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 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. Corporations 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 $ 30,000
How much is Corporation’s charitable contribution deduction for the current taxable year?
a. $14,600.
b. $21,000.
c. $26,000.
d. $30,000.
3. 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 25 percent-owned corporation. How much is Corporation’s dividends-received deduction?
a. 0.
b. $70,000.
c. $480,000.
d. $600,000.
4. Ben transferred property to his newly formed corporation, 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 that he transferred to BCD Inc., Ben received a payment of $15,000 and 100 percent of BCD Inc.’s only class of stock. The stock had a fair market value of $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 .
5. Sandra transferred property to her newly formed corporation, SDA Inc. The property had an adjusted basis to Sandra 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 SDA Inc., Sandra received a payment of $10,000 and 100 percent of SDA Inc.’s only class of stock. How much gain was recognized by Sandra 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. How much gain was recognized by Sue as a result of this transaction?
a. 0.
b. $25,000.
c. $50,000.
d. $75,000.
7. 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 $450,000 and an adjusted basis to Lee of $100,000. The building is encumbered by a $130,000 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 90 shares of authorized but not previously issued stock of MNO Inc. How much gain does Lee 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 of gain.
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 $40,000
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 Al recognize as a result of this transaction: Who is Al?
a. 0. – Assuming typo “How much gain did Tom recognize as a result of this transaction”
b. $5,000.
c. $25,000.
d. $27,000.
Fact Pattern for Questions 9 and 10: Sandra owned an equipment rental business in her sole name for four years. After her business advisors suggested that she conduct her equipment rental activity in corporate form, she promptly 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 building was $150,000, the equipment was subject to a security agreement and note assumed by the corporation 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.
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, 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 $50,000 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 $20,000, the fair market value of the land was $60,000, and the land was encumbered by a $40,000 mortgage, which liability was assumed by the shareholder. After the distribution, how much are NEWCO Inc.’s earning and profits?
a. $30,000.
b. $50,000.
c. $60,000.
d. $70,000.
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 $250,000 mortgage. How much gain did Big Corporation recognize as a result of the distribution?
a. 0.
b. $10,000.
c. $40,000.
d. $50,000.
13. Medium Inc. had one class of stock outstanding. The one class of stock was owned 50 percent by Linda and 25 percent by each of Linda’s parents. In the current taxable year, Medium Inc. redeemed 25 percent of Linda’s 50 percent, 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.
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 $15,000 (liability less basis), decreased by $40,000 (adjusted basis), 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 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.
15. XYZ Corporation had $100,000 in earnings and profits prior to any distributions. XYZ Corporation made a nonliquidating distribution to its sole shareholder of $30,000 in cash plus real property that had a fair market value of $80,000 and a basis of $60,000. How much was the total dividend income received by the shareholder as a result of the distributions made by XYZ Corporation and what is the shareholder’s basis in the real property received in the distribution
a. $80,000 dividend; basis of $60,000.
b. $80,000 dividend; basis of $60,000.
c. $100,000 dividend; basis of $80,000.
d. $110,000 dividend; basis of $60,000.
e. $100,000 dividend; basis of 110,000.
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 accumulated earnings and profits of $100,000 and no current earnings and profits when it 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 $20,000 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 $10,000 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. Mary received a liquidating distribution from ABC Corporation as part of 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 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 Mary assumed. How much gain did Mary recognize as a result of this transaction and what is Mary’s basis in the real property ?
a. $3,000 gain recognized, and basis of $40,000.
b. $18,000 gain recognized, and basis of $40,000.
c. $30,000 gain recognized, and basis of $10,000.
d. $42,000 gain recognized, and basis of $25,000.
e. none of the above.
20. Michael owns stock in an S corporation. The corporation sustained a net operating loss this year. Michael’s pro rata share of the loss is $5,000. Michael’s adjusted basis in his S corporation stock is $1,000 without regard to the loss. In addition, Michael has a loan outstanding to the corporation in the amount of $2,000. Without regard to any passive loss limitation or any at risk rule limitation, what amount, if any, is Michael entitled to deduct with respect to the loss under the subchapter S rules?
a. $1,000.
b. $2,000.
c. $3,000.
d. $5,000.
e. None of the above.
21. Beth, who died in January 2012, was survived by her husband, Ben. 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 2009. 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 and hence, no estate tax will be due because of the marital deduction. What is Ben’s basis in the real estate after Beth’s death?
a. $200,000.
b. $375,000.
c. $750,000.
d. none of the above.
22. Under Carl’s will, Carl created a testamentary trust to be funded with $700,000 worth of assets. All of the income of the trust is payable to Carl’s child, Jane, for her life, and thereafter, the remaining assets of the trust will pass to The Public Charity. Jane is serving as the trustee. In addition, the trustee has the discretion to distribute all or such portion of the principal as the trustee shall determine for Jane’s heath, support, and maintenance. Jane’s father, Carl, died during the current taxable year with a gross estate of $5,350,000. (Carl’s spouse died in 1985 and no estate tax return was due at her death). Which of the following statements is accurate with respect to the federal estate tax?
a The estate tax charitable deduction is available to Carl’s estate for the assets passing to The Public Charity.
b. Jane powers with respect to the assets of the trust constitute a general power of appointment.
c. Carl’s estate is not required to file Form 706, the Federal Estate and Generation-Skipping Tax Return.
d. When Jane dies, her right to trust income for life will not cause inclusion of the assets in her gross estate.
23. At the time of his death, Nick owned the following property:
· Land held by Nick and his sister Ellen, as joint tenants with right of survivorship. The fair market value of the land on the date of Nick’s death was $600,000, and the land was purchased by Nick for himself and his sister 20 years before his death for $150,000.
· Land held by Nick and Amy as tenants by the entirety. The fair market value of the land on the date of Nick’s death was $800,000, and the land was purchased by Amy for Nick and Amy five years before Nick’s death for $450,000.
· A one-half undivided interest in land held with Lance as tenant in common. The fair market value of the land on the date of Nick’s death was $400,000, and the land was purchased by Lance for Nick and Lance four years before Nick’s death for $300,000.
· City of Dayton bonds worth $500,000 purchased by Nick five years before his death, and titled in Nick’s sole name.
What amount is includible in Nick’s gross estate assuming alternate valuation is not available to Nick’s estate?
a. $800,000.
b. $1,100,000.
c. $1,200,000.
d. $1,700,000.
24. If an election is available and is made to use alternate valuation for federal estate tax purposes, then if a parcel of real estate owned by the decedent is sold within six months after the decedent’s death, the parcel of real estate is valued for federal estate tax purposes as of which date?
a. The date of the decedent’s death.
b. The date that is six months after the decedent’s of death.
c. The date of sale of the property.
d. The date the property is distributed to the beneficiaries.
25. Leslie died on October 31, 2011. Prior to 2009, Leslie had never made any gifts, but in 2010 she made some transfers. Specifically, on January 10, 2010, Leslie gave her vacation beach house to her five children as tenants in common. The fair market value of the vacation beach house on the date of the transfer was $50,000. The fair market value of the vacation beach house at the date of Leslie’s death was $100,000. When Leslie died on October 31, 2011, she owned a vacant lot jointly with her sister, Melissa, as joint tenants with right of survivorship. Leslie and her sister each contributed $10,000 toward the $20,000 purchase price. The basis of the property did not change subsequent to the purchase, and at Leslie’s death, the fair market value of the property was $60,000. There is $90,000 of life insurance on the life of Leslie, and her estate is named as the beneficiary. (Assume all assets have the same value on the alternate valuation date as on the date of death). What is the amount of Leslie’s gross estate for federal estate tax purposes?
a. $120,000.
b. $170,000.
c. $220,000.
d. $250,000.