Questions -
Question 1 - Fact Pattern for Questions 11 and 12: Sandra owned a rental apartment building in her sole name for four years. After her business advisors suggested that she conduct her rental activity in corporate form, she promptly transferred the apartment building to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the apartment building. At the time of the transfer of the apartment building to ABC Rental Corporation, Sandra's adjusted basis in the building was $50,000, the fair market value of the building was $150,000, the building was subject to a mortgage of $70,000 which ABC Rental Corporation assumed, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. As a result of the transaction, how much gain was recognized by Sandra and what was the character of the gain?
A. 0 gain.
B. $12,000 gain, all of which was ordinary income.
C. $20,000 gain, at least $12,000 of which was ordinary income.
D. $30,000 gain, at least $12,000 of which was ordinary income.
Question 2 - Fact Pattern for Questions 11 and 12: Sandra owned a rental apartment building in her sole name for four years. After her business advisors suggested that she conduct her rental activity in corporate form, she promptly transferred the apartment building to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the apartment building. At the time of the transfer of the apartment building to ABC Rental Corporation, Sandra's adjusted basis in the building was $50,000, the fair market value of the building was $150,000, the building was subject to a mortgage of $70,000 which ABC Rental Corporation assumed, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. As a result of the transaction, what is the corporation's basis in the building?
A. $50,000.
B. $70,000.
C. $150,000.
D. $170,000.
Question 3 - Larry formed Sleuth Corporation in order to incorporate the detective agency business that he had been operating for several years as a sole proprietorship. Larry transferred to Sleuth Corporation the detective agency's accounts receivable with an adjusted basis to Larry of $0 and a fair market value of $6,000, and the office condominium that Larry owned outright and from which he had operated the detective agency that had an adjusted basis to Larry of $30,000, a fair market value of $62,000, and as to which there was a mortgage payable of $34,000, which was assumed by the corporation. Also transferred to the corporation were accounts payable in the amount of $3,000.
In exchange for the assets transferred, Larry received 100 percent of the stock of the corporation. Which of the following statements regarding the tax consequences of the transaction is accurate?
A. Larry recognized $4,000 of his realized gain.
B. Larry recognized $7,000 of his realized gain.
C. The corporation's basis in the condominium it received from Larry is $30,000.
D. Larry recognized $6,000 of ordinary income upon the assignment of receivables.
Question 4 - ABC Inc. had current earnings and profits of $50,000 when it distributed to an individual shareholder land that the corporation held as an investment. On the date the land was distributed, ABC Inc.'s adjusted basis in the land was $10,000, the fair market value of the land was $50,000, and the land was encumbered by a $30,000 mortgage, which liability was assumed by the shareholder. There were no other transactions that might affect ABC Inc.'s earnings and profits for the year. What was the amount of ABC Inc.'s earning and profits at the end of the year?
A. $30,000.
B. $50,000.
C. $60,000.
D. $70,000.
Question 5 - EFG Inc. distributed land to an individual shareholder in a nonliquidating distribution. On the date the land was distributed, EFG Inc.'s adjusted basis in the land was $20,000, the fair market value of the land was $75,000, and the land was encumbered by a $35,000 mortgage, which liability was assumed by the shareholder. The corporation's earnings and profits were $300,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporation's earnings and profits. As a result of the distribution, how much is the amount of dividend income to the shareholder, and what is the shareholder's basis in the distributed property?
A. Dividend income of $20,000 and basis of $20,000.
B. Dividend income of $40,000 and basis of $20,000.
C. Dividend income of $40,000 and basis of $40,000.
D. Dividend income of $40,000 and basis of $75,000.
Question 6 - XYZ Corporation distributed land Jim, its sole shareholder, in a liquidating distribution. At the time of the distribution, the land had a fair market value of $120,000 and XYZ Corporation's adjusted basis in the land was $100,000. The land was encumbered by a $140,000 mortgage, which mortgage was assumed by the shareholder. How much gain did XYZ Corporation recognize as a result of the distribution?
A. 0.
B. $20,000.
C. $40,000.
D. $100,000.
Question 7 - FAS Inc. had one class of stock outstanding. The one class of stock was owned 50 percent by Fred and 25 percent by each of Fred's two sons. In the current taxable year, FAS Inc. redeemed 25 percent of Fred's 50 percent, and in exchange for the stock, FAS Inc. distributed to Fred a building that had an adjusted basis to FAS Inc. of $10,000 and a fair market value of $50,000. Assume that FAS Inc.'s current earnings and profits were $200,000, there were no accumulated earnings and profits, and Fred's total basis in his stock before the redemption was $20,000. What is Fred's basis in his remaining stock after the redemption, and what is his basis in the building distributed to him?
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.
Question 8 - 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 true?
A. The net adjustment to MNO Inc.'s earnings and profits is an increase of $15,000, (the excess of the liability over the adjusted basis in the land).
B. The net adjustment to MNO Inc.'s earnings and profits is an increase of $40,000, (that is, equal to the amount of gain realized by the corporation).
C. The corporation's realized gain of $40,000 is recognized to the extent of the $15,000, (the excess of the liability over adjusted basis in the land).
D. The shareholder's basis in the land distributed by the corporation to the shareholder is $80,000, (which is the fair market value of the land).
Question 9 - XYZ Corporation distributed to its shareholders a total of $30,000 in cash plus property that had a fair market value of $80,000 and a basis of $60,000. The corporation's earnings and profits were $100,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporation's earnings and profits. How much was the total dividend income received by the shareholders as a result of the distributions made by XYZ Corporation?
A. $50,000.
B. $90,000.
C. $100,000.
D. $110,000.
Question 10 - 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. The redemption was substantially disproportionate for:
A. Michael and Joseph.
B. Michael and John.
C. Joseph only.
D. Michael only.