Taxation and Business Law

For each question , unless the question expressly provides to the contrary, you should assume that:

1. all events occurred in ‘the current taxable year;’
2. all persons are United States citizens;
3. there is no tax avoidance purpose for any transaction, and that with respect to any mortgage on any property, there was a bona fide business purpose for incurring or assuming the debt;
4. whenever a party receives encumbered property, the party   assumed the mortgage, even if not specifically stated;
5. there is no special election made unless the facts specifically state that there is an election made and in effect;
6. in all cases, that there is only one class of stock issued and outstanding in any corporation, and that class is common voting stock;
7. with respect to each partnership question, the partnership has no hot assets, has no debts or other liabilities, and does not have a Section 754 election in effect;
8. with respect to each partnership question, each partnership is a general partnership; and
9.  with respect to each partnership question, there are no special allocation provisions contained in any partnership agreement.

Choose the letter for the choice that best answers the question or completes the sentence.

Questions

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, Sue, 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.  Corporation 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    $25,000

How much is Corporation’s charitable contribution deduction for the current taxable year?

a.    $15,000.

b.    $21,000.

c.    $25,000.

d.    $30,000.

3.    On the last day of the year, XYZ Corporation  made a nonliquidating distribution to Jane, its sole shareholder, of  $110,000 in cash.  The corporation’s earnings and profits were $100,000 on the last day of the year.  How much was the total dividend income received by the shareholder as a result of the distribution made by XYZ Corporation?

a.    0.

b.    $100,000 dividend.

c.    $110,000 dividend.

d.    None of the above.

4.    Tom and Jenny formed TJ Inc., a corporation, in 2011.  Tom received 70 shares of the voting common stock, the only class of stock of the corporation, in exchange for property, and Jenny received  30 shares that were issued in exchange for her accounting services.  In 2013, Tom transferred additional property to TJ Inc. The property had an adjusted basis to Tom of $60,000 and a fair market value of $70,000 on the date of the transfer.  On the same day, and in exchange for the property he transferred to TJ Inc., Tom received cash of $15,000 and an additional 55 shares of stock worth $55,000.  How much gain was recognized by Tom as a result of this transaction?

a.    0.

b.    $10,000.

c.    $15,000.

d.    $25,000 .

5.    Debra transferred property to her solely owned corporation,  DA Inc. The property had an adjusted basis to Debra 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 DA Inc., Debra received a payment of $10,000 and 10 additional shares of SDA Inc.’s only class of stock.  How much gain was recognized by Debra 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. What is Sue’s total basis in the stock she received from SUECO?

a.    $25,000.

b.    $50,000.

c.    $75,000.

d.    $100,000

7.    Sam 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.  Sam’s friend, Kal, owns a building having a fair market value of $450,000 and an adjusted basis to Kal of $100,000. The building is encumbered by a $130,000 mortgage.  Earlier this month, Sam and Kal discussed Sam’s becoming involved in the business of MNO Inc., and as a result of these discussions, Kal transferred the building to MNO Inc. and in exchange for the building, MNO Inc. transferred to Kal 90 shares of authorized but not previously issued stock of MNO Inc. How much gain does Kal 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.

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    $45,000

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 Tom recognize as a result of this transaction?

a.    0.

b.    $5,000.

c.    $25,000.

d.    $27,000.

e.    $45,000.

Fact Pattern for Questions 9 and 10: Sandra owned an equipment rental business in her sole name for four years. In January of 2013,  Sandra 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 equipment was $150,000, the equipment was subject to a security agreement and note assumed by the corporation in the amount 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 income.

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 in question 9, 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 $150,000 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 $120,000, the fair market value of the land was $160,000, and the land was encumbered by a $140,000 mortgage, which liability was assumed by the shareholder. After the distribution, how much are NEWCO Inc.’s earning and profits?

a.    $130,000.

b.    $150,000.

c.    $160,000.

d.    $170,000.

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 $230,000 mortgage. How much gain did Big Corporation recognize as a result of the distribution?

a.    0.

b.    $10,000.

c.    $30,000.

d.    $40,000.

13.         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 10 percent-owned corporation. How much is Corporation’s taxable income for the current taxable year?

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