Question

QUESTION 13

1. Z owns a rental building (its only asset) with a gross fair market value of $5,000 subject to the non-recourse mortgage of $2,000. Z’s adjusted basis for this building is $1,500. All of Z’s stock is owned by C, whose basis for his stock in Z is $500. Z had 1,000 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by Z on $3,500 gained is $1,250 and on $3,000 gained is $1,000. Z sells the building, subject to the mortgage, to D in the current year for $3,000 in cash. Z then liquidates, distributing all of the cash (remaining after paying its taxes) to C in cancellation of C’s stock in the current year.

   Same facts as above, except that D agrees to pay Z an additional contingent amount for the building in order to induce Z to sell. The gross fair market value of Z’s property is actually $5,000. D also agrees to give a Z “contingent” right to receive from D an additional $2,500 over 10 years if D earns profits from the building in excess of profits historically earned.

   	a.	If the transaction is held open, Z will recognize $3,500 gain on the sale.
   	b.	Upon collecting additional amounts from D, C will recognize additional capital gain.
   	c.	Upon collecting additional amounts from D,. Z might also be expected to recognize additional gain, although Bittker & Eustice apparently take a contrary position.
   	d.	None of the above.
   	e.	All of the above, except D.

2 points   

QUESTION 14

1. Z owns a rental building (its only asset) with a gross fair market value of $5,000 subject to the non-recourse mortgage of $2,000. Z’s adjusted basis for this building is $1,500. All of Z’s stock is owned by C, whose basis for his stock in Z is $500. Z had 1,000 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by Z on $3,500 gained is $1,250 and on $3,000 gained is $1,000. Z sells the building, subject to the mortgage, to D in the current year for $3,000 in cash. Z then liquidates, distributing all of the cash (remaining after paying its taxes) to C in cancellation of C’s stock in the current year.

   Same facts as above, except that C contributes to Z securities with a basis of $5,000 and a value of $1,500 in the preceding year so that C’s stock basis increases to $5,500. Z then sells the securities to D for $1,000 along with the building as previously sold.

   	a.	Z will recognize a $4,000 loss on the sale of the securities.
   	b.	Z will recognize a $500 loss on the sale of the securities under 336(d)(2), even if the presumption of tax avoidance purpose is rebutted.
   	c.	Neither of the above.

Answer 1

Q1 :

Answer : ( B )

Q 2 :