Exam 2 Practice Summer 2010 Solutions

7/30/2019 Exam 2 Practice Summer 2010 Solutions

1/10

Tax 4001Summer 2010Exam 2 Practice QuestionsSolution

1. For each of the following transactions, identify how much gain the taxpayer will recognize and thetaxpayers basis in the new property.

a. Maude exchanges computer equipment with a basis of $25,000 and a FMV of $45,000, forcomputer equipment with a FMV of $37,000 and a motorcycle with a FMV of $8,000.

Maudes Recognized Gain _____$8,000 (motorcyc le is boot property)

Maudes basis in new computer equipment ___$25,000 (25,000 + 8,000 8,000)

Maudes basis in motorcycle _______$8,000 (FMV)

b.Cane Corporations warehouse is destroyed by a hurricane in September, 2009, when itsbasis is $130,000, and its FMV is $180,000. The insurance company reimburses Cane$180,000. In December, 2009, Cane Corporation purchases a new warehouse for $140,000.

Canes Recognized Gain _______$40,000 (the unreinvested proceeds)

Canes Basis in new warehouse____$130,000

2. White Corporations first disposition of a Section 1231 Asset occurred in 2005. Fill in the table below to

indicate the character of Whites Net 1231 Gain/(losses) for the period 2005-2009.

Year Sec 1231 Gains Sec 1231 Losses Ordinary Income(loss)

Capital Gain(loss)

2005 $10,000 $8,000 $2,000

2006 $10,000 $15,000 ($5,000)

2007 $6,000 $5,000 $1,000

2008 $9,000 $3,000 $4,000 $2,000

2009 $2,000 $8,000 ($6,000)


2/10

3. Taxpayer exchanges an apartment building with an adjusted basis of $47,000 and a FMV of $55,000,and boot (Green, Inc stock) with an adjusted basis of $9,000 and a FMV of $6,000 for a rental house witha FMV of $61,000 in a like-kind exchange. What is the recognized gain or loss and what is the taxpayersbasis in the rental house?

Taxpayer has a realized gain of $8,000 on apartment building. Zero is recognized. Taxpayer has arealized and recognized a loss on the boot property of $3,000. Basis in rental house = 47000 +9,000 3,000 = $53,000.

4. Melody gives her niece, J oy, a machine to be used in her business with a FMV of $8,500 and anadjusted basis in Melodys hands of $9,500. What is J oys basis for depreciation? Assuming J oy takes$3,000 of depreciation and then sells the machine for $4,000, how much is her recognized gain or loss?

Joys depreciation basis = Melodys adjusted basis = $9,500.

Joy has a gain basis = 9,500 3,000 = 6,500and a loss basis = 8,500 3,000 = 5,500.Therefore, Joy can recognize a $1,500 loss on the sale of the machine.

5. Kevin purchased 5,000 shares of Purple Corporation stock at $10/share, to be held for investment.Two years later he receives a 5% nontaxable common stock dividend. At the time, the common stockhad a FMV of $12.50/share. What is the per/share basis of the Purple Corporation stock? If two monthsafter receiving the stock dividend, Kevin sells 100 of the new shares he receives for $12.00/share, what isthe amount and character of his recognized gain or loss?

Kevin receives 250 shares. So he now has 5,250 shares with a basis = 50,000, or $9.52/ share. Ifhe sells 100 shares for $12/share, he wil l recognized a LTCG = 1200 952 = $248. (hp of newshares includes hp o f old shares).

6. During the current year, Max recognizes a $30,000 Section 1231 gain and a $20,000 Section 1231loss. Prior to this year, Max's only Section 1231 item was a $12,000 loss two years ago. What is theamount and character of gain recognized by Max this year?

$10,000 Net Sec 1231 Gain treated as ordinary income because of the 5-year lookback rule.

7. This year, a corporation sells equipment for $280,000 that it had purchased and placed in serviceseveral year ago. The equipment cost $270,000, and $70,000 of depreciation deductions were taken.What is the amount and character of the gain recognized by the corporation?

Gain = 280,000 200,000 = $80,000 gain.$70,000 is Sec 1245 ordinary income and $10,000 is Sec 1231 gain.


3/10

8. Wilson Corporation, a C Corp, sells an office building on September 30 of this year. The building wasoriginally purchased in 1994 for $200,000. MACRS-SL Depreciation of $50,000 has been taken on thebuilding since its purchase. The building was sold for $220,000. What is the amount and character ofgain recognized by Wilson Corp on the sale?

Gain = 220,000 150,000 = $70,000Sec 1250 Recapture = 0 (because in 1990 SL was required for bui ldings)Sec 291 Recapture = .20(50,000 0) = $10,000Therefore: Character of $70,000 gain is $10,000 ordinary income and $60,000 Sec 1231 gain.

9. Answer #8 again assuming Wilson is an individual instead of a Corporation.

Gain = 220,000 150,000 = $70,000Sec 1250 Recapture = 0 (because in 1990 SL was required for bui ldings)Therefore: $70,000 gain is Sec 1231 gain, although $50,000 is also unrecaptured Sec 1250 gainand, if characterized as LTCG when it comes out o f the 1231 bucket would be subject to amaximum rate of 25%.

10. Ryan, a single individual, has taxable income of $80,000 in 2009, before consideration of the

following capital gains and losses, all recognized in August, 2007: $3,000 STCL; $3,000 28% LTCG;$2,000 25% LTCG; $6,000 Regular LTCG. Compute Ryans additional tax due as a result of thesecapital gains and losses.

Ryans marginal tax rate is 28%. Therefore, the addit ional tax due as a resul t of thesetransactions, would be: (2000 * .25) + (6000 * .15) = $1,400. [The STCL would offset the $3,000 28%LTCG, which would leave him w ith a $2,000 25% gain and a $6,000 Regular LTCG gain (taxed at15%)]

11. Kimberly, a single taxpayer, sold three capital assets during September 2009. She sold a paintingheld eight years for a gain of $4,000; stock held three years for a loss of $2,300; and stock held sevenmonths for a gain of $7,900. Kimberlys ordinary income marginal tax rate is 35%. Compute Kimberlys

additional tax due as a result of these capital transactions.

Kimberly has a net coll ectible LTCG of $1,700, and a STCG of $7,900.Her tax would be: (1,700 * .28) + (7,900 *.35) = $3,241.


4/10

12.Fran purchased computer equipment on March 1, 2006, for $10,000. She used the equipment 100%in her small business until November 15, 2009 when she sold it. She has been depreciating theequipment as MACRS 5 year property since 2005 (1/2 year convention, she elected out of bonusdepreciation). Identify the amount and character of gain/(loss) that Fran would recognize in each of thefollowing independent situations:

First compute basis of asset disposed. Depreciation expense computed as follows:2006: 10,000 * .20 = 2000.2007: 10,000 * .32 = 3200.2008: 10,000 * .192 = 1920.2009: 10,000 * .1152 * = 576.Total Depreciation Expense = 7,696. Therefore Basis of equ ipment = 10,000 7696 = 2304.

a) Sold for cash $8,400.

8400 2304 = 6,096 gain, all sec 1245 ordinary income.

b) Sold for cash of $2,000.

2000 2304 = $304 loss, all Sec 1231 loss.

c) Sold for cash of $11,000.

11000 2304 = 8696. Of this amount, $7696 is Sec 1245 ordinary income recapture, and$1000 is Sec 1231 gain.


5/10

13. Hero Corporation, a C Corp, disposed of the following assets, all Sec 1231 property this year:

Asset Deprec Method Cost Basis Sale Pri ceEquipmentBuilding

Land

MACRS - DDBMACRS - SL

N/A

$40,000$100,000

$50,000

$10,000$60,000

$50,000

$22,000$105,000

$60,000

a) How much is Hero Corporation's Sec 1245 ordinary income recapture?

Equipment is the only Sec 1245 property. The gain from the equipment is $12,000, sincedepreciation taken was $30,000, this is ALL Sec 1245 ordinary income.

b) How much is Hero Corporation's Sec 1250 ordinary income recapture?

The building is the only Sec 1250 property. Since SL was used, there is NO Sec 1250recapture.

c) How much is Hero Corporation's Sec 291 ordinary income recapture?

Sec 291 Recapture appl ies to Sec 1250 property. It is equal to 20% times (the amount thatwould have been recaptured under Sec 1245 less the amount that was recaptured undersec 1250). In this case that is .20(40,000 0) = $8,000. Therefore, $8,000 of the $45,000gain on the building will be treated as ordinary income.

d) What is Hero's net Sec 1231 gain (loss) for the 2008?

Bui lding: 45000 8000 = 37,000Land: 10,000

Total 47,000(note: all of the gain on the equipment is ordinary income).

e) If Hero has $6,000 of unrecaptured Sec 1231 losses from last year, what is the character of thecurrent year net Sec 1231 gain (loss)?

$6,000 wil l be ordinary income, and $41,000 will be LTCG.


6/10

14. Which of the following (a-c) is NOTcorrect with respect to limited liabilitycompanies?

a. An advantage of an LLC when compared to a C corporation is the ability topass tax attributes through to the owners.

b. A disadvantage of a partnership when compared with an LLC is the inability ofall the owners to have limited liability.c. An LLC has greater flexibility than does an S Corporation in terms of the

number of owners, type of owners, special allocation opportunities and capitalstructure.

d. All of the above (a-c) are correct.e. None of the above (a-c) is correct.

15. Maize Corporation had net operating income of $450,000 during the current year. Inaddition, Maize owns 50% of the stock in Blue Corporation and Blue Corporation paidMaize a dividend of $150,000. Maize has no other items of income and expense for the

year. Compute Maize Corporations taxable income.

Operating Income $450,000Dividend Income 150,000Taxable Income b4 DRD 600,000DRD (120,000)

Taxable Income $480,000

16. Kristy and Karla are equal partners in K&K Partnership. At the beginning of the yeareach partners adjusted basis in K&K was $120,000. During the year, K&K borrowed$180,000 (recourse debt). Also, during 2009, K&K had an ordinary loss of $30,000; anda Net Long Term Capital Gain of $10,000. Considering these activities, compute eachpartners basis in her partnership interest at year-end.

Basis = 120,000 + 90,000 15,000 + 5,000 = $200,000. [note: IF K&K had been anS Corporation, each s/hs basis would have been: 120,000 -15,000 + 5,000 =$110,000.]


7/10

17. Carole is a partner in CDE partnership. Her allocable share of CDEs passiveordinary losses from a non-realty activity for the current year is ($40,000). Carolesbasis in her CDE partnership (before consideration of the loss) is $30,000. Her amountat-risk is $25,000. She also has $50,000 of passive income from other sources. Howmuch of her allocated loss can she deduct this year?

$25,000 (limi ted to at-risk basis, and she has sufficient passive income to be ableto deduct entire amount at risk).

18. Which of the following (a-d), if any, is an eligible S Corporation shareholder?

a. A resident alien.

b. A Partnership.c. A Foreign corporation.d. A non-qualifying trust.e. None of the above (a-d) is an eligible S Corporation shareholder.

19. Which of the following items (a-d) is NOT separately stated on an S CorporationsSchedule K?

a. Interest Income.b. Advertising expenses.c. Foreign taxes paid.d. Section 1231 gain.e. All of the above (a-d) are separately stated.


8/10

20. Manning Corporation, a personal service corporation, reported the following items ofincome and expense for the year:

Gross Profit $1,250,000Dividends Received (less than 20% owned Domestic corps) 150,000

U.S. Treasury Bond Interest 25,000LTCG 60,000STCL 15,000City of Indianapolis Bond Interest 20,000Officer Salary 150,000Salary Expense 610,000Bad Debt Write-Offs 75,000Change in Balance of Allow for Doubtful Accts +9,000Book Depreciation Expense 35,000MACRS Depreciation Expense 59,000Charitable Contributions 45,000

Key-Man Life Insurance Premiums 12,000Other Expenses 170,000Dividends Paid/Distributions to Owners 50,000

A. Compute Manning's C Corp Taxable Income.

B. Assume instead that Manning is a Partnership with two equal partners, Eli andPeyton. Also assume that the Officer Salary is instead guaranteed payments of$100,000 to Peyton and $50,000 to Eli; and that in addition each partner received a$25,000 distribution from the partnership. Determine the Partnerships Ordinary Incomeand Separately Stated Items. Also, indicate how much income Peyton would report onhis individual income tax return as a result of partnership activities.

C. Assume instead that Manning Corporation is an electing S Corporation owned 100%by Peyton, whose basis in his shares is $120,000 at the beginning of the year.Determine the S Corporation Ordinary Income and separately-stated items, andPeytons year end basis for his S Corporation Shares.


9/10

Part A:

Gross Prof it $1,250,000Dividends 150,000LTCG 45,000

U.S. Treas Bond Interest 25,000Officer Salary (150,000)Salary Expense (610,000)Bad Debt Expense (75,000)Depreciation Expense (59,000)Other Expenses (170,000)TI B4 CC, DRD $ 406,000CC (40,600) [limited to 10%*406,000]TI B4 DRD $ 365,400DRD (105,000) [150,000 * 70%]Taxable Income $ 260,400

Part B:Manning Partnership

Ordinary Income Separately Stated ItemsGross Prof it $1,250,000Guaranteed Payments (150,000)Salary Expense (610,000)Bad Debt Expense (75,000)Depreciation Expense (59,000)Other Expenses (170,000)Total Ordinary Income $186,000

Dividends Income $150,000U.S. Treasury Interest 25,000LTCG 60,000STCL (15,000)Municipal Bond Interest 20,000Guaranteed Payments 150,000Charitable Contributions (45,000)

Distribut ions to Partners 50,000

Peytons Taxable Income would be affected by the following amounts:

Ordinary Income $93,000Dividends 75,000U.S. Treasury Interest 12,500LTCG 30,000STCL (7,500)G.P. 100,000Charitable Contribut ions (22,500)*Net Effect on Peytons Income $280,500

*assuming he itemizes his deductions


10/10

Part C:Manning S Corporation

Ordinary Income Separately Stated ItemsGross Prof it $1,250,000

Officer Salary (150,000)Salary Expense (610,000)Bad Debt Expense (75,000)Depreciation Expense (59,000)Other Expenses (170,000)Total Ordinary Income $186,000

Dividends Income $150,000

U.S. Treasury Interest 25,000LTCG 60,000STCL (15,000)Municipal Bond Interest 20,000Charitable Contributions (45,000)

Distributions to S/H 50,000

Peytons Basis:

Beginning Basis $120,000Plus:Ordinary Income 186,000Dividends Received 150,000U.S. Treasury Interest 25,000LTCG 60,000Muni Interest 20,000Less:Distributions (50,000)Non-deductible Items (12,000) key man insuranceSTCL (15,000)Charitable Contributions (45,000)

Ending Basis $439,000

Documents

Exam 2 Practice Summer 2010 Solutions