Corporate Tax Practice Test 1
John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, 2020, amounted to $1 million. For the year ended December 31, 2020, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following: Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $1,000 Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for 2 years; Ral had no other capital gains or losses) $(5,000) In computing taxable income for 2020, Ral should deduct a capital loss of a. $0 b. $2,500 c. $3,000 d. $5,000
a. $0 A corporation may deduct capital losses in the tax year incurred but only to the extent of capital gains (without regard to whether they are short or long term).
Lark Corporation and its wholly owned subsidiary, Day Corporation, both operated on a calendar year. In January Year 1, Day adopted a plan of complete liquidation. Two months later, Day paid all of its liabilities and distributed its remaining assets to Lark. These assets consisted of the following: Cash $50,000 Land (at cost) $10,000 Fair market value of the land was $30,000. Upon distribution of Day's assets to Lark, all of Day's capital stock was canceled. Lark's basis for the Day stock was $7,000. Lark's recognized gain on receipt of Day's assets in liquidation was a. $0 b. $50,000 c. $53,000 d. $73,000
a. $0 A parent corporation recognizes no gain or loss upon the receipt of a liquidating distribution from a controlled corporation. Control means ownership of at least 80% of the subsidiary's voting power and 80% of the total value of the stock. The parent corporation takes a carryover basis and holding period in the property received in the liquidation, and its basis in the subsidiary's stock disappears.
Standard Corporation and its wholly owned subsidiary, Saving Corporation, both operated on a calendar year. In January Year 1, Saving adopted a plan of complete liquidation. Two months later, Saving paid all of its liabilities and distributed its remaining assets to Standard. These assets consisted of the following: Cash$60,000Land (at cost) $20,000 Fair market value of the land was $40,000. Upon distribution of Saving's assets to Standard, all of Saving's capital stock was canceled. Standard's basis for the Saving stock was $8,000. Standard's recognized gain on receipt of Saving's assets in liquidation is a. $0 b. $60,000 c. $72,000 d. $92,000
a. $0 A parent corporation recognizes no gain or loss upon the receipt of a liquidating distribution from a controlled corporation. Control means ownership of at least 80% of the subsidiary's voting power and 80% of the total value of the stock. The parent corporation takes a carryover basis and holding period in the property received in the liquidation, and its basis in the subsidiary's stock disappears.
Mr. Bass transferred a building that had an adjusted basis to him of $300,000 and a fair market value of $500,000, to Corporation C solely in exchange for 100% of C's only class of stock. The building was subject to a mortgage of $100,000, which C assumed for bona fide business purposes. The fair market value of the stock on the date of transfer was $550,000. What is the amount of gain to be recognized by Mr. Bass? a. $0 b. $100,000 c. $300,000 d. $350,000
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 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 the voting and nonvoting stock. Mr. Bass meets these criteria, so the transfer qualifies under Sec. 351(a). No gain or loss is recognized. Note that Sec. 357(a) provides that the transfer of the mortgage on the building does not prevent the exchange from qualifying under Sec. 351(a) because tax avoidance was not the purpose of the liability assumption, which had a valid business purpose, and because the amount of the mortgage did not exceed the adjusted basis of the property.
Fact Pattern: Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Property | Basis | Adjusted Fair Market Value | Percentage of Ace Stock Acquired Lind: Building | $40,000 | $82,000 | 60% Post: Land | $5,000 | $48,000 | 40% The building was subject to a $10,000 mortgage that was assumed by Ace. What amount of gain did Lind recognize on the exchange? a. $0 b. $10,000 c. $42,000 d. $52,000
a. $0 Lind has a realized gain of $42,000 on this exchange, calculated as follows: Amount realized from stock $72,000 + Mortgage assumed by Ace $10,000 = Total amount realized $82,000 - Adjusted basis of building $(40,000) = Realized gain $42,000 However, Sec. 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and immediately after the exchange those persons control the corporation. Control is defined as 80% or more of the voting power of stock and 80% or more of the shares of each class of nonvoting stock.
Gero Corporation had operating income of $160,000 after deducting $10,000 for contributions to State University, but not including dividends of $2,000 received from nonaffiliated taxable domestic corporations (not from debt-financed portfolio stock). In computing the maximum allowable deduction for contributions, Gero should apply the percentage limitation to a base amount of a. $172,000 b. $171,000 c. $170,000 d. $162,000
a. $172,000 The charitable contribution deduction is limited to 25% of a corporation's taxable income (TI) computed before the charitable contribution deduction, dividends-received deduction (not dividends income), and capital loss carryback. Gero's base amount is $172,000 ($160,000 operating income + $10,000 contributions + $2,000 dividends).
Francis Corporation had taxable income of $260,000 for its initial taxable year. A review of company records revealed the following information:The current-year tax depreciation expense on furniture and fixtures, the only asset owned by Francis Corporation, was $10,000. If Francis had used the alternative depreciation system (straight-line method), depreciation expense deducted would have been $5,000.Francis had tax-exempt interest income of $22,000 that has not been included in taxable income.Francis paid dividends of $16,000 that were not deducted.Francis had $20,000 of returns and allowances that were deducted on the return.Francis reported a $20,000 gain on an installment sale of a noninventory item. The total gain on the sale was $100,000. Earnings and profits for Francis Corporation at the close of the current year were a. $351,000 b. $346,000 c. $271,000 d. $266,000
a. $351,000 In computing earnings and profits of a corporation, all income that is nontaxable or exempt from tax is added to taxable income. The earnings and profits are reduced by any expenditures or expenses of the corporation that are not deductible for tax purposes. Depreciation is usually determined under the alternative depreciation system (straight-line method). If depreciation reported for tax purposes exceeds straight-line depreciation, the difference is added back to taxable income. A corporation that sells property on the installment basis is treated for earnings and profits purposes as if it had not used the installment method. No adjustment is required for returns and allowances since deducting returns and allowances is an acceptable tax accounting procedure for computing taxable income and earnings and profits. The computation of earnings and profits for Francis Corporation in the current year is as follows: Taxable income $260,000 + Depreciation ($10,000 - $5,000) $5,000 + Tax-exempt interest income $22,000 + Installment sale gain not reported for tax purposes ($100,000 - $20,000) $80,000 = Current earnings and profits $367,000 - Dividends paid out of currentearnings and profits $(16,000) = Earnings and profits balance $351,000
John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, 2020, amounted to $1 million. For the year ended December 31, 2020, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following: Loss on sale of investment in stock of unaffiliated corporation (stock held for 2 years). Ral had no other capital gains or losses. $(5,000) Contribution to a recognized, qualified charity. This contribution was authorized by Ral's board of directors in December 2020, to be paid on January 31, 2021. $75,000 With regard to Ral's contribution to the recognized, qualified charity, Ral a. Can elect to deduct in its 2020 return any portion of the $75,000 that does not exceed the deduction ceiling for 2020. b. Cannot deduct any portion of the $75,000 in 2020 because the contribution was not paid in 2020. c. Can deduct the entire $75,000 in its 2020 return because Ral reports on the accrual basis. d. Can elect to carry forward indefinitely any portion of the $75,000 not deducted in 2020 or 2021.
a. Can elect to deduct in its 2020 return any portion of the $75,000 that does not exceed the deduction ceiling for 2020. A corporation that reports income on the accrual basis may elect to treat a contribution as paid (and therefore deductible) during the taxable year if the board of directors authorizes the contribution during such year and the contribution is paid within 3 1/2 months following the close of the taxable year. Deductions are limited to 25% of adjusted taxable income.
During 2020, Jake transferred land having an adjusted basis of $35,000 and a fair market value of $47,000 to Otter Corporation. In exchange for the land, he received $5,000 cash, equipment having an adjusted basis of $3,000 and a fair market value of $5,000, and 80% of Otter Corporation's only class of stock outstanding. The stock received by Jake had a fair market value of $37,000. What is the amount of gain that Jake will recognize? a. $0 b. $10,000 c. $12,000 d. $20,000
b. $10,000 The realized gain equals the fair market value of property received ($37,000 stock + $5,000 equipment + $5,000 cash) less the adjusted basis of the property transferred ($35,000), or $12,000. If other property or money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money plus the fair market value of other property received. The sum of boot property received is $10,000 ($5,000 equipment + $5,000 cash). Thus, $10,000 is the recognized gain.
Jack Carson transferred a building that had an adjusted basis of $75,000 and a fair market value of $130,000 to Corporation R in exchange for 80% of R's only class of stock and a car with an adjusted basis to R of $25,000. The fair market value of the stock at the time of the transfer was $100,000 and the car's was $30,000. What is the amount of R's basis in the building? a. $130,000 b. $105,000 c. $100,000 d. $75,000
b. $105,000 Section 358(a)(1) provides that, in a Sec. 351 exchange, the basis of the stock received by the transferors (shareholders) is the basis of the property transferred decreased by the fair market value of other property (except money) received and the amount of any money received. The basis is increased by the sum of the amount treated as a dividend plus the amount of gain recognized by the taxpayer. Jack received a car with a $30,000 fair market value in addition to the stock. This reduces his basis in the stock. Jack realizes a gain of $55,000 ($100,000 FMV of stock + $30,000 FMV car - $75,000 adjusted basis in the building). Jack recognizes a gain of $30,000, which is the FMV of the property other than the stock received. Thus, R's basis in the building is $105,000 ($75,000 Jack's adjusted basis + $30,000 gain recognized).
During 2020, 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 2020 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 or carried over to the next 5 years.
Core Corporation reported current earnings and profits of $250,000. Core distributed a building with an adjusted basis of $170,000 and a fair market value of $230,000 to its sole shareholder. The building had a mortgage of $90,000, which the shareholder will assume. What is the amount of the dividend received by the shareholder? a. $80,000 b. $140,000 c. $230,000 d. $250,000
b. $140,000 Section 301(b)(1) provides that the distribution to a shareholder is equal to the fair market value of the property distributed. Under Sec. 301(b)(2)(A), this amount must be decreased by any liabilities assumed by the shareholder or to which the property is subject. The distribution to the shareholder is $140,000 ($230,000 FMV - $90,000 liability). Under Sec. 316, a distribution is a dividend to the extent that it comes from earnings and profits. The earnings and profits would be increased by the gain (net of tax) on the distribution. Gain is recognized to the extent the FMV of the building exceeds the adjusted basis [Sec. 311(b)], or $60,000. In any event, the corporation has at least $250,000 of earnings and profits. Therefore, the entire $140,000 is a dividend.
In a bona fide transaction, Jesse transferred land worth $50,000 to his 80%-controlled corporation for stock of the corporation worth $20,000 and cash of $20,000. The basis of the property to him was $15,000 and was subject to a $10,000 mortgage, which the corporation assumed. Jesse must report a gain of a. $15,000 b. $20,000 c. $30,000 d. $35,000
b. $20,000 Immediately after the exchange, Jesse is in control of the corporation. Gain realized by Jesse is recognized to the extent of money plus the FMV of other property received. Section 351 will apply if its conditions are met even when there is no corporate formation. Jesse's reportable gain is Proceeds ($20,000 stock + $20,000 cash +$10,000 liabilities assumed by the corporation) $50,000 - adjusted basis of land transferred $(15,000) = Realized gain $35,000 Gain recognized (limited to cash received) $20,000
Corporation W, which uses the accrual method of accounting, had earnings and profits of $95,000 on December 31, Year 1. Based on the following information, compute earnings and profits as of December 31, Year 2: Taxable income per return $185,000 Contributions in excess of 10% limitation $1,500 Interest paid for tax-exempt bonds $1,000 Tax-exempt interest received $3,000 Federal income taxes $55,400 MACRS depreciation in excess of straight-line alternative depreciation system $1,500 a. $220,600 b. $226,600 c. $228,600 d. $282,000
b. $226,600 Calculation of earnings and profits begins with taxable income according to the tax return. Tax-exempt income is added to the taxable income, and nondeductible expenditures are subtracted, e.g., federal income taxes, charitable contributions in excess of the 10% limitation, and interest paid for tax-exempt bonds. Also, earnings and profits are calculated based upon straight-line depreciation using the alternative depreciation system, so excess MACRS depreciation must be added back. E&P at December 31, Year 1 $95,000 + Taxable income for Year 2 $185,000 + Tax-exempt interest $3,000 + Excess depreciation $1,500 - Excess contributions $(1,500) - Interest paid on tax-exempt bonds $(1,000) - Federal income taxes $(55,400) = E&P at December 31, Year 2 $226,600
Mr. Brown transferred an office building to Corporation J in exchange for 100% of Corporation J's stock and $30,000 in cash. The building had an adjusted basis of $150,000 and a fair market value of $250,000. The building was subject to a mortgage of $120,000, which Corporation J assumed for a valid business reason. The fair market value of Corporation J's stock on the date of the transfer was $100,000. What is Mr. Brown's recognized gain? a. $0 b. $30,000 c. $70,000 d. $100,000
b. $30,000 If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. There are three primary exceptions to Sec. 351(a). Gain can be recognized when 1. Property other than stock (e.g., cash) is received [Sec. 351(b)], 2. A liability is assumed by the corporation for tax avoidance or nonbusiness purposes [Sec. 351(b)], or 3. A liability is assumed in excess of the adjusted basis of the property transferred [Sec. 357(c)]. Since the mortgage is assumed for a valid business reason and does not exceed the $150,000 adjusted basis, none of the mortgage that is assumed is treated as boot property [Sec. 357(a)]. The recognized gain is the lesser of the cash received by the transferor ($30,000) or the realized gain of $100,000 [($100,000 FMV of stock + $120,000 mortgage release + $30,000 cash) - $150,000 adjusted basis].b. 30,000 This answer is correct.If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. There are three primary exceptions to Sec. 351(a). Gain can be recognized when Property other than stock (e.g., cash) is received [Sec. 351(b)], A liability is assumed by the corporation for tax avoidance or nonbusiness purposes [Sec. 351(b)], or A liability is assumed in excess of the adjusted basis of the property transferred [Sec. 357(c)]. Since the mortgage is assumed for a valid business reason and does not exceed the $150,000 adjusted basis, none of the mortgage that is assumed is treated as boot property [Sec. 357(a)]. The recognized gain is the lesser of the cash received by the transferor ($30,000) or the realized gain of $100,000 [($100,000 FMV of stock + $120,000 mortgage release + $30,000 cash) - $150,000 adjusted basis].
Fact Pattern: Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Property | Basis | Adjusted Fair Market Value | Percentage of Ace Stock Acquired Lind: Building | $40,000 | $82,000 | 60% Post: Land | $5,000 | $48,000 | 40% The building was subject to a $10,000 mortgage that was assumed by Ace. What was Ace's basis in the building? a. $30,000 b. $40,000 c. $72,000 d. $82,000
b. $40,000 In a Sec. 351 transaction, the corporation's basis in the transferred property is equal to the adjusted basis of the property to the shareholder plus any gain recognized by the shareholder. Since Lind recognized no gain, Ace's basis is $40,000.
A corporation distributed land with a basis of $20,000 and a fair market value of $60,000, but was subject to a non-recourse liability of $70,000 to its sole shareholder. What amount represents the corporation's recognized gain? a. $20,000 b. $50,000 c. $60,000 d. $70,000
b. $50,000 Gain realized on distributed property must be recognized by the corporation as if the property were sold to the distributee at its FMV. However, FMV is conclusively presumed to be no less than liabilities related to the property subject to which the shareholder assumes or takes the property, whether with recourse or not. Therefore, the corporation recognizes a gain on the land of $50,000 ($70,000 FMV - $20,000 basis).
For Year 2, Quest Corp., an accrual-basis, calendar-year C corporation, had an $8,000 unexpired charitable contribution carryover from Year 1. Quest's Year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, Year 2, Quest's board of directors authorized a $45,000 cash contribution to a qualified charity, which was made on January 6, Year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its Year 2 income tax return? a. $53,000 b. $50,000 c. $45,000 d. $8,000
b. $50,000 The corporate deduction for charitable contributions is limited to 25% of taxable income before any charitable contributions. Therefore, the maximum allowable deduction that Quest may take as a charitable contribution is $50,000 ($200,000 × 25%).
Krol Corporation distributed marketable securities in redemption of its stock in a complete liquidation. On the date of distribution, these securities had a basis of $100,000 and a fair market value of $150,000. What gain does Krol have as a result of the distribution? a. $0 b. $50,000 capital gain. c. $50,000 Sec. 1231 gain. d. $50,000 ordinary gain.
b. $50,000 capital gain. Gain or loss is recognized when a corporation distributes property as part of a complete liquidation. Krol recognizes a $50,000 gain ($150,000 FMV - $100,000 AB). It is a capital gain because the marketable securities are a capital asset.
Mintee Corp., an accrual-basis, calendar-year C corporation, had no corporate shareholders when it liquidated in Year 1. In cancellation of all their Mintee stock, each Mintee shareholder received in Year 1 a liquidating distribution of $2,000 cash and land with a tax basis of $5,000 and a fair market value of $10,500. Before the distribution, each shareholder's tax basis in Mintee stock was $6,500. What amount of gain should each Mintee shareholder recognize on the liquidating distribution? a. $0 b. $6,000 c. $6,500 d. $12,500
b. $6,000 The amount realized on the liquidation of a corporation is the amount of money received plus the FMV of property received. The recognized gain is the amount by which this exceeds adjusted basis of the corporation's stock. The recognized gain on this distribution is Amount realized$12,500 - Adjusted basis $(6,500) = Gain recognized $6,000
Lincoln Corp., a calendar-year C corporation, made a nonliquidating cash distribution of $1.5 million to its shareholders with respect to its stock. At that time, Lincoln's current and accumulated earnings and profits totaled $825,000, and its total paid-in capital for tax purposes was $10 million. Lincoln had no corporate shareholders. Which of the following statements, if any, are true regarding Lincoln's cash distribution? I. The distribution was taxable as $1.5 million in dividends to its shareholders. II. The distribution reduced its shareholders' adjusted bases in Lincoln stock by $675,000. a. I only. b. II only. c. Both I and II. d. Neither I nor II.
b. II only. In general, any distribution of money or property made by a corporation to its shareholders with respect to their stock out of the corporation's earnings and profits is treated as a taxable dividend. The current and accumulated earnings and profits therefore determine the level of taxability. The dividend will equal $825,000. The remaining distribution of $675,000 will reduce the adjusted bases of shareholders' stock, as it is treated as a return of capital. Therefore, only Statement II is correct.
Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return? Interest Incurred on Loan to Carry U.S. Obligations | Current State Corporation Income Tax Expense a. Yes | Yes b. No | No c. Yes | No d. No | Yes
b. No | No Items treated differently in computing income per books and taxable income are reported and reconciled on Schedule M-1. Items treated the same for financial and tax purposes are not reported on the schedule. Both interest to carry U.S. obligations and state income tax are deducted in computing book income and taxable income.
Pope, a C corporation, owns 15% of Arden Corporation. Arden paid a $3,000 cash dividend to Pope. What is the amount of Pope's dividends-received deduction? a. $3,000 b. $1,950 c. $1,500 d. $0
c. $1,500 The DRD is available only to corporations. The deduction is based on the distributee corporation's percentage ownership of the distributing corporation and may be limited to taxable income. The deduction percentage is 50% for corporations with less than 20% ownership in the distributing corporation. Pope's deduction is $1,500 ($3,000 dividend × 50%).
Tank Corp., which had earnings and profits of $500,000, made a nonliquidating distribution of property to its shareholders in 2020 as a dividend in kind. This property, which had an adjusted basis of $20,000 and a fair market value of $30,000 at the date of distribution, did not constitute assets used in the active conduct of Tank's business. How much gain did Tank recognize on this distribution? a. $30,000 b. $20,000 c. $10,000 d. $0
c. $10,000 Gain realized on distributed property must be recognized by the corporation as if the property was sold at its fair market value, or $10,000 ($30,000 FMV - $20,000 adjusted basis).
On January 1, Year 1, Kee Corp., a C corporation, had a $50,000 deficit in E&P. For Year 1, Kee had current E&P of $10,000 and made a $30,000 cash distribution to its shareholders. What amount of the distribution is taxable as dividend income to Kee's shareholders? a. $30,000 b. $20,000 c. $10,000 d. $0
c. $10,000 Treatment of a distribution is determined by reference to accumulated E&P only after any current E&P have been accounted for. To the extent current E&P are sufficient to cover a distribution, the distribution is treated as a taxable dividend, even if there is a deficit in the accumulated E&P. Thus, the current E&P of $10,000 results in ordinary dividend income to Kee's shareholders of $10,000.
In 2020, Pine Corporation had losses of $20,000 from operations. It received $180,000 in dividends from a 25%-owned domestic corporation. Pine's taxable income is $160,000 before the dividends-received deduction. What is the amount of Pine's dividends-received deduction? a. $0 b. $117,000 c. $104,000 d. $180,000
c. $104,000 A corporate deduction for dividends received from domestic taxable corporations is allowed. Pine Corporation may deduct 65% of dividends received from a domestic corporation in which Pine owned between 20% and 80% of the stock. This dividends-received deduction is limited to 65% of taxable income. Without regard to the limitation, Pine could deduct $117,000 ($180,000 × 65%). Pine, however, is limited to a $104,000 deduction ($160,000 taxable income × 65%). Thus, Pine's dividends-received deduction is $104,000.
In 2020, Garland Corp. contributed $100,000 to a qualified charitable organization. Garland's 2020 taxable income before the deduction for charitable contributions was $410,000. Included in that amount was a $20,000 dividends-received deduction. Garland also had carryover contributions of $10,000 from the prior year. In 2020, what amount can Garland deduct as charitable contributions? a. $100,000 b. $102,500 c. $107,500 d. $110,000
c. $107,500 The charitable contribution deduction for corporations is limited to 25% of the taxable income computed before the charitable contribution deduction, dividends-received deduction, and capital loss carryback. Garland's charitable contribution deduction should be $107,500 [($410,000 + $20,000) × 25%].
You transfer property with an adjusted basis of $20,000 and a fair market value of $31,000 in exchange for 100% of the stock in a new corporation. You receive 100 shares of stock having a fair market value of $16,000 and $10,000 in cash. The corporation also assumes a $5,000 mortgage on the property. Which of the following is correct? a. $11,000 gain realized; $0 recognized. b. $15,000 gain realized; $11,000 recognized. c. $11,000 gain realized; $10,000 recognized. d. $10,000 gain realized; $5,000 recognized.
c. $11,000 gain realized; $10,000 recognized. The gain realized on this transaction is $11,000 [($16,000 FMV of stock + $10,000 cash + $5,000 assumption of liability) - $20,000 adjusted basis of transferred property]. However, the transaction qualifies under Sec. 351 for nonrecognition. Transfer of mortgaged property to a controlled corporation does not require the recognition of gain unless the liabilities transferred or assumed are greater than the basis of all the property transferred. Accordingly, the only gain that must be recognized is the gain attributable to the amount of boot property received. The $10,000 cash received is boot property.
Clark and Hunt organized Jet Corp. with authorized voting common stock of $400,000. Clark contributed $60,000 cash. Both Clark and Hunt transferred other property in exchange for Jet stock as follows: Other property: Adjusted Basis | Fair Market Value | Percentage of Jet Stock Acquired Clark: $50,000 | $100,000 | 40% Hunt: $120,000 | $240,000 |60% What was Clark's basis in Jet stock? $0 $100,000 $110,000 $160,000
c. $110,000 This series of exchanges is presumed to qualify for nonrecognition treatment under Sec. 351 as the contributors, immediately after the exchange, are in control of the corporation. Therefore, Clark's basis in stock will be the value of cash transferred ($60,000) plus the adjusted basis of the other property ($50,000), or $110,000.
In 2020, its first year of operations, Rowley Corporation, not a dealer in securities, realized taxable income of $128,000 from the operation of its business. In addition to its regular business operations, it realized the following gains and losses from the sale of marketable securities: Short-term capital gain $10,000 Short-term capital loss $(4,000) Long-term capital gain $12,000 Long-term capital loss $(32,000) What is Rowley's total taxable income for 2020? a. $114,000 b. $124,000 c. $128,000 d. $134,000
c. $128,000 A corporation may deduct capital losses only to the extent of capital gains (without regard to whether they are short or long term). Therefore, Rowley may deduct only $22,000 of its capital losses since capital gains are $22,000 ($10,000 short term and $12,000 long term). The $14,000 balance of the capital losses may be carried forward 5 years. Rowley's total taxable income is Income from operations $128,000 + Capital gains $22,000 - Capital losses $(22,000) = Taxable income $128,000
For the current year, accrual-basis Corp. A's books and records reflected the following: Net income per books $104,000 Accrued federal income tax $35,000 Net capital loss $4,000 Tax-exempt interest $5,000 Book depreciation in excess of allowable tax depreciation $2,000 Based on the above facts, what is the amount of A's taxable income? a. $69,000 b. $70,000 c. $140,000 d. $150,000
c. $140,000 Federal income tax, excess capital losses, and book depreciation in excess of tax depreciation are not deductible. These amounts must be added back to book income. Tax-exempt interest is not taxable and must be subtracted from book income. These adjustments are done on Schedule M-1 of the corporation tax return. Net income per books $104,000 + Federal income tax $35,000 + Net capital loss $4,000 + Excess book depreciation $2,000 = $145,000 - Tax-exempt interest $(5,000) = Taxable income $140,000
At the beginning of the year, Data, a C corporation, had a $45,000 deficit in accumulated earnings and profits. For the current year, Data reported earnings and profits of $15,000. Data distributed $18,000 to its shareholders during the current year. What amount of the distribution is treated as a taxable dividend? a. $0 b. $3,000 c. $15,000 d. $18,000
c. $15,000 A distribution is taxable as a dividend to the extent of earnings and profits. In this case, the C corporation has $15,000 of current E&P to use in characterizing a distribution as a dividend. The remaining $3,000 is treated as a return of basis to the extent that the shareholder has stock basis remaining. Any excess over the shareholder's stock basis is treated as capital gain. Note that the treatment indicated here ignores the deficit in accumulated E&P. Depending on whether accumulated E&P is positive or negative and current E&P is positive or negative, different ordering rules apply in determining the amount of a taxable dividend and the remaining distribution's character.
Agress Corporation, a calendar-year taxpayer reporting on the accrual basis, showed the following balances on its books for 2020: Sales $130,000 Cost of sales $70,000 Operating expenses $40,000 Contributions $6,000 Net life insurance premiums on officer with Agress as the beneficiary $4,000 Accrued federal income tax $3,230 Book income $6,770 What is the amount of Agress Corporation's taxable income as it would be shown on Schedule M-1 of its 2020 corporate income tax return? a. $10,000 b. $10,770 c. $15,000 d. $20,000
c. $15,000 Schedule M-1 reconciles income or loss per books with income or loss per tax return. Taxable income before the charitable contribution is $20,000 ($130,000 - $70,000 - $40,000). The charitable contribution is limited to $5,000 ($20,000 × 25%). Net income per books $6,770 + Federal income taxes $3,230 + Excess contributions $1,000 + Life insurance premiums $4,000 = Taxable income $15,000
B Corporation had a taxable income of $140,000 for the current tax year. B's financial records contained the following information related to B's performance: Municipal bond interest of $10,000 was earned and is not included in taxable income. Depreciation claimed on trucks used in B's operations was $25,000. If the straight-line method had been used, depreciation expense would have been $15,000. B Corporation had a net capital loss of $6,000 that is carried over from a previous year to reduce its current-year taxable income. Current-year net capital gain before net capital loss carryover is $5,000. The nondeductible portion of the business meals expense for the current year was $8,000. B received a state tax refund of $7,500 related to the previous year's taxes. This amount has not been included in taxable income. What is B's current E&P at the end of the year? a. $173,000 b. $172,500 c. $157,000 d. $158,000
c. $157,000 The calculation of current E&P begins with taxable income as stated on the tax return. Tax-exempt income, as well as net capital loss carryovers deducted, are added back to taxable income. Additionally, excess depreciation claimed in excess of the straight-line method should be added back to taxable income. Furthermore, the nondeductible portion of the business meals expense should be subtracted from taxable income. Finally, certain transactions that are excluded from both E&P and taxable income, such as state tax refunds, are not used to adjust current taxable income. Net capital loss carryover deducted in the current year is limited to the current year's net capital gain before applying the carryover. Thus, net capital loss carryover deducted in the current year is $5,000. Accordingly, the current E&P at the end of the year is $157,000 ($140,000 taxable income + $10,000 municipal interest + $5,000 capital loss carryover deducted + $10,000 excess depreciation - $8,000 nondeductible business meals expense).
Kent Corp. is a calendar-year, accrual-basis C corporation. In Year 1, Kent made a nonliquidating distribution of property with an adjusted basis of $150,000 and a fair market value of $200,000 to Reed, its sole shareholder. The following information pertains to Kent:Reed's basis in Kent stock at January 1, Year 1 $500,000 Accumulated earnings and profits at January 1, Year 1 $125,000 Current earnings and profits for Year 1 (includes any gain recognized as a result of the distribution, but not reduced for the distribution amount) $60,000 What was taxable as dividend income to Reed for Year 1? a. $60,000 b. $150,000 c. $185,000 d. $200,000
c. $185,000 A distribution is a dividend that is included in the recipient's gross income to the extent that it is made from the current or accumulated earnings and profits (E&P) of a corporation. Any additional distribution is treated by the shareholder as a nontaxable return of capital to the extent of the shareholder's basis in the stock. A property distribution is valued at FMV, and the corporation recognizes gain as if the property were sold. Since the shareholder receives a $200,000 distribution, $185,000 ($125,000 + $60,000) is taxable as dividend income.
T, a calendar-year corporation that began doing business 10 years ago, had $35,000 in accumulated earnings and profits on January 1 of this year. T had an operating loss of $60,000 for the first 6 months of this year but had $10,000 in earnings and profits for the entire year. T made a distribution of $25,000 cash to its shareholders on April 1 this year. What is the amount of T's accumulated earnings and profits at the close of business on December 31? a. $0 b. $10,000 c. $20,000 d. $45,000
c. $20,000 Determination must first be made as to whether or not the cash distribution is a dividend. Section 316 defines a dividend as a distribution of earnings and profits. Regulation 1.316-1(a)(1)(ii) states that current E&P is to be computed at the end of the tax year without regard to distributions during the year. At December 31 of this year, T has a current E&P of $10,000 and accumulated E&P of $35,000. The cash distribution comes first from current E&P ($10,000 - $10,000 = $0), with the balance from accumulated E&P, thereby leaving a $20,000 balance ($35,000 - $15,000).
Wonder, Inc., had 2020 taxable income of $200,000 exclusive of the following: Gain on sale of land used in business (held greater than 1 year) $25,000 Loss on sale of machinery used in business (held greater than 1 year) $(13,000) Loss on sale of securities held 3 years $(4,000) Loss on sale of securities held 3 months $(3,000) On what amount of taxable income should Wonder compute tax? a. $200,000 b. $202,500 c. $205,000 d. $212,000
c. $205,000 The sale of the land and the sale of machinery used in the business are Sec. 1231 transactions, if held more than 1 year. Since the gain and loss net to a gain of $12,000, they are a long-term capital gain and loss. The capital losses on the securities are fully deductible because they do not exceed the $12,000 net Sec. 1231 gain.
In 2020, 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 2020 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].
Fact Pattern: Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Property | Basis | Adjusted Fair Market Value | Percentage of Ace Stock Acquired Lind: Building | $40,000 | $82,000 | 60% Post: Land | $5,000 | $48,000 | 40% The building was subject to a $10,000 mortgage that was assumed by Ace. What was Lind's basis in Ace stock? a. $82,000 b. $40,000 c. $30,000 d. $0
c. $30,000 In a Sec. 351 transaction, the shareholder's basis in the transferred stock equals the shareholder's adjusted basis in the contributed property minus boot received, money received, liabilities assumed by the corporation, and the FMV of property received, plus gain recognized by the shareholder. Therefore, Lind's basis in Ace stock is $30,000 ($40,000 adjusted basis - $10,000 liabilities assumed). All of the other answers are incorrect because Lind's basis in the Ace stock is the adjusted basis of the contributed property minus the liabilities assumed.
John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, 2020, amounted to $1 million. For the year ended December 31, 2020, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following: Key employee insurance premiums paid on Budd's life (Ral is the beneficiary of this policy.) $3,000 Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (The employees' spouses are the beneficiaries.) $4,000 What amount should Ral deduct for key employee and group life insurance premiums in computing taxable income for 2020? a. $0 b. $3,000 c. $4,000 d. $7,000
c. $4,000 Ral Corp. may deduct the premiums paid for group term life insurance. However, no deduction is allowed for premiums paid for life insurance for which the corporation is the beneficiary.
During 2020, ABC Corporation had the following income and expenses: Gross sales receipts $350,000 Salaries $175,000 Contributions to qualified charitable organizations $50,000 Capital gains $3,000 Capital loss carry-back $3,000 Depreciation expense $14,000 Dividend income $30,000 Dividends-received deduction $15,000 What is ABC's charitable contribution deduction for 2020? a. $39,000 b. $44,000 c. $48,500 d. $50,000
c. $48,500 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 25% of taxable income computed before the charitable contribution deduction, capital loss carryback, and the dividends-received deduction. ABC's charitable contribution deduction for 2020 is $48,500 as computed below. Gross receipts $350,000 + Capital gains $3,000 + Dividend income $30,000 - Salaries $(175,000) - Depreciation expense $(14,000) = Taxable income before special deductions $194,000 * Limit percentage× .25 = Charitable contribution deduction $48,500
For the tax year, Ace Corporation had net income per books of $40,000, tax-exempt interest of $2,000, excess contributions of $1,000, meals in excess of the 50% limitation of $4,000, and federal income tax of $6,000. Using this information, determine Ace Corporation's taxable income as it would be shown on Schedule M-1 of the corporate tax return. a. $38,000 b. $44,000 c. $49,000 d. $53,000
c. $49,000 Schedule M-1 reconciles income or loss per books with income or loss per tax return. Net income per books $40,000 + Federal income taxes $6,000 + Excess contributions $1,000 + Excess meals $4,000 = $51,000 - Tax-exempt interest $(2,000) = Taxable income $49,000
On January 1, Year 1, Locke Corp., an accrual-basis, calendar-year C corporation, had $30,000 in accumulated earnings and profits. For Year 1, Locke had current earnings and profits of $20,000 and made two $40,000 cash distributions to its shareholders: one in April and one in September of Year 1. What amount of the Year 1 distributions is classified as dividend income to Locke's shareholders? a. $0 b. $20,000 c. $50,000 d. $80,000
c. $50,000 The amount of a distribution is a dividend to the extent, first, of any current E&P and, then, of any accumulated E&P. When distributions during the year exceed current E&P, pro rata portions of each distribution are deemed to be from current E&P. Therefore, current E&P of $10,000 [$20,000 × ($40,000 distribution ÷ $80,000 total distributions for the year)] is allocated to each distribution. Accumulated E&P is then allocated to distributions in chronological order. The first distribution is allocated $30,000 of accumulated E&P and the second distribution is not allocated any accumulated E&P because none remains after the allocation to the first distribution. Hence, the total dividend is $20,000 from current E&P and $30,000 from accumulated E&P.
In the current year, Starke Corp., an accrual-basis, calendar-year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds. What amount should Starke's taxable income be as reconciled on Starke's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return? a. $330,000 b. $500,000 c. $502,000 d. $550,000
c. $502,000 The municipal bond income and the related interest expenses are not considered for tax purposes. The federal tax expense is not deductible for federal income tax purposes. Therefore, the net Schedule M-1 adjustment of $122,000 ($2,000 + $170,000 - $50,000) results in taxable income of $502,000 ($380,000 + $122,000).
In April, A and B formed X Corp. A contributed $50,000 cash, and B contributed land worth $70,000 (with an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each receive 50% of the corporation's stock. What is the tax basis of the land to X Corp.? a. $40,000 b. $50,000 c. $60,000 d. $70,000
c. $60,000 The basis of land to X Corp. is the adjusted basis to B ($40,000) increased by B's recognized gain ($20,000). B's realized gain is $30,000. Recognized gain is the lesser of boot received ($20,000) and realized gain.
Webster, a C corporation, has $70,000 in accumulated and no current earnings and profits. Webster distributed $20,000 cash and property with an adjusted basis and fair market value of $60,000 to its shareholders. What amount should the shareholders report as dividend income? a. $20,000 b. $60,000 c. $70,000 d. $80,000
c. $70,000 A corporate distribution is a dividend that must be included in the recipient's gross income to the extent it comes from current or accumulated earnings and profits (E&P). To the extent the distribution exceeds current and accumulated E&P, it is treated as a return of capital to the shareholder. The total distribution is equal to the fair market value of the items distributed, or $80,000 ($20,000 + $60,000). Since Webster had only $70,000 of E&P, the distribution will be taxed as a dividend only to that extent. The remaining $10,000 ($80,000 total distribution - $70,000) will be treated as a return of capital or capital gain.
Snow Corporation owns a 20% interest in Hail Corporation, a domestic corporation. For 2020, Snow Corporation had gross receipts of $390,000, operating expenses of $400,000, and dividend income of $120,000 from Hail Corporation. The dividends were not from debt-financed portfolio stock. What is Snow Corporation's dividends-received deduction for 2020? a. $24,000 b. $60,000 c. $71,500 d. $78,000
c. $71,500 A corporation is allowed a deduction for 65% of dividends received from unaffiliated domestic corporations of which it owns at least 20% of the stock. The dividends-received deduction is limited to 65% of taxable income before inclusion of the dividends-received deduction, QBID, net operating loss deduction, capital loss carrybacks, and certain adjustments for extraordinary dividends. (Note this deduction is 50% of taxable income for dividends from less than 20%-owned corporations.) Sixty-five percent of Snow's dividend income is $78,000. However, 65% of the taxable income before the dividends-received deduction is $71,500. This limit restricts the dividends-received deduction that can be claimed. Gross business income $390,000 + Dividend income $120,000 = Gross income $510,000 - Less operating expenses(400,000) = Taxable income without dividends-received deduction $110,000 Deduction is lesser of 65% of dividend income $78,000, or 65% of taxable income without dividend deduction $71,500
For the current tax year, Sting Corporation had net income per books of $65,000, tax-exempt interest of $1,500, excess contributions of $3,000, excess tax depreciation over book depreciation of $4,500, premiums paid on term life insurance on corporate officers of $10,000 (Sting is the beneficiary), and accrued federal income tax of $9,700. Based on this information, what is Sting Corporation's taxable income as would be shown on Schedule M-1 of its current year corporate tax return? a. $58,700 b. $61,700 c. $81,700 d. $93,700
c. $81,700 Schedule M-1 reconciles income or loss per books with income or loss per tax return. Net income per books $65,000 + Federal income taxes $9,700 + Excess contributions $3,000 + Life insurance premiums $10,000 = $87,700 - Tax-exempt interest $(1,500) - Excess depreciation $(4,500) = Taxable income $81,700
Bob owns 250 shares of Rice Corporation. Rice Corporation plans on redeeming 100 shares of its 500 shares of common stock outstanding. Below what percentage must Bob's interest be reduced if the redemption is to be substantially disproportionate? a. 60% b. 50% c. 40% d. 20%
c. 40% Substantially disproportionate means that the amount received by shareholders is not in the same proportion as their stock holdings. To qualify, immediately after redemption, the shareholder must own (1) less than 50% of the voting power of outstanding voting stock and (2) less than 80% each of both the common stock and voting stock owned before the redemption by the shareholder. Bob owns 50% of Rice Corporation before the redemption (250 ÷ 500). Thus, Bob must reduce his interest below 40% (50% × 80%).
Corporation H has 1,000 shares of stock issued and outstanding. Mr. K, the founder, owns 40% of the stock, his wife owns 10%, his son owns 20%, and the balance is owned by unrelated parties. Under the constructive ownership rules of the stock redemption provisions, what percentage of stock is Mr. K considered to own? a. 50% b. 60% c. 70% d. 100%
c. 70% The stock redemption provisions found in Sec. 302 use the constructive ownership (attribution) rules of Sec. 318. Under the Sec. 318(a)(1) rules, an individual is considered to own the stock owned by members of his or her family including his or her spouse, children, grandchildren, and parents. Therefore, Mr. K owns 40% of the stock directly, and he indirectly owns the stock owned by his wife and son. Mr. K has direct and indirect ownership of 70% (40% + 20% + 10%) of Corporation H. For that matter, so do his wife and son.
During 2020, Ambassador Matinee Company distributed a dividend in the form of land to its sole shareholder. The land has a fair market value of $50,000 and an adjusted basis of $10,000. Assuming that the corporation has sufficient earnings and profits and ignoring the potential tax effect of any taxes on the distribution, the net effect of the transaction on earnings and profits (E&P) is a. An increase of $40,000. b. An increase of $10,000. c. A decrease of $10,000. d. None of the answers are correct.
c. A decrease of $10,000. When appreciated property is distributed, the corporation recognizes a gain equal to the excess of the FMV of the property over the adjusted basis. The E&P are increased by the recognized gain ($40,000) and decreased by the FMV of the property distributed ($50,000). Therefore, the net effect of the distribution is a decrease of $10,000.
Adams, Beck, and Carr organized Flexo Corp. with authorized voting common stock of $100,000. Adams received 10% of the capital stock in payment for the organizational services that he rendered for the benefit of the newly formed corporation. Adams did not contribute property to Flexo and was under no obligation to be paid by Beck or Carr. Beck and Carr transferred property in exchange for stock as follows: Adjusted Basis | Fair Market Value | Percentage of Flexo Stock Acquired Beck: $5,000 | $20,000 | 20% Carr: $60,000 | 70,000 | 70% What amount of gain did Carr recognize from this transaction? a. $40,000 b. $15,000 c. $10,000 d. $0
d. $0 This formation qualifies as a nonrecognition-of-gain transaction under Sec. 351. The control requirement is satisfied since Beck and Carr have ownership of at least 80% of the stock. Since Carr did not receive any boot property, (s)he will not recognize gain from this transaction.
Pursuant to a plan of corporate reorganization adopted in July Year 1, Gow exchanged 500 shares of Lad Corp. common stock that he had bought in January Year 1 at a cost of $5,000 for 100 shares of Rook Corp. common stock having a FMV of $6,000. Gow's recognized gain on this exchange was a. $1,000 long-term capital gain. b. $1,000 short-term capital gain. c. $1,000 ordinary income. d. $0.
d. $0. The exchange of stock for stock in obtaining control of a corporation qualifies as a reorganization. No gain or loss is recognized in a reorganization if stock or securities are exchanged solely for stock or securities in the same corporation or in another corporation that was a party to the reorganization. For Gow, since no boot was received, no gain is recognized.
Wright Corporation reported $100,000 of book income before income taxes for the year ended December 31, 2020. The income statement disclosed the following information: Christmas gifts to 40 customers at $100 each Dividends of $20,000 received from Morley, Ltd., a 20%-owned corporation that is not subject to United States income tax Insurance premiums of $15,000 on a policy insuring the life of the president of the corporation, under which Wright Corporation is the beneficiary What should Wright report as its taxable income for 2020? a. $105,000 b. $103,000 c. $115,000 d. $118,000
d. $118,000 Business gifts are limited to $25 for each gift. Dividends received from foreign corporations are eligible for the dividends-received deduction only if the corporation is subject to U.S. income tax. No deduction is allowed for life insurance premiums on a policy covering the life of an officer if the corporation is directly or indirectly a beneficiary. Wright's taxable income is Pretax income per books $100,000 + Christmas gifts (40 × $75) $3,000 + Insurance premiums $15,000 = Taxable income $118,000 Note that the portion of Christmas gifts added back is the excess deduction taken in computing book income. Also, the dividends were included in book income, but no dividends-received deduction is allowed.
In 2020, 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 2020 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 - Operating expenses $(340,000) = Gross income $(90,000) - Dividends-received deduction(65% × $50,000) $(32,500) = Net operating loss$(122,500)
For the year ended December 31, 2020, Dodd Corp. had net income per books of $100,000. Included in the computation of net income were the following items: Provision for federal income tax $27,000 Net long-term capital loss $5,000 Key employee life insurance premiums(Corporation is beneficiary.) $3,000 Dodd's 2020 taxable income was a. $127,000 b. $130,000 c. $132,000 d. $135,000
d. $135,000 None of the items are deductible in computing taxable income even though they decrease book income. Therefore, they must be added back to book income to find taxable income.
Aztec, a C corporation, distributed an asset to Burn, a shareholder. The asset had a fair market value of $30,000 and was subject to a $40,000 liability assumed by Burn. The asset had an adjusted basis of $25,000. What amount of gain must Aztec recognize? a. $0 b. $5,000 c. $10,000 d. $15,000
d. $15,000 A corporation must recognize gain realized on distribution of property. Gain realized on distributed property must be recognized by the corporation as if the property were sold to the distributee at its FMV. FMV is presumed to be no less than liabilities related to the property subject to which the shareholder assumes or takes the property. Therefore, the FMV equals the $40,000 liability assumed by Burn, and the recognized gain is $15,000 ($40,000 FMV of the property less $25,000 adjusted basis).
Vernon receives a truck from Berry Trucking Company as a distribution in complete liquidation. Vernon's basis in the stock of Berry Trucking Company is $2,000. The fair market value of the truck on the date of the distribution is $30,000. There is a $15,000 loan on the truck, which Vernon assumed. What is the basis of the truck to Vernon? a. $28,000 b. $13,000 c. $15,000 d. $30,000
d. $30,000 If a shareholder assumes a liability of the liquidating corporation or receives property that is subject to a liability, then the liability reduces the amount realized by the shareholder, thus reducing the shareholder's gain or increasing the shareholder's loss. Nevertheless, the shareholder's basis for the property is the property's fair market value, in this case $30,000.
Everyday Corporation realized net book income in the amount of $300,000 for tax year ended December 31, Year 1. Included in the net book income are the following: Federal income taxes $4,000 Excess capital losses over capital gains $10,000 Tax exempt interest income $5,000 What is Everyday Corporation's taxable income? a. $290,000 b. $304,000 c. $280,000 d. $309,000
d. $309,000 To reconcile income per books with income per tax, the following adjustments are made to net income (loss) per books: net income (loss) per books plus federal income tax, excess of capital loss over capital gains, income subject to tax not recorded on books, and expenses recorded on books not deducted on tax return; minus income recorded on books not subject to tax and deductions on this return not charged against book income. Everyday Corporation's taxable income is computed as follows: Net book income $300,000 + Excess capital losses over capital gains $10,000 + Federal income taxes $4,000 - Tax exempt interest income $(5,000) = Taxable income $309,000
Bridge, a C corporation, had $15,000 in accumulated earnings and profits at the beginning of the current year. During the current year, Bridge reported earnings and profits of $10,000 and paid $20,000 in cash distributions to its shareholders in both March and July. What amount of the July distribution should be classified as dividend income to Bridge's shareholders? a. $20,000 b. $15,000 c. $10,000 d. $5,000
d. $5,000 A distribution is a dividend that is included in the recipient's gross income to the extent that it is made from the current or accumulated earnings and profits (E&P) of a corporation. Any additional distribution is treated by the shareholder as a nontaxable return of capital to the extent of the shareholder's basis in the stock. When distributions during the year exceed current E&P, pro rata portions of each distribution are deemed to be from current E&P. Therefore, current E&P of $5,000 [$10,000 × ($20,000 distribution ÷ $40,000 total distributions for the year)] is allocated to each distribution. Accumulated E&P is then allocated to distributions in chronological order. The first distribution is allocated $15,000 of accumulated E&P, and the second distribution is not allocated any accumulated E&P because none remains after the allocation to the first distribution. Hence, the total dividend for July equals $5,000 from current E&P and a return of capital of $15,000.
In the case of a corporation that is not a financial institution, which of the following statements is true with regard to the deduction for bad debts? a. Either the allowance method or the direct charge-off method may be used, if the election is made in the corporation's first taxable year. b. On approval from the IRS, a corporation may change its method from direct charge-off to allowance. c. If the allowance method was consistently used in prior years, the corporation may take a deduction for a reasonable addition to the allowance for bad debts. d. A corporation is required to use the direct charge-off method rather than the allowance method.
d. A corporation is required to use the direct charge-off method rather than the allowance method. The allowance method is not allowed. The corporation must use the direct charge-off method or the nonaccrual-experience method. Exception applies to certain financial institutions.
When a parent corporation completely liquidates its 80%-owned subsidiary, the parent (as shareholder) will ordinarily a. Be subject to capital gains tax on 80% of the long-term gain. b. Be subject to capital gains tax on 100% of the long-term gain. c. Have to report any gain on liquidation as ordinary income. d. Not recognize gain or loss on the liquidating distribution(s).
d. Not recognize gain or loss on the liquidating distribution(s). When a subsidiary corporation is liquidated into the parent corporation in a Sec. 332 transaction, no gain or loss is recognized on the liquidation.
