REG – Error in Ninja MCQ? Clarification regarding QSBS (sec 1202) gains

CPA Exam Forum REG REG Review REG – Error in Ninja MCQ? Clarification regarding QSBS (sec 1202) gains

This topic contains 4 replies, has 2 voices, and was last updated by  mad max 1 week ago.

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  • #1479466

    mad max
    Participant

    I came across a question ( NINJA REG # 944 ) that reads as below.

    Danielson invested $2 million in DEC, a qualified small business corporation. Six years later, Danielson sold all of the DEC stock for $16 million and purchased an office building with the proceeds. Danielson had not previously excluded any gain on the sale of small business stock. What is Danielson's taxable gain after the exclusion?
    A. $0
    B. $6 million
    C. $7 million
    D. $9 million

    I would select ‘A' on exam day. This assumes the only reference to a date of purchase is “six years” earlier. The realized gain is $14M, which is less than $20M (the greater of $10M or $2M*10) therefore the whole gain should be excluded from net income.
    If this was a situation where $0 was not an answer choice, I could assume that it was purchased in a year that required 50 or 75% exclusion (assuming ONLY one of those was given.) If there was a choice between 50% (old), 75% (old), and 100% (new) I would assume new rule unless question clearly dictated otherwise.
    Sources:
    IRS: Exclusion on Gain on QSB Stock (1202)
    IRC 26 US Code 1202
    According to Ninja, the answer is C:

    IRC Section 1202 permits a taxpayer, other than a corporation, to exclude in general 50% of the gain realized on the sale of a qualified small business corporation if the taxpayer holds the stock for more than five years prior to sale.


    I think the 50% should be changed to 100%, as this conflicts with information directly on IRC 1202-4-A :

    Exclusion of Gain on Qualified Small Business (QSB) Stock
    (4) 100 percent exclusion for stock acquired during certain periods in 2010 and thereafterIn the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010—
    (A) paragraph (1) shall be applied by substituting “100 percent” for “50 percent”

    How would you approach this question on exam day, or is this question just incorrect/not updated to reflect new laws? Am I understanding the concept correctly? Appreciate any and all assistance, thank you.


    I passed REG/AUD/BEC in 2011-2012, this is my second attempt.

    I'm doing FAR-REG-AUD-BEC starting 1/18 and plan on finishing by 5/31.

    AUD - NINJA in Training
    BEC - NINJA in Training
    FAR - 90
    REG - NINJA in Training
    #1480012

    mad max
    Participant

    Bump it to the top, still looking for help on this!

    Also, if it is wrong on Ninja MCQ, I need to notify Jeff/Ninja team for our fellow candidates 🙂


    I passed REG/AUD/BEC in 2011-2012, this is my second attempt.

    I'm doing FAR-REG-AUD-BEC starting 1/18 and plan on finishing by 5/31.

    AUD - NINJA in Training
    BEC - NINJA in Training
    FAR - 90
    REG - NINJA in Training
    #1480303

    mad max
    Participant

    Bump, still looking for solution.


    I passed REG/AUD/BEC in 2011-2012, this is my second attempt.

    I'm doing FAR-REG-AUD-BEC starting 1/18 and plan on finishing by 5/31.

    AUD - NINJA in Training
    BEC - NINJA in Training
    FAR - 90
    REG - NINJA in Training
    #1480312

    Hi Max – you are correct, unfortunately. Questions like this are hard to keep track of because there isn't a new tax law to prompt an edit of the question, but rather the passage of time when a year range is involved. Thank you for the heads-up.

    #1480333

    mad max
    Participant

    Thanks Jeff!


    I passed REG/AUD/BEC in 2011-2012, this is my second attempt.

    I'm doing FAR-REG-AUD-BEC starting 1/18 and plan on finishing by 5/31.

    AUD - NINJA in Training
    BEC - NINJA in Training
    FAR - 90
    REG - NINJA in Training
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