Taxation and Business Law

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 on any 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 and in effect;
6. in all cases, that there is only one class of stock issued and outstanding in any corporation, and that class is common voting stock;
7. with respect to each partnership question, the partnership has no hot assets, has no debts or other liabilities, and does not have a Section 754 election in effect;
8. with respect to each partnership question, each partnership is a general partnership; and
9.  with respect to each partnership question, there are no special allocation provisions contained in any partnership agreement.

Choose the letter for the choice that best answers the question or completes the sentence.

Questions

1. Jack  owns 60 percent of Corporation. Corporation had acquired land known as the Parcel in January of 2000 for $68,000 and held the Parcel  for investment purposes. During the current taxable year, Corporation sold the Parcel to Jack for $65,000 which amount was equal to the fair market value of the Parcel. Shortly after receiving the Parcel, Jack, never having made any gifts before, gave the Parcel  to his friend Tom from college when the property was worth $70,000.  Tom sold the Parcel two years later to Sue, a person not related to Corporation, Jack, Sue, or Tom, for $75,000.  How much gain or loss is realized and recognized as a result of these three transfers?

a. Corporation realizes a loss of $3,000 and  recognizes a loss of 3,000 on the sale; Jack realizes a gain of $8,000 and recognizes a gain of 5,000 on the transfer to Tom; Tom realizes a gain of $5,000 and recognizes a gain of $2,000 on the transfer to Sue.

b. Corporation realizes a loss of $3,000 and recognizes a loss of 3,000 on the sale; Jack realizes a gain of $5,000 and  recognizes a gain of 5,000 o the transfer to Tom; Tom realizes  gain of $5,000 and recognizes a gain of $2,000 on the transfer to Sue.

c. Corporation realizes a loss of $3,000 and recognizes a loss of 0 on the sale; Jack does not realize or recognize any gain or loss on the transfer to Tom; Tom realizes a gain of $10,000 and recognizes a gain of $10,000 on the transfer to Sue.

d.  Corporation realizes a loss of $3,000 and recognizes a loss of 0 on the sale; Jack realizes a gain of $5,000 and recognizes a gain of $5,000 on the transfer to Tom;  Tom realizes a gain of $5,000 and recognizes a gain of $5,000 on the transfer to Sue.

2.  Corporation had the following income and expenses during the current taxable year:

Income from operations  $250,000

Expenses from operations   $120,000

Dividends received (from a 70 percent-owned corporation))     $ 80,000

Cash charitable contributions    $25,000

How much is Corporation’s charitable contribution deduction for the current taxable year?

a.     $15,000.

b.     $21,000.

c.     $25,000.

d.     $30,000.

3. On the last day of the year, XYZ Corporation  made a nonliquidating distribution to Jane, its sole shareholder, of  $110,000 in cash.  The corporation’s earnings and profits were $100,000 on the last day of the year.  How much was the total dividend income received by the shareholder as a result of the distribution made by XYZ Corporation?

a.     0.

b.     $100,000 dividend.

c.     $110,000 dividend.

d.     None of the above.

4. Tom and Jenny formed TJ Inc., a corporation, in 2011.  Tom received 70 shares of the voting common stock, the only class of stock of the corporation, in exchange for property, and Jenny received  30 shares that were issued in exchange for her accounting services.  In 2013, Tom transferred additional property to TJ Inc. The property had an adjusted basis to Tom of $60,000 and a fair market value of $70,000 on the date of the transfer.  On the same day, and in exchange for the property he transferred to TJ Inc., Tom received cash of $15,000 and an additional 55 shares of stock worth $55,000.  How much gain was recognized by Tom as a result of this transaction?

a.     0.

b.     $10,000.

c.     $15,000.

d.     $25,000 .

5. Debra transferred property to her solely owned corporation,  DA Inc. The property had an adjusted basis to Debra of $60,000 and a fair market value of $100,000 on the date of the transfer and the corporation assumed an $80,000 liability on the property.  On the same day, and in exchange for the property she transferred to DA Inc., Debra received a payment of $10,000 and 10 additional shares of SDA Inc.’s only class of stock.  How much gain was recognized by Debra as a result of this transaction?

a.     0.

b.     $10,000.

c.     $20,000.

d.     $30,000.

e. $40,000.

6. Sue transferred a building to her newly formed corporation, SUECO, 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 SUECO Inc. assumed.  On the same day, and in exchange for the building she transferred to SUECO Inc., Sue received 100 percent of SUECO’s only class of stock. What is Sue’s total basis in the stock she received from SUECO?

a.     $25,000.

b.     $50,000.

c.     $75,000.

d. $100,000

7. Sam 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.  Sam’s friend, Kal, owns a building having a fair market value of $450,000 and an adjusted basis to Kal of $100,000. The building is encumbered by a $130,000 mortgage.  Earlier this month, Sam and Kal discussed Sam’s becoming involved in the business of MNO Inc., and as a result of these discussions, Kal transferred the building to MNO Inc. and in exchange for the building, MNO Inc. transferred to Kal 90 shares of authorized but not previously issued stock of MNO Inc. How much gain does Kal realize and recognize as a result of these transfers?

a.   Realized gain of 0 and recognized gain of 0.

b.   Realized gain or $350,000,  none of which is recognized.

c.Realized gain of $350,000 and recognized gain of $340,000.

d.   Realized gain of $350,000 and recognized gain of $30,000.

8. Tom owned all of the outstanding stock of  NEWCO3 Corporation.  Tom transferred a building, cash, and publicly traded stock to NEWCO3 Corporation. The adjusted basis and the fair market value of the assets transferred to NEWCO3 Corporation, and the amount remaining on the mortgage on the building transferred, were as follows:

Basis     Value     Amount

Building    $20,000     $55,000

Mortgage on building   $45,000

Cash     $5,000       $5,000

Publicly traded stock    $15,000     $12,000

In exchange for the assets transferred to NEWCO3 Corporation, Tom received additional stock of NEWCO3  Corporation.  How much gain did Tom recognize as a result of this transaction?

a.     0.

b.     $5,000.

c. $25,000.

d.     $27,000.

e. $45,000.

Fact Pattern for Questions 9 and 10: Sandra owned an equipment rental business in her sole name for four years. In January of 2013,  Sandra transferred the equipment to ABC Rental Corporation, a newly formed corporation.  Sandra received all of the stock of ABC Rental Corporation  in exchange for the equipment. At the time of the transfer of the equipment to ABC Rental Corporation, Sandra’s adjusted basis in the equipment was $50,000, the fair market value of the equipment was $150,000, the equipment was subject to a security agreement and note assumed by the corporation in the amount of $70,000, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000.

9. How much gain did Sandra recognize as a result of the transaction, and what was the character of the gain?

a.     Sandra recognized $12,000 of gain, all of which was ordinary income.

b.     Sandra recognized $20,000 of gain, at least $12,000 of which was ordinary income.

c.     Sandra recognized $30,000 of gain, at least $12,000 of which was ordinary income.

d. Sandra recognized $100,000 of gain, all of which was ordinary income.

10. As a result of the transaction in question 9, what is the corporation’s basis in the equipment?

a. $50,000.

b. $70,000.

c. $150,000.

d.   $170,000.

11.  NEWCO Inc. had current earnings and profits of $150,000 when it made a nonliquidating distribution to an individual shareholder of land that NEWCO Inc. held for use in its business.  On the date the land was distributed, NEWCO Inc.’s adjusted basis in the land was $120,000, the fair market value of the land was $160,000, and the land was encumbered by a $140,000 mortgage, which liability was assumed by the shareholder. After the distribution, how much are NEWCO Inc.’s earning and profits?

a.     $130,000.

b.     $150,000.

c.     $160,000.

d.     $170,000.

12.  Big Corporation distributed land to its sole shareholder, Little Corporation, in a liquidating distribution.  At the time of the distribution, the land had a fair market value of $240,000 and Big Corporation’s adjusted basis in the land was $200,000. The land was encumbered by a $230,000 mortgage. How much gain did Big Corporation recognize as a result of the distribution?

a.     0.

b.     $10,000.

c.     $30,000.

d.     $40,000.

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

a.     0.

b.     $70,000.

c.     ($320,000.)

d.     $420,000.

14.  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 accurate?

a.     MNO Inc.’s earnings and profits must be increased by $40,000 , the amount of the unrecognized gain, and decreased by $40,000 (the adjusted basis of the land), and increased by $55,000 (the amount of the liability).

b.     The net adjustment to MNO Inc’s earnings and profits is $40,000, the amount of the recognized gain.

c.     The distributing corporation’s realized gain of $40,000 is recognized to the extent of the $15,000.

d.     None of the above statements is accurate.

15.   Medium Inc. had one class of stock outstanding. The one class of stock was owned 50 shares by Linda, 30 shares by Linda’s mother, and 20 shares by Linda’s grandmother. On December 31, 2012, Medium Inc. redeemed 20  of Linda’s 50 shares, and in exchange for the stock, Medium Inc. distributed to Linda a building that had an adjusted basis to Medium Inc. of $10,000 and a fair market value of $50,000.  Assume that Medium Inc.’s current earnings and profits were  $200,000, there were no accumulated earnings and profits, and Linda’s total basis in her stock before the redemption was $20,000.  How much is Linda’s basis in her remaining stock after the redemption, and what is her basis in the building?

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.

e. None of the above.

16.  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. Who will receive exchange treatment as a result of the redemption?

a.     Michael and Joseph, as the transaction was not essentially equivalent to a dividend.

b.     Joseph only, because the redemption was substantially disproportionate as to Joseph.

c.     Michael only, because the redemption was substantially disproportionate as to Michael.

d.     No one, and each of Michael, John, and Joseph will receive dividend treatment.

Fact Pattern for Questions 17 and 18.   Happy Inc. is a calendar year corporation. Happy Inc. had no accumulated earnings and profits, but had $100,000 of current earnings and profits in 2012.  On December 31, 2012, Happy Inc. distributed a total of $160,000 to its two equal shareholders, Betty and Bob.  On the date of the cash distribution, Betty’s basis in her Happy Inc. stock was $10,000 and Bob’s basis in his Happy Inc. stock was $30,000.

17.   How much does Betty include in her gross income for the current taxable year with respect to the distribution to her?

a. $50,000 dividend income and $10 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.

18.  What is Bob’s adjusted basis in his EFG Inc. stock after the distribution?

a. 0.

b. $5,000.

c. $15,000.

d. none of the above.

19.  XYZ, Corp. owned 85% of ABC Corporation.  XYZ Corp. received a liquidating distribution from ABC Corporation as part of  the complete liquidation of ABC Corporation. XYZ Corp.’s basis for its ABC Corporation stock was $10,000.  In exchange for its stock, XYZ Corp. received a payment of $15,000 and real 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 XYZ Corp. assumed.  How much gain or loss did XYZ Corp. recognize as a result of this transaction and what is XYZ Corp.’s basis in the real property?

a. $3,000 gain recognized, and basis in real property of $40,000.

b. $18,000 gain recognized, and basis in real property of $25,000.

c. $0 gain recognized, and basis in real property of  $25,000.

d. $0 gain recognized, and basis in real property of $10,000.

e. $18,000 gain recognized, and basis in real property of $35,000.

20.    Jack  owns 60 percent of Corporation. Corporation had acquired land known as the Parcel in January of 2000 for $68,000 and held the Parcel  for investment purposes. During the current taxable year, Corporation sold the Parcel to Jack for $65,000 which amount was equal to the fair market value of the Parcel. Shortly after receiving the Parcel, Jack, never having made any gifts before, gave the Parcel  to his friend Tom from college when the property was worth $70,000.  Tom sold the Parcel two years later to Sue, a person not related to Corporation, Jack, Sue, or Tom, for $60,000.  How much gain or loss is realized and recognized as a result of these three transfers?

a.      Corporation realizes a loss of $3,000 and  recognizes a loss of 3,000 on the sale; Jack realizes a gain of $8,000 and recognizes a gain of 5,000 on the transfer to Tom; Tom realizes  and recognizes a loss of $8,000 on the transfer to Sue.

b.     Corporation realizes a loss of $3,000 and recognizes a loss of 3,000 on the sale; Jack does not realize or recognize a gain or loss on the transfer to Tom; Tom realizes  loss of $8,000 and recognizes a loss of $8,000 on the transfer to Sue.

c. Corporation realizes a loss of $3,000 and recognizes a loss of 0 on the sale; Jack does not realize or recognize any gain or loss on the transfer to Tom; Tom realizes and recognizes a loss of $5,000  on the transfer to Sue.

d.     Corporation realizes a loss of $3,000 and recognizes a loss of 0 on the sale; Jack realizes a gain of $5,000 and recognizes a gain of $5,000 on the transfer to Tom;  Tom realizes  and recognizes a loss of $10,000 on the transfer to Sue.

21.  Beth, who died in January 2012, was survived by her husband, Ben. Beth and Ben were married in 1996.  Beth’s federal gross estate was equal to $6,000,000 on the date of her death.  When Beth died, Beth’s assets included an undeveloped parcel of real estate in Jacksonville in the names of “Beth and Ben, as joint tenants with right of survivorship.” The fair market value of the land on the date of Beth’s death was $750,000.  Ben provided all of the consideration for the purchase of the land, paying $200,000 for it in 2000. Alternate valuation is not available to Beth’s estate as all assets owned by Beth will pass, either under Beth’s last will and testament or by operation of law, to Ben.  What is Ben’s basis in the real estate after Beth’s death?

a. $200,000.

b. $375,000.

c. $475,000.

d. $750,000.

22.   A capital asset forming part of a decedent’s gross estate takes as its basis

a.     the fair market value of the asset as determined for federal estate tax purposes.

b.     the higher of the decedent’s basis in the asset or the fair market value of the asset as determined for federal estate tax purposes.

c.     the lower of the decedent’s basis in the asset or the fair market value of the asset as determined for federal estate tax purposes.

d.     the decedent’s basis in the asset.

23.   The federal gift tax return (Form 709) is generally due

a. on the same day as the individual income tax return for a calendar year taxpayer.

b. on October 15 of the year after the year the gift is made.

c. nine months after the date of death.

d. none of the above.

24.   Which of the following transactions does not constitute a completed gift for federal gift tax purposes?

a.     An outright gift of $100,000 to a United States citizen spouse.

b.     A gratuitous transfer of $1,000,000 to an irrevocable trust,