1. A business cannot be taxed as a corporation unless it is incorporated under local law.
2. A partnership is not a tax-paying entity.
3. When a corporation receives property from a shareholder its basis equals that of the shareholder, increased by any gain recognized by the shareholder.
4. In a Code Sec. 351 transfer, liabilities cannot trigger gain, unless they exceed the aggregate basis of property transferred.
5. Depreciation claimed on a given asset will never be recaptured upon a Code Sec. 351 transfer.
6. A corporation must make all the same adjustments as an individual when computing its net operating loss.
7. 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)
8. Sandra Sherman incorporates her apartment building. It has a basis of $50,000, a value of $150,000, is subject to a mortgage of $70,000 and has a depreciation recapture potential of $12,000. If Sandra receives stock worth $80,000, she will recognize:
a. No gain.
b. $30,000 of gain, $12,000 of which is ordinary.
c. $12,000 of ordinary income.
d. $20,000 of gain, $12,000 of which is ordinary.
9. Evan Erman transferred inventory to a corporation in a Code Sec. 351 transaction. His basis in the inventory was $10,000 and its value was $8,000. If he received $2,000 in cash and 100 shares of stock, the resulting bases are:
a. Evan’s stock: $8,000; Corporation’s inventory: $10,000
b. Evan’s stock: $10,000; Corporation’s inventory: $10,000
c. Evan’s stock: $10,000; Corporation’s inventory: $8,000
d. Evan’s stock: $8,000; Corporation’s inventory: $12,000
10. Exclusive of capital transactions, Pixie Corp. had $100,000 of taxable income. Its capital gains and losses were:
Short-term gain $10,000
Long-term gain 12,000
Short-term loss (20,000)
Long-term loss 5,000
Pixie’s taxable income for the year was:
11. Two sole proprietors in the same business join their businesses by incorporating. Harvey Holmes transfers assets with a total basis of $10,000 and a value of $40,000 for 40 shares of stock. Mortimer Morgan transfers assets with a total basis of $15,000, subject to liabilities of $50,000, with a value of $110,000, for 60 shares of stock. The following statements about the transaction are all false, except:
a. Since transferred liabilities of $50,000 exceed aggregate basis of $25,000, both parties must recognize gain.
b. Harvey may have a different basis and holding period in different shares of the stock received.
c. Most likely, there will be some general business tax credit recapture upon the transfer of assets to the corporation.
d. At least one of the parties may have compensation income in the above transaction.
12. 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 three years, forward 15.
d. Both corporate and individual taxpayers may have a long-term capital loss carryforward.
13. Kevin Broid owns all the stock of Dana Corporation. During the year, Kevin sold a building to Dana for $150,000. The building cost $120,000, its adjusted basis was $94,000, and it was depreciated under the straightline method. Dana intends to use the building in its operations. Kevin’s tax consequences of the sale are:
a. $56,000 dividend income
b. $56,000 ordinary income
c. $56,000 Code Sec. 1231 gain
d. $26,000 ordinary income and $30,000 Code Sec. 1231 gain
e. $56,000 long-term capital gain
14. 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:
15. Ben Brown transferred property that had an adjusted basis to him of $40,000 and a fair market value of $50,000 to Crackers Corporation in exchange for 100 percent of Crackers’s only class of stock and $15,000 cash. At the time of the transfer, the stock had a fair market value of $35,000. What is the amount of gain to be recognized by Ben?
16. Sue Smith transferred a building that had an adjusted basis to her of $75,000 and a fair market value of $150,000 to Jumbo Corporation solely in exchange for 100 percent of Jumbo’s only class of stock. The building was subject to a mortgage of $100,000, which Jumbo assumed for bona fi de business purposes. The fair market valueof the stock at the date of transfer was $50,000. What is the amount of gain to be recognized by Sue?
17. The check-the-box election to be taxed as a corporation applies to:
d. all of the above
e. none of the above
18. When deciding if a corporate instrument is debt or equity, the IRS will consider:
a. the corporation’s debt to equity ratio
b. if the debt is convertible into stock
c. the relationship between stock and debt ownership percentages
d. if the debt is preferred over or subordinate to other debt
e. all of the above
f. none of the above
19. Poco Co. incurs expenses for investigating whether to expand its present business.
a. deduct them when incurred
b. deduct them only if Poco Co. goes through with the expansion
c. capitalize them and amortize them over 60 months
d. capitalize and expense when the firm liquidates
e. none of the above
20. The following entities are not subject to double taxation except:
b. sole proprietorship
c. C corporation
d. S corporation
e. all are subject to double taxation
21. Under the “check-the-box” system, which of the following entities could not select, or qualify for, corporate status?
a. sole proprietorship
d. none of the above may elect or qualify for corporate status
e. all of the above may elect or qualify for corporate status
22. The provisions of Code Sec. 351 are:
a. Optional if elected by a majority of the shareholders
b. Optional if elected by all the shareholders
c. Optional if elected by the corporation
23. Susan has a gain on the transfer of property to a corporation. In order for Susan to have no gain recognition under Code Sec. 351, she must receive:
a. stock and securities
b. securities only
c. stock only
d. the shareholder may receive any type of property from the corporation
24. Corporations and individuals differ in that:
a. corporations are not permitted tax credits
b. corporations are not entitled to exclusions
c. corporations do not have for AGI and from AGI deductions
d. like-kind exchange provisions do not apply to corporations
25. Bob owns all 50 shares of Max Company, valued at $50,000. His friend, Lee, owns equipment worth $50,000. Lee’s adjusted basis in the equipment is $20,000. Lee transfers the equipment to Max Company in exchange for 50 shares. Lee has a:
a. $30,000 realized and $30,000 recognized gain
b. $30,000 realized and $0 recognized gain
c. $0 realized and $0 recognized gain
d. none of the above
26. John Jergen’s stock basis is $3,000 and he has owned it for two years. If E&P is $4,000 and John receives a distribution of $12,000, the result is a dividend of $4,000, a return of capital of $3,000, and a long-term capital gain of $5,000.
27. Land with a basis of $2,000 and a value of $50,000 is distributed to an individual shareholder who has dividend income of $50,000. Consequently, E&P is reduced by $50,000.
28. A shareholder receives a tax-free preferred stock dividend on her common stock. Subsequently, she sells both her common and preferred stock to her aunt. She will not have any dividend income.
29. A corporation must recognize a gain if it distributes property with a liability in excess of adjusted basis.
30. If a distribution qualifies as a partial liquidation then all shareholders receive sale or exchange treatment on the redemption.
31. Unreasonable compensation is one type of constructive or disguised dividend.
32. A distribution by a corporation can never make its E&P negative.
33. Arrow, Inc. has an accumulated defi cit of $3,000. This year it distributes $15,000 to its shareholders. How much of the amount is a dividend if the current year’s books reveal the following items:
Taxable income $2,000
Proceeds from key-man life insurance $10,000
Interest from Iowa City bonds $5,000
Capital loss 4,000
34. Bulls & Bears, Inc., a securities dealer, had E&P of $2,000 when it distributed securities with a basis of $3,000 and a value of $10,000 to a 30 percent shareholder, Eunice. As a result of the distribution, E&P is:
a. Reduced by $3,000
b. Increased by $7,000
c. Increased by $7,000, then reduced by $9,000
d. Reduced by $10,000
35. A distribution to the shareholders of stock in the distributor constitutes a taxable dividend, except for the following:
a. Distribution of preferred stock to the common shareholders
b. Proportionate distribution of common stock to the common shareholders, where they all could have taken cash instead, but nobody did
c. Distribution of convertible preferred stock to any shareholder
d. Distribution of common stock to the preferred stockholders
36. A tract of land is distributed to Martha Moore as a dividend. Its basis immediately prior to the distribution was $40,000, its value is $80,000, and it is subject to a mortgage of $55,000. The following statements concerning the distribution are all false except:
a. E&P is increased by $15,000 (liability less basis), decreased by $40,000 and increased by the liability.
b. The net adjustment to the E&P account is $40,000, the amount of the realized gain.
c. The distributing corporation’s realized gain of $40,000 is recognized to the extent of the $15,000.
d. The shareholder’s basis in the land is $80,000, its fair market value.
37. General Company has four equal shareholders who are unrelated. Each shareholder owns 300 shares of stock. During the year General 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
38. A corporation generally recognizes gains and losses on sales of property during a complete liquidation.
39. E&P generally disappear upon liquidation.
40. If a shareholder assumes a liability on property in a liquidating distribution, the amount of assumed liability always affects the amount of gain recognized by the liquidating corporation.
41. 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
42. Rapid, Inc., a cash basis corporation, distributes $30,000 of accounts receivable to Sylvester, an individual shareholder, in cancellation of his stock, pursuant to a plan of complete liquidation. If Sylvester’s basis in his stock is $10,000 the tax result is:
a. Rapid has no gain, but Sylvester has ordinary income of $20,000.
b. Rapid recognizes $30,000 of ordinary income and Sylvester has no gain or loss.
c. Rapid recognizes $30,000 of ordinary income and Sylvester has a capital gain of $20,000.
d. Rapid recognizes no gain and Sylvester recognizes a capital gain of $20,000 under Section 331.
43. Link, Inc. liquidated and distributed its only asset with a basis of $100,000 and a value of $250,000 to its only shareholder, Lincoln Adams, who has a basis of $50,000 for his stock. The tax consequences, in part, are as follows, if both parties are in the 30 percent tax bracket:
a. Basis of property to shareholder: $200,000; combined tax liability: $105,000
b. Basis of property to shareholder: $250,000; combined tax liability: $91,500
c. Basis of property to shareholder: $150,000; combined tax liability: $90,000
d. Basis of property to shareholder: $200,000; combined tax liability: $120,000
44. The following statements about a liquidating distribution of depreciated 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 Sec. 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.
45. The advantages of making a Code Sec. 338(h)(10) election include the following, except:
a. Gains are recognized on the target’s assets.
b. The seller does not recognize gain on the sale of stock.
c. Appreciated assets receive a step-up in basis to fair market value.
d. The subsidiary’s tax attributes remain with the consolidated selling group.
46. 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.
47. 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?
48. Which of the following statements regarding E&P of a liquidating corporation is incorrect?
a. The character of an individual shareholder’s gain does not depend on the E&P of the liquidating corporation.
b. The E&P of the liquidating corporation is not reduced by the amount distributed in liquidation.
c. When a subsidiary is liquidated into its parent, the subsidiary’s E&P is extinguished.
d. The process of liquidating may increase the E&P of the liquidating corporation.
49. Liquidations and stock redemptions that are treated as exchanges have many similar tax consequences to the corporation and its shareholders. These include the following, except:
a. The corporation must recognize depreciation recapture.
b. The corporation may recognize a loss on the distributed property.
c. The shareholder receives a fair market value basis in the distributed property.
d. E&P is either reduced or eliminated.
50. 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 FMV that is subject to a $2,000 mortgage, and also receives cash of $5,000. What is Paula’s recognized gain?
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