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Principles of Taxation: Advanced Strategies Cover

Principles of Taxation: Advanced Strategies, 2/e

Sally M. Jones, University of Virginia
Shelly Rhoades-Catanach, Villanova University

Business Capital Transactions

Dispositions of Equity Interests In Business Entities

Chapter 11 - Dispositions of Equity Interests In Business Entities

True or False. If a shareholder sells less than her entire interest in a class of corporate stock, and the specific shares cannot be identified, the shareholder is considered to have sold the latest shares purchased, i.e., she must use a LIFO system to identify the shares sold.

True

False

True or False. If a shareholder sells any Section 1202 stock at a gain, the gain is eligible for the 50% gain exclusion if the shareholder has held the stock for more than five years.

True

False

True or False. If a single taxpayer sells Section 1244 stock at a loss, the maximum ordinary loss on the sale is $100,000.

True

False

True or False. The cash proceeds used to redeem corporate stock reduces a corporation’s taxable income.

True

False

True or False. If a partner sells part, or all, of her partnership interest, some of the gain can be classified as ordinary income.

True

False

Joan sells her entire interest in ABC Corporation, which is a qualifying Section 1202 corporation. Joan has held the stock in ABC for seven years. The sales price is $200,000, and her tax basis in the stock was $40,000. Assuming that Joan did not own any AMT for the year of the sale, what is Joan’s income tax from this sale?

$16,000

$32,000

$22,400

$33,000

Maude and Claude are married and file a joint tax return for the current year. During the year, Maude sold some Section 1244 stock she owned for $30,000. Her tax basis in the stock was $100,000. This was the only sale of investment stock of any sort by either Maude or Claude for the year. What is the ordinary loss that is deductible on the current year tax return?

$100,000

$50,000

$70,000

Jerry sells his entire interest in Z Corporation to Ted on July 1 of the current year for $200,000 cash. Z Corporation has been an S corporation since inception, and Jerry was the sole shareholder. At the beginning of the current year, Jerry’s tax basis in his Z stock was $40,000. For the current year, Z Corporation had taxable income of $120,000 from operations from January 1 through June 30, and $140,000 of taxable income from operations from July 1 through December 31. On February 14 of the current year, Jerry received a $90,000 cash distribution from Z Corporation. Based on these facts, what is Jerry’s gain from the sale of the stock to Ted?

$130,000

$160,000

$40,000

$70,000

Mike currently owns 60 of the 100 outstanding shares of Xanadu Corporation, a C corporation with over $1 million of earnings and profits. Parties unrelated to Mike own all the other 40 shares. During the current year, Xanadu redeems 15 of Mike’s shares for $100,000 cash. None of the other shareholders redeemed any of their stock during the year. Mike’s tax basis in these 15 shares was $20,000. Based on these facts, what is Mike’s capital gain from the redemption?

$80,000

$100,000

$40,000

Marie sold her entire interest in the Cornwall Partnership for $100,000 cash. Her share of partnership liabilities at the time of the sale was $50,000, and her adjusted tax basis at the time of the sale was $170,000. The partnership had no “hot assets.” What is Marie’s gain or (loss) on the sale, and how is it classified?

$(70,000) Capital loss

$(70,000) Ordinary loss

$(20,000) Capital loss

$(20,000) Ordinary loss

Which one of the following is considered a “hot asset” on the partnership books?

Accounts receivable of a cash-basis partnership

Unrealized ordinary gain potential in partnership equipment

Inventory with a fair market value in excess of tax basis

All of the above

Questions 12 and 13 are based on the following information. Jackson Partnership, a cash basis partnership, has the following assets at the time when Alice sells her entire 25% partnership interest to Jack.

	Fair Market Value	Book/Tax Basis
Cash	$100,000	$100,000
Accounts Receivable	500,000	0
Investments	400,000	300,000
	$1,000,000	$400,000

The amount realized by Alice on her sale was $250,000 This included a $200,000 cash payment by Jack, plus $50,000 of partnership liabilities, which had been allocated to Alice. Alice’s tax basis in her partnership interest at the time of the sale, which also included the $50,000 liabilities, was $100,000.

Based on the above information, how much capital gain does Alice recognize on the sale?

$150,000

$125,000

$25,000

What is Jack’s tax basis in his partnership interest immediately after the sale?

$150,000

$125,000

$250,000

$200,000

Sidney liquidates his entire 10% interest in the cash-basis Palmdale Partnership, at a time when his tax basis in his partnership interest is $15,000. In complete termination of his interest, Sidney is paid $100,000 cash. At the time of the liquidation, the partnership assets consisted solely of $200,000 cash, and $800,000 of zero-basis accounts receivable. There were no partnership liabilities. Based on this information, what is Sidney’s capital gain from the liquidation?

$100,000

$85,000

$80,000

$5,000

Colleen sells her entire interest in Beachcomber Partnership on January 1 of the current year for $30,000 cash. At the beginning of the year Colleen had unused suspended losses from the partnership of $20,000. This entire amount was from outside basis limitations, and not from the at-risk or passive loss rules. How much of the suspended losses can Colleen deduct in the current year?

$30,000

$20,000

$10,000

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