Name: ________________________ Class: ___________________ Date: __________
True/False Indicate whether the statement is true or false. ____ 1. Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000. 2. To determine E & P, some (but not all) previously excluded income items are added back to taxable income. 3. Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.
Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 4. Mitchell and Powell form Green Corporation. Mitchell transfers property (basis of $105,000 and fair market value of $90,000) while Powell transfers land (basis of $8,000 and fair market value of $75,000) and $15,000 of cash. Each receives 50% of Green Corporation’s stock (total value of $180,000). As a result of these transfers: a. Mitchell has a recognized loss of $15,000, and Powell has a recognized gain of $67,000. b. Neither Mitchell nor Powell has any recognized gain or loss. c. Mitchell has no recognized loss, but Powell has a recognized gain of $15,000. d. Green Corporation will have a basis in the land of $23,000. e. None of the above.
Problem 5. On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000. Its current E & P for the year is $90,000 (before considering dividend distributions). During the year, Tulip distributes $600,000 ($300,000 each) to its equal shareholders, Anne and Tom. Anne has a basis in her stock of $65,000, while Tom’s basis is $120,000. What is the effect of the distribution by Tulip Corporation on Anne and Tom? 6. Tanya is in the 35% tax bracket. She acquired 1,000 shares of stock in Swan Corporation seven years ago for $200 a share. In the current year, Swan Corporation (E & P of $1.2 million) redeems all of her shares for $500,000. What are the tax consequences to Tanya if: a. The redemption qualifies for sale or exchange treatment, and Tanya has no other transactions in the current year involving capital assets? The redemption does not qualify for sale or exchange treatment?
Name: ________________________ 7. Nancy, Guy, and Rod form Goldfinch Corporation with the following consideration. Adjusted Basis From Nancy— Cash Inventory From Guy— Land and building From Rod— Legal and accounting services to incorporate 200,000 90,000 Fair Market Value 120,000 130,000
Goldfinch issues its 500 shares of stock as follows: 250 to Nancy, 200 to Guy, and 50 to Rod. In addition, Guy gets $50,000 in cash. a. b. c. d. Does Nancy, Guy, or Rod recognize gain (or income)? What basis does Guy have in the Goldfinch stock? What basis does Goldfinch Corporation have in the inventory? In the land and building? What basis does Rod have in the Goldfinch stock?
8. Finch Corporation (E & P of $400,000) distributed machinery ($10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen. The property is subject to a $50,000 mortgage, which Kathleen assumed. How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery? 9. Steve has a capital loss carryover in the current year of $90,000. He owns 3,000 shares of stock in Carmine Corporation, which he purchased six years ago for $50 per share. In the current year, Carmine Corporation (E & P of $750,000) redeems all of his shares for $320,000. Steve is in the 35% tax bracket. What is his tax liability with respect to the corporate distribution if: a. The redemption qualifies for sale or exchange treatment, and Steve has no other transactions in the current year involving capital assets? The redemption does not qualify for sale or exchange treatment?
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