Federal Income Taxation EXAM 4 Smartbook

Byron transfers property with a value of $100,000 (adjusted basis = $80,000) to Allen Corp. for stock worth $50,000 in a §351 transaction. Allen assumes the $50,000 mortgage against the property. What is the recognized gain or loss on the transfer?

$0 Reason: Amount realized = $100,000 less adjusted basis of $80,000 = $20,000 realized gain. However, the liabilities assumed ($50,000) do NOT exceed the adjusted basis of the property, and thus no gain is recognized.

Agatha contributes land valued at $25,000 (basis = $5,000) subject to a mortgage of $15,000 to the Kristy Partnership for a 50% interest. What is Agatha's gain or loss on the contribution?

$0 Reason: Because the cash deemed to have been received does not exceed Agatha's basis in the partnership interest, she does not recognize gain.

Newt, Inc. incurs capital losses of $500 and capital gains of $100 in the current year. For tax purposes, Newt will recognize a net capital gain or loss of ______.

$0 Reason: Corporations can only offset capital losses against capital gains in the year of a net capital loss ($100 losses offset against $100 gains).

Victoria contributes cash of $10,000 in exchange for a partnership interest. In the first year, her share of dividends, tax-exempt income and ordinary business loss are $2,000, $1,000 and ($4,000), respectively. The partnership also makes a cash distribution to her of $10,000. What is Victoria's adjusted basis at the end of the year?

$0 Reason: Her original basis equals $10,000. Then add income items of $2,000 and $1,000, less distributions of $10,000 and finally less the loss of $4,000 = ($1,000). Basis can NOT be negative, so it equals $0.

Aruba, Inc. has a properly calculated charitable contribution limit of $12,000 for the current year. Aruba deducted a DRD of $6,000 and is also including a capital loss carryforward from the prior year of $13,000. If Aruba's actual charitable contributions for the year are $4,000, the company's taxable income is ______.

$110,000 Reason: A charitable contribution limit of $12,000 ÷ 10% = $120,000 of modified taxable income - $6,000 DRD -$4,000 CCD = $110,000. The capital loss carryforward from the prior year is permitted, and thus already in modified taxable income.

Barton, Inc. has taxable income, including dividend income, but before DRD of $2,500 which includes an NOL carryover of $600. Barton owns 15% of Clayton, Inc. and received a $2,600 dividend from Clayton during the year. Barton's dividend received deduction equals ______.

$2,600 Reason: Barton can deduct the full $2,600 because it results in a NOL.

In 2020, a taxpayer (with no employee compensation) was allocated $156,000 of self-employment income. Calculate the amount of self-employment tax the taxpayer would owe.

$21,253 Reason: Taxpayer would report $144,066 of net earnings from self-employment ($156,000 * .9235) and owe $21,252.71 of self-employment tax [$137,700 * .153 + ($144,066 minus $137,700) * .029]. Rounded to the nearest dollar ($21,253).

In tax year 2020, a married taxpayer with AGI of $300,000 had gross investment income of $6,150 (which included a long-term capital gain of $3,500 and interest income of $2,650), brokerage commissions of $75, and tax preparation fees of $210. Calculate the amount of net investment income tax the taxpayer is required to pay?

$231 Reason: ($6,150 - $75) * 3.8% = $6,075 * 3.8% = $231

Akram owns a C corporation that has generated a $10,000 loss in its first year. Akram has other forms of ordinary income totaling $80,000. Assuming Akram's marginal tax rate is 35% and a corporate rate of 21%, how much tax will Akram pay on the income?

$28,000 Reason: Akram may NOT offset the loss from the corporation with his other income and will pay tax of $28,000 ($80,000 x 35%).

Steven is a member in Manyou LLC. As part of his ownership in Manyou, he also personally guaranteed a portion of Manyou's debts and is considered the managing member of the company (basically he signs all the contracts and checks). Manyou paid Steven a guaranteed payment of $5,000 and allocated business loss of ($2,000) to him in the current year. What is Steven's self-employment income/loss from Manyou?

$3,000 Reason: Steven includes both the guaranteed payment (all guaranteed payments are self-employment income) and the share of the Manyou loss, since he has a high level of involvement with the LLC and guarantees its debt. $5,000 - $2,000 = $3,000.

Katie contributes property with a value of $40,000 and adjusted basis of $30,000 to the Parry Partnership in exchange for her partnership interest. Parry Partnership has no debt. What is Katie's basis in her partnership interest?

$30,000 Reason: The partner takes a substituted basis in her partnership interest equal to the basis of the contributed property.

Alexie participates in a §351 exchange in which she transfers land valued at $250,000 (her basis = $220,000) and receives Sorenson common stock valued at $210,000 and cash of $40,000. What is Alexie's recognized gain and her basis in Sorenson stock?

$30,000 recognized gain and $210,000 basis Reason: The gain recognized is the lesser of the gain realized ($250,000 - $220,000 = $30,000) or the amount of boot received ($40,000). Her basis is the substitute basis ($220,000) + the gain recognized ($30,000) - FMV of boot received ($40,000) = $210,000.

Mallory contributes property with a basis of $20,000 (market value = $50,000) to a corporation in a transaction that qualifies as a tax-deferred §351 transaction. Shortly thereafter, Mallory decides to sell the stock in the corporation for $60,000. What is the amount of the recognized gain on Mallory's sale of stock?

$40,000 Reason: Mallory takes the substituted basis in her stock of $20,000. The amount realized on the sale is $60,000, which results in a $40,000 recognized gain.

Jesbill Inc. receives property worth $50,000 from the state as a contribution to capital as an incentive to build a factory in the state. Jesbill's basis in the property is ______.

$50,000

Tracy transfers property with a fair market value of $60,000 and an adjusted basis of $50,000 in exchange for all 100 shares of Riley Corporation's stock valued $60,000. Assuming it is §1231 property, what is Riley Corp.'s basis in the property?

$50,000 Reason: Riley takes the carryover basis in the property whether its Section 1231 or not.

Match the entity with the description of income or loss allocation. Instructions: c corporation

No allocation

Contribution of property

Outside basis = basis of contributed property - debt relief + debt allocated + gain recognized

Contribution of services

Outside basis = liquidation value of capital interest + debt allocated

Match the description of a partner's rights with the term. capital interest

Partner's right to the net assets of the partnership at liquidation

Match the description of a partner's rights with the term. profits interest

Partner's right to the share of future income or losses of the partnership

Leann has basis in her partnership interest of $7,000 and an at-risk amount of $4,000 at year-end before considering the partnership ordinary loss of ($10,000). Leann does NOT materially participate in the partnership activities. Leann has passive income of $5,000 from her other passive activities and $10,000 of wages and salaries income. How much of Leann's loss is suspended due to at-risk and tax basis limitations, combined?

$6,000 Reason: The tax basis limitation reduces the loss that Leann can use from $10,000 to $7,000. The at-risk limitation further reduces the loss she can use from $7,000 to $4,000. The remaining $4,000 loss can be fully deducted because she had at least $4,000 of passive income from other sources. This leaves $6,000 of the original $10,000 loss suspended.

Shirin contributes cash of $10,000, a computer with a market value of $1,000 (her basis is $500), and land with a market value of $80,000 (her basis is $20,000) to a corporation in exchange for stock that qualifies under §351. How much gain or loss did Shirin realized and recognize?

$60,500 gain realized; $0 gain recognized

Match the capital account type with the description. 704(b) capital accounts

Reflects the fair market value of the contributed assets

Match the capital account type with the description. gaap capital accounts

Reflects the generally accepted accounting approach to capital accounts

Match the capital account type with the description. tax capital accounts

Reflects the tax basis of the contributed assets

The Lonely Partnership had an overall net loss of $57,000. Included in that amount was net capital gains of $5,000, tax-exempt interest of $1,000, and a guaranteed payment of $10,000 to one of the partners. Compute the amount of ordinary business income or loss for Lonely.

$63,000 loss Reason: ($57,000) overall loss - $5,000 capital gains - $1,000 tax exempt income. Although the guaranteed payment is a separately stated item for the receiving partner, it is also a deduction for ordinary business income.

Duncan has land that he purchased 5 years ago and equipment that he purchased this month. The land was held as an investment and the equipment was personal-use. He contributes both to the DoNut Partnership for use in a new partnership business in exchange for a partnership interest. What is the character of the property to DoNut?

Since DoNut will be using the land and equipment in a trade or business, it will be ordinary and then 1231 after one year.

To calculate the taxpayer's net earnings from self-employment, 92.35% is multiplied by:

Taxpayer's self-employment income.

Match the description of a partner's rights with the term. partnership interest

The bundle of economic rights a partner receives for his investment in a partnership

Newly formed Chasbro Partnership is preparing its first tax return. Who makes the election to expense a portion of the partnership's start-up costs?

The partnership

Brendan transfers a building with a value of $300,000 (adjusted basis = $120,000) to Fours Corp. in exchange for stock worth $100,000. As part of the transfer, Fours assumes the $200,000 mortgage on the building. Brendan's recognized gain is ______ and his basis in the stock is ______.

$80,000; $0 reason: Gain recognized = $200,000 liabilities less $120,000 adj. basis = $80,000. Basis of stock = $120,000 + $80,000 gain recognized - $200,000 liability = $0.

Victoria contributes cash of $20,000 in exchange for a partnership interest. In the first year, her share of dividends, tax-exempt income and ordinary business loss are $2,000, $1,000 and ($4,000), respectively. The partnership also makes a cash distribution to her of $10,000. What is Victoria's adjusted basis at the end of the year?

$9,000 Reason: $20,000 + $2,000 + $1,000 - $10,000 - $4,000 = $9,000

Generally, under state law, business partnerships can be classified as: (Check all that apply.)

-general -limited

When appreciated property is transferred to a closely held corporation, a taxable gain is triggered ______. (Check all that apply.)

-upon the sale of the stock received by the shareholder -upon the sale of the property received by the corporation

The tax rate for the additional Medicare tax is:

.9%

Place the following in the order in which any partnership loss limitations are considered.

1. basis limitations 2. at-risk limitations 3. passive loss limitations

Partnership income tax returns are due:

15th day of the 3rd month after year end

In an effort to avoid the second level of tax, corporations that retain earnings are subject to a ________percent accumulated earnings tax on the retained earnings.

20%

The deduction for qualified business income (QBI) for flow-through entities is calculated as what percent of qualified business income?

20%

Rebecca, Inc. incurred a net capital loss of $500 in 2020. The corporation incurred net capital gains of $0, $600 and $1,700 in tax years 2017, 2018, and 2019, respectively. Rebecca, Inc. will carry back and utilize the loss in tax year ______.

2018 Reason: Net capital losses must be carried back to the earliest year available for offset. Since 2017 has no capital gains, 2018 is the first year available for carry back.

Fill in the Blank Question Fill in the blanks to complete the sentence. Net operating losses arising in tax years beginning after December 31, 2017 can offset only _______ % of taxable income in future years. (Enter your answer as a whole number.) Listen to the complete question

80

In order to be eligible for a 100% dividends received deduction, the receiving corporation must own at least ________% of the distributing company's stock. (Enter your answer as a whole number.)

80

Inventory

Adjusted basis

Match the entity with the description of income or loss allocation. sole proprietorship

All earnings allocated to owner

Michelle owns a condominium near a college campus that she rents to college students each year. Unfortunately, Michelle was unable to find students to rent to for the entire year and her condo operated at a loss. Which of the following BEST describes how Michelle must treat her loss?

As an active loss for up to $25,000 loss if her income is low enough and she actively participates

Match the entity with the description of income or loss allocation. partnership

Based on owner's agreement

Match the entity with the description of income or loss allocation. s corporation

Based on stock ownership percentage

In which of the following scenarios will Billy meet the material participation test?

Billy participates in the activity for 120 hours. Mandy, his only other partner, participates for only 80 hours.

How does a partnership select an overall method of accounting for tax purposes?

By filing a return

A(n) ________ is a separate taxpaying entity unless a valid S election is made for tax purposes.

C corporation

Partnerships with ______ as partners are generally not eligible to use the cash method of accounting for tax purposes.

C corporations Reason: A partnership, with gross receipts exceeding a certain threshold, with which of the following types of partners is generally prohibited from using the cash method of accounting for tax?

On their December 31, 2020 tax return, Ecogreen, Inc., a C corporation, suffered a difficult year and generated a loss. What are Ecogreen's options for dealing with the loss for tax purposes?

Carry the loss forward to reduce income in future years

Greta contributed property to form Unity Corp. and received all 100 shares of stock. A year later, Bjorn contributed property and received 20 shares of Unity (total 120 shares of Unity outstanding). Which shareholder(s) will receive deferral treatment under §351?

Greta only Reason: Immediately after Greta's contribution, she was in control of 80% or more of the corporation. Bjorn only controls 16.67% (20 ÷ 120) after his transfer. Because the transactions are a year apart, his contribution must be considered separately.

Select the shareholder-type that is likely to pay a 15% (or 20%) tax on distributions from a C corporation.

Individual shareholders

Snap Inc. and Crackle Corp. own a capital and profits interest in the Cereal Bowl Partnership of 20% and 25%, respectively. There are another 35 partners, all with interests of less than 5%. Snap and Crackle have a June 30 year-end and the 35 other partners have various fiscal year ends. What year end must Cereal Bowl use?

June 30 Reason: No partners with the same year-end own a majority interest. However, the principal partners have the same year-end of June 30.

Which of the following taxes does not apply to a C corporation?

Net investment income tax

True or false: Contributions of property to a partnership generally result in the same type of deferral available to a sole shareholder's contribution of property to a corporation.

True

If a corporation has a net operating loss after deducting the full DRD, the modified taxable income limitation does not apply.

True Reason: In this case, the corporation is permitted to deduct the full dividends received deduction, no matter the amount of modified taxable income.

When a partner contributes property subject to a debt to a partnership, the debt relief the partner experiences is treated as:

a decrease in the partner's outside basis Reason: Partners that enjoy debt relief by contributing property subject to debt to a partnership, treat the debt relief as a cash distribution which lowers their outside basis.

Ripley, Inc. has a life insurance policy on one of its officers for which Ripley is the beneficiary. The premium that Ripley pays is ______ book-tax difference.

a permanent Reason: The premiums for key life insurance policies are deductible for book but are not deductible for tax.

Hudson Company recently recorded an allowance for doubtful accounts of 4% of the current year sales. By doing so, Hudson created ______ book-tax difference.

a temporary Reason: The bad debt reserve will eventually be reversed or actually written off for tax purposes making this a temporary difference.

When one corporation owns at least 80% of the total voting power and total stock value of another corporation, a(n)_________ _________ exists for tax purposes

affiliated group

The most popular method of determining estimated tax payments for corporations that cannot use their prior-year tax liability is probably the method.

annualized income

A C-corporation with a calendar year-end has an income tax return due on ______ 15th.

april

Losses from a partnership that exceed the partner's basis:

are suspended and carried forward until sufficient basis is created

Partnership allocations of income and loss should: (Check all that apply.)

be defined in the partnership agreement. have substantial economic effect.

Corporate taxpayers reconcile_______ income with _______income on Form 1120, Schedule M-1 or M-3.

book;taxable

Partnerships are taxed under:

both the entity and aggregate approach

A partner's interest in a partnership interest is treated as a(n):

capital asset

The corporate tax formula differs from the individual tax formula because the corporate tax formula ______.

does not separate deductions into those before AGI and those after AGI like the individual formula does

corporation

entity

Stock options are a form of compensation that allows employees to purchase stock by paying the

exercise price

general partnership

general partner

Accrual method, calendar-year corporations can deduct a charitable contribution ______. (Check all that apply.)

if accrued, approved by the board, and paid within 3 1/2 months of year-end when paid

Permanent book-tax differences ______.

include items of income for book purposes that will never be items of income for tax purposes

A partnership's basis in its own assets is known as the basis.

inside

Consistent with other types of entities, partnerships with gross receipts exceeding a certain threshold must use the accrual method for the purchase and sale of .

inventory

Glenda Goodwich is planning to contribute property in exchange for stock in a corporation in a §351 exchange. If she also receives cash, Glenda ______.

may have gain, but not loss recognition Reason: If Glenda has a realized gain. the boot (cash) received triggers gain recognition. Losses are not recognized.

In determining a corporation's NOL 2020, a 2019 NOL may ______ be deducted.

not

Corporations with total assets and total receipts less than $250,000 are ______.

not required to complete Schedules L, M-1 or M-2

Guaranteed payments are treated as_______ (ordinary or capital) income by the partners that receive them.

ordinary

Corporations are taxed on dividends received at the ______.

ordinary corporate tax rate

Sole Proprietorship

owner

A partner contributes property or services in exchange for the general ownership interest called a(n) .

partnership interest

When a corporation reports book compensation expense for incentive stock options it creates a(n) ______ book-tax difference.

permanent, unfavorable

If a transfer of property or cash in exchange for corporate stock does not meet the requirements of §351, the taxpayer must any_______ gain on the transfer.

recognize

If a corporation has a calendar year-end, a tax return extension will extend the due date for ______ months.

six

Adele contributed both ordinary and capital assets to a corporation in exchange for stock in a qualifying §351 exchange. Her holding period for the stock ______.

starts on the day of exchange for the ordinary assets and includes the holding period of the property for the capital assets

The tax basis of stock received in a tax-deferred §351 transaction is typically the same basis as the property transferred which is referred to as a(n) _______basis.

substituted

A liability transferred to a corporation in a §351 transaction will NOT be treated as boot unless the purpose of the transaction is__________ __________ . (Enter one word per blank.)

tax avoidance

Which of the following items qualify as boot in a §351 transaction? (Check all that apply.)

Fair market value of property received cash

A §351 deferral is only available when a single shareholder transfers property for a controlling stock interest in a corporation.

False

One of the differences between Schedule M-1 and M-3 is that the M-3 reconciliation includes the dividends received and net operating loss deductions and M-1 does not.

False

True or false: All corporations may choose to use either the cash or accrual method of accounting for tax.

False

True or false: The United States taxes C corporations on their income using a progressive tax rate system.

False

True or false: A Net Operating Loss arising in tax years beginning after December 31, 2017 can only be carried forward 20 years.

False Reason: NOLs arising in tax years beginning after 12/31/17 can be carried forward indefinitely.

Nolan seeks to protect himself from the debts his business is going to incur. Which of the following entities would be the best entity choice for Nolan?

Corporation Reason: Corporations are generally responsible for their own debts and shareholders are at risk only for their investment in shares.

Purchase

Cost basis + debt allocated

Wynk (an individual), Blynk (an individual) and Nod Corp. are each partners in the Wooden Shoe Partnership with ownership interests of 30%, 30% and 40%, respectively. As individuals, Wynk and Blynk have a calendar year-end, but Nod Corp has a March 31st year-end. What year-end must Wooden Shoe use?

December 31 Reason: Because Wynk and Blynk collectively own 60 percent and have a calendar year-end, under the majority interest test, Wooden Shoe uses the calendar year end.

Capital gain property

Fair market value