Question 11 [11] ABC Corp., a closely held C Corporation, decided to distribute two pieces of real estate that it no longer needs in its business to its two 50% shareholders. Each parcel of real estate has a fair market value of $1M and ABC Corp. has a tax basis in each piece of real estate equal to $600K. ABC Corp. has $20M of accumulated earnings and profits ("E&P") and $4M of current E&P. Upon making these distributions ABC Corp. will: a. recognize gain of $400K on each piece of real estate distributed pursuant to IRC section 311(b) because the fair market value of each piece of real estate exceeds the basis that the company had in the real estate assets by that amount. b. not recognize gains on the distribution of the real estate assets since, under IRC section 61, the company did close a transaction requiring realization and recognition of gross revenue, or gross receipts. c. not recognize any gain or income on the distribution of the property since, under IRC sections 301 and 316, the distributions will constitute dividends and the shareholders will report dividend income equal to the value of the property received on their personal income tax returns. d. not recognize gains on the distribution of the real estate assets since, under IRC section 301, the company made in-kind, not cash distributions. 2 points

Question 12 [12] Under IRC section 163(j), enacted by the Tax Cuts and Jobs Act of 2017, for calendar tax years 2018 through 2021 a C corporation's deduction for business interest expense is limited to: a. 30% of the company's earnings before interest and taxes ("EBIT") plus the company's business interest income. b. 30% of the company's gross revenue plus the company's business interest income as long as the interest payments constitute ordinary and necessary business expenses under IRC sections 162 and 163. c. 30% of a company's line 28 taxable income (taxable income prior to the deduction for net operating losses and/or dividends) without regard to the amount of interest expense claimed as a deduction by the company under IRC sections 162 and/or 163. d. 30% of the company's earnings before interest, taxes, depreciation and amortization ("EBITDA") plus the company's business interest income. 2 points

Question 13 [13] Under IRC section 7701, and the regulations promulgated thereunder referred to as the "check-the-box regs", an "eligible entity" is an entity that: a. has positive current or accumulated earnings and profits ("E&P") under IRC section 312 and is able, therefore, to declare dividends. b. is able to claim investment tax credits ("ITC's") pursuant to IRC sections 46 et seq. c. that has one class of stock and not more than 100 shareholders (who are natural persons and citizens of the U.S.) pursuant to IRC section 1361. d. is able to elect if it wants to be classified as a taxable association (subject to tax at the entity level as tradition C corporations are taxed), or as a non-taxable disregarded entity, or partnership (depending on whether the entity has one owner, or two or more owners). 2 points

Question 14 [14] If the IRS learned that the controlling shareholder of a C corporation (which corporation had substantial earnings and profits ["E&P"]), who was not an employee and otherwise did not work for the company (and did not provide services as an independent contractor to the corporation, etc.) extensively used the corporation's private jet throughout 2020 for her personal use (approximately 500 hours of use throughout the year) and did not pay the corporation anything for this use there is a high probability that the IRS would: a. assert that the shareholder received a constructive dividend from the company and would have to recognize dividend income equal to the value of the use of the jet (and pay income tax on such dividend income). b. view the use of the jet by the shareholder as a de minimus, non-compensatory fringe benefit. c. assert that the company would have to hire the shareholder as an employee and the shareholder would be obligated to provide services to the company in an amount equal to the value of her use of the jet. d. assert that the shareholder would have to recognize compensatory income (ordinary income of the type typically reportable on a W-2) for the fair value of her use of the jet and pay income tax on such income. 2 points

Question 15 [15] What was the tax result called at issue in the Chamberlin v. Commissioner, Cir. Ct. of App. (6th 1953) case, and what IRC section did Congress enact in response to this case (and several other cases)? a. preferred stock bailout ~ ~ IRC section 267 b. substance over form ~ ~ IRC section 269 c. preferred stock bailout ~ ~ IRC section 306 d. assignment of income ~ ~ IRC section 306 2 points

Question 16 [16] In a family owned/closely held C corporation if the grandmother of the family, who owns 20% of the stock (and her four children own the other 80% of the stock), wants to sell all her stock to the company and retire (which includes forgoing all involvement in the corporation for at least ten years) what action or actions may the grandmother take to ensure that the sale of her stock will be taxed as a redemption as opposed to a dividend? (Assume that the corporation has substantial earnings and profits ["E&P"].) a. Grandma can waive the IRC section 318 family attribution rules pursuant to IRC section 302. b. Grandma, pursuant to IRC section 302, can document that her sale of stock to the company resulted in a substantial disproportionate reduction in her ownership of the company. c. Grandma can declare on her personal income tax return that she intended to sell all her shares of stock as a capital asset, as defined in IRC section 1221, which will attract capital gain treatment. d. Grandma can insist that the company pay cash (instead of issuing her a note payable) for her stock. 2 points

Question 17 [17] Which of the following would prevent the application of IRC section 351 to the formation of a new C corporation? a. a contribution of professional consulting services by one of the contributing shareholders for 25% of the stock in the new company - b. a contribution office furniture worth 15% of the value of the new stock being issue and professional accounting services worth 10% of the value of the stock being issued for a total of 25% of the stock in the new company - c. a contribution of cash by one of the contributing shareholders for 25% of the stock in the new company - d. a contribution of machinery and equipment with a basis of zero, but with a value equal to 25% of the stock being issued by the company for 25% of the stock in the new company - 2 points

Question 18 [18] A C corporation sells off one of its three business lines (which business line constituted a stand alone trade or business under the IRC and which represented approximately 1/3 of the total business carried on by the corporation) for $60M. The corporation then distributed $40M of the $60M proceeds (retaining $20M to pay the corporate tax bill relating to the sale of the business line) equally to its shareholders. The corporation has $20M of accumulated earnings and profits ("E&P") and $4M of current E&P. How should the shareholders treat the $40M distribution for their personal income tax purposes? a. $24 million of the distribution should constitute a dividend to the shareholders and the balance should be reported as a return of capital, or a capital gain depending on the basis the various shareholders have in their stock. b. The entire payment of $40M to the shareholders should constitute a redemption under IRC section 302 resulting in sale or exchange treatment for the shareholders. c. The entire payment of the $40M should constitute ordinary income to the shareholders pursuant to IRC section 61 since the shareholders control the corporation making the payment. d. If the company properly increases its earnings and profits ("E&P") under IRC section 312 then the entire distribution should constitute a dividend to the shareholders under IRC section 301. 2 points

Question 19 [19] What is the definition of control under IRC section 351 that the contributing shareholder (or shareholders) must meet in order (along with the other requirements of the section) for the section to apply and result in the transaction being tax-free, or tax-deferred? a. "Control" for IRC section 351 purposes incorporates IRC section 368(c)'s definition that require the shareholder(s) to end up with 80% or more of the company's voting stock and 80% or more of all other classes of stock. b. "Control" for IRC section 351 purposes is similar to control for GAAP purposes, which exists where the shareholder(s) end up with more than 50% of the voting stock of the company. c. "Control" for section 351 purposes means that the shareholder(s) end up with the ability to elect the majority of the members of the company's Board of Directors. d. "Control" for IRC section 351 purposes incorporates IRC section 368(c)'s definition that requires the shareholder(s) to end up with 80% or more of the company's voting stock. 2 points

Question 20 [20] What is the primary reason the U.S. Congress enacted IRC section 385? a. if states within the U.S. impose a net worth tax as part of their corporate taxation (as many states do) an excess of debt on corporate balance sheets could undermine these net worth taxes - b. Congress wanted to ensure that the payment of interest (generally a deductible tax expense for a corporation, which [in turn] lowers the corporation's taxable income and its corresponding corporate income tax) is valid interest, and not a disguised dividend - c. an excess of debt on a corporation's balance sheet may cause the company to go into bankruptcy - d. interest income is not necessarily taxed at the same tax rate as dividend income -