1. Kira Ratz purchased 100 shares of common stock in Lovan Furniture, Inc. for $4,000 on July 10, 2008. On August 3, 2010, Lovan Furniture distributed 50 shares of preferred stock to Kira as a taxable stock dividend. At the time of the distribution, the common stock was valued at $90 per share, and the preferred stock was valued at $20 per share. What is Kira’s adjusted basis in the preferred stock, and when does her holding period begin?
A) Adjusted basis of $0; holding period beginning August 4, 2010.
B) Adjusted basis of $400; holding period beginning July 11, 2008.
C) Adjusted basis of $1,000; holding period beginning August 4, 2010.
D) Adjusted basis of $1,000; holding period beginning July 11, 2008.
2. Kira Wahlgren acquired 100 shares of stock by gift from her father. Her father paid $1,000 in gift tax on the gift. At the time of the gift, the shares had a fair market value of $60 per share. Her father’s adjusted basis in the shares was $90 per share. In 2011 Kira sold the stock for $70 per share. What are the tax consequences of the sale?
A) Kira does not have to recognize any gain.
B) Kira has to recognize a $1,000 capital gain.
C) Kira has to recognize a $2,000 capital loss.
D) Kira has to recognize a $3,000 capital loss.
3. Which one of the following distributions would not be taxable to the shareholders receiving stock?
A) Distribution of one share of preferred stock to the owner of each share of common stock.
B) Distribution of one share of Class A common stock to the owner of each share of Class A common stock and a distribution of $10 to the owner of each share of Class B common stock.
C) Distribution of one share of preferred stock to the owner of each share of Class A common stock and a distribution of one share of Class B common stock to the owner of each share of Class B common stock.
D) Distribution of one share of common stock to the owner of each share of preferred stock.
4. A calendar year corporation in its first year of operations reports earnings and profits of $50,000. In December of that year, it distributes land worth $40,000 to one of its shareholders. The corporation’s basis in the land was $35,000, and the land is subject to a $15,000 mortgage. What is the amount of the distribution that will be taxed as a dividend to the shareholder?
A) $0.
B) $20,000.
C) $25,000.
D) $35,000.
8. Haymon Metals, Inc. has 10,000 shares of common stock outstanding but no other classes of stock. Damon Scwark owns 2,000 shares but wants to increase his investment in the company by transferring appreciated land. However, he does not want to have to recognize any gain on the transfer. Haymon Metals is not willing to give Damon a sufficient number of shares to give Damon control of the corporation and permit him to avoid having to recognize gain on the transfer of land. However, Lauren Haymon who currently has sufficient stock so that she and Damon would have control of the corporation after transfers by the two of them, says that she will transfer some property at the same time so that the two of them will have control of the company after the transfers and Damon’s transfer will qualify for tax-free treatment under Code Sec. 351. What is the minimum value of property that Lauren must transfer to the company?
A) No minimum.
B) 10 percent of the value of the stock she already owns.
C) 20 percent of the value of the stock she already owns.
D) 25 percent of the value of the stock she already owns.
9. At the beginning of the year, Urritia Cements had a negative balance of $15,000 in its accumulated earnings and profits. During the year, it had taxable income of $10,000. On August 1, it distributed property with an adjusted basis of $5,000 and a fair market value of $8,000 to its sole shareholder, Pedro Urritia. How much of the distribution will be treated as a dividend?
A) $0
B) $5,000
C) $8,000
D) $10,000
10. When a corporation distributes property to its shareholders, it:
A) may recognize either gain or loss.
B) may recognize gain, but never a loss.
C) may recognize a loss, but never a gain
D) never recognizes a gain or loss
In general interest income id fully taxable when received by taxpayer , however, the tax law provides an exclusion for interest earned on bonds issued by state and local government – municipal bond interest.
