Chapter 2 (Corporations) – Corporate Formation and Capital Structure
_____ ( 1) Demarcus is a 50% partner in the DJ partnership. DJ has taxable income for the year of $200,000. Demarcus received a $75,000 distribution from the partnership. What amount of income related to DJ must Demarcus recognize?
- A) $200,000
- B) $75,000
- C) $100,000
- D) $37,500
_____ (2) Identify which of the following statements is true.
- A) Regular corporation and C corporation are synonymous terms.
- B) Regular corporation and S corporation are synonymous terms.
- C) A partner is generally considered to be an employee of the partnership.
- D) All of the above are false.
_____ (3) Bread Corporation is a C corporation with earnings of $100,000. It paid $20,000 in dividends to its sole shareholder, Gerald. Gerald also owns 100% of Butter Corporation, an S corporation. Butter had net taxable income of $80,000 and made a $15,000 distribution to Gerald. What income will Gerald report from Bread and Butter’s activities?
- A) $35,000
- B) $95,000
- C) $100,000
- D) $180,000
_____ (4) Identify which of the following statements is true.
- A) Under the check-the-box regulations, an LLC that has one member (owner) may be disregarded as an entity separate from its owner.
- B) An unincorporated business may not be taxed as a corporation.
- C) A new LLC that is owned by four members elects to be taxed under its default classification (as a partnership) in its first year of operations. The entity is prohibited from changing its tax classification at any time in the future.
- D) All of the above are false.
_____ (5) Rose and Wayne form a new corporation. Rose contributes cash for 85% of the stock and Wayne contributes services for 15% of the stock. The tax effect is
- A) Rose and Wayne must recognize their realized gains, if any.
- B) Wayne must report the FMV of the stock received as capital gain.
- C) Rose and Wayne are not required to recognize their realized gains.
- D) Wayne must report the FMV of the stock received as ordinary income.
_____ (6) Jermaine owns all 200 shares of Peach Corporation stock valued at $50,000. Kenya, a new shareholder, receives 200 newly issued shares from Peach Corporation in exchange for inventory with an adjusted basis of $40,000 and an FMV of $50,000. Which of the following statements is correct?
- A) No gain will be recognized by Kenya.
- B) The transaction results in $10,000 of ordinary income for Kenya.
- C) The transaction results in $10,000 of capital gain for Kenya.
- D) Kenya may defer the recognition of any tax until the stock is sold.
_____ (7) Brad forms Vott Corporation by contributing equipment, which has a basis of $50,000 and an FMV of $40,000 in exchange for Vott stock. Brad also contributes $5,000 in cash. If the transaction meets the Sec. 351 control and ownership tests, what are the tax consequences to Brad?
- A) He recognizes a $5,000 loss.
- B) He recognizes a $5,000 gain and a $10,000 loss.
- C) He recognizes neither a gain nor a loss.
- D) He recognizes a $10,000 loss.
_____ ( 8) Carmen and Marc form Apple Corporation. Carmen transfers land that is Sec. 1231 property, with an adjusted basis of $18,000 and an FMV of $20,000 in exchange for one-half of the Apple Corporation stock. Marc transfers equipment that originally cost $28,000 on which he has taken $5,000 in depreciation deductions. The equipment has an FMV of $25,000 and he receives one-half of the stock and a $5,000 short-term note. The transaction meets the requirements of Sec. 351. Which statement below is correct?
- A) There is no recognized gain or loss.
- B) Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes $5,000 as ordinary income.
- C) Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes a $5,000 Sec. 1231 gain.
- D) Carmen recognizes no gain and Marc recognizes $2,000 as ordinary income.
_____ (9) Jerry transfers two assets to a corporation as part of a Sec. 351 exchange. The first asset has an adjusted basis of $70,000 and an FMV of $50,000. The second asset has an adjusted basis of $70,000 and an FMV of $150,000. The FMV of the stock received is $180,000, and he also receives $20,000 cash. The realized and recognized gain on the second asset is
- A) $80,000 realized; $20,000 recognized.
- B) $80,000 realized; $15,000 recognized.
- C) $20,000 realized; $10,000 recognized.
- D) $10,000 realized; $10,000 recognized.
_____ (10) Henry transfers property with an adjusted basis of $95,000 and an FMV of $100,000 to a newly formed corporation in a Sec. 351 exchange. Henry receives stock with an FMV of $85,000 and a short-term note with a $15,000 FMV. Henry’s basis in the stock is
- A) $100,000.
- B) $95,000.
- C) $90,000.
- D) $85,000.
_____ ( 11) The transferor’s holding period for any stock received in exchange for a capital asset
- A) includes the holding period for the property transferred.
- B) begins on the day after the exchange.
- C) begins on the day of the exchange.
- D) none of the above
_____ (12) Beth transfers an asset having an FMV of $200,000 and an adjusted basis of $150,000 to ABC Corporation in a Sec. 351 transaction. Beth receives in exchange ABC common stock having an FMV of $175,000 and Zeus Corporation common stock (a capital asset) having an FMV of $25,000 and a basis of $10,000 to ABC Corporation. ABC Corporation must recognize
- A) no gain.
- B) a $15,000 capital gain.
- C) a $25,000 capital gain.
- D) a $50,000 capital gain.
_____ (13) Chris transfers land with a basis of $40,000 to Webb Corporation in exchange for 100% of Webb’s stock. At the date of the transfer, the land had a $30,000 fair market value. Absent an election by Chris, Webb’s basis in the land is
- A) $30,000.
- B) $35,000.
- C) $40,000.
- D) none of the above
_____(14) The transferee corporation’s basis in property received in a Sec. 351 exchange is
- A) the FMV of the property received.
- B) the transferee corporation’s basis in the stock exchanged.
- C) the transferor’s basis for the property plus gain recognized by the transferor.
- D) the transferor’s basis for the property plus gain recognized by the transferee corporation.
_____ (15) Martin operates a law practice as a sole proprietorship using the cash method of accounting. Martin incorporates the law practice and transfers the following items to a new, solely owned corporation.
Accounts payable (deductible expenses)
Note payable (on equipment)
Martin must recognize a gain of ________ and has a stock basis of ________:
- A) $0; $30,000
- B) $0; $40,000
- C) $20,000; $30,000
- D) $20,000; $40,000
Chapter 3 (Corporations) – The Corporate Income Tax
_____ (16) Which of the following items is a permanent difference between taxable and financial accounting income?
- A) depreciation
- B) dividends-received deduction
- C) bad debts
- D) net capital loss
_____ (17) Which of the following items is a temporary difference between tax income and financial accounting income?
- A) production activities deduction
- B) proceeds on life insurance on a key executive
- C) dividends-received deduction
- D) depreciation
_____ (18) Trail Corporation has gross profits on sales of $140,000 and deductible expenses of $180,000. In addition, Trail has a net capital gain of $60,000. Trail’s taxable income is
- A) a $20,000 loss.
- B) a $40,000 loss.
- C) $60,000.
- D) $20,000.
_____ (19) Identify which of the following is false.
- A) Corporations that sell real property at a gain must report an additional 20% of the entire gain as ordinary income.
- B) Corporations selling real property that previously had been depreciated using an accelerated method are subject to Sec. 291.
- C) Section 291 reduces the amount of net Sec. 1231 gains that can be offset by corporate capital losses.
- D) Section 291 recapture applies to Sec. 1250 property.
_____ (20) Organizational expenditures include all of the following except for
- A) costs incurred when issuing stock.
- B) legal costs incident to the creation of the corporation.
- C) expenses of organizational meetings.
- D) fees paid to the state of incorporation
_____ (21) Green Corporation is incorporated on March 1 and begins business on June 1. Green’s first tax year ends on October 31, i.e., a short year. Green incurs the following expenses during the year:
Accounting fees to set up books
Temporary director fees
Charter modification fee
What is the deduction for organizational expenses if Green chooses to deduct its costs as soon as possible?
- A) $36,000 D) $500
- B) $5,028
- C) $667
_____ (22) Identify which of the following statements is true.
- A) A corporation that accrues compensation payable to an employee must pay the amount within two and one-half months after the close of the taxable year to deduct the amount in the year of the accrual.
- B) Accrued compensation that is deductible in the year of accrual is considered to be part of an IRS deferred compensation plan.
- C) Accrued compensation not paid within three and one-half months after the close of the corporation tax year is deducted in the year following the accrual.
- D) All of the above are false.
_____ (23) If a corporation’s charitable contributions exceed the deduction limitation in a particular year, the excess
- A) is not deductible in any future year.
- B) becomes a carryover to a maximum of five succeeding years.
- C) may be carried back to the third preceding year.
- D) is carried over indefinitely.
_____ (24) Richards Corporation has taxable income of $280,000 calculated before the charitable contribution deduction and before its dividends-received deduction of $34,000. Richards makes cash contributions of $35,000 to charitable organizations. What is Richards Corporation’s charitable contribution deduction for the current year?
- A) $24,600
- B) $28,000
- C) $31,400
- D) $35,000
_____ (25) Island Corporation has the following income and expense items for the year:
|Gross receipts from sales
|Dividends received from 15%-owned domestic corporation
|Expenses connected with sales
The taxable income of Island Corporation is
- A) $100,000.
- B) $70,000.
- C) $47,000.
- D) $42,000.
_____ (26) Money Corporation has the following income and expenses for the tax year:
|Gross profit on sales:
|Dividends received from less-than-20%-owned domestic corporations:
What is Money’s net operating loss?
- A) $494,000
- B) $480,000
- C) $520,000
- D) $220,000
_____ (27) Webster, who owns all the Bear Corporation stock, purchases a dump truck from Bear Corporation in January. The truck cost $12,000 and has a $10,000 adjusted basis at the time of the sale. Webster pays Bear the truck’s $8,000 FMV. Later in the same year, Webster sells the dump truck to an unrelated party for $6,000. Webster can recognize a loss of
- A) $4,000.
- B) $2,000.
- C) $3,000.
- D) $5,000.
_____ (28) Delux Corporation, a retail sales corporation, has a taxable income of $500,000. Delux Corporation’s regular tax liability is
- A) $158,250.
- B) $162,200.
- C) $170,000.
- D) $175,000.
_____ (29) Baxter Corporation is a personal service corporation. Baxter Corporation has taxable income of $10,000. Baxter Corporation’s tax is
- A) $1,500.
- B) $3,400.
- C) $3,500.
- D) $3,900.
_____ (30) Which of the following is not subject to classification as a personal service corporation?
- A) construction
- B) law
- C) accounting
- D) performing arts
_____ (31) Andy owns 20% of North Corporation and 60% of Tent Corporation. North and Tent have only one class of stock outstanding. Barbara owns 50% of North Corporation and 20% of Tent Corporation. North and Tent Corporations will be brother-sister corporations if
- A) no stock ownership change occurs.
- B) Barbara acquires an additional 10% of North stock.
- C) Andy acquires an additional 10% of North stock and Barbara acquires an additional 10% of Tent stock.
- D) Barbara acquires an additional 10% of North stock and an additional 10% of Tent stock.
_____ (32) Identify which of the following statements is true.
- A) A corporate tax return must be filed by the fifteenth day of the fourth month following the close of the corporation’s tax year.
- B) A corporation is required to file a tax return even if it has no taxable income.
- C) A corporation with gross receipts, total income, and total assets of $1,000,000 or less is permitted to file Form
- D) All of the above are false.
_____ (33) Bishop Corporation reports taxable income of $700,000 on its tax return. Given the following information from the corporation’s records, determine Bishop’s net income per its financial accounting records.
|Deduction for federal income taxes per books
|Depreciation claimed on the tax return
|Depreciation reported on the financial accounting books
|Life insurance proceeds on death of a corporate officer
- A) $520,000
- B) $620,000
- C) $660,000
- D) $560,000
_____ (34) Dreyfuss Corporation reports the following items:
Unappropriated retained earnings, beginning of year: $800,000
Net income: 700,000
Federal income tax refund for last year taken
directly to retained earnings: 50,000
Cash dividends paid this year: 500,000
The unappropriated retained earnings at year-end are
- A) $1,000,000.
- B) $1,050,000.
- C) $1,500,000.
- D) $2,050,030.
Chapter 14 (Individuals) – Special Tax Computations, Tax Credits, Payment of Tax
_____ (35) The general business credit includes all of the following with the exception of
- A) research credit.
- B) disabled access credit.
- C) foreign tax credit.
- D) work opportunity tax credit.
_____ (36) Which of the following statements regarding the Work Opportunity Tax Credit (WOTC) for hiring veterans is not correct?
- A) The amount of qualifying wages varies based on length of unemployment after leaving active duty.
- B) The amount of qualifying wages varies based on whether the veteran has a service-related disability.
- C) Eligibility for the credit is based on whether the veteran served in a combat zone.
- D) All of the above statements are correct.
_____ (37) Runway Corporation has $2 million of gross receipts in the preceding year. For purposes of the disabled access credit, what is the maximum number of full-time employees the corporation can have in the preceding year?
- A) 10
- B) 15
- C) 20
- D) 30
_____ (38) Kors Corporation has 30 employees and $5 million of gross receipts. Kors spends $15,000 for qualified structural improvements for access for the disabled. The disabled access credit is
- A) $5,000.
- B) $5,125.
- C) $7,375.
- D) $7,500.
_____ (39) Which of the following expenditures will qualify as a research expenditure for purposes of the research credit?
- A) An ice cream producer develops a new type of packaging that will keep ice cream frozen while driving home from the grocery store.
- B) An ice cream producer develops a new design on the package that will be more pleasing to the culture of a new market it is entering.
- C) An ice cream producer develops a new marketing campaign to introduce its brand to a new region of the country it is entering.
- D) All of the above qualify as research expenditures for the research credit.
_____ (40) The general business credit may not exceed the net income tax minus the greater of the tentative minimum tax or
- A) 20% of the net regular tax liability above $20,000.
- B) 25% of the net regular tax liability above $20,000.
- C) 20% of the net regular tax liability above $25,000.
- D) 25% of the net regular tax liability above $25,000.
PROBLEMS (40 POINTS): 5 QUESTIONS OF VARIOUS POINT VALUES.
Note: Please be sure to support your answers. No credit will be granted otherwise.
(1) Zoe Ann transfers machinery having a $36,000 adjusted basis and a $70,000 FMV for all 100 shares of Zeema Corporation’s stock. Before the transfer, Zoe Ann used the machinery in her business. She originally paid $50,000 for the machinery and claimed $14,000 of depreciation before transferring the machinery. Zoe Ann recaptures no depreciation on the transfer and the recapture potential is transferred to Zeema Corporation. Zeema sells the machine for $66,000 after it had depreciated the machine an additional $4,000. What is the amount and character (type) of Zeema’s gain on the machine? (5 points)
(2) Reba, a cash basis accountant, transfers all of the assets and liabilities of her practice to Able Corporation in exchange for all of Able Corporation’s stock. The assets include $20,000 of accounts receivable. (5 points)
(a) What is the Corporation’s basis in the receivables?
(b) Will the corporation be taxed on the receivables, as they are collected?
(3) The tax disadvantages of the C corporation form of doing business include “double taxation.” What is meant by the term “double taxation” as used in this context? (5 points)
(4) Chambers Corporation is a calendar year taxpayer using the accrual method of accounting. In 2011, its board of directors authorizes a $20,000 contribution to the Boy Scouts. Chambers pays the contribution on March 12, 2012.
(a) What is the maximum contribution allowed in 2011?
(b) What is the maximum contribution allowed in 2012?
(5) Jackel, Inc. has the following information for the current tax year: (20 points)
Gross sales $350,000
Cost of goods sold 50,000
Dividends received (10%) 40,000
Operating expenses 30,000
Charitable contributions 45,000
(a) What is Jackel’s charitable contribution deduction?
(b) What is Jackel’s taxable income?