NATIONAL TAX EDUCATION PROGRAM 2014 Week IV Examination

Transcription

1 1 NATIONAL TAX EDUCATION PROGRAM 2014 Week IV Examination Name (please print) Instructions: Circle the letter to indicate your answer to each of the following multiple choice questions. You may use all of the material you received for the program. Upon completion of the exam, please sign the pledge below: I pledge that I did not give or receive help on this exam. 1. If a redemption fails to qualify for sale treatment, the full amount received by the shareholder for the stock qualifies a. for exchange treatment. b. for exchange treatment after deducting the stock s basis. c. as a property distribution after deducting the stock s basis, and thus is a dividend to the extent that it is out of E&P. d. as a property distribution and thus is a dividend to the extent that it is out of E&P. 2. Pennypincher Corporation has 100 shares of stock outstanding owned by the following taxpayers. Shares Shareholder Owned Mr. Penny 30 Mrs. Penny (Mr. Penny s wife) 10 John (the Pennys son) 10 Abby (the Pennys granddaughter) 10 Buddy Penny (Mr. Penny s brother) 20 P&P Partnership (Mr. Penny is a 20% partner) 10 PPP Corporation (Mr. Penny is a 40% shareholder) None of Mr. Penny s relatives nor the partnership or corporations are partners in P&P or shareholders in PPP. Under the constructive ownership rules of 318, what percentage of Pennypincher Corporation does Mr. Penny own? a. 52% b. 60% c. 62% d. 66% e. 82% f. Some other amount

2 2 3. During the year, Hickory Corporation distributed land worth $40,000 (basis $7,000) and equipment worth $10,000 (basis $15,000) to one of its shareholders, R, in complete redemption of his stock. Due to the distributions, the corporation will report a. net income of $28,000 if the distributions are treated as a dividend out of Maple s E&P. b. net income of $33,000 if the distributions qualify for sale treatment under the basic redemption rules of 302. c. no gain or loss if the distribution qualifies for sale treatment under partial liquidation rules. d. none of the above answers is correct. 4. Which of the following statements is true regarding the penalty taxes on corporations (the accumulated earnings tax and the personal holding company tax)? a. A corporation that is subject to the penalty taxes is required to complete a special form (Schedule 1120-PH or Schedule 1120-AET. b. For both penalty taxes, the penalty is an additional tax of 39.6% on a specially computed base. c. The personal holding company tax is imposed using objective criteria while the accumulated earnings tax is imposed using on subjective criteria. d. More than one of the above is true. e. None of the above are true 5. The treatment of distributions in liquidation differs from that in nonliquidating distributions in that the corporation is normally allowed to recognize loss on a liquidating distribution. To prevent abuse of this privilege and to circumvent the gain recognition rule, restrictions prohibit the liquidating corporation from recognizing losses on distributions to related parties if: a. the distribution is non-pro rata (i.e., each shareholder did not receive his or her pro rata share of each type of property). b. the property was acquired during the first two years of a corporation s existence. c. there is a clear and substantial relationship between the contributed property and the corporation s current or anticipated business. d. all of the above. 6. A Corporation owns 90% of the outstanding stock of B Corporation; the remaining 10% of B is owned by unrelated parties. In a liquidation pursuant to 332, B distributed and transferred property to A with a fair market value of $80,000 (basis $30,000). In addition, B distributed and transferred property to the minority shareholders worth $11,000 (basis $9,000). How much gain does B realize? a. $50,000 b. $52,000 c. $2,000 d. $0

3 3 7. P Corporation owns all of the stock T Corporation. P s basis in its T stock is $100,000. T owns one asset, land, with a basis of $125,000. This year, ACQ Corporation acquired all of the stock of T from P for $500,000. Assuming ACQ and T jointly make the 338(h)(10) election, which of the following statements is true? a. P recognizes no gain or loss on the sale of T stock; T recognizes a gain of $375,000. b. P recognizes a gain of $400,000 gain on the sale of stock; T recognizes no gain or loss. c. P recognizes a gain of $400,000 gain on the sale of stock; T recognizes a gain of $375,000. d. None of the above. 8. K Corporation is 100% owned by Seller, who has a basis in her stock of $10,000. K Corporation s sole asset is a waterbed factory worth $100,000 (basis $30,000). If Buyer purchases all the stock of K Corporation for $100,000, Buyer will own a corporation that holds a waterbed factory with a basis in the factory of $30,000, much less than the cost to Buyer. If Buyer is a corporation, a 338 election could be made to obtain a step-up in basis to $100,000 for the factory. The result would be a. a deemed sale of the factory and a tax on a gain of $70,000 ($100,000 - $30,000 basis). b. a tax on the gain of $90,000 ($100,000 - $10,000 basis). c. no tax, as basis would be carried over from the subsidiary corporation. d. none of the above. 9. H owns all of the stock of Little Inc., a C corporation. He plans on selling the business to Big Corp. H is considering the following plans: (1) Little would sell all of the assets to Big and distributes the proceeds to H in complete liquidation. (2) Little would distribute all of the assets to H and H would sell all of the assets to Big. Assuming H wants to maximize the amount that he receives after-tax, which of the following statements is correct? a. H would prefer plan 1. b. H would prefer plan 2. c. It makes no difference from a tax perspective which plan H selects.

4 4 10. R owns all of the stock of Small Inc., an S corporation. He plans on selling the business to Large Corp. According to R s plan, Small would sell all of the assets to Large and distributes the proceeds to H in complete liquidation. Which of the following statements is true? a. Unlike the sale of a C corporation s assets, there is a single tax on the sale while if Small were a C corporation there would be two taxes. b. The result is the same as would occur with a C corporation, two taxes in both cases. c. The result is the same as would occur with a C corporation, one tax in both cases. d. None of the above is correct. 11. X owns all of the stock of M&N Inc., a C corporation. He plans on selling the business to Big Inc. Assuming the transaction is properly structured under the reorganization provisions, which of the following statements is true? a. X can completely avoid paying taxes on the sale. b. X could defer any tax on the sale but only if Big is willing to accept X as a shareholder. c. Big could acquire M&N in an all cash statutory merger and the transaction would qualify for tax-free treatment d. None of the above. 12. This year Blockbuster Inc. acquired Target Inc. from its sole shareholder, Mr. T, in a statutory merger, using only Blockbuster stock. As part of the transaction Target transferred assets worth $500,000 (basis $200,000) to Blockbuster. In addition, as part of the transaction, Mr. T received Blockbuster stock worth $500,000. Mr. T had a basis in his Target stock of $10,000. Which of the following statements is correct concerning the acquisition? a. Target must recognize gain on the sale of its assets to Blockbuster of $300,000. b. Mr. T must recognize gain of $490,000. c. Blockbuster s basis for the assets it purchased is $200,000 d. All of the above are correct e. None of the above are correct. 13. Which of the following statements is false regarding reorganizations qualifying for special treatment under Section 368? a. In a statutory merger, the acquiring corporation generally obtains all of the target corporation s assets as well as all of the target corporation s liabilities b. A name change such as Federal Express to FedEx is subject to the reorganization rules. c. In a reverse triangular merger the identity of the target corporation does not survive. d. In a Type B reorganization, the acquiring corporation is not permitted to use cash as part of the consideration given to the target corporation to acquires its stock but can use only voting stock

5 5 14. Which one of the following statements concerning the continuity of interest doctrine is true? a. The target corporation s shareholders can only receive stock. b. To obtain a ruling regarding a planned reorganization, at least 50% of the consideration received by the target corporation s shareholders as a group must be stock of the acquiring corporation; however, the regulations suggest that only 30% is necessary. c. The target corporation s shareholders can dispose of the acquiring corporation s stock immediately after the transaction. d. All of the above statements are false. 15. Which one of the following statements concerning the continuity of business enterprise doctrine is true? a. The acquiring corporation must continue all of the acquired corporation s lines of business to qualify as continuing the business. b. The acquiring corporation may not sell any of the target corporation s assets to qualify as using target s assets in a business. c. As long as the acquiring corporation uses a significant portion of target s assets in a business, it is immaterial that they are used in a different manner than target used them. d. All of the above statements are false. 16. In a C reorganization, Target Corporation transferred all of its assets except land to Acquiring Corporation. The land was worth $600,000 (basis $520,000). The transferred assets were worth $20 million and had a basis of $16 million in the hands of Target. In exchange, Target received stock of Acquiring worth $19.4 million, cash of $200,000, and an office building worth $400,000 (basis to Acquiring was $260,000). Target liquidates, subject to the rules of 361. How much gain must Target recognize? a. None. b. $80,000 on land. c. $140,000 on office building. d. $600,000 on the assets received. e. $600,000 on the assets received and $80,000 on the land distributed.

6 6 17. Code 382 limits the deductibility of NOLs acquired from loss corporations, if there has been a substantial change in ownership a so-called ownership change. In which one of the following situations has ownership change occurred? a. R owns 1,000 shares of Q Corporation. Q Corporation has 1,000 shares outstanding. R sells 400 shares to T Corporation. b. Same as above, except Q Corporation issues 200 shares each to T and U later that same year. c. M owns 10% of Loss Corporation. She purchased additional stock, increasing her ownership to 15%. d. Loss Corp., publicly held, is actively traded such that there has been a complete change in ownership. At no time did one shareholder own more than 5% of stock. 18. Network Corporation is a publicly traded corporation with its stock widely held. It owns all of the stock of Cable Corporation. Both corporations have substantial E&P. A recent government ruling required Network to divest itself of Cable. As a result, Network distributed all of the stock of Cable to its shareholders. One Network shareholder, T, received 50 shares of Cable worth $2,000. These shares had a basis to Network of $500. T must recognize a. a dividend of $2,000. b. a capital gain of $2,000. c. no gain or loss. d. a dividend of $500. e. a capital gain of $ Brothers A and B each own 50% of the stock of P. P Corporation manufactures coats, and its wholly owned subsidiary, Q, manufactures ties. Q was acquired 20 years ago. During the current year, A and B squabbled over company policy and B decided he wanted to go his separate way. Accordingly, P distributed the stock of Q to B in exchange for all of B s stock in P, for which he had a basis of $15,000. The Q stock was worth $100,000. B will report a. dividend income of $100,000. b. dividend income of $85,000. c. capital gain of $85,000. d. no gain or loss. e. none of the above. 20. Which of the following is considered to be an includible corporation in an affiliated group of corporations? a. A real estate investment trust. b. An S corporation. c. A foreign corporation. d. A personal holding company. e. None of the above.

7 7 21. The consolidated return regulations are interpretive regulations and therefore do not have the force and effect of law. a. True b. False 22. If any member of an affiliated group does not join in the filing of a consolidated return, a. the tax liability of each member is determined as if separate returns were filed. b. the group is automatically terminated by the IRS. c. the tax liability of each member is determined by spreading out liability among the remaining groups. d. the common parent is held responsible even if it was an inadvertent error. e. none of the above. 23. If affiliated member M sells an asset with a cost of $20,000 to affiliated member N for $23,000, what is N s basis in the asset? a. $0 b. $3,000 c. $14,000 d. $20,000 e. $23, Which one of the following statements is true concerning the filing of a consolidated tax return? a. All members of the affiliated group must conform to the same accounting period. b. Estimated tax payments are to be determined in the aggregate. c. Each member of the group is liable for the entire tax liability of the group. d. The parent corporation has the authority to act as agent for the entire group. e. All of the above statements are true. 25. A consolidated tax return must be filed on the basis of the common parent s taxable year. Which of the following statements is not true? a. Each subsidiary must adopt the parent s annual accounting period for the initial consolidated tax return. b. A subsidiary must obtain advance permission from the Commissioner to change its tax year to conform to the accounting period of the parent. c. The IRS has ruled that it will allow a parent corporation to change its taxable year to that of its subsidiary. d. Consolidated tax returns could result in a tax savings. e. All of the above statements are true.