Advanced Tax Spring, 2003 EXAM 1 Name: 1. An individual taxpayer owns a landscape painting. The painting would not be a capital asset if it was held by the taxpayer in which of the following circumstances? a. It is used in his business and is depreciable property. b. It is personal use activity property for the taxpayer. c. It is investment activity property for the taxpayer. d. It is held as inventory by the taxpayer. e. a. and d. 2. Sam operates a variety store as a sole proprietorship. Which of the following items are capital assets in the hands of Sam? a. The vacant lot next to his store that was purchased for use as a parking lot for his customers. b. Sixteen bicycles that have been in his inventory for over a year. c. A note receivable that was given to him by a customer in payment of the balance due on the customer s account at the store. d. A corporate bond in which Sam invested some of the store s excess cash. 3. Which of the following is a capital asset? a. The bicycle of a 10-year old child. The child purchased the bicycle with money inherited from an aunt. b. The tools used by a self-employed carpenter. c. The lots owned by a company that is in the business of buying and reselling residential building lots. d. A mint set of 1985 coins owned by a coin dealer and that is for sale on his website. 4. Gold Corporation (a calendar year taxpayer) is engaged in the business of retailing children's apparel and makes the following donations during the year: Fair Market Adjusted Basis Value Children's clothing (held as inventory) to Goodwill's "Clothes for Needy Tots" $5,000 $5,400 Stock in Exxon acquired two years ago and held as an investment to a Lutheran Church seminary 4,000 4,500 Delivery van to local SPCA (animal shelter) 5,000 3,800 How much qualifies for the charitable contribution deduction? a. $13,500. b. $13,200. c. $14,000. d. $14,500. f. None of the above.
5. Rob and Sharon form Swallow Corporation with the following investments. Adjusted Fair Market Basis Value From Rob Cash $400,000 $400,000 From Sharon Land 500,000 440,000 Each receives 50% of Swallow s stock. In addition, Sharon receives cash of $40,000. One result of these transfers is that Sharon has a: a. Recognized loss of $60,000. b. Recognized loss of $20,000. c. Basis of $460,000 in the Swallow stock. d. Basis of $400,000 in the Swallow stock. 6. Tim, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Wren Corporation. Adjusted Fair Market Basis Value Cash $ 5,000 $ 5,000 Building 110,000 160,000 Mortgage payable (secured by the building and held for 5 years) 120,000 120,000 With respect to this transaction: a. Wren Corporation's basis in the building is $110,000. b. Tim has no recognized gain. c. Tim has a recognized gain of $10,000. d. Tim has a recognized gain of $5,000. 7. A corporation sells property (basis of $45,000) to its sole shareholder for $25,000, the fair market value of the property. With respect to the sale, a. The corporation has a tax loss of $20,000. b. The shareholder has a constructive dividend of $20,000. c. The shareholder has a basis of $45,000 in the property. d. The corporation does not recognize a tax loss but reduces its E & P account by $20,000.
8. Bluebird Corporation has a deficit in accumulated E & P of $180,000. For 2002, it has current E & P of $120,000. On July 1, 2002, Bluebird distributes $135,000 to its sole shareholder, Cameron. Cameron has a basis of $60,000 in his stock in Bluebird Corporation. As a result of the distribution, a. Cameron has dividend income of $135,000. b. Cameron has dividend income of $60,000 and reduces his stock basis to zero. c. Cameron has dividend income of $120,000 and reduces his stock basis to $45,000. d. Cameron has no dividend income, reduces his stock basis to zero, and has a capital gain of $65,000. 9. Redbird Corporation, with E & P of $300,000, distributes property worth $70,000, adjusted basis of $100,000, to Bluebird, a corporate shareholder. The property is subject to a liability of $15,000, which Bluebird assumes. a. Bluebird Corporation has dividend income of $55,000. b. Bluebird Corporation has dividend income of $70,000. c. Bluebird s basis in the property is $55,000. d. The distribution reduces E & P of Redbird Corporation $100,000. e. None of the above statements is correct. 10. Roadrunner Corporation distributes property to its sole shareholder, Linda. The property has a fair market value of $250,000 and an adjusted basis of $175,000. In addition, the property is subject to a liability of $200,000. Current E & P is $450,000. With respect to the distribution, which of the following statements is correct? a. Roadrunner has a gain of $75,000 and Linda has dividend income of $50,000. b. Roadrunner has a gain of $50,000 and Linda s basis in the distributed property is $50,000. c. Roadrunner has a gain of $25,000 and Linda s basis in the distributed property is $250,000. d. Roadrunner has a gain of $75,000 and Linda has dividend income of $250,000.
Problems: 1. Heron Corporation, a calendar year, accrual method taxpayer, provides the following information for 2001 and asks you to prepare Schedule M-1: Net income per books (after-tax) $257,950 Taxable income 150,000 Federal income tax liability 41,750 Interest income from tax-exempt bonds 15,000 Interest paid on loan incurred to purchase tax-exempt bonds 1,500 Life insurance proceeds received as a result of death of Heron s president 150,000 Premiums paid on policy on life of Heron s president 7,800 Excess of capital losses over capital gains 6,000 Retained earnings at beginning of year 375,000 Cash dividends paid 90,000
2. Nancy, Guy, and Rod form Goldfinch Corporation with the following consideration. Adjusted Fair Market Basis Value From Nancy Cash $100,000 $100,000 Inventory 80,000 100,000 From Guy Land and building 120,000 200,000 From Rod Legal and accounting services to incorporate 20,000 Goldfinch issues its 400 shares of stock as follows: 200 to Nancy, 180 to Guy, and 20 to Rod. In addition, Guy gets $20,000 in cash. a. Does Nancy, Guy, or Rod recognize gain (or income)? b. What basis does Guy have in the Goldfinch stock? c. What basis does Goldfinch Corporation have in the inventory? In the land and building? d. What basis does Rod have in the Goldfinch stock?
3. Hummingbird Corporation has 100 shares of common stock outstanding owned as follows: Juan, 50 shares and Rosa (an unrelated party), 50 shares. Juan and Rosa each paid $1,000 per share for the Hummingbird stock 10 years ago. Hummingbird has $100,000 of accumulated E & P and $20,000 of current E & P. Hummingbird distributes land held as an investment (fair market value of $80,000, adjusted basis of $100,000) to Rosa in redemption of 25 of her shares. a. What are the tax results to Rosa on the redemption of her Hummingbird stock? b. What gain or loss results to Hummingbird Corporation on the redemption?
Bonus Question: Worth all sorts of huge points! Cardinal Corporation, an accrual basis taxpayer, has struggled to survive since its formation, six years ago. As a result, it has a deficit in accumulated E & P at the beginning of the year of $300,000. This year, however, the tide was turned and Cardinal earned a significant profit; taxable income was $200,000. To celebrate, Cardinal made two cash distributions to Max, its sole shareholder. The first distribution, $125,000, was made on July 1. The second distribution, $175,000, was paid on December 31. Cardinal s accountant has provided you with the following information that she thinks might be relevant to determining the tax treatment of the distributions. This year s taxable income included a net operating loss carryover of $55,000. The corporation s Federal income tax liability was $61,250 for the year. Cardinal paid nondeductible fines and kickbacks of $5,000. The company also paid nondeductible life insurance premiums of $22,000. The cash surrender value of the corporate-owned life insurance policies increased by $8,000 during the year. The company sold a piece of equipment during the year and reported a 1231 gain of $90,000 and recapture income under 1245 of $35,000. There were no other 1231 transactions during the year, but the corporation did have a capital loss carryforward of $20,000. MACRS depreciation exceeds E & P depreciation by $9,000. In addition, an election under 179 was made this year for $18,000 of assets. a. Compute Cardinal s E & P for the year using the above information. b. What are the tax consequences of the two distributions made during the year to Max? Assume Max s stock basis is $75,000.