Tax 2 midterm

Which of the following items does not result in a permanent difference? Tax exempt life insurance proceeds. Disallowed portion of business-related meals. Tax credit for research and development. Capitalized costs in inventory under §263A.

Capitalized costs in inventory under §263A.

Lansing Company is owned equally by Jennifer, her husband, Dan, and by DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the Section 318 stock attribution rules, how many shares of Lansing stock is Jennifer deemed to own?

250 100 shares+Dan's 100 shares+ 1/2 of corporations shares

Horned Frog Corporation is owned equally by Sandy, her husband Tom, her daughter Caitlin, and her grandmother, Martha. Each shareholder owns 200 shares in the company. Under the family attribution rules, how many shares of Horned Frog stock is Sandy deemed to own?

600

What document must corporations file with the state to organize their business?

Articles of incorporation

All corporate deductions are deductions from AGI deductions.

False Corporations do not report AGI.

Qualified business income does not include which of the following?

Income generated from specified services and dividend income.

Which tax classification(s) can potentially apply to legal corporations?

S corporation and C corporation

Which of the following statements is true about compensation paid to owners who work for an entity taxed as a partnership?

The compensation is self-employment income to the owner-worker.

Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate, liquidating distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD partnership interest is $20,000. What is the amount and character of Daniela's gain or loss from the distribution?

$0

Riley is a 50% partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is the amount and character of Riley's recognized gain or loss and what is his basis in his partnership interest?

$0 gain, $42,000 basis

Emily transferred 100 percent of her stock in Nelson Company to Admiral Corporation in an "A" reorganization. In exchange she received stock in Admiral with a fair market value of $200,000 plus $100,000 in cash. Emily's tax basis in the Nelson stock was $50,000. What amount of gain, if any, does Emily recognize in the exchange and what is her basis in the Admiral stock she receives?

$100,000 gain recognized and a basis in the Admiral stock of $50,000. Gain recognized is $100,000, the lesser of gain realized of $250,000 or cash received ($100,000). The stock basis is the carryover basis of $50,000 plus gain recognized of $100,000 less cash received of $100,000. If Emily sells the stock for $200,000, she will recognize gain of $150,000, an amount equal to the gain deferred on the exchange.

Cubs Inc. was completely liquidated. In the exchange for his 20 percent interest, Ross received land with a fair market value of $200,000. Ross's basis in the Cubs stock was $100,000. The land had a basis to Cubs Inc. of $50,000. What amount of gain does Ross recognize in the exchange and what is his basis in the land he receives?

$100,000 gain recognized and a basis in the land of $200,000

Randolph is a 30% partner in the RD Partnership. On January 1, RD distributes $26,000 cash to Randolph in complete liquidation of his interest. RD has only capital assets and no liabilities at the date of the distribution. Randolph's basis in RD is $37,000. What is the amount and character of Randolph's gain or loss on the distribution?

$11,00 capital loss

Ski Inc. owns 30 percent of Snow Inc., both of which are domestic C corporations. Snow pays Ski a dividend of $20,000 in 2020. What is the amount of Ski's dividend's received deduction, assuming the taxable income limitation does not apply?

$13,000 Ski is entitled to a 65% dividends received deduction ($20,000 × 65% = $13,000) because it owns 30% of the stock of Snow Inc.).

Chairs-R-Us Inc. reported a net capital loss of $25,000 in year 4. It reported net capital gains of $10,000 in year 3 (before any capital loss carryback) and $20,000 of net capital gains in year 5 (before any capital loss carryovers). What is the amount and nature of the book-tax difference in year 5 related to the net capital loss carryover?

$15,000 favorable

Wildcat Corp. uses the annualized income method to determine its quarterly federal income tax payments. It had $50,000, $25,000, and $45,000 of taxable income for the first, second, and third quarters, respectively ($120,000 in total through the first three quarters). What is Wildcat's annual estimated taxable income as of the end of the third quarter?

$150,000

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20x3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences because of the stock redemption?

$150,000 dividend and a tax basis in each of his remains shares of $4,000

Aztec Company reports current E&P of $200,000 in 20x3 and accumulated E&P at the beginning of the year of negative $100,000. Aztec distributed $300,000 to its sole shareholder on January 1, 20x3. How much of the distribution is treated as a dividend in 20x3?

$200,000

Tiger Company, a calendar year corporation, reports a deficit in current E&P of negative ($500,000) this year and positive accumulated E&P at the beginning of the year of $300,000. Tiger distributed $250,000 to its sole shareholder on June 30 of this year. How much of the distribution is treated as a return of capital this year if the shareholder has a $1 million adjusted basis in Tiger stock?

$200,000

Andy is talking to his friend Bruce, who has an interest in Arlington, LLC, about purchasing his LLC interest. Bruce's outside basis in Arlington, LLC is $21,000. This includes his $5,000 one-fourth share of the LLC's debt. Bruce's 704(b) capital account is $25,000. If Andy bought Bruce's LLC interest for $18,000, what would Andy's outside basis be in Arlington, LLC?

$23,000. $18,000 + $5,000 of LLC debt

Jones Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. What is their book equivalent of taxable income?

$360,000 400,000-40,000

Boulder Company reports current E&P of $500,000 this year and a deficit in accumulated E&P at the beginning of the year of negative ($200,000). Boulder distributed $400,000 to its sole shareholder on December 31 of this year. How much of the distribution is treated as a dividend this year?

$400,000

Daniel acquires a 30% interest in the PPZ Partnership from Paolo, an existing partner for $39,000 of cash. The PPZ Partnership includes $10,000 of recourse liabilities. What is Daniel's basis in his partnership interest?

$42,000

Force Corporation is owned equally by Luke and his sister Leia, each of whom own 200 shares in the company. Force redeemed 100 shares of Luke's stock in the company on December 31 of this year paying Luke $1,000 per share. Luke's income tax basis in each share is $500. Force has total E&P of $800,000. What are the tax consequences to Luke as a result of the stock redemption?

$50,000 capital gain and a tax basis in each of his remaining shares of $500.

Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company. In the exchange, he received land with a fair market value of $100,000. Jalen's basis in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of $80,000. What amount of gain does Jalen recognized in the exchange and what is his basis in the land he receives

$50,000 gain $100,000 basis in land

Amelia transfers property with a tax basis of $500 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $800 in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

$500 900- (500-100)

At the end of last year, Cynthia, a 20% partner in the five-person CYG partnership, has an outside basis of $30,000 including her $15,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt. CYG has no hot assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?

$7,500 capital gain

Manistee Corporation reported taxable income of $1,200,000 this year and paid federal income taxes of $252,000. Not included in the computation was disallowed entertainment expenses of $25,000, tax-exempt interest of $20,000, and a net capital loss of $50,000 incurred this year. Manistee is an accrual basis taxpayer. The corporation's current earnings and profits this year would be:

$893,000 $1,200,000 − $252,000 − $25,000 + $20,000 − $50,000 = $893,000

Abbot Corporation reported pretax book income of $600,000 in 2020. Included in the computation were favorable temporary differences of $150,000, unfavorable temporary differences of $50,000, and an unfavorable permanent differences of $40,000. Abbot's current income tax expense for 2020 would be:

($600,000 − $150,000 + $50,000 + $40,000 = $540,000) × 21% $113,400

Evergreen Company reported pretax book income of $700,000 in 2020. Included in the computation were favorable temporary differences of $150,000, unfavorable temporary differences of $200,000, and unfavorable permanent differences of $80,000. The book equivalent of taxable income is:

780,000

Jones Company reported pretax book income of $1,000,000 in 2020. Included in the computation were favorable temporary differences of $100,000, unfavorable temporary differences of $120,000, and favorable permanent differences of $60,000. Compute the company's deferred income tax expense or benefit for 2020.

A net deferred tax benefit of $4,200. $100,000 favorable temporary difference − $120,000 unfavorable temporary difference = $20,000 net unfavorable temporary difference × 21% = $4,200. The favorable permanent difference does not affect the deferred tax expense or benefit.

Which of the following statements best describes the process for evaluating a company's uncertain tax positions?

ASC 740 requires a company to complete step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more-likely-than-not that its tax position will be sustained on its merits.

Which of the following statements is true? Another name for a taxable temporary difference is an unfavorable difference Another name for a taxable temporary difference is an favorable difference Another name for a deductible temporary difference is a favorable difference Another name for a deductible temporary difference is a permanent difference

Another name for a taxable temporary difference is an favorable difference

Samantha owns 70 percent of the stock of Bewitched Corporation. Unrelated individuals own the remaining 30 percent. Bewitched intends to redeem some of Samantha's stock. In order for the redemption to be treated as an exchange under the "substantially disproportionate" test, what is the maximum percentage of Bewitched stock Samantha can own after the redemption?

Any amount less than 50 percent

Which of the following would be classified as a separately-stated item? Supplies expense Employee salaries Rent expense Charitable contributions

Charitable contributions

Which of the following does not create a permanent book-tax difference? Federal income tax expense. Charitable contributions in excess of the 10% of taxable income limitation. Fines and penalties. Municipal bond interest income.

Charitable contributions in excess of the 10% of taxable income limitation.

A corporate shareholder of a corporation that is completely liquidated will always defer gains realized on the liquidation.

False

A current year temporary book-tax difference is unfavorable if it causes taxable income to decrease relative to book income.

False

A partnership can elect to amortize organization, startup costs and syndication costs.

False

A stock redemption is treated as a sale or exchange of the shares if the shareholder whose shares are redeemed is a corporation.

False

Business income allocations from an S corporation to its shareholders are self-employment income to the shareholders.

False

Distributions from a corporation to a shareholder are only taxed as dividends when accumulated earnings and profits are positive.

False

Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss) but not treated as a separately stated item.

False

LLC members don't have as much flexibility as corporate shareholders to alter their legal arrangements with respect to one another, the corporation, and with outsiders.

False

Lansing Inc. incurred a net operating loss of $10,000,000 in 2020. Lansing Inc. reports $10,000,000 of taxable income before the NOL deduction in 2021. Lansing Inc. can offset all of its 2021 taxable income with the 2020 NOL carryover.

False

Martin defers $500 of gain realized in a §351 transaction. The stock he receives in the exchange has a fair market value of $900. Martin's tax basis in the stock will be $500.

False

Nan realizes a $2,000 loss in a §351 exchange but receives $500 of boot in the exchange. Nan can recognize $500 of the loss realized from receiving the boot.

False

Nonrecourse debt is generally allocated according to the capital-sharing ratios of the partnership.

False

Partnership tax rules apply the aggregate approach and disregard the entity approach.

False

Stock received in exchange for services provided to the corporation in the formation of the corporation can never be counted in determining if the control test is met for §351 purposes.

False

Tax-exempt interest will create a deductible temporary difference.

False

The computation of earnings and profits can only include expenditures that are deductible.

False

The corporate tax rate is slightly higher than the top individual marginal tax rate.

False

The excess of tax depreciation over book depreciation during the year usually gives rise to a permanent difference.

False

The requirements for tax deferral in a stock-for-stock "B reorganization" and a reverse triangular Type A merger are the same.

False

To receive tax deferral in a §351 transaction, an individual shareholder must own 80 percent or more of the corporation after the transaction.

False

Z Corporation uses a net capital loss carryover from the prior year to offset current year capital gains. The net capital loss carryover used in the current year will reduce current earnings and profits.

False

A calendar-year corporation has positive current E&P of $1,500 and a deficit in accumulated E&P of ($2,000). The corporation makes a $500 distribution to its sole shareholder on July 1. Which of the following statements is true?

The distribution will be a dividend if current earnings and profits are positive and exceed the distribution.

Which of the following statements regarding capital and profit interests received for services contributed to a partnership is true?

The holding period of a capital or profits interest begins on the date the interest is received.

Which of the following statements does not describe a tax consequence to the liquidated corporation in a complete liquidation?

The liquidated corporation always recognizes gain on appreciated property distributed to corporate shareholders.

M Corporation distributes property with a value of $100 and an adjusted basis of $150 to its shareholder as a dividend. M Corporation will realize a $50 loss on the distribution of the property, but M will not be able to deduct this loss in computing taxable income.

True

Partners typically don't recognize any income for the value of profits interests they receive in exchange for services.

True

Qualified dividends may be subject to a marginal tax rate of 23.8 percent (20 percent for the capital gain and 3.8 percent tax on net investment income) for taxpayers with income over a certain threshold.

True

Tax elections are usually made at the partnership level.

True

The computation of current earnings and profits can be affected by the receipt of tax exempt income.

True

The courts require the acquired shareholders receive some equity in the acquiring corporation in exchange for their target stock in order to qualify as an "A" reorganization.

True

The focus of ASC 740 is on the balance sheet.

True

The tax effects of most permanent differences show up in a company's reconciliation of its effective tax rate in the income tax note to the financial statements.

True

Under ASC 740, an uncertain tax position must pass the recognition test before it is measured for balance sheet purposes.

True

Which of the following taxes would not be accounted for under ASC 740? Income taxes paid to the U.S. government. Value-added taxes paid to the Dutch government. Income taxes paid to the City of San Francisco. Income taxes paid to the state of Michigan.

Value-added taxes paid to the Dutch government.

Which of the following exemplifies the entity theory of partnership taxation? a) partnerships are taxable entities b) partnerships determine the character of separately stated items at the partnership level c) partnerships make the majority of the tax election -both a & c -both b & c

both b and c

Unrealized receivables include accounts receivable for which of the following partnerships? -accrual method partnerships -cash method partnerships -neither cash nor accrual method partnerships -both cash and accrual method partnerships

cash method partnerships

Which statement best describes the "double taxation" of corporation income? -corporate income is subject to two levels of taxation: the regular tax and excess profits tax -corporate income is taxed twice at the corporate level; first when earned and then a second time if appreciated property is distributed to a shareholder -corporate income is taxed when earned by a C corporation and then a second time at the shareholder level distributed as a dividend -corporate income is subject to two levels of taxation; at the federal level and a seance time at the state level

corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend

In what order should the tests to determine a partnership's year end be applied

majority interest taxable year-principal partners test- least aggregate deferral

Which of the following statements regarding capital and profit interests received for services contributed to a partnership is false? -the holding period of a capital or profits interest begins on the date the interest is received -partners receiving capital interests must recognize the liquidation value of their capital interest as capital gain -partners receiving only profits interest generally don't recognize income when the profits interest is received -partners receiving only profits interest include their share of partnership debt in the tax basis of their partnership interest

partners receiving capital interest must recognize the liquidation value of their capital interest as capital gain

A taxable merger (e.g., cash in exchange for the target stock) results in a step-up in the acquired assets.

True

A valuation allowance only reduces a deferred tax asset and not a deferred tax liability.

True

ASC 740 applies only to accounting for income taxes.

True

A deductible temporary difference that arises in the current year also is referred to as an unfavorable difference.

True

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder? -distribution is a dividend to the extent of the corporation's earnings and profits, then a return of capital, and finally gain from sale stock -distribution is a return of capital, then a dividend to the extent of the corporation's earnings and profits, and finally gain from sale of stock -distribution is a retune of capital, then gain from sale of stock, and finally a dividend to the extent of the corporation's earnings and profits -the shareholders can elect to treat the distribution as either a dividend to the extent of the corporation's earnings and profits or a return of capital, followed by gain from sale of stock

the distribution is a dividend to the extent of the corporation's earnings and profits, then a return of capital, and finally gain from sale of stock

Although corporate income is subject to double tax, in some circumstances, the overall tax rate for corporate income is lower than the tax rate for flow-through income.

True

For tax purposes, a single-member LLC is treated as either a sole proprietorship or a disregarded entity.

True

BETI

Book equivalent of taxable income

Losses from which of the following business entities are carried forward at the entity level? C corporation LLC S corporation Sole proprietorship

C corporation

which of the following entities is not considered a flow-through entity? -C corporation -S corporation -Limited Liability Company (LLC) -Partnership

C corporation

Gain realized in a sales transaction is defined as the excess of the amount realized over the adjusted basis of the property that is sold.

True

Which of the following items is not considered evidence in determining if a valuation allowance is necessary? A net operating loss expired unused in the current year Management can implement a tax strategy to create future taxable income, but it will be detrimental to the future profitability of the company Management projects future taxable income based on a backlog of signed contracts A cumulative book loss over some period of time

Management can implement a tax strategy to create future taxable income, but it will be detrimental to the future profitability of the company.

Mustang Company was completely liquidated. In the exchange for its 80 percent interest, Bronco Corporation received land with a fair market value of $500,000. Bronco's tax basis in the Mustang stock was $200,000. The land had a tax basis to Mustang Company of $100,000. What amount of gain does Bronco recognize in the exchange, if any, and what is its tax basis in the land it receives?

No gain recognized and a basis in the land of $100,000 The exchange is tax deferred to Bronco because Bronco owns 80% of Mustang stock. As a result, Bronco takes a basis in the land equal to Mustang's basis in the land of $100,000.

LLCs with multiple members may elect to be taxed as corporations.

True

Which of the following entities is not considered a flow-through entity? Limited partnership S corporation Limited Liability Company (LLC) General partnership None of the choices are correct. All are treated as flow-through entities.

None of the choices are correct. All are treated as flow-through entities.

Which of the following statements regarding the process for determining a partnership's tax year-end is false?

Only the partners' profits interests are relevant when determining if a partnership has a majority interest taxable year.

Which of the following does not create a permanent book-tax difference? Organizational and start-up expenses Key employee death benefit income Fines and penalties expense Municipal bond interest income

Organizational and start-up expenses

P Corporation receives a dividend from Q Corporation. P Corporation includes the dividend in its gross income for tax and financial accounting purposes. If P accounted for the dividend as gross income for book and tax purposes, what can we conclude about P's ownership in Q?

P likely owns less than 20 percent of the stock of Q.

If partnerships retain their earnings, when will partners be taxed on the earnings?

Partners will be taxed as partnership earnings are allocated to them at the end of the year whether they actually receive a distribution or not.

Which of the following statements regarding a partner's basis adjustments is false?

Partnership fines and penalties do not affect a partner's basis.

Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

Salaries and compensation

M Corporation distributes appreciated property to its shareholder as a dividend. M Corporation will recognize the gain on the distribution of the property and include the gain in taxable income.

True

Puma Inc. sold equipment at a loss. Puma depreciated the property using the straight-line method for financial accounting purposes and immediately expensed the property for tax purposes. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes on the date of the sale, what is the nature of the book-tax difference associated with the loss on the sale?

Temporary; unfavorable.

A partner's outside basis must be increased by any positive basis adjustments and decreased by any distributions.

True

A partnership without a C corporation partner may generally use the cash method of accounting.

True