuming that the exact date of the loss is not known, the distribution is treated as:

A. $8,920 dividend and $11,080 return on capital.

B. $20,000 dividend.

C. $20,000 return of capital.

D. $16,000 dividend and $4,000 return of capital.

Question 43

Ellen sells her Section 306 stock during the year for $16,000. Her basis in the stock was $2,000. In 2006, when she received the stock, its fair market value was $12,000 and the corporation’s earnings and profits were $10,000. Assuming that Ellen retains her common stock, the result of the sale is:

A. $14,000 ordinary (dividend) income.

B. $14,000 long-term capital gain.

C. $10,000 ordinary (dividend) income and $4,000 long- term capital gain.

D. $12,000 ordinary (dividend) income and $2,000 long-term capital gain.

Question 44

Babb Corporation owns 80 percent of Atley Corporation’s stock and Linda owns the remaining 20 percent of Atley’s stock. Babb Corporation’s basis for its Atley stock is $300,000 and Linda’s Atley stock has a basis of $80,000. Pursuant to a plan of complete liquidation of Atley Corporation, Babb Corporation receives property with a $400,000 adjusted basis and a $480,000 fair market value, and Linda receives property with a $130,000 adjusted basis and a $120,000 fair market value. The bases of the properties to Babb Corporation and Linda are:

A. Babb: $480,000; Linda: $120,000.

B. Babb: $400,000; Linda: $130,000.

C. Babb: $300,000; Linda: $80,000.

D. Babb: $400,000; Linda: $120,000.

Question 45

The following statements regarding a corporation’s liquidating distribution of loss assets to shareholders are all false, except:

A. The liquidating corporation cannot recognize a loss on a liquidating distribution.
B. A loss can be recognized on a subsidiary liquidating distribution to which Code Section 332 applies.
C. The liquidating corporation cannot recognize a loss on a distribution to a shareholder who is a “related taxpayer.”
D. The general rule is that all losses are realized and recognized, subject to some exceptions.

Question 46

ABC Corporation made cash contributions of $35,000 to charitable organizations in 2012. ABC Corporation had taxable income of $280,000 without taking into account its charitable contributions for the taxable year ended December 31, 2012, but after deducting a dividends-received deduction of $34,000. What amount, if any, can ABC Corporation deduct as charitable contributions for 2012?

A. $32,000

B. $31,400

C. $35,000

D. 0

Question 47

Jack transferred property with an adjusted basis of $45,000 to JKL Corporation. There was a $35,000 mortgage on the property. In exchange for the transferred property, Jack received stock with a fair market value of $65,000 and $25,000 cash, and the corporation assumed the liability on the property. How much gain is recognized by Jack?

A. $0

B. $20,000

C. $25,000

D. $35,000

Question 48

Jack transferred to JKL Corporation, real property that had an adjusted basis to Jack of $45,000. There was a $35,000 mortgage on the property. In exchange for the transferred property, Jack received stock with a fair market value of $65,000 and $25,000 cash, and the corporation assumed the liability on the property. What is Jack’s basis in the stock he received?

A. $0

B. $20,000

C. $25,000

D. $45,000

Question 49

Jack transferred property with an adjusted basis of $45,000 to JKL Corporation. There was a $35,000 mortgage on the property. In exchange for the transferred property, Jack received all of the stock of the corporation that had a fair market value of $70,000 and cash of $25,000, and the corporation assumed the liability on the property. What is JKL Corporations’ basis in the property transferred to it by Jack?

A. $45,000

B. $65,000

C. $70,000

D. $90,000

Question 50

Jack and Jill each own one-half of the stock of JJ Corporation, which corporation has earnings and profits of $15,000. JJ Corporation distributed to its two shareholders property with a total fair market value of $24,000 and an adjusted basis to the corporation of $24,000. The amount taxable to each shareholder as a dividend is

A. $0

B. $7,500

C. $12,000

D. $15,000

Extra Credit (Maximum of 20 points).

The following 20 questions are extra credit. Each correct answer is worth one point.

You will not lose credit on the regular portion of Test One for wrong answers on the extra credit portion.

The answer sheet for the extra credit is the second page of the answer sheet for Test One.
If you choose to do the extra credit question, your answers are due by 11 p.m. on February 15.

1. Future, Inc. reported the following results for the year:

Net income per books $110,000
Federal income taxes 36,170
Life insurance proceeds on key employee 15,000
Tax-exempt interest income 13,000
Net capital loss 25,000

Future’s taxable income for the year was:

a. $123,170
b. $143,170
c. $72,000
d. $135,000
e. $107,000

2. Schedule M-3 is used to reconcile:

a. uncertain tax positions
b. U.S. GAAP and IFRS differences
c. Schedule M-1 and Schedule M-2 differences
d. Book income and taxable income differences

3. Assume corporate tax rates are a constant 35%. Elco started operations at the beginning of this year. Its book income is $10 million and its taxable income is $13 million. The difference will give rise to

a. deferred tax liability of $1,050,000
b. deferred tax asset of $1,050,000
c. income taxes payable of $3,500,000
d. income tax expense of $4,550,000

4. Which of the following items are eligible for immediate expensing and 180-month amortization?

(1.) Fee to CPA to handle Subchapter S election
(2.) Refreshments served at organizational meetings
(3.) Underwriting commission
(4.) Legal fees in connection with incorporation
(5.) Recording fees upon transfer of assets to corporation

a. (2), (4), and (5)
b. (1), (2), and (5)
c. (1), (2), (3), (4), and (5)
d. (1), (2), and (4)

5. When comparing corporate and individual taxation the following statements are true, except:

a. Individuals have exemptions and a standard deduction, corporations do not.
b. Both types of taxpayers have percentage limitations on the charitable contribution deduction, coupled with a carryover of the excess contribution.
c. All taxpayers may carry net operating losses back two years, forward 20.
d. Both corporate and individual taxpayers may have a long-term capital loss carryforward.
6. Algernon transferred the following to his controlled corporation in exchange for stock:

Basis Value Amount Remaining on Mortgage
Building $20,000 $50,000
Mortgage on the building $40,000
Cash 10,000 10,000
IBM stock 15,000 12,000

Algernon must recognize a gain of:

a. $20,000
b. $0
c. $10,000
d. $27,000
7. Minerva, Inc. has one class of stock, owned 20 percent by Mr. Peters, 20 percent by Mrs. Peters, 15 percent by Mrs. Peters’s brother, 10 percent by Mr. & Mrs. Peters’ grandchild, and 35 percent by an irrevocable trust with Mrs. Peters’ son from a previous marriage as
beneficiary. Mr. and Mrs. Peters own the following percentage of Minerva, Inc. directly and constructively:

a. Mr. Peters: 50%; Mrs. Peters: 100%
b. Mr. Peters: 50%; Mrs. Peters: 85%
c. Mr. Peters: 65%; Mrs. Peters: 85%
d. Mr. Peters: 65%; Mrs. Peters: 100%
8. Harold owns 100 percent of Clawson Company. Clawson’s E&P is $500,000. Harold needs to withdraw $100,000 from the company. Which of the following transactions might be reclassified as a constructive (disguised) dividend?

a. $100,000 bonus; Harold’s compensation (before the bonus) is $350,000, relatively equal to what other presidents of similarly sized companies earn.
b. $100,000 in return for a promissory note from Harold, due upon demand but not having a fixed due date.
c. $100,000 in return for property Harold would lease to the corporation.
d. $100,000 gift from the corporation to Harold.
e. All of the above.

9. Cookies Corporation distributed land to its sole shareholder. On the date of distribution, the land had a fair market value of $85,000 and an adjusted basis to Cookies of $42,000. What is the amount of Cookies’ gain on the distribution?

a. $0
b. $42,000
c. $43,000
d. $85,000

10. Jennifer owns 1,000 shares of Ernie Company. Her adjusted basis in the shares is $100,000. Ernie Company has no earnings and profits. It made a cash distribution to its shareholders, of which Jennifer received $60,000. The result of this distribution to Jennifer is:

a. Jennifer must recognize a $40,000 loss and has a zero basis in the stock
b. Jennifer must recognize $60,000 dividend income and her basis in the stock does not change
c. Jennifer has no recognized gain or loss and her basis in the shares is reduced to $40,000
d. None of the above

11. Tugboats Corporation, a calendar year corporation that began doing business on January 1, 2007, had $35,000 in accumulated earnings and profits on January 1, 2013. Tugboats had an operating loss of $60,000 for the first six months of 2013, but had $10,000 in earnings for the entire year. Tugboats made a distribution of $25,000 cash to its stockholders on April 1, 2013. What is the amount of Tugboat’s accumulated earnings and profits on
January 1, 2014?

a. $0
b. $10,000
c. $20,000
d. $45,000

12. Jones owns 100 percent of X Corporation. X Corporation’s overall marginal tax rate is 35 percent. Jones’ overall marginal tax rate is 30 percent. Jones needs $40,000 from the firm. The firm has decided that it either will declare a dividend of $40,000 or will pay Jones a performance-based bonus of $40,000.

a. Overall, it is best if the firm declares the dividend
b. Overall, it is best if the firm pays a bonus
c. Overall, both parties should be indifferent regarding what form the distribution takes

13. The Trap Corporation liquidates. One shareholder, who owned 30 percent of the stock, receives for the stock, inventory worth $90,000 with a basis of $70,000. Trap Corporation will recognize:

a. $20,000 of capital gain
b. $20,000 of ordinary income
c. $20,000 of Sec. 1231 gain
d. No gain
14. Mark receives a liquidating distribution from Arosa Corporation as part of a redemption of all of its stock. Mark’s basis for his Arosa stock is $10,000. In exchange for his stock, Mark receives property with a $10,000 basis and a $25,000 fair market value that is subject to a $12,000 mortgage, and also receives cash of $15,000. What is Mark’s recognized gain?

a. $42,000
b. $30,000
c. $18,000
d. $3,000

15. Prime Corporation liquidates its 80%-owned subsidiary, Bass Corp. Bass Corp. distributes land to its minority shareholder, Shirley, who owns 20% of the Bass Corp. stock. The land received by Shirley has a $55,000 FMV. The land was used in Bass Corp.’s business and has an adjusted basis of $50,000 and is subject to a $10,000 liability which is assumed by Shirley. Shirley’s basis in her stock is $25,000. What gain will Shirley and Bass Corp.
recognize on the distribution of the land?
Shirley Bass Corp.
a. $20,000 gain $ 0
b. $20,000 gain $ 5,000 gain
c. $30,000 gain $15,000 gain
d. $30,000 gain $ 5,000 gain
16. The following statements about property distributions in complete liquidations with liabilities in excess of fair market value are all false, except:

a. A loss may be recognized.
b. The shareholder receives a basis in the property equal to the amount of liability.
c. The distributor recognizes gain equal to the excess of liabilities over basis.
d. Since liabilities exceed fair market value, no depreciation recapture will occur.

17. The stock of Hill Corp. is 60 percent owned by Joe and 40 percent owned by Joe’s brother, Bob. During 2012, Bob transferred land (basis of $300,000; FMV of $320,000) as a contribution to capital to Hill Corp. During March 2013, Hill Corp. adopted a plan of liquidation and subsequently made a pro rata distribution of the land back to the brothers. At the time of the liquidating distribution, the land had a FMV of $160,000. What amount
of loss can be recognized by Hill Corp. on the distribution of land?

a. $0
b. $16,000
c. $40,000
d. $60,000
18. Holly Wreath, a shareholder in the acquired corporation, turned in 100 shares of common stock with a basis of $4,200. In return she received voting convertible preferred stock worth $4,700 and a debenture with a face value of $1,000 and a value of $850. As a result, Holly must recognize a gain of:

a. $1,350
b. $850
c. $800
d. $0
19. The “solely for voting stock” requirement in Type B reorganizations is met in all the following cases, except:

a. The acquiring corporation agrees to assume the acquired corporation’s shareholders’ expenses but only if directly related to the acquisition.
b. The acquired corporation, on the eve of the acquisition, redeems five percent of its shares for cash.
c. The acquiring corporation pays cash in lieu of fractional shares resulting from the stock for stock exchange.
d. The acquiring corporation assumes the acquired corporation’s legal expenses incurred in connection with the acquisition.

20. Kate owns all the stock in Warbler Corporation. Kate has a basis of $25,000 in the Warbler stock, which currently has a fair market value of $150,000. Warbler is merged into Wren Corporation. Kate receives Wren preferred stock worth $100,000 and common stock worth $50,000. Kate recognizes a gain of:

a. $125,000
b. $100,000
c. $50,000
d. $0

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