ACC-331 Pearson Midterm Exam 2022 update Questions and Answers | 100% correct

A friend notices that you are reading the Internal Revenue Code of 1986. Your friend inquires why you are consulting a 1986 publication, especially when tax laws change so frequently. What is your response? A. It is updated for every statutory change to Title 26 subsequent to 1986. Therefore it includes the post-1986 tax law changes enacted by Congress and today reflects the current state of the law. B. It is the last time the code was published, therefore it is easier to read Title 26 of 1986 first, and then research updated tax law for anything newer in the committee reports. C. It is always the first place you should start any research project. D. The Internal Revenue Code of 1986 is the first time the statutory law was printed in one book, or as Title 26, and is therefore the only way to find the codification of laws. Requirement Provide the proper citations (including both primary and secondary citations where applicable) for the authorities listed below. (For secondary citations, reference both the AFTR and USTC.) (Ignore lack of italics in selections.) a. Rev. Rul. 99-7 b. Frank H. Sullivan, a Board of Tax Appeals decision c. Tate & Lyle, Inc., a 1994 Tax Court decision d. Ralph L. Rogers v. U.S., a U.S. district court decision e. Norman Rodman v. CIR, a Second Circuit Court decision a. Rev. Rul. 99-7 Citation: Rev. Rul. 99-7, 1999-1 C.B. 361. b. Frank H. Sullivan, a Board of Tax Appeals decision Citation: Frank H. Sullivan, 1 B.T.A. 93 (1924). c. Tate & Lyle, Inc., a 1994 Tax Court decision Citation: Tate and Lyle, Inc., 103 T.C. 656 (1994). d. Ralph L. Rogers v. U.S., a U.S. district court decision Citation: Ralph L. Rogers v. U.S., 539 F. Supp. 104, 49 AFTR 2d 82-1160, 82-1 USTC ¶ 9246 (DC OH, 1982). e. Norman Rodman v. CIR, a Second Circuit Court decision Citation: Norman Rodman v. CIR, 542 F.2d 845, 38 AFTR 2d 76-5840, 76-2 USTC ¶ 9710 (2nd Cir., 1976). List four methods of searching the CHECKPOINT and INTELLICONNECT databases. A. Citation, date, keyword, or author B. Keyword, index, citation, or content C. Groupings, date, author, or content D. Author, groupings, citation, or content Rev. Rul. 2001-29 interprets Section(s) 355 and 856. What two functions does a citator serve? A. Citators (1) assist in internet-based tax research by grouping words together and (2) list common words together during a search so you can refine your results after the initial query. B. Citators (1) trace the history of the case in question and (2) assist in internet-based tax research by grouping words together. C. Citators (1) trace the history of the case in question and (2) list other authorities that have cited such cases. D. Citators (1) list common words together during a search so you can refine your results after the initial query and (2) list other authorities that have cited such cases. Describe two ways that the information available from the CHECKPOINT citator differs from that available from the INTELLICONNECT citator. A. CHECKPOINT indicates how the case in question was cited, when INTELLICONNECT only lists the case for the researcher to read themselves. B. CHECKPOINT lists all citing cases, however INTELLICONNECT which just lists those that the editors believe will serve as precedent. C. CHECKPOINT allows the researcher to enter case names or case citations. Unlike INTELLICONNECT which only allows a researcher to enter case citations. D. Both A and B. Look up Bush Brothers & Co., 73 T.C. 424 (1979) and answer the questions below. Requirements a. Was the case reviewed by the court? If so, was the decision unanimous? Explain. b. Was the decision entered under Rule 155? c. Consult a citator. Was the case reviewed by an appellate court? If so, which one? Requirement a. Was the case reviewed by the court? If so, was the decision unanimous? Explain. A. Yes. The case was reviewed by the court. The decision was not unanimous. Judge Quealy dissented. Judge Tannenwald issued a concurring opinion with which five judges agreed. Judge Chabot issued a dissenting opinion with which three judges agreed, and Judge Nims issued a dissenting opinion with which three judges agreed. B. Yes. The case was reviewed by the court. The decision was unanimous. Judge Chabot issued a dissenting opinion with which all judges agreed. C. No. The case was not reviewed by the court. D. Yes. The case was reviewed by the court. The decision was unanimous. Judge Tannenwald issued a concurring opinion with which all judges agreed. Requirement b. Was the decision entered under Rule 155? No. The decision was not entered under Rule 155. Requirement c. Consult a citator. Was the case reviewed by an appellate court? If so, which one? Yes. The case was reviewed by the Sixth Circuit Court of Appeals in 1982. Debate the following proposition: All corporate formation transactions should be taxable events. Select the pro's for this debate. (Select all that apply.)   A. Making a corporate formation a taxable event decreases tax revenues. B. This change eliminates the need for taxpayers to artificially structure transaction to avoid Sec. 351 to recognize gains and/or losses. C. Simplification is achieved by eliminating one of the two options - whether a transaction is taxable or not. This change will make administration of the tax laws easier. D. A corporate formation is a deemed stock purchase; therefore, parties to this stock purchase do not have to recognize gains or losses until they leave the corporation. Select the con's for this debate. (Select all that apply.) A. With taxation, businesses would be encouraged to incorporate because of the tax benefits that boost economic growth in the U.S. B. This change would hurt start-up corporations by reducing their capital through the income tax paid by transferors on an asset transfer. C. Taxpayers are required to recognize losses under the current system, thereby decreasing revenues to the government. D. With taxation, corporations will have to raise more capital because transferors of noncash property will have reduced capital to invest and because money must be diverted to pay taxes. In 2013, Mick, George, and Lesley form Zeus Corporation. Mick contributes land (a capital asset) having a $62,500 FMV in exchange for 100 shares of Zeus stock. He purchased the land in 2011 for $140,000. George contributes machinery (Sec. 1231 property purchased in 2010) having a $130,000 adjusted basis and a $37,500 FMV in exchange for 90 shares of Zeus stock. Lesley contributes services worth $25,000 in exchange for 10 shares of Zeus stock. Read the requirements. Requirement a. What is the amount of Mick's recognized gain or loss? Mick realizes a $77,500 loss and recognizes no gain or loss.    Requirement b. What is Mick's basis in his Zeus shares? When does his holding period begin? Mick's basis in the Zeus shares is $140,000 and his holding period for the stock begins in 2011.    Requirement c. What is the amount of George's recognized gain or loss? George realizes a $92,500 loss and recognizes no gain or loss. Requirement d. What is George's basis in his Zeus shares? When does his holding period begin? George's basis in the Zeus shares is $130,000 and his holding period for the stock begins in 2010. Requirement e. How much income, if any, does Lesley recognize? Lesley realizes a $25000 gain and recognizes ordinary income of $25,000. Requirement f. What is Lesley's basis in her Zeus shares? When does her holding period begin? Lesley's basis in the Zeus shares is $25000 and her holding period begins the day after the exchange date in 2013. Requirement g. What is Zeus's basis in the land and the machinery? When does its holding period begin? How does Zeus treat the amount paid to Lesley for her services? Let's begin by determining the basis in the land and when the holding period would begin. Zeus Corporation's basis in the land is $62,500 and Zeus's holding period begins the day after the exchange date in 2013.         Determine the basis in the machinery and when the holding period would begin. Zeus Corporation's basis in the machinery is $37500 and Zeus's holding period begins the day after the exchange date in 2013. Determine how Zeus will treat the amount paid to Lesley for her services. Zeus's basis in the services would be $25000 if the services were capitalized and the holding period would start in 2013. What items are considered to be property for purposes of Sec. 351(a)? What items are not considered to be property? What items are considered to be property for purposes of Sec. 351(a)? A. Property includes money and almost any other kind of tangible or intangible property, including installment obligations, accounts receivable, inventory, equipment, patents, trademarks, trade names, and computer software. B. Property includes any type of tangible property, including all equipment, furniture and fixtures and computer software. It also includes buildings, and the fixtures included within the building, but does not include any intangible property. C. Property includes any type of services rendered to the corporation in exchange for its stock. D. Property includes money, and any tangible property. All other forms of intangible property are not under Sec. 351(a)'s definition of property. What items are not considered to be property? A. Property does not include installment obligations, accounts receivable, inventory, equipment, patents, trademarks, trade names, or computer software. B. Property does not include equipment, furniture and fixtures and computer software. It also doesn't include buildings, and the fixtures included within the building. C. Property does not include money, or any tangible property. D. Property does not include services, an indebtedness of the transferee corporation that is not evidenced by a security, or an interest on an indebtedness that accrued on or after the beginning of the transferor's holding period for the debt. Brian incorporates his sole proprietorship as Grand Corporation and transfers its assets to Grand in exchange for all 100 shares of Grand stock and four $7,500 interest-bearing notes. The stock has a $120,000 FMV. The notes mature consecutively on the first four anniversaries of the incorporation date. The assets transferred are as follows: Assets Adjusted Basis FMV Cash $7,500 $7,500 5% Equipment $135,000 Minus: Accumulated Depreciation $(85,000) $50,000 $78,000 52% Building $120,000 Minus: Accumulated Depreciation $(70,000) $50,000 $36,000 24% Land $22,500 $28,500 19% Total $130,000 $150,000 Requirement a. What are the amounts and character of Brian's recognized gains or losses? Complete the table to determine the amount and character of Brian's recognized gain or loss for each asset type. If an asset does not have a gain or loss, select "N/A" for the character type. (Round the percentages to the nearest whole percent and dollar amounts to the nearest whole dollar. Use parentheses or a minus sign for losses. For amounts with a $0 balance, make sure to enter "0" in the appropriate cell.) Cash Equipment Building Land Asset's FMV $7,500 $78,000 $36,000 $28,500 Percent of total FMV 5 % 52 % 24 % 19 % Consideration received in exchange for asset: Stock $6,000 $62,400 $28,800 $22,800 Notes 1,500 15,600 7,200 5,700 Total proceeds $7,500 $78,000 $36,000 $28,500 Minus: Adjusted basis (7,500) (50,000) (50,000) (22,500) Realized gain (loss) $0 $28,000 $(14,000) $6,000 Boot received $1,500 $15,600 $7,200 $5,700 Recognized gain (loss) $0 $15,600 $0 $5,700 Character of gain (loss) N/A Ordinary gain N/A Capital gain Requirement b. What is Brian's basis in the Grand stock and notes? Begin by determining the adjusted basis of the stock. (Leave any unnecessary cells blank.) Adjusted basis of property transferred to the corporation $130,000 Plus: Gain recognized by transferor 21,300 Minus: FMV of boot received (30,000) Adjusted basis of stock received $121,300 Why do special restrictions on using the progressive corporate tax rates apply to controlled groups of corporations? Identify five restrictions on claiming multiple tax benefits that apply to controlled groups of corporations. Why do special restrictions on using the progressive corporate tax rates apply to controlled groups of corporations? A. Special restrictions do not affect the tax paid for the controlled groups of corporations. Restrictions only apply to the amount of depreciation allowed, the amount of interest expense allowed, and the amount of bad debt to be taken on a yearly basis. B. Special restrictions apply to ensure corporations are not filtering money through one corporation for losses or profit to make a company look a specific way for investors. C. Special restrictions apply to prevent shareholders from creating multiple corporations so as to have all the corporate income taxed as less than the maximum 35% marginal tax rate and to prevent multiple corporations from each having special corporate deductions. D. Special restrictions apply to allow owners of a corporation allocate the corporation's income among two or more corporations and take advantage of the lower corporate tax rates on the first $10 million of corporate income for each corporation. Identify five restrictions on claiming multiple tax benefits that apply to controlled groups of corporations. (Select the five choices that apply.) A. Low-bracket tax rates B. Minimum net capital loss carryforward C. AMT exemption D. General business tax credit limitation E. Section 179 expense limitation F. Dividends received deduction limitation G. Minimum accumulated earnings tax credit H. Maxiumum net operating losses allowed Compare the tax treatment of capital gains and losses by a corporation and by an individual. A. Corporations can net capital losses with ordinary income since they are taxed at the same rate. However, individuals can only carry losses forward for an indefinite period. B. Corporations and individuals compute capital gains and losses the same way. However, corporations have a preferential tax rate for net capital gains that is lower than the ordinary income rate ofcorporations, so more corporations invest for gains. C. Capital gains are computed the same way for corporations and individuals. However, capital losses are treated as a carry back of 5 years and a carry forward of 20 years for corporations. Individuals can only take capital losses in the year they are incurred. D. Corporations and individuals compute capital gains and losses the same way. However, corporations cannot deduct capital losses from ordinary income, and instead carry a capital loss back three years and forward five years to offset capital gains. Individuals carry losses forward for an indefinite period. Yager Corporation purchased residential real estate several year ago for $275,000, of which $55,000 was allocated to the land and $220,000 was allocated to the building. Yager took straight-line MACRS deductions of $70,000 during the years it held the property. In the current year, Yager sells the property for $305,000, of which $80,000 is allocated to the land and $225,000 is allocated to the building. Requirement What are the amount and character of Yager's recognized gain or loss on the sale? Begin by computing the gain or loss on sale. Select the formula and then enter the amounts and compute the gain or loss on the sale for the land, building and for the total. Amount of gain: Sales price Minus: Adjusted basis Recognized gain or loss Land Building Total $80,000 $225,000 $305,000 (55,000) (150,000) (205,000) $25,000 $75,000 $100,000 Next, determine the character of the gain or loss on sale of the land and building. (For items with a $0 balance, make sure to enter "0" in the appropriate cell.) Land Building Total Character of gain: Ordinary income (loss) $0 $14,000 $14,000 Sec. 1231 gain/loss 25,000 61,000 86,000 Recognized gain or loss $25,000 $75,000 $100,000 Why is it necessary to distinguish between current and accumulated E and P? A. Distributions are deemed to come first out of accumulated E&P and then out of current E&P, so if accumulated E&P does not cover the full distribution, the remaining is taken from current E&P. However, if current E&P is still insufficient to cover the remaining distribution, the distributions are treated as a return of capital and reduce the shareholder's stock basis. B. Distributions are deemed to come first out of current E&P and then out of accumulated E&P, so if current E&P is positive, any distributions will be dividends to the extent of current E&P. However if E&P is insufficient to cover all distributions, distributions are deemed to come pro rata out of current E&P and then in chronological order out of accumulated E&P. C. Distributions are deemed to come first out of current E&P and then out of accumulated E&P. However if the distribution is for the sole intent of avoiding tax, the distribution is disallowed and the full amount that would have been paid out is deemed a capital gain, and required to be taxed at the corporate level. D. Distributions can come out of accumulated E&P or current E&P first. The order does not matter, but once a method has been chosen, the corporation must stay with that method. However, if the distribution exceeds the total E&P, the remainder will be dividends. Two Hearts Corporation is a calendar year taxpayer. Lou Anne owns all of its stock. Her basis for the stock is $8,000. On April 1 of the current (non-leap) year Two Hearts distributes $56,000 to Lou Anne. Requirement Determine the tax consequences of the cash distribution in each of the following independent situations: a. Current E&P of $10,000; accumulated E&P of $35,000. b. Current E&P of $30,000; accumulated E&P of $(22,000). c. Current E&P of $(76,000); accumulated E&P of $50,000. d. Current E&P of $(18,000); accumulated E&P of $(15,000). (Round to the nearest whole dollar. For zero amounts, make sure to enter "0" in the appropriate cell. Use parentheses or a minus sign for losses and E&P deficits.) a. Distribution $56,000 Dividend income $(45,000) Remaining distribution $11,000 Return of Capital $(8,000) Capital gain (loss) $3,000 Carryforward Accumulated E and P $0 b. $56,000 $(30,000) $26,000 $(8,000) $18,000 $(22,000) c. $56,000 $(31,260) $24,740 $(8,000) $16,740 $(57,260) d. $56,000 $0 $56,000 $(8,000) $48,000 $(33,000) Define the following terms relating to the AMT: a. Tax preference item b. AMT adjustment item c. Adjusted current earnings d. Alternative minimum taxable income e. AMT exemption amount f. Tentative minimum tax g. Minimum tax credit a. The taxpayer adds it to regular taxable income as part of calculating AMTI. b. The taxpayer adds and/or subtracts this from regular taxable income as part of calculating AMTI. c. Preadjustment AMTI plus and/or minus various adjustments for differences between preadjustment AMTI and ACE. d. The amount that equals regular taxable income, plus tax preference items, and plus and/or minus AMT adjustment items. e. An amount of $40,000 and phased out gradually based on the increase of AMTI. f. An amount that equals 20% of AMTI minus the AMT exemption amount, reduced by any AMT foreign tax credit allowed. g. The amount of AMT incurred in a given year. Unused credits carry forward indefinitely. Indicate whether the following items are includible in regular taxable income, preadjustment AMTI, and/or ACE. Also indicate whether a corporation must make a positive, negative, or zero adjustment when calculating preadjustment AMTI and when calculating ACE. a. Tax-exempt interest on private activity bonds (not issued in 2009 or 2010). b. Tax-exempt interest on a state's general revenue bonds (not issued in 2009 or 2010). c. Proceeds from a life insurance policy (with no cash surrender value) paid on account of a corporate officer's death. d. Gain on a current year sale of property for which a corporation uses the installment method. e. Gain on a previous year sale of property for which a corporation uses the installment method. f. Deduction of organizational expenditures made in the previous year. g. Deduction for a dividend received from a 25%-owned domestic corporation. h. Deduction for a dividend received from a 5%-owned domestic corporation. Select the answers from the drop-down choices below. Included Included in Adjustment from in regular preadjustment Included Reg. Tax. Inc. Preadjustment taxable income AMTI in ACE to preadj. AMTI AMTI to ACE a. No Yes Yes Positive Zero b. No No Yes Zero Positive c. No No Yes Zero Positive d. Yes Yes Yes Zero Positive e. Yes Yes No Zero Negative f. Yes Yes No Zero Positive g. Yes Yes Yes Zero Zero h. Yes Yes No Zero Positive In the current year, Weller Corporation has taxable income of $900,000 and tax preference items of $80,000. It also has $290,000 of positive AMT adjustment items and $50,000 of negative AMT adjustment items (neither of which includes the ACE adjustment). Weller's ACE amount is $1.8 million. Weller is not a small corporation exempt from the AMT. Requirements a., b., and c. Determine the AMTI, tentative minimum tax (TMT) and AMT for Weller. Begin by computing Weller's preadjustment AMTI, then compute the AMTI, TMT and finally the AMT. (Enter tax rate or percentage in this format 0.XX. Enter a "0" for items with a zero balance.) Taxable income $900,000 Plus: Tax preference items 80,000 Positive AMT adjustment items 290,000 Minus: Negative AMT adjustment items (50,000) Preadjustment AMTI $1,220,000 Adjusted current earnings (ACE) $1,800,000 Minus: Preadjustment AMTI (1,220,000) Difference $580,000 Times: ACE adjustment percentage 0.75 ACE adjustment 435,000 Alternative minimum taxable income (AMTI) $1,655,000 Minus: AMT exemption amount 0 Tax base for AMT $1,655,000 Times: AMT tax rate 0.20 Tentative minimum tax (TMT) $331,000 Minus: Regular income tax (306,000) Alternative minimum tax (AMT) $25,000 Requirement d. Determine the minimum tax credit for Weller. Weller's minimum tax credit is $25,000. Weller carries the credit forward indefinitely. Requirement e. How much smaller would Weller's tax preference and AMT adjustment items have to be for its AMT to be zero? (Assume the reduction in Weller's tax preference and AMT adjustment items would affect its ACE by the same amount. Round your answer to the nearest whole dollar.) The reduction would have to be $125,000. The reduction could involve a combination of tax preference and AMT adjustment items. Assume that personal holding company income comprises more than 60% of Small's adjusted ordinary gross income. Requirement In which of the situations will Small Corporation be deemed to be a PHC? a. Art owns 100% of Parent Corporation stock, and Parent owns 100% of Small's stock. Parent and Small file separate tax returns. Small is deemed to be a PHC because Art is deemed to own all of Small's stock under the Sec. 544 stock attribution rules. b. Art owns one-third of Small's stock. The PRS Partnership, of which Phil, Robert, and Sue each have a one-third capital and profits interest, also owns one-third of Small's stock. The remaining shares of Small's stock are owned by 50 individuals unrelated to Art, Phil, Robert, and Sue. Small is deemed to be a PHC because Art plus Phil, Robert, and Sue are considered to own two-thirds of Small's stock. c. Art and his wife, Becky, each own 20% of Small's stock. The remaining shares of Small's stock are owned by the Whitaker Family Trust. Becky and her three sisters each have a one-fourth beneficial interest in the trust. Small is deemed to be a PHC because Becky Whitaker is deemed to own all all of Small's stock, 40% from her and her husband Art, 15% indirectly from the Trust, and 45% constructively from her sisters. In the current year, McKinnon Corporation is deemed to be a PHC and reports the following results: Taxable income $125,000 Dividend received from an 18%-owned domestic corporation 35,000 Dividends paid 30,000 Requirement a. What is McKinnon's regular tax liability (ignoring any AMT implications)? McKinnon's regular income tax liability is $32,000. Requirement b. What is McKinnon's PHC tax liability? Begin by computing the undistributed personal holding company income (UPHCI). Then compute McKinnon's PHC tax liability. (Enter tax rate in decimal form, 0.XX. Round your answer to the nearest whole dollar.) Taxable income $125,000 Plus: Dividends-received deduction 24,500 Minus: Federal income taxes (32,000) Dividends-paid deduction (30,000) Undistributed personal holding company income (UPHCI) 87,500 Times: Tax rate 0.20 Personal holding company tax $17,500 Requirement c. What measures can McKinnon take to eliminate its PHC tax liability after year-end and before it files its tax return? After it files its tax return? Before McKinnon Corporation files its tax return, it can eliminate its PHC tax liability by having its shareholders elect a consent dividend or a consent dividend and throwback dividend of at least $87,500. The throwback dividend is limited to 20% of the $30,000 actual dividends paid, or $6,000. After McKinnon files its income tax return, McKinnon can pay a deficiency dividend in the amount of $87,500, which will eliminate the PHC tax liability but not the interest and penalties owed. What event or occurrence determines when a cash or accrual method of accounting taxpayer reports a liquidating distribution? A. An accrual method shareholder reports gain or loss when events have occurred that fix the amount of the liquidating distribution and when the shareholders are entitled to receive the distribution upon surrender of their shares. A cash method shareholder reports the gain when he or she has actually or constructively received the liquidating distribution. B. An accrual method shareholder reports gain when all events have occurred that fix the amount of the liquidating distribution and shareholders receive the distribution upon surrender of their shares. A cash method taxpayer reports gain when the corporation announces the amount of the distribution, regardless of when the distribution is actually sent to the shareholder. A loss is never recognized for a cash or accrual method taxpayer. C. The only time a shareholder reports a gain or loss on a tax return is after the final liquidating distribution occurs. It does not matter if the shareholder uses the cash method or the accrual method of accounting when reporting the liquidating distribution. D. Both cash and accrual method shareholders report the entire amount of the distribution as one lump sum on the tax return after the final liquidating distribution occurs. However, a cash method shareholder reports the distribution only if a loss is calculated. Kelly Corporation makes a liquidating distribution. Among other property, it distributes land subject to a mortgage. The mortgage amount exceeds both the adjusted basis and FMV for the land. Explain to Kelly Corporation's president how the amount of its recognized gain or loss on the distribution and the shareholder's basis for the land are determined. A. Kelly Corporation's recognized gain or loss is determined by comparing the amount of the assumed mortgage to the basis of the land. The shareholder's basis of the land will be the amount equal to its actual FMV. B. Kelly Corporation's recognized gain is the amount of mortgage released and the recognized loss is the amount, if any, of the adjusted basis over the FMV. The shareholder's basis of the land will be a carryover adjusted basis amount. C. Kelly Corporation's recognized gain or loss is the amount of mortgage released from the land. The shareholder's basis of the land is zero. D. Kelly Corporation does not recognize a gain or loss since the mortgage released exceeds the adjusted basis and FMV for the land. The shareholder's basis for the land therefore is zero. For seven years, Greece Corporation has been owned entirely by Shawn and Maryssa, who are husband and wife. Shawn and Maryssa have a $175,000 basis in their jointly owned Greece stock. The Greece stock is Sec. 1244 stock. They receive the following assets in liquidation of their corporation: accounts receivable, $18,000 FMV; a car, $15,000 FMV; office furniture, $5,000 FMV; and $22,000 cash. Requirements a. What are the amount and character of their gain or loss? b. How would your answer change if the accounts receivable instead had a $144,000 FMV? c. What is the Greece's basis for each property received in the liquidation in Parts a and b? Requirement a. What are the amount and character of their gain or loss? Begin by computing the gain or loss recognized. Select the formula then enter the amounts and compute the gain or loss recognized. (Use a parentheses or minus sign for a loss. Abbreviations used: FMV=fair market value; BV=book value.) Cash + FMV of noncash property received - Adjusted basis of stock = Gain (loss) recognized $60,000 - $175,000 = $(115,000) What is the character of their gain or loss? Enter the amounts and select the character of their gain or loss. (Complete all boxes.) Gain (loss) Character of the gain or loss $(100,000) Ordinary loss under Sec. 1244 (15,000) Capital loss Requirement b. How would your answer change if the accounts receivable instead had a $144,000 FMV? Compute the gain or loss recognized and select the character of the gain or loss. Gain (loss) Character of the gain or loss $11,000 Capital gain Requirement c. What is the Greece's basis for each property received in the liquidation in Parts a and b? Select the property received in the liquidation and enter Greece's basis for each property received in the liquidation in Parts a and b. Property received Part a. Part b. Cash $22,000 $22,000 Accounts receivable 18,000 144,000 Office furniture 5,000 5,000 Car 15,000 15,000 Preston owns 10% of Hampton Corporation stock in which he has a $260,000 adjusted basis. Consider the following situations: Requirement For each situation, what amount of gain/loss will Preston report in the current year? In the next year? Compute the gain or loss that Preston will report for each situation in the current year and in the next year. Begin with situation a., then, complete the table for situation b. (If the shareholder does not have a gain or loss for a year, leave the box empty; do not enter a zero.) Gain / (loss) Current year Next year a. $50,000 b. 50,000 Fusion Corporation is owned equally by Randy and Sawyer. Randy and Sawyer purchased their stock several years ago and have adjusted bases for their Fusion stock of $15,000 and $27,500, respectively. Each shareholder receives two liquidating distributions. The first liquidating distribution, made in the current year, results in each shareholder receiving a one-half interest in a parcel of land that has a $50,000 FMV and an $20,000 adjusted basis to Fusion Corporation. The second liquidating distribution, made in the next year, results in each shareholder receiving $15,000 in cash. Requirements a. What are the amount and character of Randy and Sawyer's recognized gain or loss for the current year? For the next year? b. What is the basis of the land in Randy and Sawyer's hands? c. How would your answers to Parts a and b change if the land has a $15,000 FMV instead of a $50,000 FMV? Requirement a. What are the amount and character of Randy and Sawyer's recognized gain or loss for the current year? For the next year? Compute the gain or loss and select the character of the gain or loss for each shareholder for the current year, then, for the next year. Gain or loss recognized - Current year Shareholder Amount Character Randy $10,000 Capital gain Sawyer $2,500 Unrecovered basis Gain or loss recognized - Next year Amount Character $15,000 Capital gain $12,500 Capital gain Requirement b. What is the basis of the land in Randy and Sawyer's hands? Shareholder Basis Randy $25,000 Sawyer $25,000 Requirement c. How would your answers to Parts a and b change if the land has a $15,000 FMV instead of a $50,000 FMV? Compute the gain or loss and select the character of the gain or loss for each shareholder for the current year and then for the next year. Gain or loss recognized - Current year Shareholder Amount Character Randy $7,500 Unrecovered basis Sawyer $20,000 Unrecovered basis Gain or loss recognized - Next year Amount Character $7,500 Capital gain $5,000 Capital loss What is the basis of the land in Randy and Sawyer's hands if the land has a $15,000 FMV instead of a $50,000 FMV? Shareholder Basis Randy $7,500 Sawyer $7,500 What requirements must be satisfied for the Sec. 332 rules to apply to a corporate shareholder? A. Distribution of the property must (a) occur within a single tax year or (b) be one of a series of distributions completed within three years from the close of the tax year during which the first of the series of liquidating distributions is made. B. The parent corporation must own (a) at least 80% of the total combined power of all classes of stock entitled to vote and (b) 80% of the total value of all classes of stock for the period beginning on the date of adoption of the plan of liquidation and ending upon receipt of the subsidiary corporation's assets. C. The distribution of the property must be in complete cancellation or redemption of all the subsidiary corporation's stock. D. All of the above. Parent Corporation owns 100% of Subsidiary Corporation's stock. The adjusted basis of its stock investment is $165,000. A plan of liquidation is adopted, and Subsidiary distributes to Parent assets having a $440,000 FMV and a $360,000 adjusted basis (to Subsidiary), and liabilities in the amount of $55,000. Subsidiary has a $140,000 E&P balance. Requirement a. What are the amount and character of Subsidiary's recognized gain or loss on the distribution? Subsidiary does not recognize the $80,000 gain realized on the distribution to Parent per Sec. 337(a). Requirement b. What are the amount and character of Parent's recognized gain or loss on the surrender of the Subsidiary stock? Parent does not recognize the $220,000 gain realized on the distribution received per Sec. 332. Requirement c. What basis does Parent take in the assets? Parent's basis in the assets is $360,000. Requirement d. What happens to Parent's basis in the Subsidiary stock and to Subsidiary's tax attributes? The basis for the Parent stock disappears and is replaced by the basis of each of the individual assets Subsidiary's E&P balance carries over to Parent. Forest Corporation owns 100% of Tree Corporation's single class of stock. Its adjusted basis for the stock is $300,000. After adopting a plan of liquidation, Tree distributes the following property to Forest: money, $80,000; LIFO inventory, $195,000 FMV; and equipment, $140,000 FMV. The inventory has a $145,000 adjusted basis. The equipment originally cost $290,000. Tree has claimed depreciation of $160,000 on the equipment. Tree has a $80,000 E&P balance and a $70,000 NOL carryover on the liquidation date. Requirement a. What are the amount and character of Tree's recognized gain or loss when it makes the liquidating distributions? Tree does not recognize the $60,000 gain realized on the distribution to Forest per Sec. 337(a). Requirement b. What are the amount and character of Forest's recognized gain or loss on its surrender of the Tree stock? Forest does not recognize the $115,000 gain realized on the distribution received per Sec. 332. Requirement c. What is Forest's basis in each noncash property? Inventory $145,000 Equipment $130,000 Requirement d. What happens to Tree's E&P balance and NOL carryover following the liquidation? Tree's E&P balance and NOL carry over to Forest per Sec. 381(a). Requirement e. What happens to Forest's $300,000 basis in the Tree stock? Forest's basis for the stock disappears.