“Understanding Tax and Accounting Concepts: Exploring Common Scenarios and Reorganizations”

QUESTION

1- Which is the most common reason why Section 1250 is rarely applicable?

a. Taxpayers rarely sell real property

b. Taxpayers elect to apply Section 1245 rather than Section 1250

c. Taxpayers have been required to depreciate real property straight-line since 1986

d. Real property is usually sold at a loss rather than a gain

e. Taxpayers often fail to recognize the applicability of this provision

 

2- A taxpayer recognizes capital gain in 2006 on a sale of a business.  In 2010, the taxpayer had to pay out a settlement resulting from the sale, giving rise to a capital loss under the Arrowsmith Doctrine.  Under the “restoration” principles, the taxpayer would:

a. Be unable to claim the loss if 2006 is a closed year

b. Amend the 2006 return and claim the loss

c. Claim the loss in 2010

d. Recompute 2006’s tax liability inclusive of the loss, and take any decrease in tax as a credit against 2010’s tax liability

e. Either C or D

 

3- JH Company sold machinery for $45,000 on December 23, 2018. The machinery had been acquired on April 1, 2016, for $69,000 and its adjusted basis was $34,200. The § 1231 gain, § 1245 recapture gain, and § 1231 loss from this transaction are:

a. $0 § 1231 gain, $10,800 § 1245 recapture gain, $0 § 1231 loss.

b. $0 § 1231 gain, $0 § 1245 recapture gain, $14,800 § 1231 loss.

c. $0 § 1231 gain, $34,200 § 1245 recapture gain, $0 § 1231 loss.

d. $0 § 1231 gain, $10,800 § 1245 recapture gain, $34,200 § 1231 loss.

e. None of the above.

 

4- JH Company had an involuntary conversion on December 23, 2018. The machinery had been acquired on April 1, 2016, for $49,000 and its adjusted basis was $14,200. The machinery was completely destroyed by fire and JH received $10,000 of insurance proceeds for the machine and did not replace it. This was JH’s only casualty or theft event for the year. As a result of this event, JH initially has:

a. $10,000 § 1231 loss.

b. $10,000 § 1245 recapture gain.

c. $4,200 casualty loss.

d. $4,200 § 1231 loss.

e. None of the above.

 

5- JH Company had machinery destroyed by a fire on December 23, 2018. The machinery had been acquired on April 1, 2016, for $49,000 and its adjusted basis was $14,200. The machinery was completely destroyed, and JH received $30,000 of insurance proceeds for the machine and did not replace it. This was JH’s only casualty or theft event for the year. As a result of this event, JH has:

a. $4,200 ordinary loss.

b. $15,800 § 1245 recapture gain.

c. $14,200 § 1245 recapture gain.

d. $30,000 § 1231 gain.

e. None of the above.

 

6- Statutory merger or consolidation is which reorganization?

A. Type A

B. Type B

C. Type C

D.  Type D

 

7- “Substantially all” assets must be acquired under tax-free reorganization:

A. Type A & Type B

B. Type A & Type C

C. Type B & Type C

D. Type C & Type D

 

8- Voting stock requirement is required under tax-free reorganization:

A. Type A & Type B

B. Type A & Type C

C. Type B & Type C

D. Type C & Type D

 

9- A shareholder receives a nontaxable stock dividend.  Which of the following best describes the treatment:

a. Take the basis per share of the shares owned immediately before the dividend, and assign that same amount to each of the new shares received

b. Take the total basis of shares owned immediately before the dividend, and divide that basis over the old and new shares based on the fair market value of the shares when each was purchased or issued

c. Take the total basis of shares owned immediately before the dividend, and divide that basis over the old and new shares based on the fair market value the shares at the time of the stock dividend

d. Use a FIFO approach and allocate basis

 

10- A shareholder is issued two warrants in a transaction qualifying as a nontaxable stock dividend.  The shareholder owns 10 shares with a basis of $4 each and the dividend is made when each has a value of $10.  Each warrant allows the holder to purchase one share for $5.  No separate elections are made by the shareholder. Immediately after the dividend, what is the shareholder’s basis in each warrant

A.        Zero

B.        $3

C.        $5

D.        $8

E.         $10

ANSWER

“Understanding Tax and Accounting Concepts: Exploring Common Scenarios and Reorganizations”

The correct answer is c. Taxpayers have been required to depreciate real property straight-line since 1986. The straight-line method became mandatory for depreciating real property after the Tax Reform Act of 1986.

The correct answer is b. Amend the 2006 return and claim the loss. The “restoration” principles would allow the taxpayer to amend their 2006 return to claim the capital loss resulting from the settlement in 2010.

The correct answer is a. $0 § 1231 gain, $10,800 § 1245 recapture gain, $0 § 1231 loss. The transaction results in a § 1245 recapture gain due to the sale price being less than the adjusted basis, but there’s no § 1231 gain or loss.

The correct answer is a. $10,000 § 1231 loss. The insurance proceeds of $10,000 are less than the adjusted basis, resulting in a § 1231 loss.

The correct answer is a. $4,200 ordinary loss. The insurance proceeds exceed the adjusted basis, resulting in an ordinary loss, not a § 1231 gain or § 1245 recapture gain.

The correct answer is A. Type A. Statutory merger or consolidation is classified as a Type A reorganization.

The correct answer is A. Type A & Type B. “Substantially all” assets must be acquired under tax-free reorganizations of Type A and Type B.

The correct answer is A. Type A & Type B. Voting stock requirement applies to tax-free reorganizations of Type A and Type B.

The correct answer is c. Take the total basis of shares owned immediately before the dividend, and divide that basis over the old and new shares based on the fair market value of the shares at the time of the stock dividend.

The correct answer is C. $5. The shareholder’s basis in each warrant is equal to the value of the warrant at the time of issuance, which is $5.