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True/False 1.If a distribution qualifies as a partial liquidation then all shareholders receive sale or exchange treatment on the redemption. 2.Unreasonable compensation is one type of constructive or disguised dividend. 3.To receive a fair market value basis in the assets of a purchased subsidiary, the parent corporation must liquidate the subsidiary. 4.A code section 338 is irrevocable. Multiple Choice 1.On January 4, 2010, Ray Zeyke purchased 100 shares of common stock in Windows Corp. for $40 per share. Six months later he purchased 60 more shares at %50 per share. On December 1, 2010, Ray received a 25% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Ray's basis in each share of stock? a. 200 shares at $35 per share. b. 200 shares at $43.75 per share. c. 125 shares at $32 per share and 75 shares at $40 per share. d.125 shares at $40 per share and 75 shares at $50 per share. 2.The authority of the U.S. Government to raise revenue through a federal income tax is derived from: 3.a. The Internal Revenue Service 4.b. Eisner v. Macomber (a supreme court case) 5.c. The 16th Amendment to the Constitution 6.d. The House Ways and Means Committee 7.which of the following sources of tax law are cross-referenced to related Internal Revenue Code sections through the use of a similar numbering system? 8.a. Revenue Rulings 9.b. Tax Court cases 10.c. Treasury Regulations 11.d. Determination Letters 12.which of the following types of tax matters are typically handled by a Correspondence Examination? 13.a. Audits involving complex corporate reorganizations. 14.b. Simple matters that can usually be resolved by mail. 15.c. Tax shelter examinations. 16.d. TCMP audits. 17.Larry Monn incorporated his detective agency and transferred the following assets and liabilities to Moon Probes, Inc. for 100% of its stock: Adjusted Basis Value Accounts Receivable $0 $7,000 Accounts Payable $0 $3,000 Office Condominium $30,000 $62,000 Mortgage Payable $34,000 $34,000 The following statements about the above incorporations are all false, except: a. Larry must recognize $7,000 of his realized gain. b. The corporation's basis in the condominium is the carried over basis of 30,000. c. Larry must recognize a gain of $4,000 and the corporation can deduct $3,000 when it pays the accounts payable. d. Larry must recognize $7,000 of ordinary income upon the assignment of receivables. 6.Cookie Corporation distributed land to its sole shareholder. On the date of distribution, the land had a fair market value of $85,000 and an adjusted basis to Cookies of $42,000. What is the amount of Cookie's gain on the distribution? 7.a. $0 8.b. $42,000 9.c. $43,000 10.d. $85,000 11.Pro Co.'s accumulated E&P is $100,000. On June 15, it distributes land to its sole shareholder (Susan). Pro Co's adjusted basis in the land is $40,000 and the land's fair market value is $60.000. What are the tax consequences of the distribution? 12.Brenda Pro Co. a. $40,000 dividend income $0 recognized gain b. $40,000 dividend income $20,000 recognized gain c. $60,000 dividend income $0 recognized gain d. $60,000 dividend income $20,000 recognized gain 8.INK, Ltd. Distributes inventory with a basis of $20,000 to a shareholder in complete liquidation. The shareholder, who has a basis of $10,000 for the stock, immediately sells the inventory independently for $50,000. Tax results to the parties are: 9.a. INK recognizes $30,000 of ordinary income, and the shareholder recognizes $40,000 of capital gain. 10.b. INK recognizes no gain or loss, but the shareholder recognizes $40,000 of ordinary income. 11.c. INK recognizes $30,000 of ordinary income and the shareholder recognizes no gain or loss. 12.d. INK recognizes no gain or loss and the shareholder recognizes $30,000 of ordinary income and $10,000 capital gain. 13.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 Solve and show your work 10.Stanley Stummer had the following items on his timely filed 2010 income tax return: Gross receipts $1,000,000 Cost of goods sold ($750,000) Capital Gain $50,000 Capital Loss ($75,000) Stanley inadvertently omitted some income on his 2010 return. What is the statue of limitations if he omitted $300,000 income on the return? What if he omitted $250,000? 11.Answer the following questions concerning the statue of limitations for assessment of tax liability: 12.a. What is the general rule for the statute of limitations on assessment of tax liability? 13.b. What are the exceptions to the general rule? 12.What factors should a taxpayer consider in deciding whether to litigate a case and where to litigate? 13.Robots, Inc. reports the following financial data for last year: Gross income from sales and services Wages, cost of recovery and other expenses Dividend income from at least 20% owned U.S. Corporations Net operating loss carryover $200,000 180,000 40,000 20,000 Capital losses Charitable contribution carryover Current charitable contributions a. b. c. d. 10,000 7,000 11,000 What is Robot's charitable contribution deduction? How much of the charitable contribution carryover is used up? What is taxable income? What is the dividends received deduction? 14.Ruth Rainer incorporated her office building with a basis of $40,000, a mortgage of $55,000, a value of $100,000, and depreciation recapture potential of $7,000. She received stock worth $45,000. a. What is Ruth's realized and recognized gain? What character is it? b. What is Ruth's basis in her stock? c. What is the corporation's basis in the building? d. When do the holding periods start? 15.The following information is available for Stride Corporation: Taxable Income Federal income taxes Life insurance proceeds on key employee Premiums for life insurance on key employees Tax-exempt interest income Interest paid on loan to acquire tax-exempt bonds MACRS depreciation in excess of straight-line used for book purposes Net capital loss Contributions in excess of the 10% limit $125,000 30,400 36,000 1,200 9,100 1,400 6,000 9,200 12,500 Determine Stride Corporation's net income per books. 16.Wheelbarrows, Inc. distributed $20,000 to John Bellows, a shareholder with a basis of $5,000 in his stock, at a time when it has an accumulated deficit of $9,000 and a current E&P of $7,000. a. How much gross income does John have? b. What is the amount of the dividend? c. What is John's basis in his after the distribution? d.What is Wheelbarrow's accumulated and current E&P after the distribution? 17.In each of the independent case below, indicate the taxable portion and return of capital for each distribution. Accumulated E&P Current E&P beginning of the yr. Year-End Cash Distributions Taxable Amount Return of Capital a. $40,000 $60,000 _____________ _____________ $20,000 b. 40,000 20,000 70,000 _____________ _____________ c. (40,000) 40,000 30,000 _____________ _____________ d. (10,000) (20,000) 15,000 _____________ _____________ e. 40,000 (15,000) 35,000 _____________ _____________ _____________ _____________ f. Same as e, except the distribution is made at the end of the third quarter