ACC5762 assignment 1

| November 28, 2016

Question
TXX 5762, Assignment 1 Instructions:

Please read the following carefully. For each question, unless the question expressly provides to the contrary, you should assume that:

1. all events occurred in ‘the current taxable year;’

2. all persons are United States citizens;

3. there is no tax avoidance purpose for any transaction, and that with respect to any mortgage onany property, there was a bona fide business purpose for incurring or assuming the debt;

4. whenever a party receives encumbered property, the party assumed the mortgage, even if not specifically stated;

5. there is no special election made unless the facts specifically state that there is an election made or in effect;

6. in all cases, there is only one class of stock issued and outstanding in any corporation, and that is common voting stock, unless the question expressly states to the contrary, and

7. all corporations are “C” corporations.

For each question, choose the one letter that best answers the question or completes the sentence.

Question 1

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 2

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 3

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%

Question 4

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.

Question 5

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

Question 6

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 7

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 8

Jane Smith owns 85 percent of Smith Sisters Company, Inc. On March 8, 2014, Jane 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. Jane 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 9

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 contributingcash. 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 10

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 11

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 12

Paula receives a liquidating distribution from Pell Corporation. Paula’s basis for her Pell stock is $10,000. In exchange for her stock, Paula receives real estate with an $8,000 basis and a $15,000 fair market value that is subject to a $2,000 mortgage. What is Paula’s basis in the real estate she received?

A. $13,000.

B. $8,000.

C. $15,000.

D. $10,000.

Question 13

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 14

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 15

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 16

ABC Corporation made cash contributions of $35,000 to charitable organizations in 2013. ABC Corporation had taxable income of $280,000 without taking into account its charitable contributions for the taxable year ended December 31, 2013, but after deducting a dividends-received deduction of $34,000. What amount, if any, can ABC Corporation deduct as charitable contributions for 2013?

A. $32,000

B. $31,400

C. $35,000

D. 0

Question 17

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 18

Jack transferred to JKL Corporation, real property that had an adjusted basis to Jack of $45,000 and a fair market value of $125,000. 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. $10,000

B. $20,000

C. $25,000

D. $45,000

E. None of the above

Question 19

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 20

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.

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.) Refreshments served at organizational meetings

(2.) Underwriting commission

(3.) Legal fees in connection with incorporation

(4.) Recording fees upon transfer of assets to corporation

a. (2) and (4),

b. (1) and (2)

c. (1), (2), (3), and (4)

d. (1) and (3)

e. None of the above choices is correct.

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. 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.

8. 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.

9. 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.

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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