1 A business cannot be taxed as a corporation unless it is incorporated under local law True False 2 When a corporation receives property from a shareholder its basis equals that of the shareholder, increased by any gain recognized by the shareholder True False 3 Options to buy stock constitute stock for Code Sec 351 purposes, but only if the stock so qualifies True False 4 A sale of Code Sec 1244 stock results in ordinary income if sold at a gain True False 5 A corporation s deduction for charitable contributions is limited to 50 percent of adjusted taxable income True False 6 Organizational expenditures must be capitalized but may be amortized over 60 months or longer True False 7 A brother sister controlled group can fi le a consolidated return if all members of the group consent True False 8 Sandra Sherman incorporates her apartment building It has a basis of $50,000, a value of $150,000, is subject to a mortgage of $70,000 and has a depreciation recapture potential of $12,000 If Sandra receives stock worth $80,000, she will recognize a No gain b $30,000 of gain, $12,000 of which is ordinary c $12,000 of ordinary income d $20,000 of gain, $12,000 of which is ordinary 9 Algernon Amsley transferred the following to his controlled corporation in exchange for stock Basis Value Building $20,000 $50,000 Cash 10,000 10,000 Mortgage on building 40,000 40,000 IBM stock 15,000 12,000 Algernon must recognize a gain of a $20,000 b $0 c $10,000 d $27,000 10 One year Potter, Inc had gross income from sales of $210,000, business expenses of $230,000, and dividend income from U S corporations of $150,000 Potter s 80 percent dividends received deduction was a $104,000 b $120,000 c $0 d $150,000 11 Prior to a charitable gift to the Plato University of land with a basis of $6,000 and a value of $13,000, All Set, Inc had taxable income of $50,000 If the dividends received deduction was $80,000, the charitable contribution deduction is a $5,000 b $6,000 c $2,925 d $5,800 12 Black White, Inc has $20,000 in taxable income, plus a long term capital gain of $10,000 Its tax liability is a $4,500 b $10,200 c $5,800 d $7,500 13 Kevin Broid owns all the stock of Dana Corporation During the year, Kevin sold a building to Dana for $150,000 The building cost $120,000, its adjusted basis was $94,000, and it was depreciated under the straight line method Dana intends to use the building in its operations Kevin s tax consequences of the sale are a $56,000 dividend income b $56,000 ordinary income c $56,000 Code Sec 1231 gain d $26,000 ordinary income and $30,000 Code Sec 1231 gain e $56,000 long term capital gain 14 Hoover, Inc had gross receipts from operations of $230,000, operating and other expenses of $310,000, and dividends received from a 45 percent owned domestic corporation of $120,000 Hoover s tax position for the year is a $8,000 taxable income b $56,000 net operating loss c $40,000 taxable income d $80,000 net operating loss 15 Future, Inc reported the following results for the year Net income per books $110,000 Federal income taxes 36,170 Life insurance proceeds on key employee 15,000 Tax exempt interest income 13,000 Net capital loss 25,000 Future s taxable income for the year was a $123,170 b $143,170 c $72,000 d $135,000 e $107,000 16 In order for Bandana Corporation, a calendar year taxpayer, to be required to make estimated tax payments in 2009, its expected tax liability would have to be a $500 or more b $600 or more c $1,000 or more d $2,000 or more 17 Ben Brown transferred property that had an adjusted basis to him of $40,000 and a fair market value of $50,000 to Crackers Corporation in exchange for 100 percent of Crackers s only class of stock and $15,000 cash At the time of the transfer, the stock had a fair market value of $35,000 What is the amount of gain to be recognized by Ben a $0 b $10,000 c $15,000 d $25,000 18 The check the box election to be taxed as a corporation applies to a corporations b partnerships c trusts d all of the above e none of the above 19 John, the sole owner of LV Co , transfers equipment to LV Co in return for 100 shares of its stock and $10,000 The stock is worth $70,000 John bought the machine several years ago for $60,000 and its adjusted basis at the time of the transfer was $28,000 John s recognized gain on the transfer is a $ 0 b $52,000 $32,000 Code Sec 1245 and $20,000 Code Sec 1231 c $10,000 all Code Sec 1231 d $10,000 all Code Sec 1245 e none of the above 20 When deciding if a corporate instrument is debt or equity, the IRS will consider a the corporation s debt to equity ratio b if the debt is convertable into stock c the relationship between stock and debt ownership percentages d if the debt is preferred over or subordinate to other debt e all of the above f none of the above 21 Absent any special provision (e g , Code Sec 351), a transfer of property from a shareholder to a corporation in return for its shares would result in a full gain or loss recognition b partial gain or loss recognition c no gain or loss recognition d none of the above 22 Susan has a gain on the transfer of property to a corporation In order for Susan to have no gain recognition under Code Sec 351, she must receive a stock and securities b securities only c stock only d the shareholder may receive any type of property from the corporation 23 Bob owns all 50 shares of Max Company, valued at $50,000 His friend, Lee, owns equipment worth $50,000 Lee s adjusted basis in the equipment is $20,000 Lee transfers the equipment to Max Company in exchange for 50 shares Lee has a a $30,000 realized and $30,000 recognized gain b $30,000 realized and $0 recognized gain c $0 realized and $0 recognized gain d none of the above 24 Dave formed Shull Company and transferred land ($100,000 fair market value $40,000 adjusted basis) and equipment ($50,000 fair market value $10,000 adjusted basis) in exchange for 100 shares of stock Shull Company assumes the $45,000 mortgage on the land as part of the transfer Dave s tax consequences are Recognized Gain Basis in 100 shares a $0 $50,000 b $5,000 $0 c $50,000 $60,000 d $100,000 $100,000 25 Jenny Co donated inventory with an adjusted basis of $50,000 and a $78,000 fair market value to a qualified public charity, which will use the inventory for the care of the ill and needy It donates other inventory with an adjusted basis of $26,000 and a $40,000 fair market value to a qualified public charity that will not use the inventory for the care of the needy, ill, or infants (the donee is not an educational or research organization) What is Jenny Co s charitable deduction a $118,000 b $97,000 c $90,000 d $75,000 26 The amount of a cash dividend is independent of whether or not the shareholder is a corporation True False 27 John Jergen s stock basis is $3,000 and he has owned it for two years If E P is $4,000 and John receives a distribution of $12,000, the result is a dividend of $4,000, a return of capital of $3,000, and a long term capital gain of $5,000 True False 28 A shareholder receives a tax free preferred stock dividend on her common stock Subsequently, she sells both her common and preferred stock to her aunt She will not have any dividend income True False 29 When a tax free right is received, the shareholder may be able to allocate basis to it from his stock, or it may simply have a zero basis True False 30 A corporation must recognize a gain if it distributes property with a liability in excess of adjusted basis True False 31 A distribution of nontaxable stock dividends does not reduce the corporation s E P True False 32 If a distribution qualifies as a partial liquidation then all shareholders receive sale or exchange treatment on the redemption True False 33 A sale of Code Sec 306 stock always results in ordinary income True False 34 Unreasonable compensation is one type of constructive or disguised dividend True False 35 A distribution by a corporation can never make its E P negative True False 36 Arrow, Inc has an accumulated defi cit of $3,000 This year it distributes $15,000 to its shareholders How much of the amount is a dividend if the current year s books reveal the following items Taxable income $2,000 Proceeds from key man life insurance $10,000 Interest from Iowa City bonds $5,000 Capital loss $4,000 a $10,000 b $0 c $13,000 d $2,000 37 Grounded Air Flight Company had E P of $50,000 when it distributed land held as an investment with a basis of $10,000, a value of $50,000, but subject to a liability of $30,000 to an individual shareholder After the distribution, E P equals a $50,000 b $70,000 c $30,000 d $60,000 38 Better Pools, Inc distributed land with a basis of $20,000, a value of $75,000, subject to a liability of $35,000 to a noncorporate shareholder when its E P was $300,000 As a result of the distribution, the amount of the dividend and he shareholder s basis in the distributed property are as follows a Dividend $40,000 basis $40,000 b Dividend $20,000 basis $20,000 c Dividend $40,000 basis $20,000 d Dividend $40,000 basis $75,000 39 Fred Farmer and his two sons owned 100 percent of Fruits and Nuts, Inc Fred owned 50 percent of the stock, but he had 25 percent redeemed by the corporation for a building with a basis of $10,000 and a value of $50,000 If E P is $200,000 and Fred s basis in his stock before the redemption was $20,000, the stock and building basis after the redemption are a Stock basis $10,000 building basis $50,000 b Stock basis $20,000 building basis $50,000 c Stock basis $10,000 building basis $10,000 d Stock basis $20,000 building basis $10,000 40 Vaccines Corporation sold equipment used in its business to its sole shareholder Clancy Yarrow for $10,000 On the date of the sale, the fair market value of the equipment was $15,000 and Clancy s adjusted basis was $12,000 What amount of the transfer is considered to be a dividend to Clancy a $20,000 b $5,000 c $2,000 d $0 41 A corporation generally recognizes gains and losses on sales of property during a complete liquidation True False 42 A liquidating distribution may be treated as a dividend to shareholders if the liquidating corporation has accumulated earnings and profits True False 43 A liquidating corporation may recognize gain or loss on the distribution of installment obligations to shareholders True False 44 The Trap Corporation liquidates One shareholder, who owned 30 percent of the stock, receives for the stock, inventory worth $90,000 with a basis of $70,000 Trap Corporation will recognize a $20,000 of capital gain b $20,000 of ordinary income c $20,000 of Sec 1231 gain d No gain 45 Rapid, Inc , a cash basis corporation, distributes $30,000 of accounts receivable to Sylvester, an individual shareholder, in cancellation of his stock, pursuant to a plan of complete liquidation If Sylvester s basis in his stock is $10,000 the tax result is a Rapid has no gain, but Sylvester has ordinary income of $20,000 b Rapid recognizes $30,000 of ordinary income and Sylvester has no gain or loss c Rapid recognizes $30,000 of ordinary income and Sylvester has a capital gain of $20,000 d Rapid recognizes no gain and Sylvester recognizes a capital gain of $20,000 under Section 331 46 The following statements about property distributions in complete liquidations with liabilities in excess of fair market value are all false, except a A loss may be recognized b The shareholder receives a basis in the property equal to the amount of liability c The distributor recognizes gain equal to the excess of liabilities over basis d Since liabilities exceed fair market value, no depreciation recapture will occur 47 Mark receives a liquidating distribution from Arosa Corporation as part of a redemption of all of its stock Mark s basis for his Arosa stock is $10,000 In exchange for his stock, Mark receives property with a $10,000 basis and a $25,000 fair market value that is subject to a $12,000 mortgage, and also receives cash of $15,000 What is Mark s recognized gain a $42,000 b $30,000 c $18,000 d $3,000 48 Which of the following statements regarding E P of a liquidating corporation is incorrect a The character of an individual shareholder s gain does not depend on the E P of the liquidating corporation b The E P of the liquidating corporation is not reduced by the amount distributed in liquidation c When a subsidiary is liquidated into its parent, the subsidiary s E P is extinguished d The process of liquidating may increase the E P of the liquidating corporation 49 In 2009, pursuant to a plan of complete liquidation, Woods Corp distributed all of its property to its shareholders Among the property distributed was cash of $200,000, and land that had been held as an investment that had a basis of $100,000, and a fair market value of $160,000 The land was subject to a mortgage of $170,000 which the shareholders assumed What amount of gain must Woods Corp recognize as a result of its liquidating distributions a $0 b $10,000 c $60,000 d $70,000 50 Paula receives a liquidating distribution from Pell Corporation as part of a redemption of all of its stock Paula s basis for her Pell stock is $10,000 In exchange for her stock, Paula receives property with an $8,000 basis and a $15,000 FMV that is subject to a $2,000 mortgage, and also receives cash of $5,000 What is Paula s recognized gain a $12,000 b $10,000 c $8,000 d $0 TAXATION OF CORPORATIONS AND PARTNERSHIPS 1 A business cannot be taxed as a corporation unless it is incorporated under local law True False 2 When a corporation receives property from a shareholder its basis equals that of the shareholder, increased by any gain recognized by the shareholder True False 3 Options to buy stock constitute stock for Code Sec 351 purposes, but only if the stock so qualifies True False 4 A sale of Code Sec 1244 stock results in ordinary income if sold at a gain True False 5 A corporation's deduction for charitable contributions is limited to 50 percent of adjusted taxable income True False 6 Organizational expenditures must be capitalized but may be amortized over 60 months or longer True False 7 A brother sister controlled group can fi le a consolidated return if all members of the group consent True False 8 Sandra Sherman incorporates her apartment building It has a basis of $50,000, a value of $150,000, is subject to a mortgage of $70,000 and has a depreciation recapture potential of $12,000 If Sandra receives stock worth $80,000, she will recognize a No gain b $30,000 of gain, $12,000 of which is ordinary c $12,000 of ordinary income d $20,000 of gain, $12,000 of which is ordinary 9 Algernon Amsley transferred the following to his controlled corporation in exchange for stock Building Cash Mortgage on building IBM stock Basis $20,000 10,000 40,000 15,000 Value $50,000 10,000 40,000 12,000 Algernon must recognize a gain of a $20,000 b $0 c $10,000 d $27,000 10 One year Potter, Inc had gross income from sales of $210,000, business expenses of $230,000, and dividend income from U S corporations of $150,000 Potter's 80 percent dividends received deduction was a $104,000 b $120,000 c $0 d $150,000 11 Prior to a charitable gift to the Plato University of land with a basis of $6,000 and a value of $13,000, All Set, Inc had taxable income of $50,000 If the dividends received deduction was $80,000, the charitable contribution deduction is a $5,000 b $6,000 c $2,925 d $5,800 12 Black White, Inc has $20,000 in taxable income, plus a long term capital gain of $10,000 Its tax liability is a $4,500 b $10,200 c $5,800 d $7,500 13 Kevin Broid owns all the stock of Dana Corporation During the year, Kevin sold a building to Dana for $150,000 The building cost $120,000, its adjusted basis was $94,000, and it was depreciated under the straight line method Dana intends to use the building in its operations Kevin's tax consequences of the sale are a $56,000 dividend income b $56,000 ordinary income c $56,000 Code Sec 1231 gain d $26,000 ordinary income and $30,000 Code Sec 1231 gain e $56,000 long term capital gain 14 Hoover, Inc had gross receipts from operations of $230,000, operating and other expenses of $310,000, and dividends received from a 45 percent owned domestic corporation of $120,000 Hoover's tax position for the year is a $8,000 taxable income b $56,000 net operating loss c $40,000 taxable income d $80,000 net operating loss 15 Future, Inc reported the following results for the year Net income per books Federal income taxes Life insurance proceeds on key employee Tax exempt interest income Net capital loss Future's taxable income for the year was a $123,170 b $143,170 c $72,000 d $135,000 e $107,000 $110,000 36,170 15,000 13,000 25,000 16 In order for Bandana Corporation, a calendar year taxpayer, to be required to make estimated tax payments in 2009, its expected tax liability would have to be a $500 or more b $600 or more c $1,000 or more d $2,000 or more 17 Ben Brown transferred property that had an adjusted basis to him of $40,000 and a fair market value of $50,000 to Crackers Corporation in exchange for 100 percent of Crackers's only class of stock and $15,000 cash At the time of the transfer, the stock had a fair market value of $35,000 What is the amount of gain to be recognized by Ben a $0 b $10,000 c $15,000 d $25,000 18 The check the box election to be taxed as a corporation applies to a corporations b partnerships c trusts d all of the above e none of the above 19 John, the sole owner of LV Co , transfers equipment to LV Co in return for 100 shares of its stock and $10,000 The stock is worth $70,000 John bought the machine several years ago for $60,000 and its adjusted basis at the time of the transfer was $28,000 John's recognized gain on the transfer is a $ 0b $52,000 $32,000 Code Sec 1245 and $20,000 Code Sec 1231 c $10,000 all Code Sec 1231 d $10,000 all Code Sec 1245 e none of the above 20 When deciding if a corporate instrument is debt or equity, the IRS will consider a the corporation's debt to equity ratio b if the debt is convertable into stock c the relationship between stock and debt ownership percentages d if the debt is preferred over or subordinate to other debt e all of the above f none of the above 21 Absent any special provision (e g , Code Sec 351), a transfer of property from a shareholder to a corporation in return for its shares would result in a full gain or loss recognition b partial gain or loss recognition c no gain or loss recognition d none of the above 22 Susan has a gain on the transfer of property to a corporation In order for Susan to have no gain recognition under Code Sec 351, she must receive a stock and securities b securities only c stock only d the shareholder may receive any type of property from the corporation 23 Bob owns all 50 shares of Max Company, valued at $50,000 His friend, Lee, owns equipment worth $50,000 Lee's adjusted basis in the equipment is $20,000 Lee transfers the equipment to Max Company in exchange for 50 shares Lee has a a $30,000 realized and $30,000 recognized gain b $30,000 realized and $0 recognized gain c $0 realized and $0 recognized gain d none of the above 24 Dave formed Shull Company and transferred land ($100,000 fair market value $40,000 adjusted basis) and equipment ($50,000 fair market value $10,000 adjusted basis) in exchange for 100 shares of stock Shull Company assumes the $45,000 mortgage on the land as part of the transfer Dave's tax consequences are Recognized Gain Basis in 100 shares a $0 $50,000 b $5,000 $0 c $50,000 $60,000 d $100,000 $100,000 25 Jenny Co donated inventory with an adjusted basis of $50,000 and a $78,000 fair market value to a qualified public charity, which will use the inventory for the care of the ill and needy It donates other inventory with an adjusted basis of $26,000 and a $40,000 fair market value to a qualified public charity that will not use the inventory for the care of the needy, ill, or infants (the donee is not an educational or research organization) What is Jenny Co 's charitable deduction a $118,000 b $97,000 c $90,000 d $75,000 26 The amount of a cash dividend is independent of whether or not the shareholder is a corporation True False 27 John Jergen's stock basis is $3,000 and he has owned it for two years If E P is $4,000 and John receives a distribution of $12,000, the result is a dividend of $4,000, a return of capital of $3,000, and a long term capital gain of $5,000 True False 28 A shareholder receives a tax free preferred stock dividend on her common stock Subsequently, she sells both her common and preferred stock to her aunt She will not have any dividend income True False 29 When a tax free right is received, the shareholder may be able to allocate basis to it from his stock, or it may simply have a zero basis True False 30 A corporation must recognize a gain if it distributes property with a liability in excess of adjusted basis True False 31 A distribution of nontaxable stock dividends does not reduce the corporation's E P True False 32 If a distribution qualifies as a partial liquidation then all shareholders receive sale or exchange treatment on the redemption True False 33 A sale of Code Sec 306 stock always results in ordinary income True False 34 Unreasonable compensation is one type of constructive or disguised dividend True False 35 A distribution by a corporation can never make its E P negative True False 36 Arrow, Inc has an accumulated defi cit of $3,000 This year it distributes $15,000 to its shareholders How much of the amount is a dividend if the current year's books reveal the following items Taxable income Proceeds from key man life insurance Interest from Iowa City bonds Capital loss $2,000 $10,000 $5,000 $4,000 a $10,000 b $0 c $13,000 d $2,000 37 Grounded Air Flight Company had E P of $50,000 when it distributed land held as an investment with a basis of $10,000, a value of $50,000, but subject to a liability of $30,000 to an individual shareholder After the distribution, E P equals a $50,000 b $70,000 c $30,000 d $60,000 38 Better Pools, Inc distributed land with a basis of $20,000, a value of $75,000, subject to a liability of $35,000 to a noncorporate shareholder when its E P was $300,000 As a result of the distribution, the amount of the dividend and he shareholder's basis in the distributed property are as follows a Dividend $40,000 basis $40,000 b Dividend $20,000 basis $20,000 c Dividend $40,000 basis $20,000 d Dividend $40,000 basis $75,000 39 Fred Farmer and his two sons owned 100 percent of Fruits and Nuts, Inc Fred owned 50 percent of the stock, but he had 25 percent redeemed by the corporation for a building with a basis of $10,000 and a value of $50,000 If E P is $200,000 and Fred's basis in his stock before the redemption was $20,000, the stock and building basis after the redemption are a Stock basis $10,000 building basis $50,000 b Stock basis $20,000 building basis $50,000 c Stock basis $10,000 building basis $10,000 d Stock basis $20,000 building basis $10,000 40 Vaccines Corporation sold equipment used in its business to its sole shareholder Clancy Yarrow for $10,000 On the date of the sale, the fair market value of the equipment was $15,000 and Clancy's adjusted basis was $12,000 What amount of the transfer is considered to be a dividend to Clancy a $20,000 b $5,000 c $2,000 d $0 41 A corporation generally recognizes gains and losses on sales of property during a complete liquidation True False 42 A liquidating distribution may be treated as a dividend to shareholders if the liquidating corporation has accumulated earnings and profits True False 43 A liquidating corporation may recognize gain or loss on the distribution of installment obligations to shareholders True False 44 The Trap Corporation liquidates One shareholder, who owned 30 percent of the stock, receives for the stock, inventory worth $90,000 with a basis of $70,000 Trap Corporation will recognize a $20,000 of capital gain b $20,000 of ordinary income c $20,000 of Sec 1231 gain d No gain 45 Rapid, Inc , a cash basis corporation, distributes $30,000 of accounts receivable to Sylvester, an individual shareholder, in cancellation of his stock, pursuant to a plan of complete liquidation If Sylvester's basis in his stock is $10,000 the tax result is a Rapid has no gain, but Sylvester has ordinary income of $20,000 b Rapid recognizes $30,000 of ordinary income and Sylvester has no gain or loss c Rapid recognizes $30,000 of ordinary income and Sylvester has a capital gain of $20,000 d Rapid recognizes no gain and Sylvester recognizes a capital gain of $20,000 under Section 331 46 The following statements about property distributions in complete liquidations with liabilities in excess of fair market value are all false, except a A loss may be recognized b The shareholder receives a basis in the property equal to the amount of liability c The distributor recognizes gain equal to the excess of liabilities over basis d Since liabilities exceed fair market value, no depreciation recapture will occur 47 Mark receives a liquidating distribution from Arosa Corporation as part of a redemption of all of its stock Mark's basis for his Arosa stock is $10,000 In exchange for his stock, Mark receives property with a $10,000 basis and a $25,000 fair market value that is subject to a $12,000 mortgage, and also receives cash of $15,000 What is Mark's recognized gain a $42,000 b $30,000 c $18,000 d $3,000 48 Which of the following statements regarding E P of a liquidating corporation is incorrect a The character of an individual shareholder's gain does not depend on the E P of the liquidating corporation b The E P of the liquidating corporation is not reduced by the amount distributed in liquidation c When a subsidiary is liquidated into its parent, the subsidiary's E P is extinguished d The process of liquidating may increase the E P of the liquidating corporation 49 In 2009, pursuant to a plan of complete liquidation, Woods Corp distributed all of its property to its shareholders Among the property distributed was cash of $200,000, and land that had been held as an investment that had a basis of $100,000, and a fair market value of $160,000 The land was subject to a mortgage of $170,000 which the shareholders assumed What amount of gain must Woods Corp recognize as a result of its liquidating distributions a $0 b $10,000 c $60,000 d $70,000 50 Paula receives a liquidating distribution from Pell Corporation as part of a redemption of all of its stock Paula's basis for her Pell stock is $10,000 In exchange for her stock, Paula receives property with an $8,000 basis and a $15,000 FMV that is subject to a $2,000 mortgage, and also receives cash of $5,000 What is Paula's recognized gain a $12,000 b $10,000 c $8,000 d $0

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1. A business cannot be taxed as a corporation unless it is incorporated under local law. True/False 2. When a corporation receives property from a

1. A business cannot be taxed as a corporation unless it is incorporated under local law. True/False 2. When a corporation receives property from a shareholder its basis equals that of the shareholder, increased by any gain recognized by the shareholder. True/False 3. Options to buy stock constitute stock for Code Sec. 351 purposes, but only if the stock so qualifies. True/False 4. A sale of Code Sec. 1244 stock results in ordinary income if sold at a gain. True/False 5. A corporation?s deduction for charitable contributions is limited to 50 percent of adjusted taxable income. True/False 6. Organizational expenditures must be capitalized but may be amortized over 60 months or longer. True/False 7. A brother-sister controlled group can fi le a consolidated return if all members of the group consent. True/False 8. Sandra Sherman incorporates her apartment building. It has a basis of $50,000, a value of $150,000, is subject to a mortgage of $70,000 and has a depreciation recapture potential of $12,000. If Sandra receives stock worth $80,000, she will recognize: a. No gain. b. $30,000 of gain, $12,000 of which is ordinary. c. $12,000 of ordinary income. d. $20,000 of gain, $12,000 of which is ordinary. 9. Algernon Amsley transferred the following to his controlled corporation in exchange for stock: Basis Value Building $20,000 $50,000 Cash 10,000 10,000 Mortgage on building 40,000 40,000 IBM stock 15,000 12,000 Algernon must recognize a gain of: a. $20,000 b. $0 c. $10,000 d. $27,000 10. One year Potter, Inc. had gross income from sales of $210,000, business expenses of $230,000, and dividend income from U.S. corporations of $150,000. Potter?s 80 percent dividends-received deduction was: a. $104,000 b. $120,000 c. $0 d. $150,000 11. Prior to a charitable gift to the Plato University of land with a basis of $6,000 and a value of $13,000, All-Set, Inc. had taxable income of $50,000. If the dividends-received deduction was $80,000, the charitable contribution deduction is: a. $5,000 b. $6,000 c. $2,925 d. $5,800 12. Black & White, Inc. has $20,000 in taxable income, plus a long-term capital gain of $10,000. Its tax liability is: a. $4,500 b. $10,200 c. $5,800 d. $7,500 13. Kevin Broid owns all the stock of Dana Corporation. During the year, Kevin sold a building to Dana for $150,000. The building cost $120,000, its adjusted basis was $94,000, and it was depreciated under the straight-line method. Dana intends to use the building in its operations. Kevin?s tax consequences of the sale are: a. $56,000 dividend income b. $56,000 ordinary income c. $56,000 Code Sec. 1231 gain d. $26,000 ordinary income and $30,000 Code Sec. 1231 gain e. $56,000 long-term capital gain 14. Hoover, Inc. had gross receipts from operations of $230,000, operating and other expenses of $310,000, and dividends received from a 45 percent-owned domestic corporation of $120,000. Hoover?s tax position for the year is: a. $8,000 taxable income b. $56,000 net operating loss c. $40,000 taxable income d. $80,000 net operating loss 15. Future, Inc. reported the following results for the year: Net income per books $110,000 Federal income taxes 36,170 Life insurance proceeds on key employee 15,000 Tax-exempt interest income 13,000 Net capital loss 25,000 Future?s taxable income for the year was: a. $123,170 b. $143,170 c. $72,000 d. $135,000 e. $107,000 16. In order for Bandana Corporation, a calendar year taxpayer, to be required to make estimated tax payments in 2009, its expected tax liability would have to be: a. $500 or more b. $600 or more c. $1,000 or more d. $2,000 or more 17. Ben Brown transferred property that had an adjusted basis to him of $40,000 and a fair market value of $50,000 to Crackers Corporation in exchange for 100 percent of Crackers?s only class of stock and $15,000 cash. At the time of the transfer, the stock had a fair market value of $35,000. What is the amount of gain to be recognized by Ben? a. $0 b. $10,000 c. $15,000 d. $25,000 18. The check-the-box election to be taxed as a corporation applies to: a. corporations b. partnerships c. trusts d. all of the above e. none of the above 19. John, the sole owner of LV Co., transfers equipment to LV Co. in return for 100 shares of its stock and $10,000. The stock is worth $70,000. John bought the machine several years ago for $60,000 and its adjusted basis at the time of the transfer was $28,000. John?s recognized gain on the transfer is: a. $-0- b. $52,000: $32,000 Code Sec. 1245 and $20,000 Code Sec. 1231 c. $10,000: all Code Sec. 1231 d. $10,000: all Code Sec. 1245 e. none of the above 20. When deciding if a corporate instrument is debt or equity, the IRS will consider: a. the corporation?s debt to equity ratio b. if the debt is convertable into stock c. the relationship between stock and debt ownership percentages d. if the debt is preferred over or subordinate to other debt e. all of the above f. none of the above 21. Absent any special provision (e.g., Code Sec. 351), a transfer of property from a shareholder to a corporation in return for its shares would result in: a. full gain or loss recognition b. partial gain or loss recognition c. no gain or loss recognition d. none of the above 22. Susan has a gain on the transfer of property to a corporation. In order for Susan to have no gain recognition under Code Sec. 351, she must receive: a. stock and securities b. securities only c. stock only d. the shareholder may receive any type of property from the corporation 23. Bob owns all 50 shares of Max Company, valued at $50,000. His friend, Lee, owns equipment worth $50,000. Lee?s adjusted basis in the equipment is $20,000. Lee transfers the equipment to Max Company in exchange for 50 shares. Lee has a: a. $30,000 realized and $30,000 recognized gain b. $30,000 realized and $0 recognized gain c. $0 realized and $0 recognized gain d. none of the above 24. Dave formed Shull Company and transferred land ($100,000 fair market value; $40,000 adjusted basis) and equipment ($50,000 fair market value; $10,000 adjusted basis) in exchange for 100 shares of stock. Shull Company assumes the $45,000 mortgage on the land as part of the transfer. Dave?s tax consequences are: Recognized Gain Basis in 100 shares a. $0 $50,000 b. $5,000 $0 c. $50,000 $60,000 d. $100,000 $100,000 25. Jenny Co. donated inventory with an adjusted basis of $50,000 and a $78,000 fair market value to a qualified public charity, which will use the inventory for the care of the ill and needy. It donates other inventory with an adjusted basis of $26,000 and a $40,000 fair market value to a qualified public charity that will not use the inventory for the care of the needy, ill, or infants (the donee is not an educational or research organization). What is Jenny Co.?s charitable deduction? a. $118,000 b. $97,000 c. $90,000 d. $75,000 26. The amount of a cash dividend is independent of whether or not the shareholder is a corporation. True/False 27. John Jergen?s stock basis is $3,000 and he has owned it for two years. If E&P is $4,000 and John receives a distribution of $12,000, the result is a dividend of $4,000, a return of capital of $3,000, and a long-term capital gain of $5,000. True/False 28. A shareholder receives a tax-free preferred stock dividend on her common stock. Subsequently, she sells both her common and preferred stock to her aunt. She will not have any dividend income. True/False 29. When a tax-free right is received, the shareholder may be able to allocate basis to it from his stock, or it may simply have a zero basis. True/False 30. A corporation must recognize a gain if it distributes property with a liability in excess of adjusted basis. True/False 31. A distribution of nontaxable stock dividends does not reduce the corporation?s E&P. True/False 32. If a distribution qualifies as a partial liquidation then all shareholders receive sale or exchange treatment on the redemption. True/False 33. A sale of Code Sec. 306 stock always results in ordinary income. True/False 34. Unreasonable compensation is one type of constructive or disguised dividend. True/False 35. A distribution by a corporation can never make its E&P negative. True/False 36. Arrow, Inc. has an accumulated defi cit of $3,000. This year it distributes $15,000 to its shareholders. How much of the amount is a dividend if the current year?s books reveal the following items: Taxable income $2,000 Proceeds from key-man life insurance $10,000 Interest from Iowa City bonds $5,000 Capital loss $4,000 a. $10,000 b. $0 c. $13,000 d. $2,000 37. Grounded Air Flight Company had E&P of $50,000 when it distributed land held as an investment with a basis of $10,000, a value of $50,000, but subject to a liability of $30,000 to an individual shareholder. After the distribution, E&P equals: a. $50,000 b. $70,000 c. $30,000 d. $60,000 38. Better Pools, Inc. distributed land with a basis of $20,000, a value of $75,000, subject to a liability of $35,000 to a noncorporate shareholder when its E&P was $300,000. As a result of the distribution, the amount of the dividend and he shareholder?s basis in the distributed property are as follows: a. Dividend: $40,000; basis: $40,000 b. Dividend: $20,000; basis: $20,000 c. Dividend: $40,000; basis: $20,000 d. Dividend: $40,000; basis: $75,000 39. Fred Farmer and his two sons owned 100 percent of Fruits and Nuts, Inc. Fred owned 50 percent of the stock, but he had 25 percent redeemed by the corporation for a building with a basis of $10,000 and a value of $50,000. If E&P is $200,000 and Fred?s basis in his stock before the redemption was $20,000, the stock and building basis after the redemption are: a. Stock basis: $10,000; building basis: $50,000 b. Stock basis: $20,000; building basis: $50,000 c. Stock basis: $10,000; building basis: $10,000 d. Stock basis: $20,000; building basis: $10,000 40. Vaccines Corporation sold equipment used in its business to its sole shareholder Clancy Yarrow for $10,000. On the date of the sale, the fair market value of the equipment was $15,000 and Clancy?s adjusted basis was $12,000. What amount of the transfer is considered to be a dividend to Clancy? a. $20,000 b. $5,000 c. $2,000 d. $0 41. A corporation generally recognizes gains and losses on sales of property during a complete liquidation. True/False 42. A liquidating distribution may be treated as a dividend to shareholders if the liquidating corporation has accumulated earnings and profits. True/False 43. A liquidating corporation may recognize gain or loss on the distribution of installment obligations to shareholders. True/False 44. The Trap Corporation liquidates. One shareholder, who owned 30 percent of the stock, receives for the stock, inventory worth $90,000 with a basis of $70,000. Trap Corporation will recognize: a. $20,000 of capital gain b. $20,000 of ordinary income c. $20,000 of Sec. 1231 gain d. No gain 45. Rapid, Inc., a cash basis corporation, distributes $30,000 of accounts receivable to Sylvester, an individual shareholder, in cancellation of his stock, pursuant to a plan of complete liquidation. If Sylvester?s basis in his stock is $10,000 the tax result is: a. Rapid has no gain, but Sylvester has ordinary income of $20,000. b. Rapid recognizes $30,000 of ordinary income and Sylvester has no gain or loss. c. Rapid recognizes $30,000 of ordinary income and Sylvester has a capital gain of $20,000. d. Rapid recognizes no gain and Sylvester recognizes a capital gain of $20,000 under Section 331. 46. The following statements about property distributions in complete liquidations with liabilities in excess of fair market value are all false, except: a. A loss may be recognized. b. The shareholder receives a basis in the property equal to the amount of liability. c. The distributor recognizes gain equal to the excess of liabilities over basis. d. Since liabilities exceed fair market value, no depreciation recapture will occur. 47. Mark receives a liquidating distribution from Arosa Corporation as part of a redemption of all of its stock. Mark?s basis for his Arosa stock is $10,000. In exchange for his stock, Mark receives property with a $10,000 basis and a $25,000 fair market value that is subject to a $12,000 mortgage, and also receives cash of $15,000. What is Mark?s recognized gain? a. $42,000 b. $30,000 c. $18,000 d. $3,000 48. Which of the following statements regarding E&P of a liquidating corporation is incorrect? a. The character of an individual shareholder?s gain does not depend on the E&P of the liquidating corporation. b. The E&P of the liquidating corporation is not reduced by the amount distributed in liquidation. c. When a subsidiary is liquidated into its parent, the subsidiary?s E&P is extinguished. d. The process of liquidating may increase the E&P of the liquidating corporation. 49. In 2009, pursuant to a plan of complete liquidation, Woods Corp. distributed all of its property to its shareholders. Among the property distributed was cash of $200,000, and land that had been held as an investment that had a basis of $100,000, and a fair market value of $160,000. The land was subject to a mortgage of $170,000 which the shareholders assumed. What amount of gain must Woods Corp. recognize as a result of its liquidating distributions? a. $0 b. $10,000 c. $60,000 d. $70,000 50. Paula receives a liquidating distribution from Pell Corporation as part of a redemption of all of its stock. Paula?s basis for her Pell stock is $10,000. In exchange for her stock, Paula receives property with an $8,000 basis and a $15,000 FMV that is subject to a $2,000 mortgage, and also receives cash of $5,000. What is Paula?s recognized gain? a. $12,000 b. $10,000 c. $8,000 d. $0 image text in transcribed

TAXATION OF CORPORATIONS AND PARTNERSHIPS 1. A business cannot be taxed as a corporation unless it is incorporated under local law. True/False 2. When a corporation receives property from a shareholder its basis equals that of the shareholder, increased by any gain recognized by the shareholder. True/False 3. Options to buy stock constitute stock for Code Sec. 351 purposes, but only if the stock so qualifies. True/False 4. A sale of Code Sec. 1244 stock results in ordinary income if sold at a gain. True/False 5. A corporation's deduction for charitable contributions is limited to 50 percent of adjusted taxable income. True/False 6. Organizational expenditures must be capitalized but may be amortized over 60 months or longer. True/False 7. A brother-sister controlled group can fi le a consolidated return if all members of the group consent. True/False 8. Sandra Sherman incorporates her apartment building. It has a basis of $50,000, a value of $150,000, is subject to a mortgage of $70,000 and has a depreciation recapture potential of $12,000. If Sandra receives stock worth $80,000, she will recognize: a. No gain. b. $30,000 of gain, $12,000 of which is ordinary. c. $12,000 of ordinary income. d. $20,000 of gain, $12,000 of which is ordinary. 9. Algernon Amsley transferred the following to his controlled corporation in exchange for stock: Building Cash Mortgage on building IBM stock Basis $20,000 10,000 40,000 15,000 Value $50,000 10,000 40,000 12,000 Algernon must recognize a gain of: a. $20,000 b. $0 c. $10,000 d. $27,000 10. One year Potter, Inc. had gross income from sales of $210,000, business expenses of $230,000, and dividend income from U.S. corporations of $150,000. Potter's 80 percent dividends-received deduction was: a. $104,000 b. $120,000 c. $0 d. $150,000 11. Prior to a charitable gift to the Plato University of land with a basis of $6,000 and a value of $13,000, All-Set, Inc. had taxable income of $50,000. If the dividends-received deduction was $80,000, the charitable contribution deduction is: a. $5,000 b. $6,000 c. $2,925 d. $5,800 12. Black & White, Inc. has $20,000 in taxable income, plus a long-term capital gain of $10,000. Its tax liability is: a. $4,500 b. $10,200 c. $5,800 d. $7,500 13. Kevin Broid owns all the stock of Dana Corporation. During the year, Kevin sold a building to Dana for $150,000. The building cost $120,000, its adjusted basis was $94,000, and it was depreciated under the straight-line method. Dana intends to use the building in its operations. Kevin's tax consequences of the sale are: a. $56,000 dividend income b. $56,000 ordinary income c. $56,000 Code Sec. 1231 gain d. $26,000 ordinary income and $30,000 Code Sec. 1231 gain e. $56,000 long-term capital gain 14. Hoover, Inc. had gross receipts from operations of $230,000, operating and other expenses of $310,000, and dividends received from a 45 percent-owned domestic corporation of $120,000. Hoover's tax position for the year is: a. $8,000 taxable income b. $56,000 net operating loss c. $40,000 taxable income d. $80,000 net operating loss 15. Future, Inc. reported the following results for the year: Net income per books Federal income taxes Life insurance proceeds on key employee Tax-exempt interest income Net capital loss Future's taxable income for the year was: a. $123,170 b. $143,170 c. $72,000 d. $135,000 e. $107,000 $110,000 36,170 15,000 13,000 25,000 16. In order for Bandana Corporation, a calendar year taxpayer, to be required to make estimated tax payments in 2009, its expected tax liability would have to be: a. $500 or more b. $600 or more c. $1,000 or more d. $2,000 or more 17. Ben Brown transferred property that had an adjusted basis to him of $40,000 and a fair market value of $50,000 to Crackers Corporation in exchange for 100 percent of Crackers's only class of stock and $15,000 cash. At the time of the transfer, the stock had a fair market value of $35,000. What is the amount of gain to be recognized by Ben? a. $0 b. $10,000 c. $15,000 d. $25,000 18. The check-the-box election to be taxed as a corporation applies to: a. corporations b. partnerships c. trusts d. all of the above e. none of the above 19. John, the sole owner of LV Co., transfers equipment to LV Co. in return for 100 shares of its stock and $10,000. The stock is worth $70,000. John bought the machine several years ago for $60,000 and its adjusted basis at the time of the transfer was $28,000. John's recognized gain on the transfer is: a. $-0b. $52,000: $32,000 Code Sec. 1245 and $20,000 Code Sec. 1231 c. $10,000: all Code Sec. 1231 d. $10,000: all Code Sec. 1245 e. none of the above 20. When deciding if a corporate instrument is debt or equity, the IRS will consider: a. the corporation's debt to equity ratio b. if the debt is convertable into stock c. the relationship between stock and debt ownership percentages d. if the debt is preferred over or subordinate to other debt e. all of the above f. none of the above 21. Absent any special provision (e.g., Code Sec. 351), a transfer of property from a shareholder to a corporation in return for its shares would result in: a. full gain or loss recognition b. partial gain or loss recognition c. no gain or loss recognition d. none of the above 22. Susan has a gain on the transfer of property to a corporation. In order for Susan to have no gain recognition under Code Sec. 351, she must receive: a. stock and securities b. securities only c. stock only d. the shareholder may receive any type of property from the corporation 23. Bob owns all 50 shares of Max Company, valued at $50,000. His friend, Lee, owns equipment worth $50,000. Lee's adjusted basis in the equipment is $20,000. Lee transfers the equipment to Max Company in exchange for 50 shares. Lee has a: a. $30,000 realized and $30,000 recognized gain b. $30,000 realized and $0 recognized gain c. $0 realized and $0 recognized gain d. none of the above 24. Dave formed Shull Company and transferred land ($100,000 fair market value; $40,000 adjusted basis) and equipment ($50,000 fair market value; $10,000 adjusted basis) in exchange for 100 shares of stock. Shull Company assumes the $45,000 mortgage on the land as part of the transfer. Dave's tax consequences are: Recognized Gain Basis in 100 shares a. $0 $50,000 b. $5,000 $0 c. $50,000 $60,000 d. $100,000 $100,000 25. Jenny Co. donated inventory with an adjusted basis of $50,000 and a $78,000 fair market value to a qualified public charity, which will use the inventory for the care of the ill and needy. It donates other inventory with an adjusted basis of $26,000 and a $40,000 fair market value to a qualified public charity that will not use the inventory for the care of the needy, ill, or infants (the donee is not an educational or research organization). What is Jenny Co.'s charitable deduction? a. $118,000 b. $97,000 c. $90,000 d. $75,000 26. The amount of a cash dividend is independent of whether or not the shareholder is a corporation. True/False 27. John Jergen's stock basis is $3,000 and he has owned it for two years. If E&P is $4,000 and John receives a distribution of $12,000, the result is a dividend of $4,000, a return of capital of $3,000, and a long-term capital gain of $5,000. True/False 28. A shareholder receives a tax-free preferred stock dividend on her common stock. Subsequently, she sells both her common and preferred stock to her aunt. She will not have any dividend income. True/False 29. When a tax-free right is received, the shareholder may be able to allocate basis to it from his stock, or it may simply have a zero basis. True/False 30. A corporation must recognize a gain if it distributes property with a liability in excess of adjusted basis. True/False 31. A distribution of nontaxable stock dividends does not reduce the corporation's E&P. True/False 32. If a distribution qualifies as a partial liquidation then all shareholders receive sale or exchange treatment on the redemption. True/False 33. A sale of Code Sec. 306 stock always results in ordinary income. True/False 34. Unreasonable compensation is one type of constructive or disguised dividend. True/False 35. A distribution by a corporation can never make its E&P negative. True/False 36. Arrow, Inc. has an accumulated defi cit of $3,000. This year it distributes $15,000 to its shareholders. How much of the amount is a dividend if the current year's books reveal the following items: Taxable income Proceeds from key-man life insurance Interest from Iowa City bonds Capital loss $2,000 $10,000 $5,000 $4,000 a. $10,000 b. $0 c. $13,000 d. $2,000 37. Grounded Air Flight Company had E&P of $50,000 when it distributed land held as an investment with a basis of $10,000, a value of $50,000, but subject to a liability of $30,000 to an individual shareholder. After the distribution, E&P equals: a. $50,000 b. $70,000 c. $30,000 d. $60,000 38. Better Pools, Inc. distributed land with a basis of $20,000, a value of $75,000, subject to a liability of $35,000 to a noncorporate shareholder when its E&P was $300,000. As a result of the distribution, the amount of the dividend and he shareholder's basis in the distributed property are as follows: a. Dividend: $40,000; basis: $40,000 b. Dividend: $20,000; basis: $20,000 c. Dividend: $40,000; basis: $20,000 d. Dividend: $40,000; basis: $75,000 39. Fred Farmer and his two sons owned 100 percent of Fruits and Nuts, Inc. Fred owned 50 percent of the stock, but he had 25 percent redeemed by the corporation for a building with a basis of $10,000 and a value of $50,000. If E&P is $200,000 and Fred's basis in his stock before the redemption was $20,000, the stock and building basis after the redemption are: a. Stock basis: $10,000; building basis: $50,000 b. Stock basis: $20,000; building basis: $50,000 c. Stock basis: $10,000; building basis: $10,000 d. Stock basis: $20,000; building basis: $10,000 40. Vaccines Corporation sold equipment used in its business to its sole shareholder Clancy Yarrow for $10,000. On the date of the sale, the fair market value of the equipment was $15,000 and Clancy's adjusted basis was $12,000. What amount of the transfer is considered to be a dividend to Clancy? a. $20,000 b. $5,000 c. $2,000 d. $0 41. A corporation generally recognizes gains and losses on sales of property during a complete liquidation. True/False 42. A liquidating distribution may be treated as a dividend to shareholders if the liquidating corporation has accumulated earnings and profits. True/False 43. A liquidating corporation may recognize gain or loss on the distribution of installment obligations to shareholders. True/False 44. The Trap Corporation liquidates. One shareholder, who owned 30 percent of the stock, receives for the stock, inventory worth $90,000 with a basis of $70,000. Trap Corporation will recognize: a. $20,000 of capital gain b. $20,000 of ordinary income c. $20,000 of Sec. 1231 gain d. No gain 45. Rapid, Inc., a cash basis corporation, distributes $30,000 of accounts receivable to Sylvester, an individual shareholder, in cancellation of his stock, pursuant to a plan of complete liquidation. If Sylvester's basis in his stock is $10,000 the tax result is: a. Rapid has no gain, but Sylvester has ordinary income of $20,000. b. Rapid recognizes $30,000 of ordinary income and Sylvester has no gain or loss. c. Rapid recognizes $30,000 of ordinary income and Sylvester has a capital gain of $20,000. d. Rapid recognizes no gain and Sylvester recognizes a capital gain of $20,000 under Section 331. 46. The following statements about property distributions in complete liquidations with liabilities in excess of fair market value are all false, except: a. A loss may be recognized. b. The shareholder receives a basis in the property equal to the amount of liability. c. The distributor recognizes gain equal to the excess of liabilities over basis. d. Since liabilities exceed fair market value, no depreciation recapture will occur. 47. Mark receives a liquidating distribution from Arosa Corporation as part of a redemption of all of its stock. Mark's basis for his Arosa stock is $10,000. In exchange for his stock, Mark receives property with a $10,000 basis and a $25,000 fair market value that is subject to a $12,000 mortgage, and also receives cash of $15,000. What is Mark's recognized gain? a. $42,000 b. $30,000 c. $18,000 d. $3,000 48. Which of the following statements regarding E&P of a liquidating corporation is incorrect? a. The character of an individual shareholder's gain does not depend on the E&P of the liquidating corporation. b. The E&P of the liquidating corporation is not reduced by the amount distributed in liquidation. c. When a subsidiary is liquidated into its parent, the subsidiary's E&P is extinguished. d. The process of liquidating may increase the E&P of the liquidating corporation. 49. In 2009, pursuant to a plan of complete liquidation, Woods Corp. distributed all of its property to its shareholders. Among the property distributed was cash of $200,000, and land that had been held as an investment that had a basis of $100,000, and a fair market value of $160,000. The land was subject to a mortgage of $170,000 which the shareholders assumed. What amount of gain must Woods Corp. recognize as a result of its liquidating distributions? a. $0 b. $10,000 c. $60,000 d. $70,000 50. Paula receives a liquidating distribution from Pell Corporation as part of a redemption of all of its stock. Paula's basis for her Pell stock is $10,000. In exchange for her stock, Paula receives property with an $8,000 basis and a $15,000 FMV that is subject to a $2,000 mortgage, and also receives cash of $5,000. What is Paula's recognized gain? a. $12,000 b. $10,000 c. $8,000 d. $0