Response to the following multiple choice questions:
1. Al Bundy owns Bundiful World, a sole proprietorship. He incorporates as Bundiful, Inc. transferring all of the proprietorship's assets (FMV: $350,000, basis: $ 275,000) for all of the stock. Bundiful, Inc. also assumes $15,000 of liabilities, $14,500 were business related, the remaining $500 was for a DVR so his wife, Peg, could record Oprah.
Based on the above:
a. Bundiful, Inc. has an asset basis of $275,000; Al has a stock basis of $260,000.
b. Bundiful, Inc. has an asset basis of $290,000; Al has a stock basis of $260,000.
c. Bundiful, Inc. has an asset basis of $290,000; Al has a stock basis of $290,000.
d. Bundiful, Inc. has an asset basis of $275,000; Al has a stock basis of $275,000.
e. Bundiful, Inc. has an asset basis of $290,000; Al has a stock basis of $275,000.
2. Archibald Leach incorporates his sole proprietorship as Cary On, Inc.. He transfers Cash of $12,000 and real estate (FMV: $200,000. basis: $135,000). Cary On assumes a mortgage on the real estate of $155,000 and accounts payable of $5,000 (all business use). Archie is on the cash basis. With respect to this transaction:
a. Cary On has a basis in the real estate of $135,000.
b. Cary On has a basis in the real estate of $135,000.
c. Archie recognizes gain of $8,000.
d. Archie recognizes gain of $13,000.
e. Archie recognizes gain of $20,000.
3. Lucy and Desi form Babaloo, Inc. Lucy contributes business property (FMV: $200,000, basis $100,000) and provides managerial services in organizing Babaloo (FMV: $50,000). Desi contributes business property (FMV:$250,000, basis $75,000). Each receives one-half of the stock. With respect to the transfers:
a. Lucy and Desi will recognize gain.
b. Lucy will recognize gain of $100,000 and income of $50,000.
c. Babaloo will have a basis of $150,000 in Lucy's property.
d. Babaloo can take a business deduction of $50,000.
e. None of the above.
4. Al formed Bundiful, Inc. under § 351 by contributing property (FMV: $21,000, Basis: $25,000) for stock which qualified as § 1244 stock. Five years later, Bundiful goes bankrupt, Al will get nothing. Al's current basis in the stock is still $24,000. Al, who is still married with children, owned the stock as an investment. He can deduct:
a. $25,000 long-term capital loss.
b. $25,000 ordinary loss.
c. $24,000 ordinary loss and $1,000 long-term capital loss.
d. $21,000 ordinary loss and $4,000 long-term capital loss.
e. $21,000 ordinary loss and $3,000 long-term capital loss.
5. Who's On, Inc. is owned equally by Bud and Lou. It reports on the calendar year. Who's on makes a distribution to Bud of $180,000 on April 30 and a distribution to Lou of $420,000 on September 25. Current E & P is $210,000 and accumulated E & P is $200,000. As a result:
a. Bud and Lou each have a dividend of $205,000.
b. Lou has a dividend of $230,000 and a return of capital of $190,000.
c. Bud has a dividend of $123,000 and a return of capital of $57,000.
d. Lou has a dividend of $287,000 and a return of capital of $133,000.
e. Both c and d..
6. Fly by Night, Inc. is a calendar year corporation. On January 1, it had accumulated E&P of $200,000. During the year, it generated a deficit in current E&P of $90,000. On July 1 (of a leap year) it distributed $210,000. What part of that distribution was a dividend?
a. $0.
b. $110,000.
c. $200,000.
d. $155,000.
e. $90,000..
7. Chico is the sole shareholder of Flywheel, Inc.On January 1, his stock basis is $60,000. Flywheel has accumulated E&P of $5,000. It generates current E&P for the year--from business operations only(but before any distributions)--of $10,000. On August 15, Flywheel distributes some unused property (FMV: $35,000, basis: $25,000). On September 15, Chico sells his shares to Gummo for $90,000. Which of the following statements is true?
a. Chico recognizes a $50,000 gain on the sale of his stock.
b. Chico recognizes a $40,000 gain on the sale of his stock.
c. Chico receives $15,000 of dividend income.
d. Chico receives $20,000 of dividend income.
e. Chico recognizes a $30,000 gain on the sale of his stock.
8. Diego was the sole shareholder of Zeee, Inc., a calendar year corporation. His stock basis on the first of the year was $50,000. On April 13, he received a cash distribution from Zeee of $60,000. On August 18, he sold his shares to Bernardo for $110,000. On November 16, Zeee made a cash distribution to Bernardo of $30,000. Zee had accumulated E&P on January 1 of $30,000 and generated total current E&P (prior to any distributions) of $45,000. , Which of the following statements is correct?
a. Diego recognizes a $70,000 gain on the sale of the stock.
b. Bernardo's ending stock basis is $110,000.
c. Diego recognizes dividend income of $25,000.
d. Bernardo recognizes dividend income of $30,000.
e. Bernardo's ending stock basis is $95,000.
9. Bravo, Inc. distributes land (FMV: $50,000, basis: $60,000) to Duke, a shareholder. It has current E&P for the year of $10,000. It has no accumulated E&P. The land is subject to a liability of $35,000 that Duke assumes. Duke has:
a. A taxable dividend of $15,000.
b. A taxable dividend of $10,000.
c. A taxable dividend of $25,000.
d. A basis in the land of $35,000.
e. A basis in the land of $60,000.
10. Five years ago, Bernard Schwartz bought 100 shares of Curtis, Inc. stock for $5,000. This year, Curtis declared a non-taxable distribution of stock rights. One right is issued for each two shares of stock owned. Each right allows for the purchase of one share of Curtis, Inc. stock for $50. At the date of distribution, the rights are worth $1,000 (50 rights at $10 per right) and Bernie's stock is worth $9,000 (or $90 per share). Bernie sells 25 stock rights for $12 per right and uses the other 25 rights to buy Curtis stock. Which of the following is true?
a. Bernie has a gain of $50 on the rights and a basis in the new stock of $1,250.
b. Bernie has a gain of $300 on the rights and a basis in the new stock of $1,750.
c. Bernie has a gain of $50 on the rights and a basis in the new stock of $1,500.
d. Bernie has a gain of $0 on the rights and a basis in the new stock of $1,750.
e. Bernie has a loss of $50 on the rights and a basis in the new stock of $1,500.
11. Dean and Jerry are equal shareholders in Pardners, Inc. Last year it sold an asset for $100,000 (basis of $50,000) on the installment basis. It was to be paid in two installments. The first was received this year, the second is due next year. Including the $25,000 profit on the sale received this year, Pardners had taxable income of $175,000. Parrdners is just starting t turn a profit, so it had no accumulated E&P at the start of the year. Dean and Jerry each received a distribution of $100,000 this year. How much of each of their distribution will be taxed as a dividend?
a. $0.
b. $100,000.
c. $75,000.
d. $87,500.
e. None of the above.
12. Fly by Night, Inc. had accumulated E & P of $50,000 on January 1, 2012. In 2012, it incurred an operating loss of $70,000. It distributed cash of $40,000 to Pam, its sole shareholder, on July 1, 2012. Fly by Night's balance in its E & P account as of January 1, 2013, is:
a. $70,000 deficit.
b. $20,000 deficit.
c. $90,000 deficit.
d. $35,000 deficit.
e. None of the above.
13. Shellhead Corporation makes a property distribution to its sole shareholder, Tony. The property distributed had a FMV of $125,000 and basis of $95,000. Tony assumed a lien on the property of $135,000. Prior to the distribution, Shellhead had current E&P of $35,000 and accumulated &P of $55,000 and Tony has a stock basis of $50,000. Shellhead made no other distributions during the current year. Which of the following is true?
a. Shellhead has a gain of $30,000.
b. Tony has a dividend of $30,000.
c. Tony has a capital gain $75,000.
d. Tony recognizes no gain or dividend income.
e. Tony has a loss of $10,000.
14. Wayne Corporation has 1,000 shares of stock outstanding. Bruce owns 300 shares, his father, Thomas, owned 200 shares, Damien, his son, owns 100 shares, and Damien's wife, Luna, owns 200 shares. Riddle Corporation owns the other 200 shares in Wayne Corporation. The Pennyworth partnership owns 85% of Riddle. Bruce owns half of Pennyworth and Luna owns the other half. Thomas is deceased, and Bruce is the sole heir of the estate. Applying the §318 stock attribution rules, how many shares does Bruce own in Wayne Corporation?
a. 400.
b. 600.
c. 800.
d. 685.
e. None of the above.
15. Hamilton, Joe Frank and Reynolds, all, unrelated individuals, own all of the stock in Vinyl Corporation. Hamilton owns 1,900 shares; Joe Frank, 600 shares; and Reynolds, 500 shares. Vinyl redeems 900 of Hamilton's shares (basis of $60,000) for $100,000 at a time when it has E&P of $400,000. With respect to this transaction::
a. Hamilton has a capital gain of $40,000.
b. Hamilton has dividend income of $40,000.
c. Hamilton has dividend income of $100,000.
d. Hamilton has a capital gain of $100,000.
e. None of the above.
16. Al and Bud Bundy, father and son, each own 50% of the stock outstanding of Bundiful Corporation (E & P of $200,000). During the current year, Bundiful redeems all of Bud's shares for $950,000. The transaction cannot qualify as a complete termination redemption if:
a. Three years after the redemption, Bud inherits Al's stock.
b. Bud goes to work for Soleless, Inc., a subsidiary of Bundiful..
c. Al defaults on a loan from bud and he forecloses on the Bundiful stock Al pledged as security two years following the redemption.
d. Bud's mother, Peg, gets appointed to the board of directors five years following the redemption.
e. More than one of the above is correct.
17. Gomez owns 800 shares of Handy Thing Enterprises, Inc. which he bought 8 years ago for $100,000. Handy has operated 6 different business for the last 11 years. This year, handy has decided to terminate its line of mummy apparel and concentrate on its zombie outfitters store. It sells off the mummy line related assets and distributes the proceeds to all of the shareholders, pro rata, in redemption of 10 % of their shares. Gomez receives $45,000 for his 80 shares redeemed. Handy has $500,000 E&P at the time of the distribution. As a result of this transaction, Gomez will recognize:
a. $55.000 long-term capital loss.
b. $45,000 dividend income.
c. $35,000 dividend income.
d. $35,000 long-term capital gain.
e. Gomez has no gain, loss or dividend income..
18. Jonathan Kent used his farm subsidies to buy 28% of LexCorp for $1,600,000 and 32% of WayneCorp for $550,000 several years ago. He died this year leaving an adjusted gross estate of $6,525,000, including the LexCorp stock now worth $1,350,000 and the WayneCorp stock now worth $975,000. His wife, Martha, and his son, Clark are the sole heirs of the estate. They own the balance of the stock of both corporations, each of which has substantial E&P.. The estate has funeral and administration expenses of $1,175,000. LexCorp redeems all of the estate's shares for $1,350,000 with IBM shares (basis of $1,400,000). Which of the following is a correct statement regarding the tax consequences of this redemption?
a. The estate recognizes a loss of $250,000 on the redemption.
b. LexCorp recognizes a loss of $50,000 on the distribution of the stock.
c. The estate recognizes no gain or loss on the redemption.
d. The estate has a basis of $1,400,000 in the IBM stock.
e. The estate recognizes dividend income of $175,000 on the redemption.
19. In a qualified redemption of 59 shares, Babaloo Corporation distributes equipment (FMV: $100,000, basis: $135,000) To Desi, a shareholder. Desi's basis in the shares is $75,000. The equipment is distributed subject to a lien of $145,000. With respect to the redemption:
a. Babaloo Corporation will recognize a loss of $35,000.
b. Babaloo Corporation will recognize a gain of $35,000.
c. Desi will recognize a gain of $25,000.
d. Desi will have a basis in the equipment of 100,000..
e. Desi will recognize no gain or loss.
20. Lobo, Inc. distributes property (FMV: $35,000, basis: 40,000). Duke takes subject to a lien on the property of $45,000 as a dividend to its shareholder Duke.Lobo recognizes:
a. A loss of $5,000.
b. A gain of $5,000.
c. A gain of $10,000.
d. A loss of $10,000.
e. No gain or loss.
21. Five years ago, Shemp bought 100 shares of Susquehanna Hat Corporation for $9,000. Two years ago he received a non-taxable preferred stock dividend of 50 shares from Susquehanna. At that time, the common stock had a FMV of $20,000, the preferred had a FMV of $10,000, and Susquehanna had E&P of $25,000. Last year, Shemp sold the preferred to Zeppo, an unrelated individual for $12,000. At that time Susquehanna had E&P of $8,000. This year, Shemp sold his common to Claude, also unrelated, for $23,000. With respect to these sales:
a. Shemp has a $17,000 capital gain on sale of the common.
b. Susquehanna reduces its E & P by $10,000.
c. Shemp has an $8,000 dividend and a $1,000 capital gain on sale of the preferred.
d. Shemp has a $10,000 dividend and a $1,000 capital loss on sale of the preferred.
e. None of the above.
22. Ed Norton received a non-taxable preferred stock dividend five years ago from Sewer Sweet, Inc. At that time, Sewer had E&P of $25,000 and the preferred had a FMV of $15,000. He allocated $4,000 of his common basis to the preferred. Two years ago, he gave the preferred stock to his friend, Ralph Kramden (Ralph is unrelated to Sewer or Norton). This year, Sewer redeemed the preferred from Ralph for $17,000. Its E&P at the redemption was $10,000. With respect to the stock redemption:
a. Ralph will recognize dividend income of $15,000 and a capital loss of $2,000.
b. Sweet reduces its E & P by $15,000.
c. Ralph will recognize dividend income of $10,000 and a $3,000 capital gain.
d. Ralph will recognize capital gain of $13,000.
e. Sweet reduces its E & P by $17,000.
23. Al owns 100% of Bundiful Corporation and 30% of No'Mam, Inc. 70% of No'Mam is owned by XTerminator partnership in which Al's daughter Kelly is a 30% partner. Al sells 54% of his Bundiful shares to No'Mam for $60,000, the FMV. At the time, his basis in the shares sold is $35,000, Bundiful has E&P of $25,000 and No'Mam has E&P of $40,000. Al bought the stock five years ago. As a result of the sale:
a. Al has dividend income of $40,000.
b. Al has long-term capital gain of $25,000.
c. No'Mam has a deficit in E&P of $20,000.
d. Al has long-term capital loss of $35,000.
e. None of the above.
24. Upon complete liquidation, Sewer Sweet Corporation distributes its remaining asset, acquired seven years ago, pro rata to its shareholders, Ralph and Norton. The asset had a FMV of $25,000, basis of $40,000 and is subject to a liability of $35,000. As a result of the distribution:
a. Sewer recognizes no gain or loss.
b. Sewer recognizes a $15,000 loss.
c. Sewer recognizes a $5,000 loss.
d. Sewer recognizes a $10,000 gain.
e. None of the above.
25. The stock in Susquehanna Hat Corporation is held by Curly (30%), Larry (40%) and Moe (30%). Moe and curly are brothers, Larry is unrelated. Two years ago, Larry contributed property to the corporation in a §351 transaction (FMV: $70,000, basis: $65,000). Pursuant to their plan of liquidation, Susquehanna will distribute the property to them pro rata. At the time of distribution, its FMV was only $45,000. As a result of the distribution:
a. Susquehanna will recognize no gain or loss.
b. Susquehanna will recognize a loss of $20,000.
c. Susquehanna will recognize a loss of $8,000.
d. Susquehanna will recognize a loss of $12,000.
e. Susquehanna will pay a dividend of $16,000.
26. The stock in Helping Hand, Inc. is owned 15% by Gomez Adams, 25% by his wife, Morticia, 30% by Uncle Fester, Gomez's brother, and 30% by Grammama, the grandmother of Gomez and Fester. Helping Hand plans to distribute some land to all four shareholders, pro rata, in complete liquidation. The land was contributed by Grandmama three years ago in a transaction that qualified under §35 At the time, it had a FMV of $250,000 and a basis of $200,000. At time of distribution, the FMV is $100,000. What amount of loss will Helping Hand, Inc. recognize on the distribution of the property?
a. $0.
b. $25,000.
c. $30,000.
d. $60,000.
e. $100,000.
27. Jed, his daughter, Ellie May, and his nephew, Jethro, Clampett formed Whee, Doggies, Inc. several years ago as equal shareholders. It was a construction company specializing in installing cement ponds in Beverly Hills. Last year, in a transaction qualifying under §351, Jed and Ellie May transferred additional property to the corporation. Jed transferred a tar pit he thought he could use to trap dinosaurs to make oil (FMV: $100,000, basis $150,000), a cement truck (FMV: $35,000, basis: $15,000) and some excavating equipment (FMV: $95,000, basis: $55,000). Ellie May contributed a cement mixer (FMV: $65,000, basis: $45,000). This year, the corporation adopts a plan of liquidation, sells all of its assets {except one item of the excavating equipment (FMV:$10,000, basis: $25,000)} and distributes the proceeds and equipment pro rata to Jed, Ellie May and Jethro. The only loss realized upon sale of the other assets was on the tar pit (as the corporation never used it was allowed to deteriorate) and was sold for $50,000. What amount of loss can the corporation recognize on the liquidation?
a. $0.
b. $5,000.
c. $50,000.
d. $55,000.
e. $100,000.
28. After the war, George retired from the army and formed Custard's Last Stand, Inc. which operated a chain of roadside confectionary stands. George owned the corporation equally with his partner, Ulysses S. Custard's is on the accrual, calendar year basis but has been unsuccessful with its line of flavors: Brussels sprout, cabbage, etc. At the start of this year, it had a deficit in accumulated E&P of $90,000.
This year, Ulysses suggested a change to another line of flavors, such as bourbon, scotch, rye and gin. In addition they added a new line of antelope wings. The company took off and their tax return for the year showed taxable income of $150,000.
Custard's made a distribution to George and Ulysses of $50,000 each on June 28. On November 18, Ulysses decided to go into politics and sold his interest to George for $20,000. In December, Custard's distributed another $100,000 to George.
Custard's had the following other transactions during the year:
A. It paid federal income tax of $10,000.
B. It paid life insurance premiums on whole life policies on George and Ulysses of $11,000; the cash surrender value of those policies increased by $1,500.
C. It sold one location to Eli Whitney who had developed a new alcohol based candy confection he called "cotton gin" at a profit of $9,000. Eli paid 1/3 down and is to pay the remainder in annual installments over the next two years.
D. MACRS depreciation on their equipment amounted to $8,000; depreciation for E&P purposes was $12,000.
E. It received interest on municipal bonds of $6,000.
E. It bought new barrels to store the liquor for its ice cream and expensed the entire amount of $10,000 under §179.
F. It incurred a capital loss of $2,500. It had no capital gains.
a. Compute Custard's current E & P for the year.
b. What are the tax consequences of the two distributions made during the year to George (his stock basis at the start of the year was $15,000)?
How much is taxed as a dividend?
2. How much is a return of capital?
3. How much is taxed as a capital gain?
29. Hamilton, Joe Frank and Reynolds, all, unrelated individuals, own all of the stock in Vinyl Corporation. Hamilton owns 1,500 shares; Joe Frank, 700 shares; and Reynolds, 800 shares. Vinyl redeems 300 of Hamilton's shares (basis of $60,000) for $100,000 at a time when it has E&P of $400,000. With respect to this transaction::
A. Hamilton would like to claim this as a capital transaction (i.e. a redemption). Must he report this as a dividend?
B. Explain your . Show your calculations or your reasoning, as appropriate, to substantiate your position. Note: do not discuss termination of interest as he still owns shares, nor partial liquidation as there are no facts to support this.
30. Bonus Questions:
Topic: Medical cutups.
I play a genius doctor in New Jersey, but I'm really from England. Over there I played the idiot sidekick to what character in a historical, comic series (name of character)?
2. They call him Dr. Bambi, but his chief rival is a janitor who plays air bass in what band (name of band)?
3. After Korea, I returned to Hannibal, Mo. to work at General General Hospital with Klinger. Who am I (character)?
4. I became famous sweeping chimneys and then solving murders. Who am I (name of actor)?
5. I solve murders with a former angel. They call me (nickname of character)?