1. Z is a corporation owned by an individual, C, and a partnership. D, C owns 60 shares of Z common stock, D owns 40 shares of Z common stock. C wishes to sell 30 shares back to Z for $600. C owns 45% of the stock of D partnership and E, C's father, owns 2% of D.
a. There is no attribution under Section 3 18 of D's ownership in Z because C owns only 45%
b. There is attribution of 47% of D's ownership in Z
c, There is attribution of all C's shares in Z to D
d, B and C
e. None of the above
2. Z is a corporation owned entirely by two individuals, C and D. C owns 60 shares of Z, D owns 40 shares of Z. D has an option to buy 21 shares from Z
a. D is considered as owning 61 shares of Z for purposes of 318 and 302 calculations regarding
b. D is considered by the IRS as owning 21 shares of Z for purposes of 302 and 318 calculations for C
c, A and B
d. None of the above
3. C owns 60 shares and D owns 40 shares of Z Corporation, representing all of Z's outstanding shares. C and D are father and son. Z redeems all of C's stocks. C stays on as is president with compensation tied to is profits.
a. This redemption is treated as a sale or exchange under 302(b)(3).
b. This redemption is dividend since C has not completed termination in his interest in Z because of the role as president.
c. None of the above.
4. C owns 60 shares and D owns 40 shares of Z Corporation, representing all of Z's outstanding shares. C's stock is entirely redeemed for a note. C is D's father. D hates C.
a. This is a complete termination of interest under 302(b)(3).
b. This is a complete termination of interest under 302(b)(3) if a family waiver of attribution is obtained.
c. In all court circuits, the family hostility alone may prevent family attribution.
d. B and C.
e. None of the above.
5. C owns 60 shares and D owns 40 shares of Z Corporation, representing all of the outstanding shares. C and D are otherwise unrelated individuals. C sells all of the Z stock to D for $600 in cash and $3,000 in notes payable over a 20 year period. Z pays off D's note as payments fall due.
a. Under these facts, C may transfer the obligation to Z without any additional tax implications.
b. Under the Wall case, D would receive corporate distributions from Z. If E&P is present, there would be a dividend.
c. Neither of the above.
6. Z is a corporation in the fast food business and the shoe business and has two individual shareholders, C and D. is slogan is, "Take Care of Your Feet While You Eat." Z owns 10 fast food stores which are adjacent to 10 shoe stores that it owns. This arrangement has continued for at least 10 years. Z proposes to sell the fast food stores since one of his executives has taken to heart the comment that fast food is neither. Z will distribute the proceeds of the sale of the food stores to C and D in a pro rata redemption. Z will over time convert its shoe inventory to upscale footwear made in Italy and Brazil.
a. The pro rata distribution is a dividend to C and D.
b. The pro rata distribution is a dividend to C and D since they did not surrender any shares for redemption.
c. The pro rata distribution is not essentially equivalent to a dividend under 302(b)(1).
d. The pro rata distribution is essentially equivalent to a dividend under 302(b)(4).
e. None of the above.
7. C and D organized Z Corporation 10 years ago, each contributing $40,000 and each receiving 400 shares of common stock. Five years ago, in June, Z declared a one for one dividend payable in pure preferred with a $400 fair market value. The value of the common stock after the distribution was $1,600 per share. In that year, five years ago, Z had accumulated E&P of $52,000 and current E&P of $12,000. In the current year, Z has accumulated E&P of $112,000 and current E&P of $8,000. In December of the current year, C sells all of his preferred stock to E for $36,000. In June of that same year, C had previously sold all of his common stock to F for $200,000, E is C's son.
a. There is a complete termination of C's interest so that the preferred stock is excepted from the 306 rules.
b. 306 applies to C's sale of the preferred. All $36,000 is treated as ordinary income.
c. The 306 rules apply to C's sale of the preferred. Of the $36,000 sales price, $32,000 is treated as ordinary income.
d. None of the above.
8. Same facts as Question 7 except that shortly after receiving the preferred stock, C contributed to a charity and the charity shortly thereafter sells it to Z Corporation for $36,000.
a. C has a charitable contribution of $36,000.
b. C's charitable contribution is not reduced by the ordinary income
component of $32,000 resulting in a charitable contribution of $4,000.
c. The IRS might argue that there is no charitable contribution but rather a straight sale to the corporation Z by C resulting in $36,000 of ordinary income.
B and C.
e. None of the above.
9. Same facts as Question 7, except in the current year Z redeems all of C's preferred stock in exchange for $36,000.
a. 306 does not apply to this transaction. The entire $36,000 is ordinary income.
b. 306 does not apply to this transaction. Of the redemption proceeds, $32,000 is ordinary income.
c. 306 does not apply because of the complete termination of the preferred stock interest.
d, None of the above.
10. Z owns a rental building (its only asset) with a gross fair market value of $5,000 subject to the nor-recourse mortgage of $2,000. Z's adjusted basis for this building is $1,500. All of Z's stock is owned by C, whose basis for his stock in Z is $500. Z had 1,000 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by Z on $3,500 gain is $1,250 and on $3,000 gain is $1,000. Z sells the building, subject to the mortgage, to D in the current year for $3,000 in cash. Z then liquidates, distributing all of the cash (remaining after paying its taxes) to C in cancellation of C's stock in the current year.
a. Z's gain on the sale of the building is $1,500.
b. Z's E&P goes over to purchaser, 0, if D is a corporation.
c. Section 331 treats C as selling its stock to Z.
d. None of the above
11. Same facts as Question 10, except that Z adopts a plan of complete liquidation instead of selling the building to D. Z distributes the building to C "in-kind" pursuant to the plan. C then sells the building to D for $3,000 in cash with D taking subject to the mortgage of $2,000.
a. Section 336 treats Z as selling the building to C for $5,000.
b. Z will recognize $3,500 gain which is probably ordinary under Section 1239.
c. C will take the property subject to both $2,000 mortgage and most likely a $1,250 tax due from Z to the IRS.
d. C's basis will be the fair market value of $5,000 under Section 334(a).
e. All of the above.
12. Same facts as Question 11, except that Z is an S Corporation and Section 1374 does not apply.
a. Z has $1,500 gain.
b. C has a $2,500 gain on the distribution.
c. C has a $1,000 ordinary loss on the distribution under Section 1244 if that section applies.
d. C has $1,000 capital loss.
e. None of the above.
13. Same facts as in Question 10, except that D agrees to pay Z an additional contingent amount for the building in order to induce Z to sell. The gross fair market value of Z's property is actually $5,000. D also agrees to give a Z "contingent" right to receive from D an additional $2,500 over 10 years if D earns profits from the building in excess of profits historically earned.
a. If the transaction is held open, Z will recognize $3,500 gain on the sale.
b. Upon collecting additional amounts from D, C will recognize additional capital gain.
c. Upon collecting additional amounts from D,. Z might also be expected to recognize additional gain, although Bittker & Eustice apparently take a contrary position.
d. None of the above.
e. All of the above, except D.
14. Same facts as Question 10, except that C contributes to Z securities with a basis of $5,000 and a value of $1,500 in the preceding year so that C's stock basis increases to $5,500. Z then sells the securities to D for $1,000 along with the building as previously sold.
a. Z will recognize a $4,000 loss on the sale of the securities.
b. Z will recognize a $500 loss on the sale of the securities under 336(d)(2),
even if the presumption of tax avoidance purpose is rebutted.
c. Neither of the above.
15. Corporation W owns 100% of the common stock of Corporation Z with a basis of $300. Z owns a rental building (its only asset) with a gross fair market value of $3,000, subject to a non-recourse mortgage of $1,200. Z's adjusted basis for this building is $900. Z has $600 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Z and W do not report on a consolidated basis. Z distributes the building to W in complete liquidation and W sells the building to Corporation V for $1,800 cash, subject to the debt.
a. W recognizes no gain on the liquidation under Section 332
b. Z has gain on the liquidation under Section 336.
c. W would recognize gain on the sale to V.
d. All of the above.
e. None of the above.
16. Same facts as Question 15, except that the liability on the building is $3,300 rather than $1,200.
a. W recognizes no gain or loss on the liquidation under Section 332.
b. Z recognizes $2,400 gain under Section 336.
c. Neither of the above.
d. Both A and B of the above.
17. Same facts as Question 15, and W owes Z additionally $1,200.
a. W has forgiveness of indebtedness income on the liquidation.
b. Section 332 does not apply.
c. Section 332 applies and W recognizes no income
d. None of the above.
18. Same facts as Question 15, except that W sells the Z stock to V for $1,800 cash instead of selling the building following a liquidation.
a. V should make a Section 338 election as a normal procedure in order to obtain a cost basis in the Z assets.
b. V should make a Section 338 election because of the tax under 338 on the hypothetical sale.
c. V should make a 338 election if it is an S Corporation.
d. None of the above.
19. Same facts as Question 15, except that besides W Corporation several shareholders own Z's pure preferred outstanding stock which represents 1/4 of the is equity value and which is entitled to 1/4 of Z's net asset value upon liquidation. Assume 1504(a)(4)(C) is met.
a. 332 does not apply because W does not own 80% of the voting stock and value of all classes of stock.
b Neither W nor the pure preferred shareholders would recognize gain.
c. Z would recognize no gain on a distribution of the building in-kind proportionately to W and the pure preferred shareholders.
d. Z would recognize gain under 337 on the distribution of the building in-kind since neither shareholder is an 80% distributee.
e. None of the above.
20. J owns all the stock of T. T's only asset is a thoroughbred racing track with an adjusted basis of $1,200,000 and a fair market value of $3,000,000. J's basis in the T stock is $1,000,000. P, a corporate developer of shopping malls wants to acquire the race track for a mall site. P and J agree on a Type C reorganization, with T trading the race track for P stock worth $2,580,000 and $20,000 in cash and then liquidating. P will give T some treasury shares P bought in the market for $2,000,000. Assume this will qualify as a good Type C reorganization to which T and P are "parties to a reorganization."
a. Upon the transfer of the race track to P for the stock and cash, T will recognize gain of $20,000.
b. The transaction is good Type C reorganization per the 368(a)(1); the exchange will not violate the continuity of business enterprise rule because P will use the race track in a different business.
c. T will recognize any gain under Section 361 because it distributes the boot in liquidation as required.
d. None of the above.
21. Same facts as Question 20.
a. Upon Ts distribution of the P stock and cash to J, T recognizes no gain under Section 336(c) and Section 361(c).
b. Upon the distribution of the P stock and cash, T has recognized gain of $20,000 on the distribution of the boot.
c. Upon the distribution of the P stock and cash, T has gain of $2,580,000 less $1,200,000 less $20,000.
d. None of the above.
22. Same facts as Question 20.
a. Upon the distribution of the P stock and cash by T to J, J recognizes no gain due to Section 354,
b. Upon the distribution of P stock and cash by T to J, J recognizes gain of $20,000. J's basis in the P stock will still be $1,000,000.
c. Upon the distribution of P stock and cash by T to J, J recognizes $20,000 gain. J's basis in the P stock will be $1,000,000 less $20,000.
d. None of the above.
23. Same facts as Question 20.
a. P recognizes gain on the transfer of the treasury stock because of Section 1032.
b. P takes a transferred basis from T of $1,200,000 plus $20,000 gain recognized under Section 362.
c. P takes a transferred basis from T of $1,200,000 under Section 362.
d. A and B.
e A and C.
24. Same facts as Question 20, except J incorporated the race track just prior to doing the deal with P. J used Section 351 to incorporate the track. Also, J and P decide to do a Type B stock for stock reorganization rather than a Type C reorganization as in Question 20.
a. This is a good Section 351 followed by a good Type B reorganization so that J can avoid tax. The taxpayer is free to arrange transactions to minimize tax.
b. The IRS might well argue that the two transactions are too closely related under the step transaction doctrine and treat the transaction as if J had sold the assets to P which would have happened if J had not incorporated shortly before the Type B reorganization.
c. Neither of the above.
25. In an S Corporation which of the following items is not separately stated under Section 1366?
a. Net income from business operations.
b. Long-term capital gain, short-term capital gain, long-term capital loss, short-term capital loss.
c. 1231 gains, 1231 losses.
d. All of the above.
e. None of the above.
26. An S Corporation has four shareholders. The corporation has land with a fair market value of $100,000 and a basis of $20,000. The corporation distributes the land in-kind to the four shareholders. Each shareholders' basis in the corporation is $1,000. Assume the corporation has always been an S Corporation. Assume also that the AAA balance prior to the property distribution is zero.
a. Each shareholder has a $20,000 gain.
b. Each shareholder has a $20,000 gain and a $4,000 gain.
c. Each shareholder has a $4,000 gain.
d. Each shareholder has no gain or loss until selling the property.
e. None of the above.
27. Same facts as Question 26, except the corporation has accumulated E&P of $16,000.
a. Each shareholder has a gain of $20,000.
b. Each shareholder has a dividend of $4,000.
c. Each shareholder has a gain of $20,000 and a dividend of $4,000.
d. Each shareholder has no gain or loss until the property is sold.
e. None of the above.
28. Shareholder A is the sole shareholder in S Corporation, an S Corporation. On January 1 of the tax year specified for the exam, A's basis is $70,000. During that same year, the corporation has non-separately stated income of $30,000. A 1231 gain in the first half of the year of $3,000 and a charitable contribution in the second half of the year of $2,000. On July 1, of the same year, A sells his stock to B for $150,000.
a. A's gain is $80,000.
b. A's gain is $45,000.
c. A's gain is $62,000.
d. A's gain is $64,500
e. None of the above.
29. Corporation S elects S Corporation status effective January 1 of the tax year specified for the exam. J is the sole shareholder having a basis of $450,000 in his stock. S has accumulated earnings in profits of $600,000. During the same year, S has net earnings of $150,000. S distributed $1,350,000 to J during the tax year.
a. The distribution is tax free.
b. $600,000 of the distribution is tax free. The remaining $650,000 is taxable.
c. $600,000 of the distribution is tax free, $600,000 is a dividend, and the remaining $150,000 is treated as income from the sale or exchange of stock.
d. None of the above.
30. Corporation S is an S Corporation which elects S status effective January 1 of the tax year specified for the exam. Sole shareholder J has a basis of $400,000 in his stock. At the same time, S has $200,000 in accumulated earnings and profits. For the same tax year, S has the following items of income and expense:
Gross Business Income $250,000
Dividend Income 150,000
Business Expenses 100,000
Expenses Related to Dividends 50,000
a. J has non-separately stated income of $150,000 and dividend income of $100,000.
b. J has non-separately stated income of $150,000 and dividend income of $83,333.
c. Neither of the above.
31. Buff and Buffy are real estate speculators each of whom over the past 10 years have bought and sold vast acres of unimproved land in Temecula, Lake Elsinore and Hemet. Their most recent purchase is dry lake bottom in Elsinore. Biff and Buffy together with Regina, a tax lawyer, and Dirk and Edward, cosmetic surgeons, purchased the Elsinore land. On advice of Regina, they transferred the land to a newly formed S Corporation. They had held it for two years during the Riverside County land recession and made no effort to sell it. After holding the land for six years, the S Corporation sold 1/3 for a $100,000 gain and then the remaining 2/3 for a $300,000 gain. The sales were on the installment method and as the corporation collected the money it was invested in Elsinore Water District bonds.
a. The gain on the sale of the land is most likely capital gain at the corporate level and flows through to the shareholders with the same character.
b. The gain on the sale flows through as ordinary income to Biff and Buffy with capital gain to the remaining shareholders.
c. Since the corporation was formed to convert ordinary income for some shareholders to capital gain, the gain is ordinary income to all shareholders.
d. None of the above.
32. Sixteen years ago, Biff, Buffy, and Buffy, Jr. organized Beach Wear Inc. (BWI) to sell beach wear throughout California. The sole class of common stock of BWI is owned by Buffy (60%) and her husband, Biff (20%), and Buffy, Jr. (20%). On December 1 of the tax year specified for the exam, BWI files an S election. As of December 31 of that same tax year, BWI's balance sheet includes the following:
Asset AB FIVIV
Accounts Receivable $ 0 $300,000
Payments Due Under
Installment Sale $450,000 $600,000
Machinery $ 0 $225,000
During the next tax year, BWI collected the accounts receivable receiving $300,000. BVVI also collected the one of two payments still due on the installment sale of $300,000. BWI's taxable income for the same tax year is $900,000.
a. There is no built-in gain.
b. There is built-in gain of $675,000 of which $375,000 was recognized in the tax year specified for the exam.
c. The flow-through of the built-in gain to Buffy is $225,000.
d. None of the above.
33. Same facts as Question 32, except that BWI has a net operating loss for the year ended December 31 of the tax year before the year specified for the exam in the amount of $300,000.
a. The NOL reduces the taxable income calculated as if the S Corporation were a C Corporation under 1374(d)(2)(A).
b. The NOL reduces the recognized built-in gain of $375,000 by the $300,000 for purposes of the tax calculation.
c. The NOL does not reduce the flow-through of the $300,000. Only the built-in gain tax reduces the flow-through of the $300,000.
d. B and C.
34. BWI of Question 32 holds real estate for investment at the time of its S election.
Its S election is effective January 1 of the tax year specified for the exam. During that same tax year, it sells land for $915,000 less 10% costs with a basis of $300,000. Installment payments are made of $165,000 in the same tax year, $150,000 in the next tax year, $150,000 in Year 3, $450,000 in Year 4. BWI's income from operations was $300,000 in Year 1, a loss of $150,000 in Year 2, income of $450,000 in Year 3, and income of $600,000 in Year 4.
a. In Year 2, BWI will owe no built-in gain tax under 1374(d)(2)(A).
b. In Year 3, BWI will owe built-in gain tax based on $150,000 collected times 57.21 % gross profit percentage times 35% or $30,035.
c. In Year 3, BWI will owe twice as much built-in gain tax as answer B or $60,070.
d. A and B.
e. A and C.
35. BVVI of Question 32 invested in common stock of another corporation, Apple Computer, which represented a fractional interest in the company. BWI elected S status beginning January 1, of the year specified for the exam. BVVI purchased the Apple stock for $300,000 in January, 10 years ago. On December 31, of last year, the stock was still worth $300,000. On December 30, the same specified year, the stock was sold for $900,000. BVVI had earnings on profits as a C Corporation of $600,000 on December 31, last year. BVVI had the following items of income and expenses for December 31, this specified year.
|
Operational Income Tax Exempt Income Gain from sale of Apple Stock
|
$1,155,000 45,000 600,000
|
|
|
Total Income
|
|
$1,800,000
|
|
Operational Expense
|
$600,000
|
|
|
Depreciation
|
15,000
|
|
|
Investment Advice
|
18,000
|
|
|
Interest Expense
|
117,000
|
|
|
Total Expenses
|
|
750,000
|
|
Total Net income
|
|
$1,050,000
|
a. Built-in gains tax is due.
b. Excess net passive investment income tax is due.
c. Passive investment income tax is due since the gains from the stock and tax exempt income totaling $645,000 are more than 25% of the $1,800,000 gross receipts.
d. None of the above.