Which one of the following statements isfalse?

1. Adjusted gross income is a concept that appears only on the individual tax return.
2. Individuals are permitted to take deductions for personal and dependency exemptions, but C corporations cannot do so.
3. Both individuals and C corporations use the same tax rate tables to calculate their tax liabilities.
4. C-corporations may take advantage of the dividends received deduction, but individual taxpayers are not permitted to take this deduction.
5. Both C-corporations and individuals are permitted to deduct charitable contributions, but they are subject to different limitations as to the amount of the deduction.

Luis is the sole shareholder of a corporation, and Eduardo owns a sole proprietorship. Both businesses were started in year 2015, and both make a profit of $80,000 in year 2015. Each owner withdraws $50,000 from his business during the year to pay personal expenses. Which one of the following statements is incorrect?

1. Eduardo must report net profit from his business of $80,000 for 2015.
2. Luis must report dividend income of $80,000 for 2015.
3. Eduardo’s proprietorship (as opposed to Eduardo) is not required to pay tax on the $80,000 profit for 2015.
4. Luis’s corporation must pay tax on $80,000 for 2015.
5. None of the above.

Ted is the sole shareholder of a regular C corporation, and Sue owns a sole proprietorship. Both businesses were started in 2014, and each business sustained a $3,000 capital loss for the year 2015. Which one of the following statements is correct?

1. Ted’s corporation can deduct the $3,000 capital loss in 2015.
2. Ted’s corporation cannot carry the capital loss back but can carry it forward.
3. Sue cannot deduct any of this loss in 2015.
4. Sue can offset the $3,000 capital loss against ordinary income in 2015.
5. None of the above statements are correct.

Mitchell and Lane form Green Corporation. Mitchell transfers property (basis of $105,000 and fair market value of $90,000) while Lane transfers land (basis of $8,000 and fair market value of $75,000) and $15,000 in cash. Each receives 50% of Green Corporation’s stock, which is worth a total of $180,000. As a result of these transfers,

1. Mitchell has a recognized loss of $15,000, and Lane has a recognized gain of $67,000.
2. Neither Mitchell nor Lane has any recognized gain or loss.
3. Mitchell has no recognized loss, but Lane has a recognized gain of $15,000.
4. Green Corporation will have a basis in the land of $23,000.
5. None of the above statements are correct.

Eve transfers property worth $400,000, basis of $120,000, to Green Corporation for 85% of its stock, worth $350,000, and a long-term note, executed by Green and made payable to Eve, worth $50,000.

1. Eve recognizes no gain on the transfer.
2. Eve recognizes a gain of $230,000 on the transfer.
3. Eve recognizes a gain of $280,000 on the transfer.
4. Eve recognizes a gain of $50,000 of the transfer.
5. None of the above.

Tara incorporates her sole proprietorship, transferring it to newly formed Black Corporation. The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000. Also transferred was $10,000 in liabilities, $1,000 of which was personal and the balance of $9,000 being business related. In return for these transfers, Tara receives all of the stock in Black Corporation.

1. Tara’s recognized gain is $70,000.
2. Tara’s recognized gain is $10,000.
3. Tara’s recognized gain is $1,000.
4. Tara’s recognized gain is zero.
5. None of the above statements are correct.

Tim, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Wren Corporation.

Adjusted Basis Fair Market Value

Cash $ 10,000 $ 10,000

Building 100,000 160,000

Mortgage payable (secured by the

Building & held for 5 years) 120,000 120,00

With respect to this transaction,

Tim has a recognized gain because Section 357(b) applies.

Tim has no recognized gain because this is a Section 351 transaction.

Tim has a recognized gain because Section 357(c) applies

Tim has a recognized gain because both Section 357(b) and (c) apply and (b) takes priority.

None of the above.

Which one of the following statements is false? Similar to the like-kind exchange provisions,

1. Section 351 can be partly justified by the wherewithal to pay concept.
2. The receipt of boot under Section 351 can cause gain to be recognized.
3. Section 351 is mandatory.
4. Section 351 does not defer loss recognition.
5. None of the above.

Kim owns 100% of the stock of Cardinal Corporation. In the current year Kim transfers an installment obligation, tax basis of $30,000 and fair market value of $200,000, for additional stock in Cardinal worth $200,000.

1. Kim recognizes no taxable gain on the transfer.
2. Kim has a taxable gain of $170,000.
3. Kim has a basis of $200,000 in the additional stock she received in Cardinal Corporation.
4. Kim has a taxable gain of $200,000.
5. None of the above statements are correct.

Wade and Paul form Swan Corporation with the following investments. Wade transfers machinery worth $100,000, with a basis of $40,000, while Paul transfers land worth $90,000, with a basis of $20,000, and services rendered in organizing the corporation worth $10,000. Each is issued 25 shares in Swan Corporation. With respect to the transfers,

1. Wade has no recognized gain; Paul recognizes gain of $80,000.
2. Neither Wade nor Paul has recognized gain on the transfers.
3. Swan Corporation has a basis of $30,000 in the land transferred by Paul.
4. Paul has a basis of $30,000 in the 25 shares he acquires in Swan Corporation.
5. None of the above statements are correct.

Sarah and Tony (mother and son) form Dove Corporation with the following investment: cash by Sarah of $55,000; land by Tony (basis of $55,000, and fair market value of $45,000). Dove Corporation issues 200 shares of stock, 100 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000.

1. Section 351 cannot apply since Sarah should have received 110 shares instead of only 100 shares.
2. Section 351 only applies to Sarah.
3. Section 351 only applies to Tony.
4. Section 351 applies to both Tony and Sarah because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.
5. None of the above.

Which one of the following statements is true? For Section 351,

1. Stock rights and warrants are included in the definition of stock.
2. An installment obligation is considered to be property.
3. Nonqualified preferred stock is included in the definition of stock.
4. Property includes services provided to help organize the corporation.
5. None of the above statements are true.

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation. After the transfer, Leah owns 80% of Crow’s stock. Associated with the equipment is Section 1245 recapture potential of $70,000. As a result of the transfer,

1. Leah recognizes ordinary income of $70,000.
2. Leah recognizes no gain and the recapture potential under Section 1245 carries over to Crow Corporation.
3. Leah recognizes no gain and the recapture potential under Section 1245 disappears.
4. Leah recognizes a capital gain of $100,000.
5. None of the above.

In order to induce Parakeet Corporation to build a new manufacturing facility in Huntsville, Alabama, the city donates land (fair market value of $250,000) and cash of $50,000 to the corporation. Within several months of the donation, Parakeet Corporation spends $350,000 (which includes the $50,000 received from Huntsville) on the construction of a new plant located on the donated land.

1. Parakeet must recognize income of $50,000 as to the donation.
2. Parakeet will have a zero basis in the land and a basis of $350,000 in the plant.
3. Parakeet must recognize income of $300,000 as to the donation.
4. Parakeet will have a zero basis in the land and a basis of $300,000 in the plant.
5. None of the above statements are correct.

Which one of the following statements is false?

1. If a debt instrument has too many features of stock, the IRS may treat it as a form of stock.
2. If the IRS reclassifies debt as a form of stock, principal and interest payments will be considered dividends.
3. The IRS has the authority to characterize corporate debt as wholly equity or as part debt and part equity.
4. With the current 20% ceiling on taxing dividend income, the IRS is more inclined to convert interest income to dividend income than when dividend income was taxed at the taxpayer’s marginal tax rate.
5. None of the above.

Which one of the following factors supports classifying an instrument as equity rather than debt?

1. Payment on the instrument is contingent upon earnings.
2. The instrument is not subordinated to any liabilities.
3. Each shareholder does not own the same percentage of stock and debt.
4. The corporation is not thinly capitalized.
5. None of the above.

Black Corporation owns stock in White Corporation. Black Corporation had net operating income of $500,000 for the year. White pays Black a dividend of $50,000. Black takes a dividends received deduction of $40,000. Which one of the following statements is correct?

1. Black owns less than 20% of White Corporation.
2. Black owns 20% or more, but less than 80% of White Corporation.
3. Black owns 80% of White Corporation.
4. Black owns 80% or more of White Corporation.
5. None of the above statements are correct.

Ruby Corporation, an accrual basis taxpayer, was formed and began operations on July 1, 2015. The following expenses were incurred during the first year (July 1 to December 31, 2015) of operations.

Expenses of temporary directors and of organizational meetings $ 4,000

Fee paid to the state of incorporation 500

Accounting services incident to organization 1,000

Legal services for drafting the corporate charter and bylaws 2,800

Expenses incident to the printing and sale of stock certificates 1,000

Assume Ruby Corporation makes an appropriate and timely election under Section 248(c) and the

related Regulations. What is the maximum organizational expense Ruby may write off for 2015?

$5,310

$5,143.33

$5,110

$5,000

None of the above.

Which one of the following statements is true?

1. A transferor who receives stock for both property and services may never be included in the control group in determining whether an exchange meets the requirement of Section 351.
2. In order to retain the services of Eve, a key employee in Ted’s sole proprietorship, Ted contracts with Eve to make her a 30% owner. Ted incorporates the business receiving in return 100% of the stock. Three days later, Ted transfers 30% of the stock to Eve for her services. Under these circumstances, Section 351 will not apply to the incorporation of Ted’s business.
3. One month after Hortense incorporates her sole proprietorship and with no pre-arranged plan, she gives 25% of the stock to her children. Section 351 cannot apply to Hortense’s incorporation because she has not satisfied the 80% control requirement.
4. All of the above statements are true.
5. None of the above are true statements.