REVIEW QUESTIONS 1. Property is sold in 1926 having values as follows: Compute the taxable profit or deductible loss in each case. 2. (a) A acquired property by gift from B. What taxable profit or deductible loss would result under the following cases, should A sell the property in 1926? (b) How would your answers be modified in case A had received the property through inheritance from B? 3. What characteristics of property received in exchange for other property make the transaction non-taxable? 4. A exchanges his farm for B's, knowing that valuable ore deposits are on B's property, although B is unaware of the fact. Does A realize any taxable income? 5. How do the regulations define "fair market value"? 6. (a) A bond house, dealing in Liberty bonds, exchanges with a customer bonds of the third issue for bonds of the fourth. May taxable income or deductible loss arise from the transaction in 1922? In 1923? (b) Two individual speculators in Liberty bonds, neither of whom maintains a place of business or has customers, exchange bonds of the third issue for bonds of the fourth. Would your answer be different than in (a)? 7. Is U. S. v. Phellis applicable to the 1926 act and regulations? 8. A owns 100 shares of stock in the D corporation which he purchased in 1917 at par. In 1926 the corporation calls in all its outstanding stock of 1,000 shares of a par value of $100 each and a market value of 60, and issues to its old stockholders 500 shares of non-voting preferred ($100 par) and 500 shares of common without par value. A market value of 65 and 60, respectively, is attached immediately to the two new classes of stock. Later in 1926, A sells 20 shares of the non-voting preferred at 75. What profits must he report for 1926 in connection with these transactions? 9. A owns 100 shares of stock of the F corporation which cost $150 per share in 1915. During January, 1922, the E company (a corporation which had been operating several years) purchased the assets of the F corporation and the latter was dissolved, the stockholders receiving common stock of an equal par value ($100) and bonds the face value of which equaled one-half the par value of the stock. No value could be assigned to the stock inasmuch as no trading had taken place in this security for several years, and A's (see below) was the only sale in 1922. Several bonds were disposed of during 1922 by other securityholders at prices averaging par and this may be assumed to be a fair valuation of the bonds at the time of acquisition. A sold 20 shares at $200 per share in April, 1922. What taxable income with respect to these transactions must A report for 1922? 10. In January, 1922, a building owned by A was destroyed by fire. Its cost in 1910 was $80,000 and its reproductive value in 1913 was $100,000 after allowing for depreciation. Depreciation at the rate of 3% on the appreciated value had been provided on the books. The latter contained the following information at the time of the fire: Settlement was made with the insurance company for $88,200. In March A purchased another building to serve the same purposes as the old for $79,380. At what value (for tax purposes) may the new building appear on the books and what taxable profit, if any, must A report from the transaction? On what value may subsequent depreciation be deducted? 11. The B corporation purchased 150 shares of the X company in 1926 at 90. In January, 1927, 100 additional shares are acquired at 50, and in the same month the original 150 shares are disposed of at 48. What loss may the B corporation deduct? If the remaining 100 shares should be sold in March at 100, what taxable profit would result? 12. A bought land in 1915 for $10,000 and exchanged it in 1921 for $50,000 cash and 100 shares of stock in the X corporation. In 1926 the stock is sold for $50 per share. What taxable income for 1926 must A report? 13. A purchased 100 shares of stock in the X corporation in 1911 at $100. At March 1, 1913, the value of each share was $120. In 1915 a stock dividend of 50 shares was received. Forty of the 50 shares were sold in 1926 at 90. What taxable profit or deductible loss resulted? 14. B purchased 100 shares of stock in the X corporation in 1911 at $100 (March 1, 1913, value, 120) and another block of 150 shares in 1914 at $132. He also received the 50% stock dividend in 1915 in one certificate and sold 40 shares thereof in 1926 at 90. What taxable income must he report? 15. If B had received two certificates, one for 50 shares and the other for 75 shares, and sold 40 shares of the latter, would your answer be different? 16. C in 1926 sold for $100 per share 50 shares of dividend stock (preferred) which he had received in 1916 on 50 shares of the R corporation common stock as a 100% stock dividend. The original 50 shares of common had been purchased in 1914 at 300 and the market values of the common and preferred at the time the latter was issued were 300 and 100, respectively. Compute the taxable income. 17. A in 1923 received a cash dividend of $50,000 on his holdings of 1,000 shares in the T corporation which had cost him $200 per share in 1920. An explanation accompanying the dividend explained that the distribution was realized appreciation of property values which had accrued prior to March 1, 1913. What profit or loss must be returned under the following circumstances? (a) A subsequently sells 500 shares at 220. (c) A sells 500 shares at 130. 18. B bought two shares of stock in the U corporation in 1920 for $120 each. A 50% stock dividend was paid in 1921. In 1923, rights are given to each stockholder permitting him to acquire one new share of stock for each share held for $50. B sells his rights for a total of $60. What profit should B report? 19. Formulate a rule applicable to the income or loss arising from the repurchase by a corporation of its own bonds. 20. What general rules apply to the accounting procedure in connection with instalment sales? 21. A cash dividend was made payable December 24, 1925, but, because of delayed mails, was not received by a stockholder until January 3, 1926. In what year's income should the dividend be included? 22. The profits (less taxes) of the X corporation for 1926 were $16,000; the balance of the surplus account at January 1, 1926, was $12,000 which consisted of earnings prior to March 1, 1913, of $10,000, and earnings between that date and January 1, 1926, of $2,000. A cash dividend of $11,000 is paid July 1, 1926. What portion of the dividend, if any, is tax-free in the hands of the stockholder? 23. What effect would the dividend of Question 22 have had on the subsequent sale of the stock by a stockholder (a) at a profit and (b) at a loss? In 1923? In 1926? 24. An investment company pays a dividend to its stockholders one-half of which represents interest from municipal bonds. What income should the stockholders report? 25. The Surplus account of a personal service corporation stands as follows on December 31, 1926: What taxable income would have accrued to the stockholders, if any, if any one of the following dividends had been declared? (a) $10,000, paid January 31, 1921; (b) $10,000, paid April 1, 1921; (c) $20,000, paid January 31, 1926 (Estimated profits for the month of January were $1,000.00); or (d) $10,000, paid July 1, 1915. |