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1. (TCO 1) Hunter and Warren form Tan Corporation. Hunter transfers equipment (basis of $210,000 and fair market value of $180,000), and Warren transfers land (basis of $15,000 and fair market value of $150,000) and $30,000 cash. Each receives 50% of Tan’s stock. Which happens as a result of these transfers? (Points : 5)

Hunter has a recognized loss of $30,000; Warren has a recognized gain of $135,000.
Neither Hunter nor Warren has any recognized gain or loss.
Hunter has no recognized loss; Warren has a recognized gain of $30,000.
Tan Corporation has a basis in the land of $45,000.
None of the above

 

2. (TCO 1) Samantha transferred land worth $200,000 (basis of $40,000) to Lava Corporation, an existing entity, for 300 shares of its stock. Lava Corporation has two other shareholders, Timothy and Brett, each of whom holds 50 shares. Which happens with respect to the transfer? (Points : 5)

Samantha has no recognized gain.
Lava Corporation has a basis of $200,000 in the land.
Samantha has a basis of $200,000 in her 300 shares in Lava Corporation.
Both B and C
None of the above

 

3. (TCO 2) Pelican Inc., a closely held corporation (not a PSC), has a $350,000 loss from a passive activity, $135,000 of active income, and $160,000 of portfolio income. How much is Pelican’s taxable income? (Points : 5)

($55,000)
$0
$135,000
$295,000
$160,000

 

4. (TCO 2) Silver Corporation has average gross receipts of $5.7 million, $4.6 million, and $4.8 million for the last three years, respectively. Silver is _____.  (Points : 5)

not subject to the corporate income tax
a small corporation with respect to the AMT
not subject to the AMT
not a small corporation with respect to the AMT
None of the above

 

5. (TCO 3) As of January 1, Everest Corporation has a deficit in accumulated E & P of $75,000. For tax year, current E & P (all of which accrued ratably) is $40,000 (prior to any distribution). On July 1, Everest Corporation distributes $60,000 to its sole, noncorporate shareholder. Which is the amount of the distribution that is a dividend? (Points : 5)

$0
$40,000
$60,000
$75,000
None of the above

 

6. (TCO 3) Parrot Corporation has accumulated E & P of $40,000 on January 1, 20×1. In 20×1, Parrot has current E & P of $45,000 (before any distribution). On December 31, 20×1, the corporation distributes $120,000 to its sole shareholder, Michael (an individual). Which is Parrot Corporation’s E & P as of January 1, 20×2? (Points : 5)

$0
($35,000)
$40,000
$85,000
None of the above

 

7. (TCO 4) Cardinal Corporation has 1,000 shares of common stock outstanding. John owns 300 of the shares, John’s grandfather owns 200 shares, John’s daughter owns 300 shares, and Redbird Corporation owns 200 shares. John owns 60% of the stock in Redbird Corporation. How many shares is John deemed to own in Cardinal Corporation under the attribution rules of §318? (Points : 5)

300
600
720
800
None of the above

 

8. (TCO 5) Francis exchanges her 20% interest in Beryl Corporation for 10,000 shares of Pyrite Corporation (value $200,000) and $40,000 cash. Francis’s basis in her Beryl stock is $95,000. The accumulated earnings of Beryl are $325,000, and the accumulated earnings of Pyrite are $225,000 at the time of the reorganization. How does Francis treat this transaction for tax purposes? (Points : 5)

No gain is recognized by Francis in this reorganization.
Francis reports a $40,000 recognized dividend
Francis reports a $40,000 recognized capital gain.
Francis reports a $35,000 recognized dividend and a $5,000 capital gain.
None of the above

 

9. (TCO 6) How are the members of a consolidated group affected by computations related to E & P? (Points : 5)

E & P is computed solely on a consolidated basis.
Consolidated E & P is computed as the sum of the E & P balances of each of the group members.
Members E & P balances are frozen as long as the consolidation election is in place.
Each member keeps its own E & P account.
None of the above

 

10. (TCO 11) Which statement, if any, does not reflect the rules governing the negligence accuracy-related penalty?(Points : 5)

The penalty rate is 20%.
The penalty is imposed only on the part of the deficiency attributable to negligence.
The penalty applies to all federal taxes, except when fraud is involved.
The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable, though contrary, to the IRS position.
None of the above

 

1. (TCO 7) On January 1 of the current year, Rachel and Julio form an equal partnership. Rachel makes a cash contribution of $80,000 and a property contribution (adjusted basis of $110,000, fair market value of $80,000) in exchange for her interest in the partnership. Julio contributes property (adjusted basis of $120,000, fair market value of $160,000) in exchange for his partnership interest. Which statement is true concerning the income tax results of this partnership formation? (Points : 5)

Rachel has a $160,000 tax basis for her partnership interest.
The partnership has an $80,000 adjusted basis in the property contributed by Rachel.
Rachel recognizes a $30,000 loss on her property transfer.
Julio has a $120,000 tax basis for his partnership interest.
None of the above

 

2. (TCO 7) Samantha and Rebecca are equal partners in the S&R Partnership. On January 1 of the current year, each partner’s adjusted basis in S&R was $240,000. During the current year, S&R borrowed $180,000 for which Samantha and Rebecca are personally liable. S&R sustained a net operating loss of $30,000 in the current year ended December 31. If liabilities are shared equally by the partners, which is each partner’s basis in her interest in S&R on January 1 of the next year? (Points : 5)

$135,000
$225,000
$240,000
$315,000
None of the above

 

3. (TCO 7) Naomi contributed property ($80,000 basis and fair market value of $120,000) to the ABC Partnership in exchange for a 50% interest in partnership capital and profits. During the first year of partnership operations, ABC had net taxable income of $60,000 and tax-exempt income of $56,000. The partnership distributed $24,000 cash to Naomi. Her share of partnership recourse liabilities on the last day of the partnership year was $32,000. Which is Naomi’s adjusted basis (outside basis) for her partnership interest at year-end? (Points : 5)

$110,000
$146,000
$144,000
$196,000
None of the above

 

4. (TCO 8) During 20×2, Houston Nutt, the sole shareholder of a calendar-year S corporation, received a distribution of $16,000. On December 31, 20×1, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It has no accumulated E & P. Which statement is correct? (Points : 5)

Nutt recognizes a $1,000 LTCG.
Nutt’s stock basis will be $2,000.
Nutt’s ordinary income is $15,000.
Nutt’s return of capital is $11,000.
None of the above

 

5. (TCO 8) Which statement is correct with respect to an S corporation? (Points : 5)

There is no advantage also to elect § 1244 stock.
An S corporation can own 85% of an insurance company.
An estate may be a shareholder.
A voting trust arrangement is not available.
None of the above

 

6. (TCO 9) Which reduces a shareholder’s S corporation stock basis? (Points : 5)

Depletion in excess of basis of property
Illegal kickbacks
Nontaxable income
Sales
None of the above

 

7. (TCO 9) Matt and Hillary are husband and wife, and live in Pennsylvania. Using joint funds, in 1990 they purchase an insurance policy on Matt’s life and designate their daughter, Sandra, as the beneficiary. The policy has a maturity value of $2,000,000. Matt dies first and the insurance proceeds are paid to Sandra. As to the proceeds, (Points : 5)

Matt’s taxable estate includes $0, and no other tax consequences ensue.
Matt’s taxable estate includes $2,000,000.
Matt’s taxable estate includes $0, and Hillary makes a gift of $2,000,000 to Sandra.
Matt’s taxable estate includes $1,000,000, and Hillary makes a gift to Sandra of $1,000,000.
None of the above

 

8. (TCO 10) The trustee of the Washington Trust is not required to distribute all of the current-year annual accounting income of the trust to its sole beneficiary, Betty. Which is the trust’s personal exemption? (Points : 5)

$600
$300
$100
$0
None of the above

 

9. (TCO 10) The Jain Trust is required to pay its entire annual accounting income to the Daytona Museum, a qualifying charity. Which is the trust’s personal exemption? (Points : 5)

$600
$300
$100
$0
None of the above

 

10. (TCO 10) Pam makes a gift of land (basis of $313,000; fair market value of $913,000) to her granddaughter, Tracy. As a result of the transfer, Pam paid a gift tax of $45,000. Which is Tracy’s income tax basis in the land? (Points : 5)

$343,000 if the gift was made after 1976
$358,000 if the gift was made after 1976
$328,000 if the gift was made after 1976
$313,000 if the gift was made before 1977
None of the above

 

1. (TCO 8) Blue Corporation elects S status effective for tax year 2011. As of January 1, 2011, Blue’s assets were appraised as follows.

Adjusted BasisFair Market Value
Cash$16,010$16,010
Accounts receivable–0–$55,400
Inventory (FIFO)$70,000$90,000
Investment in land$110,000$195,000
Building$220,000$275,000
Goodwill–0–$93,000

In each of the following situations, calculate any built-in gains tax, assuming that the highest corporate tax rate is 35%. C corporation taxable income would have been $100,000.

(I) During 2011, Blue collects $48,000 of the accounts receivable and sells 80% of the inventory for $99,000.
(II) In 2012, Blue sells the land held for investment for $203,000.
(III) In 2013, the building is sold for $270,000. (Points : 30)

 

 

 

 

2. (TCO 7) Chelsea owns a 25% capital and profits interest in the calendar-year CJDV Partnership. Her adjusted basis for her partnership interest on July 1 of the current year is $170,000. On that date, she receives a proportionate nonliquidating distribution of the following assets.

Partnership’s Basis in AssetAsset’s Fair Market Value
Cash$90,000$90,000
Inventory$110,000$140,000
Land (held for investment)$100,000$160,000

(I) Calculate Chelsea’s recognized gain or loss on the distribution, if any.
(II) Calculate Chelsea’s basis in the inventory received.
(III) Calculate Chelsea’s basis in land received. The land is a capital asset.
(IV) Calculate Chelsea’s basis for her partnership interest after the distribution. (Points : 30)

 

 

3. (TCO 9) Murray owns an insurance policy on the life of his father, Ethan. Upon Ethan’s death, the policy proceeds of $2,000,000 are paid to the designated beneficiary, Grace. What are the tax consequences resulting from Ethan’s death based on the following assumptions?(I) Grace is Murray’s daughter.
(II) Grace is Murray’s wife.
(III) What are the tax consequences if Murray dies first (i.e., predeceases both Grace and Ethan)? (Points : 30)

 

4. (TCO 10) In 1985, Scott and Dana acquired land for $600,000, with Scott furnishing $200,000 and Dana $400,000 of the purchase price. Title to the property is listed as equal joint tenancy with right of survivorship. Scott died first in 2011, when the land was worth $3,000,000. What is Dana’s income tax basis in the property under each of the following assumptions?(I) Scott and Dana are brothers.
(II) Scott and Dana are husband and wife.
(III) Scott and Dana are husband and wife, and the land is community property. (Points : 30)

 

5. (ALL TCOs) You are the director of a Washington, D.C., think tank focusing on tax and economic policy issues. You were recently (and informally) contacted by staff of the Congressional Joint Committee on Taxation to weigh in on a number of issues currently under consideration by the committee. In particular, the committee asked you to reflect upon the following proposed changes and/or issues:(I) The committee has proposed phasing out § 351 of the tax code.
(II) The committee has considered separating the gift and estate tax systems from one unified system to two completely independent, separate systems.
(III) The committee has considered eliminating the built-in gains tax for S corporations.The committee would like for you to summarize your conclusions regarding the potential effects — both good and bad — of these potential changes. In formulating your answer, please discuss all of the possible tax and economic implications that you see arising from these transactions on all taxpayers. (Points : 30)

 

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