1. Sandra Sherman incorporates her apartment building.

It has a basis of $50,000, a value

of$150,000, is subject to a mortgage of $70,000 and has a depreciation recapture
potential of $12,000. If Sandra receives stock worth $80,000, she will recognize:

a. No gain.

b. $30,000 of gain, $12,000 of which is ordinary.

c. $12,000 of ordinary income.

d. $20,000 of gain, $12,000 of which is ordinary.

Wrong
d. Liabilities in excess of basis ($70,000 - $50,000) are
recognized, $8,000 of which is Code Sec. 1231 gain,
$12,000 is Code Sec. 1250 gain.

2. Exclusive of capital transactions, Pixie Corp. had $100,000 of taxable income. Its capital
gains and losses were:

Short-term gain $10,000

Long-term gain 12,000
Short-term loss (20,000)
Long-term loss 5,000

Pixie's taxable income for the year was:

a. $97,000

b. $122,000

c. $100,000

d. $107,000

Correct: c. Capital losses exceed gains and must be carried back or

forward.

3. Future, Inc. reported the following results for the year:

Net income per books $110000

Federal income taxes 36170
Life insurance proceeds on key employee 15000
Tax-exempt interest income 13000
Net capital loss 25000

Future's taxable income for the year was:

 a. $123,170

b. $143,170

c. $72,000

d. $135,000

e. $107,000

Correct
b. Futures taxable income of $143,170 is determined as follows: Net
income per books $110,000 Add: Federal income taxes $36,170 Net
capital loss $25,000 61,170 $171,170 Deduct: Tax-exempt interest
income $13,000 Life insurance proceeds 15,000 (28,000) $143,170

Centor Corporation's unappropriated retained earnings on January 1, 2015, were $678,000.

For 2015 its net income per books was $120,000. It paid cash dividends of $93,000 in
2015 and it appropriated $75,000 of retained earnings during 2015. Centor
Corporation's unappropriated retained earnings on December 31, 2015, were:

a. $630,000

b. $798,000

c. $603,000

d. $510,000

e. $585,000

f. $705,000

Correct:
a. Centors unappropriated retained earnings are determined as
follows: Unappropriated retained earnings, January 1, 2009
$678,000 Add: Net income per books 120,000 $798,000 Deduct: Cash
dividend $93,000 Appropriations 75,000 (168,000) Unappropriated
retained earnings, December 31, 2009 $630,000

Comic Books Corporation, a calendar year corporation, had a net operating loss of $50,000 for
2015. Comic Books made a proper election to forgo the carryback period. For 2016, Comic
Books correctly deducted $40,000 of the 2015 loss. Comic Books will lose the remaining
$10,000 if it cannot be deducted by the end of which tax year?

a. 2022

b. 2025

c. 2030

d. 2035

Correct

The Internal Revenue Service (IRS) allows businesses to carry net operating
losses (NOL) forward 20 years

Grounded Air Flight Company had E&P of $50,000 when it distributed land held as an
investment with a basis of $10,000, a value of $50,000, but subject to a liability of $30,000
to an individual shareholder. After the distribution, E&P equals:

a. $50,000

b. $70,000

c. $30,000

d. $60,000

Correct : D

= 50,000 + (50,000 10,000 30,000) = 60,000

Bulls & Bears, Inc., a securities dealer, had E&P of $2,000 when it distributed securities with a
basis of $3,000 and a value of $10,000 to a 30 percent shareholder, Eunice. As a result of the
distribution, E&P is:

a. Reduced by $3,000

b. Increased by $7,000

c. Increased by $7,000, then reduced by $9,000

d. Reduced by $10,000
 Correct

Nirvana Corporation has accumulated E&P of $5,000, but a current deficit of $2,000. If Nick
Normans, the sole shareholder, has a basis of $7,000 in his stock and receives a distribution of
$13,000 in the beginning of the year, his gross income equals:

a. $0

b. $13,000

c. $6,000

d. $7,000

Correct

Income = 13000 7000 = 6000

Minerva, Inc. has one class of stock, owned 20 percent by Mr. Peters, 20 percent by Mrs. Peters,
15 percent by Mrs. Peters's brother, 10 percent by Mr. & Mrs. Peters' grandchild, and 35 percent
by an irrevocable trust with Mrs. Peters' son from a previous marriage as beneficiary. Mr. and
Mrs. Peters own the following percentage of Minerva, Inc. directly and constructively:

a. Mr. Peters: 50%; Mrs. Peters: 100%

b. Mr. Peters: 50%; Mrs. Peters: 85%

c. Mr. Peters: 65%; Mrs. Peters: 85%

d. Mr. Peters: 65%; Mrs. Peters: 100%

Correct

Harold Hampter owns 100 percent of Clawson Company. Clawson's E&P is $500,000.
Harold needs to withdraw $100,000 from the company. Which of the following
transactions might be reclassified as a constructive (disguised) dividend?

a. $100,000 bonus; Harold's compensation (before the bonus) is $350,000,

relatively equal to what other presidents of similarly sized companies earn.

b. $100,000 in return for a promissory note from Harold, due upon demand but not
having a fixed due date.

c. $100,000 in return for property Harold would lease to the corporation.

d. $100,000 gift from the corporation to Harold.

e. All of the above.

Correct

Cookies Corporation distributed land to its sole shareholder. On the date of distribution, the land
had a fair market value of $85,000 and an adjusted basis to Cookies of $42,000. What is the
amount of Cookies's gain on the distribution?

a. $0

b. $42,000

c. $43,000

d. $85,000

Correct

=85000-42000

The Trap Corporation liquidates. One shareholder, who owned 30 percent of the stock, receives
for the stock, inventory worth $90,000 with a basis of $70,000. Trap Corporation will recognize:

a. $20,000 of capital gain

b. $20,000 of ordinary income

c. $20,000 of Sec. 1231 gain

 d. No gain

Correct

90000-70000

Rapid, Inc., a cash basis corporation, distributes $30,000 of accounts receivable to Sylvester, an
individual shareholder, in cancellation of his stock, pursuant to a plan of complete liquidation. If
Sylvester's basis in his stock is $10,000 the tax result is:

a. Rapid has no gain, but Sylvester has ordinary income of $20,000.

b. Rapid recognizes $30,000 of ordinary income and Sylvester has no gain or loss.

c. Rapid recognizes $30,000 of ordinary income and Sylvester has a capital gain
of $20,000.

d. Rapid recognizes no gain and Sylvester recognizes a capital gain of $20,000

under Section 331.

Correct : C

For Rapid, account receivables are accrued and not realized, so no gains on its
transfer.

For shareholder, under sec 331, account receivables increased the value of their
investment of 10,000 to 30,000. So capital gain of 30,000

INK, Ltd. distributes inventory with a basis of $20,000 to a shareholder in complete

liquidation. The shareholder, who has a basis of $10,000 for the stock, immediately
sells the inventory independently for $50,000. Tax results to the parties are:

a. INK recognizes $30,000 of ordinary income, and the shareholder recognizes

$40,000 of capital gain.

b. INK recognizes no gain or loss, but the shareholder recognizes $40,000 of

ordinary income.

c. INK recognizes $30,000 of ordinary income and the shareholder recognizes no

gain or loss.

d. INK recognizes no gain or loss and the shareholder recognizes $30,000 of

ordinary income and $10,000 of capital gain.
 Correct

For INK = 50000-20000

For shareholder = 50000-10000

Link, Inc. liquidated and distributed its only asset with a basis of $100,000 and a value of
$250,000 to its only shareholder, Lincoln Adams, who has a basis of $50,000 for his stock. The
tax consequences, in part, are as follows, if both parties are in the 30 percent tax bracket:

a. Basis of property to shareholder: $200,000; combined tax liability: $105,000

b. Basis of property to shareholder: $250,000; combined tax liability: $91,500

c. Basis of property to shareholder: $150,000; combined tax liability: $90,000

d. Basis of property to shareholder: $200,000; combined tax liability: $120,000

Correct
For shareholder = 250000 (newly acquired assets fair value)
Tax liab =