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Poppy Corporation was formed three years ago. Poppy’s E&P history is as follows:
Year Current E & P Distributions
2005 $6,000 $4,000
2006 5,000 1,000
2007 1,000 -0-
Poppy Corporation’s accumulated E&P on January 1 will be
A) $0.
B) $7,000.
C) $5,000.
D) $12,000.
4.
Crossroads Corporation distributes $60,000 to its sole shareholder Harley. Crossroads has earnings and profits of $55,000 and Harley’s basis in her stock is $20,000. After the distribution, Harley’s basis is
A) $5,000.
B) $15,000.
C) $20,000.
D) $60,000.
5.
Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year. Current E&P is $20,000. During the year the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock. Date Amount Distributed April 1 $20,000 June 1 20,000 August 1 15,000 November 1 5,000
Date Amount Distributed
April 1 $20,000
June 1 20,000
August 1 15,000
November 1 5,000
The treatment of the $15,000 August 1 distribution would be
A) $15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P.
B) $15,000 is taxable as a dividend from accumulated E&P.
C) $4,000 is taxable as a dividend from accumulated E&P, and $11,000 is tax-free as a return of capital.
D) $5,000 is taxable as a dividend from current E&P and $10,000 is tax-free as a return of capital.
6.
Wills Corporation, which has accumulated and current E&P totaling $65,000, distributes land to its sole shareholder, an individual. The land has a FMV of $75,000 and an adjusted basis of $55,000. The shareholder assumes a $15,000 liability associated with the land. The shareholder will recognize
A) 60,000 of dividend income and have a $60,000 basis in the land.
B) $65,000 of dividend income and have a $75,000 basis in the land.
C) $60,000 of dividend income and have a $75,000 basis in the land.
D) $65,000 of dividend income and have a $65,000 basis in the land.
A corporation distributes land and the related liability in a nonliquidating distribution to a shareholder. The land (a capital asset) has an adjusted basis of $70,000 and a FMV of $100,000 and is subject to a mortgage of $120,000. The corporation must recognize
A) $20,000 capital loss.
B) $50,000 capital gain.
C) $70,000 capital gain.
D) no gain or loss.
8.
Which of the following transactions does not have the potential of creating a constructive dividend?
A) Compensation paid by corporation to a shareholder-employee.
B) Purchase of corporate property by the shareholder.
C) Shareholder’s rental of corporate property.
D) All of the above can result in a constructive dividend.
9.
Bat Corporation distributes stock rights with a $20,000 FMV to its common stock shareholders. The $20,000 value of the stock rights at the time of distribution is less than 15% of the value of the underlying stock.
A) A shareholder must allocate basis to the rights based on the relative FMVs of the stock and the rights.
B) A shareholder cannot allocate any basis to the rights.
C) The basis in the rights is zero unless a shareholder makes a valid election to allocate basis to the rights.
D) The holding period for the rights begins on the day the rights are distributed in all cases.
10. Which of the following is not a reason for a stock redemption?
A) desire by remaining shareholders to retain control
B) desire by shareholders to reduce the corporate tax liability
C) Redemption of shares is a good corporate investment.
D) No outside market exists for the stock.
11.
Elijah owns 20% of Park Corporation’s single class of stock. Elijah’s basis in the stock is $8,000. Park’s E&P is $28,000. If Park redeems all of Elijah’s stock for $48,000, Elijah must report dividend income of
A) $0.
B) $28,000.
C) $40,000.
D) $48,000.
12.
Texas Corporation is undergoing a complete liquidation and distributes land to Robert, one of its shareholders, in exchange for all of Robert’s stock. The land has a basis of $300,000 and a FMV of $400,000 on Texas Corporation’s books and is subject to a $325,000 liability. Robert assumes the liability on the property. Robert’s basis in his Texas Corporation stock is $100,000. What is the amount of gain or loss recognized by Robert on the distribution?
A) $175,000 gain
B) $25,000 gain
C) No gain or loss is recognized.
D) $25,000 loss
13.
Property received in a corporate liquidation by a noncorporate shareholder has
A) a basis equal to its basis on the liquidating corporation’s books increased by any gain recognized by the shareholder upon receipt of the property. Its holding period includes the holding period of the shareholder’s stock.
B) a basis equal to its basis on the liquidating corporation’s books increased by any gain recognized by the shareholder upon receipt of the property. Its holding period commences on the day after the distribution date.
C) a basis equal to its FMV reduced by any liabilities assumed by the shareholder. Its holding period commences on the day after the distribution date.
D) a basis equal to its FMV. Its holding period commences on the day after the distribution date.
14.
Identify which of the following statements is true.
A) In general, a noncorporate shareholder that receives a distribution in complete liquidation of the liquidating corporation recognizes his or her entire realized gain as a capital gain.
B) The basis for nonmoney property received by a noncorporate shareholder as part of a liquidating distribution is the same as its basis on the books of the liquidating corporation.
C) The liquidating corporation does not recognize gains and losses when making a distribution of nonmoney property.
D) All are false.
15.
Identify which of the following statements is true.
A) A loss recognized by a shareholder upon complete liquidation of a corporation may not qualify for ordinary loss treatment if the stock is Sec. 1244 stock.
B) The loss that is recognized by an individual shareholder on the liquidation of a corporation is a capital loss, up to certain limits, if the stock is Sec. 1244 stock.
C) The loss recognized by a corporate shareholder on the worthlessness of the controlled subsidiary’s stock is an ordinary loss.
D) All are false.
16.
Identify which of the following statements is true.
A) With limited exceptions, a loss can be recognized by a liquidating corporation when it makes a liquidating distribution of property that has declined in value.
B) When computing the corporate level gain on a liquidating distribution, the FMV of the property cannot exceed the liability assumed or acquired by the shareholder.
C) The FMV of property distributed by a liquidating corporation can be less than the amount of the liability assumed or acquired by the shareholder.
D) All are false.
17.
Under a plan of complete liquidation, Key Corporation distributes land (not a disqualified property) with an adjusted basis of $410,000 and a FMV of $300,000 for all Sharon’s stock. Sharon’s basis in her 5% interest in the Key stock is $250,000. Find Sharon’s basis in the land and Key Corporation’s recognized gain or loss.
Basis Recognized Gain/Loss
A) $300,000 $110,000 loss
B) $250,000 $110,000 loss
C) $300,000 $-0-
D) 250,000 $-0-
18.
Barnett Corporation owns an office building that cost $900,000. Barnett has taken $600,000 of depreciation on the building. The property is subject to a $600,000 mortgage. The office building has a current FMV of $400,000. Barnett Corporation is liquidated and the office building is distributed to a single individual shareholder who assumes the mortgage. Barnett Corporation must recognize
A) no gain or loss.
B) a $100,000 gain.
C) a $300,000 gain.
D) none of the above
19.
Parent Corporation for ten years has owned all of the stock of Subsidiary Corporation, which manufactures widgets. Parent’s basis in Subsidiary’s stock is $500,000. Subsidiary Corporation is insolvent and has no assets to redeem any of the stock that Parent Corporation owns when it liquidates. Nearly all of Subsidiary’s gross income during the past five years has come from nonpassive activities. Parent can recognize
A) a $500,000 short-term capital loss.
B) a $500,000 long-term capital loss.
C) a $500,000 ordinary loss.
D) a $500,000 bad debt deduction.
20.
Ball Corporation owns 80% of Net Corporation’s stock and Jack owns the remaining 20% of Net Corporation’s stock. Ball’s basis in the Net stock is $200,000 and Jack’s basis in the Net stock is $100,000. Under a plan of complete liquidation, Ball Corporation receives property with an adjusted basis of $400,000 and a FMV of $800,000 and Jack receives property with an adjusted basis of $50,000 and a FMV of $200,000. Ball and Jack’s recognized gains on the liquidation are:
Ball Jack
A) $0 $0
B) $0 $100,000
C) $200,000 $50,000
D) $600,000 $100,000
21.
Parent Corporation owns all of Subsidiary Corporation’s stock. In addition, Parent Corporation owns $100,000 (face amount and basis) of Subsidiary Corporation’s bonds. When Subsidiary Corporation is completely liquidated, it distributes property with a $70,000 adjusted basis and a $100,000 FMV to Parent Corporation in redemption of the Subsidiary Corporation bonds. Following the liquidation, Parent Corporation will have a basis in the Subsidiary Corporation property received for the bonds of
A) $-0-.
B) $70,000.
C) $100,000.
D) none of the above
22.
Broom Corporation transfers assets with an adjusted basis of $300,000 and a FMV of $400,000 to Docker Corporation in exchange for $400,000 of Docker Corporation stock as part of a tax-free reorganization. The Docker stock had been purchased from its shareholders one year earlier for $350,000. How much gain do Broom and Docker Corporations recognize on the asset transfer?
Broom Docker
A) $0 $0
B) $0 $50,000
C) $100,000 $0
D) $100,000 $50,000
23.
Identify which of the following statements is false.
A) The acquiring corporation does not recognize gains or losses under Sec. 1001 when it transfers non-cash boot property to the target corporation or its shareholders.
B) Gain recognized by a shareholder in a tax-free reorganization may be characterized as a dividend.
C) If no gain or loss is recognized by a stock or security holder in a tax-free reorganization, the stock or securities received take a substituted basis equal to the basis of the shares or securities surrendered.
D) Tax-free reorganizations generally do not involve actual redemptions of the stock of the target corporation’s shareholders.
24.
Identify which of the following statements is true.
A) In a tax-free reorganization, the acquiring corporation’s holding period for the acquired properties includes the period of time the target corporation held the properties.
B) In a tax-free reorganization, if the acquiring corporation uses nonmonetary boot property, gains or losses will be recognized by the acquiring corporation.
C) The receipt of cash by a shareholder results in the recognition of all of his or her realized gain even if the transaction qualifies as a tax-free reorganization.
D) All are false.
25.
In which of the following reorganizations does the distributing corporation transfer all of itsassets to two controlled corporations before the distributing corporation dissolves?
A) split-off
B) spin-off
C) split-up
D) Type C reorganization
26.
Identify which of the following statements is true.
A) A plan of reorganization must be a written document.
B) Advance rulings are required for all reorganizations.
C) The IRS will issue an advance ruling on any proposed tax-free reorganization.
D) All are false.
27.
Identify which of the following statements is true.
A) To be part of an affiliated group a corporation must be at least 80% directly owned by another group member.
B) Only common stock is considered when determining if the 80% ownership test is met for affiliated group eligibility.
C) An affiliated group electing to file a consolidated return may be comprised of as few as two corporations.
D) All are false.
28.
Ajak Corporation owns 85% of the single class of Utech Corporation stock. Utech Corporation owns 35% of Tech Corporation. Ajak Corporation also owns 50% of Tech Corporation, and Tech Corporation owns 75% of Baxter Corporation.
A) Ajak, Tech, Utech and Baxter Corporations are an affiliated group.
B) Ajak, Tech, and Baxter Corporations are an affiliated group.
C) Ajak, Tech and Utech Corporations are an affiliated group.
D) none of the above.
29.
Identify which of the following statements is true.
A) If 100% of the stock of two corporations is owned by the same individual, the two corporations are eligible to file a consolidated return.
B) The check-the-box regulations permit partnership and LLCs to elect C corporation tax treatment.
C) A group of corporations that meets the parent-subsidiary controlled group requirements is always eligible to file a consolidated return.
D) All are false.
30.
Identify which of the following statements is true.
A) Corporations that join in a consolidated return must adopt the same tax year as the parent corporation.
B) Permission to discontinue the filing of consolidated tax returns is sometimes granted by the IRS.
C) Additional administrative costs may be incurred when filing a consolidated tax return.
D) All are true.

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