Taxation Exam

QUESTION 1

C contributes to Z, a newly formed corporation, property worth $400 with a basis of $300 in exchange for 100 shares. As a part of the same transaction, D (an employee of C) contributes to Z property worth $100 with a basis of $40 in exchange for 400 shares

a.

This is most likely not a good 351. C must recognize $100 of gain and D $50 of gain.

b.

This is not a good 351 because receipt of stock is disproportionate to the property contributed.

c.

This is not a good 351 transaction. C and D will recognize gain on the transfers to Z.

d.

This is a good 351 transaction. C must have also transferred property to D (an employee after the incorporation). Most likely this would be a transfer of 300 shares to D. Gain to C would be $75.

e.

C and D.

2 points

QUESTION 2

C contributes appreciated property worth $800, with an adjusted basis of $600, to newly formed Z Corporation in exchange for all the 80 outstanding shares of Z. Immediately thereafter, C gives 20 shares to D, C’s employee, in payment of accrued wages. C had agreed with D that if D would stay with the newly incorporated Z, C would be bound to give D the shares.

a.

351 does not appliy since C does not have control immediately after.

b.

351 does not apply under American Bantam Car

c.

351 applies and C has gain of $50 on the satisfaction of the debt to D.

d.

a and b.

e.

None of the above.

2 points

QUESTION 3

C owns all of the stock of Z Corporation, which is worth $1 million. Z wants to acquire land worth $75,000 from D. C proposes to transfer $1.00 of cash to Z at the same time D transfers the land to Z. Each C and D will receive stock.

a.

This is not a good Section 351 transaction. D could recognize loss and Z Corporation will take a higher carry-over basis from D.

b.

This is a good Section 351 transaction since C is transferring de minimus amount of property per regulation 1.351(a)(1)(ii).

c.

Neither of the above.

2 points

QUESTION 4

C and D jointly organized Z. C leases real property to Z for 40 years, receiving $500 in cash and half of Z’s stock. D transfers $500 in cash to Z in exchange for the other half of Z’s stock.

a.

This is a good Section 351 transaction. Z takes a $500 basis in the lease amortizable over 40 years.

b.

This is simply a lease of property by C to Z with C being paid in cash and stock. C’s income is $500 plus the fair market value of the stock.

c.

Neither of the above.

2 points

QUESTION 5

C and D jointly organized Z corporation. C transfers property to Z in exchange for $500 in cash and 45 shares of Z’s stock. D transfers $500 in cash to Z in exchange for 45 shares of Z’s stock. Z also issues 5 shares of its stock to lawyer in payment of lawyer’s bill for legal services in organizing Z.

a.

This is a good 351 transaction since property transferors do have control immediately afterwards. Lawyer has received shares for services.

b.

This is not a good 351 transaction because the property transferors do not control 80% of the shares since A only receives 45 shares.

c.

This transfer does not qualify for non-recognition under 351.

d.

None of the above.

2 points

QUESTION 6

C and D jointly organize Z Corporation. C transfers properties to Z in exchange for $150 cash and half of Z’s stock. D transfers $150 in cash to Z in exchange for the other half of the stock. C’s property consists of two parcels, parcel 1 with a basis of $120 and a value of $240 and parcel 2 with a basis of $90 and a value of $60.

a.

C has a gain of $120 on parcel 1 which is recognized and a loss of $30 on parcel 2 which is not recognized. C has a basis of $180 in all of the stock based on a basis of $210 in the property transferred in plus $120 in gain realized less $150 in cash received.

b.

Under 351 C has a net gain of $90 on the transfer of the two parcels and must recognize that amount of gain because of the $150 cash boot.

c.

C’s basis in its stock received is the basis of $210 plus $150 gain realized minus $150 cash received or $210.

d.

None of the above.

2 points

QUESTION 7

C and D jointly organized Z Corporation. C transfers his property to Z in exchange for a $200 five-year note (which is a debt not equity) and half of Z’s stock. D transfers $200 in cash to Z in exchange for the other half of Z’s stock.

a.

351 covers the transfers. There is no gain or loss to recognize.

b.

C must recognize gain on the property to the extent of amount realized minus basis because 351 does not cover the transaction.

c.

351 Covers the transaction; however, 351(b) requires C to recognize gain on the property to the extent of the boot received which is the $200 note.

d.

C may report this gain on the $200 note on the installment basis under section 453.

e.

c and d.

2 points

QUESTION 8

C borrows $250 from bank on a non-recourse loan with property as security. C then transfers the property to Z Corporation, subject to the debt, in exchange for half of Z’s stock, and, as part of the same transaction, D transfers $250 in cash to Z in exchange for the other half of Z’s stock. Assume the property has a fair market value of $500 prior to the borrowing and a basis of $200. Assume also that the borrowing does not have a tax avoidance purpose under 357(b).

a.

The transaction does not qualify under Section 351.

b.

The transaction qualifies under Section 351. There is no gain or loss to recognize since no boot is received.

c.

Boot is received equal to the amount of the liability of $250 so that gain must be recognized to that extent.

d.

Boot is received to the extent of $50, the excess of the liability over the basis of the property. Gain must be recognized to that extent.

e.

None of the above.

2 points

QUESTION 9

C transfers $1,000 in uncollected customer accounts receivable from his cash basis service business to Z in exchange for half of Z’s common stock plus Z’s assumption of $500 of accounts payable attributable to the service business. C could have deducted the $500 upon payment in cash. D transfers $500 in cash to Z in exchange for the other half of Z’s stock.

a.

The transaction is not covered by Section 351 because customer accounts receivable are not property.

b.

Section 351 applies. However, the $500 of accounts payable are not liabilities in excess of basis so that no gain must be recognized to that extent because of I.R.C. sec. 357(c)(3)(A(i).

c.

The transaction is covered by Section 351. There is no gain or loss to recognize. C’s stock basis is zero and Z’s property basis is zero.

d.

b. and c.

e.

None of the above.

2 points

QUESTION 10

Regarding the corporate tax brackets, which of the following statements are true.

a.

In 2017, the highest marginal corporate tax rate is actually 39%.

b.

In 2017, personal service corporations are taxed at a flat 35%.

c.

In 2017, corporations with taxable income in excess of $335,000 are not necessarily taxed at a flat 34%.

d.

In 2020, C corporations will be taxed at a flat 21%.

e.

All of the above.

2 points

QUESTION 11

In 2020, the dividends received deduction (DRD) for corporations owning less than 10% of a foreign corporation is:

a.

50%

b.

65%

c.

100%

d.

0

e.

None of the above

2 points

QUESTION 12

Ziggy continues to earn only about $30,000 a year in royalties, etc. from licensing his father’s image, music, etc. He asks you for tax advice regarding incorporating or not for the annual receipt of the $30,000.

a.

You recommend an LLC because they’re the hot ticket. He can enjoy limited liability and tax rates at the individual rate. Employment taxes and a possible passive tax are no problem.

b.

You recommend a C corporation in order to lock up income in the corporation at lower tax brackets. Double tax is no problem.

c.

You recommend that he just continue receiving royalties and report them on Form 1040. He may purchase insurance if he is worried about lawsuits.

d.

None of these is good advice.

2 points

QUESTION 13

P is a publicly held corporation with a subsidiary S of which P has always owned 100% of the outstanding stock. P has taxable income of $1,000,000 and S has taxable income of $100,000.

a.

Corporate income tax on P is $340,000 and on S is $22,250.

b.

The tax is as in answer (a.) as long as P and S have consented to an apportionment plan giving 100% of the lower bracket benefits to S.

c.

The corporate income tax rate in 2020 will be a flat 35%.

d.

None of the above.

2 points

QUESTION 14

Same facts as question 13 and add that S distributed a dividend of $50,000 from its taxable of $100,000 so that P has potential additional taxable income of $50,000 and add that P has not owned S always but the distribution is from E&P earned when P owned 100% of S and P owned 100% of S in the year of distribution.

a.

P’s taxable income does not increase because of the 100% DRD.

b.

P has additional AMT exposure because 80% DRD’s are an AMT ACE adjustment.

c.

P’s corporate income tax is $340,000.

d.

All of the above.

e.

None of the above.

2 points

QUESTION 15

P Corporation is a publicly held corporation which owns 10% of S Corporation’s stock. S Corporation has taxable income of $100,000 and distributes a $50,000 dividend to P. P has taxable income of $1,000,000 before the dividend.

a.

P’s corporate income tax is $345,100 on $1,015,000 of taxable income. S Corporation tax is $22,250.

b.

P’s corporate income tax is $345,100 and S’s corporate income tax is $34,000.

c.

P Corporation owes AMT.

d.

None of the above.

2 points

QUESTION 16

E Corporation learns that F Corporation (a large public company) will pay a large dividend so that before the record date E buys 1 share of F for $500, receives a $250 dividend 30 days later, and sells the stock for $250 on the next day.

a.

E Corporation has a 70% DRD equal to $175.

b.

E has a $250 capital loss.

c.

a and b.

d.

None of the above.

2 points

QUESTION 17

During the current year, Z Corporation accrued income and expenses as follows:

Gross income from Business $1,000

Dividends on Apple Stock 300

Interest on State Bonds 300

Capital Gain 300

Total 2,400

Deductible Business Expenses 1,290

Non-Capital Expenses,

Non Deductible under 162(e) 270

Capital Losses 438

Total 1,998

Net $ 402

a.

For the calculation of earnings and profits (E&P), net capital loss is currently deductible.

b.

Accrued corporate tax does not reduce E&P.

c.

The DRD on the Apple dividend at 70% is deducted for E&P purposes.

d.

All of the above

e.

None of the above.

2 points

QUESTION 18

On December 1 of the current year (the declaration date), Z’s board of directors vote to pay a $600 distribution by mailing checks on December 31 of the current taxable year (the payment date) to shareholders of record on December 15 (the record date). The checks are actually received by shareholders on January 2. Shareholder C is an individual with a stock basis of $120. C sells his stock on December 10 for $1,620.

a.

The distribution by the corporation will still be taxable to shareholder C.

b.

The distribution by the corporation will be taxable to the purchaser from shareholder C.

c.

C’s sale of the stock will generate capital gain.

d.

b and c.

e.

None of the above.

2 points

QUESTION 19

Corporation Z has an accumulated deficit of $100 in E&P as of December 31 of the preceding year. In addition, corporation Z is operating at a loss for the current year. Z has a valuable asset which if sold will generate a gain sufficient to eliminate the current year’s deficit in E&P and cause there to be positive earnings and profits. Rather than sell the asset in the current year and distribute the proceeds to shareholders as a dividend, Z borrows against the asset and distributes the loan funds to the shareholders. In the following year, Z sells the asset and pays off the loan.

a.

There is a dividend in the current year because the borrowing and the delaying of the sale is a sham.

b.

The distribution will be a return of capital and potential gain to shareholders.

c.

a and b.

d.

None of the above.

2 points

QUESTION 20

Corporation Z distributes $200 total in cash to shareholder C and $200 total in cash to shareholder D during the current year at quarterly intervals, $50 in cash per quarter per shareholder. At the end of the preceding taxable year Z’s accumulated E&P was $0. In the current taxable year, Z’s taxable income and current E&P is $200.

a.

The first two quarterly installments of $50 to each shareholder are dividends.

b.

$25 of each quarterly distribution is a dividend to each shareholder.

c.

There are no dividends to either shareholder.

d.

None of the above.

2 points

QUESTION 21

Corporation Z distributes in kind its long held Apple stock with an adjusted basis of $480 and a fair market value of $200 to shareholder C. Corporation Z also distributes Apple stock with an adjusted basis of $120 at a fair market value of $200 to shareholder D.

a.

Corporation Z does not have loss on the distributions.

b.

The distributions to C will reduce E&P by $480 (but not create negative E&P).

c.

Corporation Z realizes gain of $80 on the distribution of the property and that amount less accrued income tax is added to E&P.

d.

All of the above.

e.

None of the above.

2 points

QUESTION 22

Corporation Z is owned entirely by two individuals, C and D. C owns 60 shares of Z common stock bought in one transaction for $1,200. D owns 40 shares of Z common stock with a basis of $60 per share. The stock’s fair market value is $40 per share. Z’s E&P is $1,000. C sells 60 shares to Z for $1,800. The following statements are with regard to C.

a.

The redemption will be given dividend treatment.

b.

The redemption will be given sale treatment under 302(b)(3), complete termination of interest.

c.

It is impossible to tell whether the transaction will be given sale or dividend treatment.

d.

None of the above.

2 points

QUESTION 23

Corporation Z is owned entirely by two individuals, C and D. C owns 60 shares of Z common stock bought in one transaction for $1,200. D owns 40 shares of Z common stock with a basis of $60 per share. The stock’s fair market value is $40 per share. Z’s E&P is $1,000.C sells 20 shares to Z for $800. The following statements are with regard to C.

a.

The redemption will be given dividend treatment.

b.

The redemption will be given sale or exchange treatment under 302(b)(2), substantially disproportionate disposition.

c.

It is impossible to tell whether the transaction will be given sale or dividend treatment.

d.

The redemption will most likely be treated as a sale under 302(b)(1), not essentially equivalent to a dividend, since the voting percentage has dropped to 50 percent in a two-person corporation and this is usually sufficient to meet the test.

e.

None of the above.

2 points

QUESTION 24

Corporation Z is owned entirely by two individuals, C and D. C owns 60 shares of Z common stock bought in one transaction for $1,200. D owns 40 shares of Z common stock with a basis of $60 per share. The stock’s fair market value is $40 per share. Z’s E&P is $1,000. D sells 10 shares back to Z for $400. The following statements are with regard to D.

a.

The redemption will be treated as a dividend.

b.

The redemption will be treated as a sale under 302(b)(2), substantially disproportionate disposition.

c.

It is impossible to tell how the redemption will be treated.

d.

The redemption will likely be treated as a sale under 302(b)(1), not essentially equivalent to a dividend.

e.

None of the above.

2 points

QUESTION 25

Corporation Z is owned entirely by two individuals, C and D. C owns 60 shares of Z common stock bought in one transaction for $1,200. D owns 40 shares of Z common stock with a basis of $60 per share. The stock’s fair market value is $40 per share. Z’s E&P is $1,000. C sells 60 shares to Z for $1,800. Additionally, C and D for this question are father and son.

a.

There will be attribution under Section 318, so that no matter how many shares C sells to Corporation Z, by attribution he will own 100% of the outstanding shares afterwards.

b.

There will be attribution under 318 if C’s father is living since there is double attribution through C’s father.

c.

There is no attribution.

d.

None of the above.