Quiz Chapter 11
*During 2022, Dowdy, a C corporation, realized a long-term capital gain of $8,000 from the sale of a tract of land, a short-term capital gain of $6,000 from the sale of stock of Ornery Corporation, and a long-term capital loss of $18,000 from the sale of U.S. government securities. What amount of the long-term capital loss may Dowdy deduct on its 2022 income tax return?* A) $8,000 B) $14,000 C) $18,000 D) $0
B) $14,000 A corporation may deduct capital losses only to the extent of capital gains (without regard to whether they are short- or long-term). Therefore, Dowdy can deduct only $14,000 of its net long-term capital loss in the current year. The remaining $4,000 long-term capital loss will be carried back 3 years and carried over to the next 5 years. [1]
Mr. A owned 75% of the voting stock and 85% of the nonvoting stock of Corporation Y. Mr. A transferred property with a fair market value of $90,000 and an adjusted basis of $70,000 to Y for an additional 5% of the voting stock and 5% of the nonvoting stock. What is the amount of gain to be recognized by Mr. A? A) $0 B) $8,000 C) $10,000 D) $20,000
A) $0 If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. The requirements are that the transfer be made by one or more persons solely in exchange for stock, and the transferor(s) must be in control of the corporation immediately after the exchange. Section 368(c) defines control as the ownership of at least 80% of both the voting and nonvoting stock. After the transaction, Mr. A owns 80% (75% + 5%) of the voting stock and 90% (85% + 5%) of the nonvoting stock. He therefore meets the criteria and qualifies under Sec. 351(a). No gain or loss is recognized.
*In Year 1, a domestic LLC with two members elected classification as a corporation. In Year 2, one of the members withdrew from the LLC. What is the LLC's tax classification for Year 2 immediately after the member withdrew?* A) A corporation. B) A liquidated corporation for tax purposes. C) A new entity eligible to make a classification election. D) A single-member LLC disregarded as separate from its owner.
A) A corporation. The withdrawal of one of the members does not change the LLC's elected tax classification. An entity that elects to be classified as a corporation by filing Form 8832, Entity Classification Election, can make another election to change its classification. The entity generally cannot change its classification by election again during the 60 months after the effective date of the election. The 60-month limitation does not apply if the previous election was made by a newly formed eligible entity and was effective on the date of formation. [1]
*Corporations cannot take a deduction for dividends received from any of the following entities except...* A) A regulated investment company. B) A real estate investment trust. C) A corporation whose stock has been held less than 46 days during the 91-day period beginning 45 days before the stock becomes ex-dividend with respect to the dividend. D) Any corporation under an obligation (pursuant to a short sale or otherwise) to make related payments for positions in substantially similar or related property.
A) A regulated investment company. A corporation may take a deduction for dividends received from a regulated investment company. However, in determining the deduction, dividends received from a regulated investment company are subject to the regulations provided in Sec. 854. [1] [2] [3]
*The selection of an accounting method for tax purposes by a newly incorporated C corporation...* A) Is made on the initial tax return by using the chosen method. B) Is made by filing a request for a private letter ruling from the IRS. C) Must first be approved by the company's board of directors. D) Must be disclosed in the company's organizing documents.
A) Is made on the initial tax return by using the chosen method. A newly incorporated C corporation makes its initial accounting method selection simply by using the chosen method on their initial return. This is a form of an election. [1]
*In order to adopt a fiscal tax year on its first federal income tax return, a corporate taxpayer must...* A) Maintain books and records and report income and expenses using that tax year. B) Attach a completed Form 1128, Application to Adopt, Change, or Retain a Tax Year, to his or her fiscal-year-basis income tax return. C) File a short-period return. D) Get IRS approval.
A) Maintain books and records and report income and expenses using that tax year. Permission from the IRS is generally not needed to place a taxpayer's first tax year on either a calendar- or a fiscal-year basis. A taxpayer's first tax year is selected on the initial return. However, in order to adopt a fiscal year, the new taxpayer must adopt that year on the books and records before the due date for filing the return for that year (not including extensions). [1]
*Which one of the following statements about the taxation of personal service corporations is false for the current tax year?* A) Personal service corporations are subject to the "flat" 21% tax rate only if more than 75% of their gross income is earned income. B) Taxable income of a qualified personal service corporation is taxed at a 21% rate, the same as C corporations. C) Substantially all of the stock of the corporation must be owned by current or retired employees (or their estates or heirs) that are employed performing services for the corporation in connection with activities in certain professional fields. D) The fields covered by the personal service corporation rules are health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
A) Personal service corporations are subject to the "flat" 21% tax rate only if more than 75% of their gross income is earned income. Under Sec. 448(d)(2), a personal service corporation has two main characteristics: (1) Substantially all of its activities must involve the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and (2) substantially all of its stock must be owned by employees who perform the services. Section 11(b)(2) provides that the taxable income of a personal service corporation is taxed at a flat rate of 21% for tax years beginning after December 31, 2017. There is no requirement that more than 75% of the gross income be earned income for the flat 21% tax rate. [1] [2]
*On December 31, 1999, Homer Corporation issued $2 million of 50-year bonds for $2.6 million. On December 31, 2022, Homer issued new bonds with a face amount of $3 million for which it received $3.4 million. Part of the proceeds received were used to repurchase $2,320,000 of the bonds issued in 1999. No elections were made to adjust the basis of any property. Assume the straight-line method is used for premium amortization. What is the taxable income to Homer on the repurchase of the 1999 bonds?* A) $0 B) $16,000 C) $264,000 D) $336,000
B) $16,000 If bonds are issued by a corporation and are subsequently repurchased at a price less than the issue price minus any amount of premium already recognized as income, the difference is included in income for the taxable year. Prior to 1987, a corporation could elect to exclude the income and reduce the basis of property, but this election is available in post-1986 years only in cases of bankruptcy or insolvency. The amount of income taxable to Homer is... Original issue price: $2,600,000 Less: Face amount: $(2,000,000) = Total premium: $600,000 Issue price: $2,600,000 Less: Premium already recognized as income [($600,000 ÷ 50 years) × 22 years]: $(264,000) = Issue price less premium already included in income: $2,336,000 Less: Repurchase price: $(2,320,000) = Amount included in 2022 income: $16,000 [1] [2] [3]
*Beta, a C corporation, reported the following items of income and expenses for the year:* *- Gross income (other than dividends): $600,000* *- Dividend income from a 30% owned domestic corporation: $100,000* *- Operating expenses: $400,000* *What is Beta's taxable income for the year?* A) $200,000 B) $235,000 C) $250,000 D) $300,000
B) $235,000 Corporation income tax is calculated by subtracting deductions from gross income. Deductions from corporate gross income for ordinary and necessary business expenses are allowed. A 65% dividends-received deduction (DRD) is allowed if the corporation owns 20% or more but less than 80% of the distributing corporation. Thus, there is a $65,000 DRD ($100,000 × 65%). So, taxable income is $235,000 ($600,000 gross income + $100,000 dividend income - $400,000 operating expenses - $65,000 DRD). [1] [2]
*Porter, the sole shareholder of Preston Corp., transferred property to the corporation as a contribution to capital. Two years later, Corley transferred property to the corporation in exchange for a 10% interest in corporate stock. The property transferred was valued as follows:* *Porter's transfer:* *- Basis = $50,000* *- Fair market value: $200,000* *Corley's transfer:* *- Basis = $250,000* *- Fair market value: $500,000* *What amount represents the corporation's basis in the property received?* A) $700,000 B) $550,000 C) $450,000 D) $300,000
B) $550,000 Under Sec. 351, a shareholder or shareholders who control more than 80% of a corporation may contribute property to a corporation without recognition of gain or loss by either party. The corporation takes a carryover basis in the property, and the taxpayer takes a substituted (equal to the basis given up) basis in the shares of the corporation received. However, the contribution by a shareholder who does not qualify under Sec. 351 would trigger recognition of gain to the shareholder, and the corporation would take a FMV basis in the property. In this question, the first contribution would result in a carryover (AB) basis to the corporation of $50,000, and the second would be at a FMV of $500,000. Accordingly, the total is $550,000 of basis held by the corporation after contributions. [1] [2] [3]
*The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?* A) $0 B) $6,000 C) $8,000 D) $12,000
B) $6,000 The amount of the shareholder's liability assumed by the S corporation is treated as recognized gain from the sale or exchange of an asset only to the extent it exceeds the adjusted basis of all property contributed by the shareholder. Therefore, the shareholder will recognize a gain of $6,000 ($12,000 liability assumed by S corporation - $6,000 adjusted basis in equipment). [1] [2]
*During 2022, Corporation G received $30,000 in dividends from a taxable domestic corporation in which G had 25% ownership. G received no other dividends. G's charitable contributions for 2022 totaled $15,000. G's taxable income for 2022 was $70,000 after the dividends-received deduction but before the deduction for charitable contributions. What is the amount of Corporation G's charitable contribution deduction for 2022?* A) $7,000 B) $8,950 C) $10,000 D) $15,000
B) $8,950 The charitable contribution deduction for a corporation may not exceed 10% of the corporation's taxable income computed before the charitable contribution deduction, capital loss carryback, and the dividends-received deduction. G's charitable contribution is limited to $8,950 as computed below. The excess of $6,050 ($15,000 - $8,950) may be carried over for 5 years. G's taxable income before deduction for charitable contributions: $70,000 Add back: Dividends-received deduction ($30,000 × 65%): $19,500 = Adjusted taxable income: $89,500 × .10 = 10% limit on contribution deduction: $8,950 [1] [2]
*The corporate dividends-received deduction...* A) Must exceed the applicable percentage of the recipient shareholder's taxable income. B) Is affected by a requirement that the investor corporation must own the investee's stock for a specified minimum holding period. C) Is unaffected by the percentage of the investee's stock owned by the investor corporation. D) May be claimed by S corporations.
B) Is affected by a requirement that the investor corporation must own the investee's stock for a specified minimum holding period. The distributee corporation must own the distributing corporation's stock for more than 46 days (91 days for dividends more than a year in arrears received on preferred stock) to qualify for the dividends-received deduction. [1] [3]
*When a corporation has an unused net capital loss that is carried back or carried forward to another tax year,* A) It retains its original identity as short term or long term. B) It is treated as a short-term capital loss whether or not it was short term when sustained. C) It is treated as a long-term capital loss whether or not it was long term when sustained. D) It can be used to offset ordinary income up to the amount of the carryback or carryover.
B) It is treated as a short-term capital loss whether or not it was short term when sustained. A net capital loss for the corporation may be carried back 3 years and forward 5 years. A capital loss carried back or forward to other taxable years is treated as a short-term capital loss in each such taxable year. [1] [2] [3]
*Sam transferred property with an adjusted basis of $30,000 for stock in Tuscany Corporation in a Sec. 351 exchange. Sam received corporate stock worth $15,000 and $5,000 cash. What is Sam's recognized gain (loss)?* A) $5,000 B) $(10,000) C) $0 D) $(15,000)
C) $0 Sam realized a $10,000 ($30,000 - $15,000 - $5,000) loss on the exchange. However, no loss is recognized on a Sec. 351 exchange when boot is received. Therefore, Sam will not recognize any gain or loss on the exchange. [1] [2]
*The Sunra Corporation had the following data available for the current year:* *- Gross profit on sales: $40,000* *- Dividend income from nonaffiliated domestic corporations (not debt financed - 20%-owned): $2,000* *- Operating expenses (exclusive of charitable contributions): $28,000* *- Charitable contributions: $1,500* *Sunra's taxable income for the current year is...* A) $10,600 B) $11,200 C) $11,300 D) $12,700
C) $11,300 Section 63(a) defines taxable income as gross income less deductions allowed. Section 162 allows a deduction for ordinary and necessary business expenses. Section 170 allows a deduction for contributions made to qualified charitable organizations, limited to 10% of taxable income computed before the charitable contribution deduction and the dividends-received deduction. In this case, the limit applies because taxable income before charitable and dividends-received deductions is $14,000 ($40,000 + $2,000 - $28,000), and the $1,400 limit is less than actual contributions. Section 243 allows a deduction for dividends received from 20% or more (but less than 80%) owned domestic corporations of 65% of the dividends received, which is $1,300 ($2,000 × 65%). Sunra's taxable income is: Gross profit: $40,000 Dividend income: $2,000 = Gross income: $42,000 Less: Operating expenses: $(28,000) Charitable contributions: $(1,400) Dividends-received deduction: $(1,300) = Taxable income: $11,300 [1] [2]
*The following information for 2022 pertains to Bartley Corporation:* *- Capital contributions by shareholders: $50,000* *- Realized loss on sale of treasury stock: $(10,500)* *- Income from rental property in a sinking fund (in the hands of a trustee): $5,500* *- Rent paid directly to a bond holder on a lease of corporate property: $8,000* *What is the amount of gross income to Bartley Corporation for 2022?* A) $53,000 B) $47,500 C) $13,500 D) $8,000
C) $13,500 Gross income of a corporation includes all income, unless specifically excluded. Excluded from a corporation's gross income are capital contributions by shareholders and any gain or loss realized by a corporation on the sale or exchange of its own stock (including treasury stock). Included in a corporation's gross income are income from property in a sinking fund and income that has been assigned by the corporation to another. Thus, Bartley Corporation's gross income is $13,500 ($5,500 sinking fund income + $8,000 assignment of income). [1] [2]
*During 2022, ABC Corporation had the following income and expenses:* *- Gross sales receipts: $350,000* *- Salaries: $175,000* *- Contributions to qualified charitable organizations: $20,000* *- Capital gains: $3,000* *- Capital loss carryback: $3,000* *- Depreciation expense: $14,000* *- Dividend income: $30,000* *- Dividends-received deduction: $15,000* *What is ABC's charitable contribution deduction for 2022?* A) $15,600 B) $17,600 C) $19,400 D) $20,000
C) $19,400 Charitable contributions made to qualified organizations and paid within the taxable year may be deducted from taxable income. A corporation's charitable deduction is limited to 10% of taxable income computed before the charitable contribution deduction, capital loss carryback, and the dividends-received deduction. ABC's charitable contribution deduction for 2022 is $19,400 as computed below. Gross receipts: $350,000 Capital gains: $3,000 Dividend income: $30,000 Less: Salaries: $(175,000) Less: Depreciation expense: $(14,000) = Taxable income before special deductions: $194,000 Times: Limit percentage: × .10 = Charitable contribution deduction: $19,400 [1] [2] [3]
In 2022, Acorn, Inc., had the following items of income and expense: - Sales: $500,000 - Cost of sales: $250,000 - Dividends received: $25,000 The dividends were received from a corporation of which Acorn owns 30%. In Acorn's 2022 corporate income tax return, what amount should be reported as taxable income before special deductions? A) $525,000 B) $505,000 C) $275,000 D) $250,000
C) $275,000 The dividends received deduction (DRD) and net operating losses (NOLs) are special deductions. Thus, taxable income before special deductions includes all items of gross income and deductions except for the DRD and NOL. Taxable income before special deductions is $275,000 [($500,000 - $250,000) + $25,000].
Feld, the sole stockholder of Maki Corp., paid $50,000 for Maki's stock in Year 1. In Year 2, Feld contributed a parcel of land to Maki but was not given any additional stock for this contribution. Feld's basis for the land was $10,000, and its fair market value was $18,000 on the date of the transfer of title. What is Feld's adjusted basis for the Maki stock? A) $50,000 B) $52,000 C) $60,000 D) $68,000
C) $60,000 A shareholder recognizes no gain on the voluntary contribution of capital to a corporation. The contribution of capital merely increases the shareholder's basis in the corporation. The shareholder's basis is increased by the basis in the property contributed, not by the fair market value. Feld will recognize no gain on the contribution and his basis for the Maki stock is: Cost of stock: $50,000 + Contribution of property (basis): $10,000 = Adjusted basis in stock: $60,000
*On July 1 of the current year, Rich, sole proprietor of Kee Nail, transferred all of Kee's assets to Merit, Inc., a new corporation, solely for a certain percentage of Merit's stock. Dee, who is not related to Rich, also bought some of Merit's stock on July 1. Merit's outstanding capital stock consisted of 1,000 shares of common stock with a par value of $100 per share. For the transfer of Kee Nail's assets to be tax-free, what is the minimum number of shares of Merit's stock that must be owned by Rich and Dee immediately after the exchange?* A) 500 B) 501 C) 800 D) 801
C) 800 A transfer of assets for stock of a corporation is tax-free if the transferors are in control of the corporation immediately after the exchange. A person who transfers appreciated property will receive the benefit if another transferor transfers property and together they meet the control test. Property includes money. Control is ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. At a minimum, Rich and Dee must own 800 shares (1,000 shares × 80%). [1]
*Donna exchanges property having an $18,000 adjusted basis and a $35,000 fair market value for 70 shares of the newly created Table Corporation stock. Evelyn exchanges legal services worth $15,000 for the remaining 30 shares of Table Corporation stock. Which of the following is true?* A) Evelyn recognizes no income, and the exchange is nontaxable. B) Evelyn must recognize $15,000 of income, but Donna's transfer of property qualifies under Sec. 351 as nontaxable. C) Evelyn must recognize $15,000 of income, and Donna must recognize $17,000 gain on the exchange. D) The exchange qualifies as a nontaxable exchange under Sec. 351.
C) Evelyn must recognize $15,000 of income, and Donna must recognize $17,000 gain on the exchange. Section 351(a) provides that no gain or loss is recognized if one person or more transfers property to a corporation solely in exchange for stock in such corporation and if, immediately after the exchange, such person or persons are in control of the corporation. "Control" is defined in Sec. 368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock. However, a tax-free transfer to a controlled corporation applies only to a transfer of property. A transfer of services in exchange for stock is fully taxable. Accordingly, Evelyn must recognize $15,000 of income for the legal services provided. Donna must recognize $17,000 ($35,000 - $18,000) of gain because she is not in control of the corporation for purposes of nonrecognition under Sec. 351. Since Evelyn provided only services, her shares are not counted when determining control. [1] [3]
*Which of the following costs are amortizable organizational expenditures?* A) Professional fees to issue the corporate stock. B) Printing costs to issue the corporate stock. C) Legal fees for drafting the corporate charter. D) Commissions paid by the corporation to an underwriter.
C) Legal fees for drafting the corporate charter. A corporation is deemed to elect to deduct up to $5,000 (subject to a phase-out) of qualified organizational expenses. Any remaining amount is amortized over a period of 180 months. Expenditures associated with the formation of the corporation, including legal fees for drafting the corporate charter, are amortizable. [1]
*An S corporation engaged in manufacturing has a year end of June 30. Revenue consistently has been more than $30 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year end. Which of the following statements is correct if it changes to a C corporation?* A) The year end will be December 31, using the cash basis of accounting. B) The year end will be December 31, using the accrual basis of accounting. C) The year end will be June 30, using the accrual basis of accounting. D) The year end will be June 30, using the cash basis of accounting.
C) The year end will be June 30, using the accrual basis of accounting. C corporations that are not personal service corporations, S corporations, or small C corporations (less than an average of $27 million in revenues per year over the past 3 years) must use the accrual basis of accounting. A corporation can use a fiscal year end; June 30 is therefore allowed. [1]
For the year ended December 31, 2022, Kell Corp.'s book income, before income taxes, was $70,000. Included in the computation of this $70,000 was $10,000 of proceeds of a life insurance policy, representing a lump-sum payment in full as a result of the death of Kell's controller. Kell was the owner and beneficiary of this policy since 2005. In its income tax return for 2022, Kell should report taxable life insurance proceeds of... A) $10,000 B) $8,000 C) $5,000 D) $0
D) $0 For employer-owned policies issued prior to August 17, 2006, proceeds of a life insurance policy paid by reason of death of the insured are excluded by the beneficiary. Since no part of the $10,000 represents interest on proceeds retained by the insurance company, no part of it is reported as gross income.
*In 2022, Lakeside Corporation had the following results:* *- Gross income from operations: $200,000* *- Dividends from a 25%-owned domestic corporation for which a 65% deduction is allowed: $50,000* *- Operating expenses: $340,000* *- Charitable contributions: $20,000* *- NOL carryforward: $30,000* *What is the amount of Lakeside's 2022 net operating loss for the current year before NOL carryforward?* A) $110,000 B) $90,000 C) $80,000 D) $122,500
D) $122,500 A net operating loss is the excess of deductions over gross income, with certain modifications. Lakeside may not deduct any of the charitable contributions. One modification is that the dividends-received deduction is computed without regard to the 65% of taxable income limitation (i.e., $0) in Sec. 246(b); therefore, the deduction is the full amount of $32,500. Thus, Lakeside's NOL is $122,500 as computed below. Gross income from operations: $200,000 Dividend income: $50,000 Less: Operating expenses: $(340,000) = Gross income: $(90,000) Less: Dividends-received deduction (65% × $50,000): $(32,500) = Net operating loss: $(122,500) [1] [3]
*For the current year, Sandit Corporation had gross income from operations of $500,000 and operating expenses of $700,000. Additionally, Sandit had $50,000 in charitable contributions and a net operating loss (NOL) of $80,000 carried forward from last year. What is the current NOL for Sandit Corporation?* A) $250,000 B) $280,000 C) $330,000 D) $200,000
D) $200,000 A NOL is any excess deductions over gross income. Charitable deductions are not included in operating expenses and are not allowed in computing a current NOL. Additionally, NOLs carried over from other tax years are not allowed in computing a current NOL. [1] [2]
*Craig transferred a tractor truck and two trailers to ZYX Transport. The truck and trailers had a basis of $160,000. Craig received stock worth $150,000, property with a FMV of $20,000, and $25,000 in cash. What is Craig's recognized gain if this was a Sec. 351 exchange?* A) $25,000 B) $45,000 C) $20,000 D) $35,000
D) $35,000 In a Sec. 351 exchange, Craig recognizes gain realized to the extent of money and the FMV of other property (except the stock of the corporation) received in the exchange. The total gain realized in the exchange is $35,000 ($150,000 + $20,000 + $25,000 - $160,000) and includes the stock received. Because the realized gain of $35,000 is less than the boot received of $45,000 ($25,000 cash + $20,000 FMV of property), the gain recognized by Craig is limited to $35,000. [2] [3]
*Shaney Corporation repurchased its own outstanding bonds in the open market for $258,000 on May 31, 2022. The bonds were originally issued on May 5, 2018, at face value of $250,000. For its tax year ending December 31, 2022, Shaney should report...* A) Neither income nor a deduction. B) A capital gain of $8,000. C) A capital loss of $8,000. D) A deduction of $8,000.
D) A deduction of $8,000. If bonds are issued and subsequently repurchased by the corporation at a price in excess of the issue price, the excess of the purchase price over the issue price is deductible as interest expense for that taxable year. Shaney should therefore report a deduction of $8,000 (repurchase price of $258,000 less issue price of $250,000). [1] [2] [3]
Most unincorporated businesses can choose whether to be taxed as a partnership or a corporation. The new regulations provide for a default rule if no election is made. If an election is not made and the default rules apply, which of the following is true? A) Any new domestic eligible entity having at least two or more members is classified as a partnership. B) Any new domestic eligible entity with a single member is disregarded as an entity separate from its owner. C) If all members of a new foreign entity have limited liability, the entity is classified as an association taxed as a corporation. D) All of the answers are correct.
D) All of the answers are correct. Under a "check-the-box" system, certain business entities are automatically treated as corporations for federal tax purposes, while others may elect to be treated as corporations for federal tax purposes. If an entity has one owner and is not automatically considered a corporation, it may nevertheless elect to be treated as a corporation or, by default, it will be treated as a disregarded entity (e.g., a sole proprietorship). Similarly, if an entity has two or more owners and is not automatically considered a corporation, it can elect to be taxed as a corporation for federal tax purposes; otherwise, it will be taxed as a partnership. Further, if all members of a new foreign entity have limited liability, the entity is classified as a corporation. One type of a corporation as defined in the Internal Revenue Code is an association.
Which of the following qualifies for the dividends-received deduction? A) Dividends from a DISC paid out of accumulated DISC income. B) Dividends on deposits in a mutual savings bank. C) Dividends from a real estate investment trust. D) Dividends from a taxable domestic corporation.
D) Dividends from a taxable domestic corporation. A corporation may deduct 50% of dividends received from a domestic taxable corporation of which it owns less than 20% of the stock, 65% of dividends received if the stock is 20% or more owned, and 100% of dividends received if the stock is 80% or more owned.
*Which of the following is not taken into account when determining if a gain or loss should be recognized on the transfer of property to a corporation in exchange for a controlling interest in stock of the corporation?* A) Ownership of at least 80% of the total combined voting power of all stock entitled to vote. B) Ownership of at least 80% of the total number of shares of all other classes of stock. C) Receipt of money in addition to stock. D) Holding period of contributed assets.
D) Holding period of contributed assets. Section 351(a) provides that no gain or loss is recognized if one person or more transfers property to a corporation solely in exchange for stock in such corporation and if, immediately after the exchange, such person(s) is(are) in control of the corporation. Control is defined in Sec. 368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock. In a Sec. 351 exchange, the holding period of property transferred is not taken into account when determining the amount of the recognized gain or loss (although it may determine character if gain or loss is recognized). [1]
During 2022, Ral Corp. exchanged 5,000 shares of its own $10 par common stock for land with a fair market value of $75,000. As a result of this exchange, Ral should report in its 2022 tax return... A) $25,000 Sec. 1245 gain. B) $25,000 Sec. 1231 gain. C) $25,000 ordinary income. D) No gain.
D) No gain. A corporation does not recognize any gain or loss on the sale or exchange of its own stock, including treasury stock. Ral Corp. should report no gain.
Austin is the sole owner of Backyard BBQ, an S corporation. Austin transferred property with a FMV of $70,000 and a basis of $50,000 to the corporation. No stock or boot was received in the exchange. What is Austin's realized and recognized gain on the transfer? A) Realized Gain = $20,000: Recognized Gain = $20,000 B) Realized Gain = $0: Recognized Gain = $0 C) Realized Gain = $0: Recognized Gain = $20,000 D) Realized Gain = $20,000: Recognized Gain = $0
D) Realized Gain = $20,000: Recognized Gain = $0 Section 351 can apply to contributions of property to a corporation even if the corporation issues no stock in the exchange, such as capital contributed by a sole shareholder. Because Austin owns 100% of the corporation and Sec. 351 applies, none of the $20,000 realized gain is recognized.
*In 2021, Bell Corporation (its first year of operations) had net short-term capital gains of $3,000 and net long-term capital losses of $8,000. How will the capital loss carryover be treated in Bell's 2022 income tax return?* A) Ordinary loss. B) Section 1231 loss. C) Long-term capital loss. D) Short-term capital loss.
D) Short-term capital loss. A corporation may carry capital losses back to each of the 3 preceding taxable years and forward to each of the 5 succeeding taxable years. The capital loss that is carried back or forward is treated as a short-term capital loss in each such taxable year. Consequently, the capital loss carryover in Bell's 2022 tax return will be treated as a short-term capital loss and is deductible only against capital gains. [1] [3]
