Question 1. Albert is in the 35% marginal tax bracket. He sold a building in the cur

1. Albert is in the 35% marginal tax bracket. He sold a building in the current year for $450,000. Albert received

$110,000 cash at closing, the buyer assumed Albert’s mortgage for $120,000, and the buyer gave Albert a 6% note for $220,000 due in two years. The Federal rate was 6%. Albert’s basis in the building was $180,000 ($500,000 cost – $320,000 accumulated straight­line depreciation). Assuming he did not elect out of the installment method, Albert’s § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts?

Section 1231 Gain	Unrecaptured § 1250 Gain Taxed at 25%
a. $66,000	$0
b. $0	$66,000
c. $90,000	$90,000
d. $90,000	$0
e. $0	$110,000

2. Walter sold land (a capital asset) to an unrelated party for $100,000 cash and a 4% note for $150,000 due in three years. His basis in the land was $40,000. Walter and the purchaser are cash basis taxpayers. Which of the following statements is correct?

a. If the Federal rate is 3%, interest will be imputed at that rate.

b. If the Federal rate is 5%, interest will be imputed at that rate and the capital gain will be reduced.

c. If the Federal rate is 4.5%, interest will be imputed at that rate and the capital gain will be increased.

d. All of the above.

e. None of the above.

3. Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.

a. Interest will be imputed, thus increasing the total gross income from the transactions.

b. Interest will be imputed, thus decreasing the capital gain.

c. Interest will notbe imputed because the contract is for less than five years.

d. Interest will be imputed, thus increasing the buyer’s basis in the asset.

e. None of the above.

4. Related-party installment sales include all of the following exceptthe first seller’s:

a. Brothers and sisters.

b. Controlled corporations.

c. Lineal descendants and ancestors.

d. Uncles and aunts.

e. All of the above would be considered related parties.

5. Father sold land to Son for $500,000 in 2014. Father’s basis in the land was $100,000. Son paid Father $50,000 and gave Father a note for $450,000 due in 2017. In 2015, Son sold the land for $600,000 cash. The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

a. Father must recognize $400,000 of income in 2015.

b. The installment method is not permitted because this is a related-party transaction.

c. Father’s gain is all ordinary income.

d. Father must recognize a $360,000 gain in 2015.

e. None of the above.

6. In 2014, Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2018. Father’s basis was $100,000. In 2015, after paying $8,000 interest but nothing on the principal, Son sold the land for $300,000 cash. What gain, if any, must Father recognize in 2015?

a. $0.

b. $75,000.

c. $100,000.

d. $200,000.

e. None of the above.

7. Kathy was a shareholder in Matrix, Inc., when she sold the corporation a commercial building. The building cost

$500,000 and the balance in the accumulated depreciation account was $400,000. Matrix, Inc., paid $100,000 in the year of sale and gave Kathy a note for $400,000 plus adequate interest due in 2016.

a. Because Kathy is a shareholder in Matrix, she cannot report the gain by the installment method.

b. Generally, if Kathy owned 100% of the Matrix stock, Kathy cannot use the installment method.

c. Generally, if Kathy owned only 60% rather than 100% of the Matrix stock, she could use the installment method.

d. Kathy cannot use the installment method to report the gain because the realized gain is equal to the depreciation she claimed on the building.

e. None of the above.

8. Which of the following statements is true concerning the disposition of an installment note?

a. Deferred gain is not recognized by the transferor if the installment note is a non-taxable transfer to a controlled corporation.

b. Deferred gain must only be recognized if the installment note was transferred as a gift to a related party.

c. Transfer of an installment obligation to another party will not trigger immediate recognition of deferred gain.

d. Deferred gain must be recognized if the note is transferred to the owner’s estate at his death.

e. None of the above.

9. Wendy sold property on the installment basis in 2012 for more than her basis in the property. Wendy was to receive installment payments at the end of each year for the next five years. In 2014, Wendy was killed in a car accident and the note was transferred to her estate.

a. The estate must recognize the gain from all the amounts collected on the installment obligation in 2014.

b. The income will be reported on Wendy’s 2014 income tax return as income in respect of a decedent.

c. The entire gain must be recognized in 2012.

d. Gain is recognized by Wendy and reported on her 2014 income tax return when the note is transferred into the estate.

e. None of the above.

.

10.Gold Corporation sold its 40% of the Ruby Corporation common stock. Gold received $10 million in the year of the sale and a note for $15 million, payable in three years with interest at the Federal rate. Gold’s basis in the stock was $5 million. Assume that Gold Corporation will report the gain by the installment method where the method is permitted.

a. The installment method is never permitted on the sale of stock.

b. If Ruby Corporation stock is traded on an established securities market, Gold must recognize a $20 million gain in the year of sale.

c. If the Ruby Corporation stock is not traded on a national exchange, Gold must recognize a $20 million gain.

d. All of the above are true.

e. None of the above is true.

11.In the case of a small home construction company that builds under long-term contracts, generally:

a. The percentage of completion method is required to report the income from the construction contracts.

b. The percentage of completion method can be elected and generally will defer income until the contract is completed.

c. The completed contract method can be used and generally will defer income.

d. The accrual method must be used because inventories are an income-producing factor.

e. None of the above is true.

12.Robin Construction Company began a long-term contract in 2014. The contract price was $800,000. The estimated cost of the contract at the time it was begun was $500,000. The actual cost incurred in 2014 was $350,000. The contract was completed in 2015 and the cost incurred that year was $125,000. Under the percentage of completion method:

a. Robin should report $300,000 of income in 2014.

b. Robin should report $90,000 of income in 2015.

c. Robin will receive interest (under the lookback method) on the underpayment of taxes in 2014.

d. Robin should report $325,000 of income in 2014.

e. None of the above is correct.

13.Under the percentage of completion method, if the actual costs arethe estimated costs, the taxpayer must pay interest on the underpayment of prior years’ taxes.

a. Greater than.

b. Less than.

c. Equal to or greater than.

d. Equal to.

e. None of the above.

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