Corporate Tax exam #2

Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level? Multiple Choice Partial liquidation Dividend Compensation paid to a shareholder or employee of the corporation. Stock redemption

Compensation paid to a shareholder or employee of the corporation.

Aztec Company reports current E&P of $200,000 in 20X3 and a deficit of ($100,000) in accumulated E&P at the beginning of the year. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3? Multiple Choice $100,000 $300,000 $200,000 $0

$200,000

Inca Company reports a deficit in current E&P of ($140,000) in 20X3 and accumulated E&P at the beginning of the year of $280,000. Inca distributed $380,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3? Multiple Choice $140,000 $280,000 $0 $380,000

$280,000

common separately stated items:

(Schedule B.1040) -interest and dividend income -guaranteed payments -net earnings from SE -tax exempt interest -royalties -179 -net rental/real estate -investment income expense

Panda Company is owned equally by Min, her husband, Bin, her sister Xiao, and her grandson, Han, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Panda stock is Min deemed to own? Multiple Choice 200 100 300 400

300

Hilary had an outside basis in LTL General Partnership of $17,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $12,000, a $17,000 reduction in Hilary's share of partnership debt, a cash distribution of $27,000, and tax-exempt income of $10,000. What is Hilary's adjusted basis at the end of the year? Multiple Choice $5,000 $0 ($5,000) $39,000 $29,000

0

stock distributions are nontaxable to shareholders if...

1. common stock 2. pro-rata (non pro-rata is taxed as dividend)

3 levels of distributions to shareholders:

1. dividends (to extent of current E&P) 2. return of capital (to extent of basis) 3. capital gain

stock redemption must meet ONE of these to receive exchange treatment:

1. substantially disproportionate 2. complete redemption of stock owned 3. not essentially equivalent to a dividend

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption? Multiple Choice No reduction in E&P because of the exchange. A reduction of $50,000 in E&P because of the exchange. A reduction of $125,000 in E&P because of the exchange. A reduction of $62,500 in E&P because of the exchange.

A reduction of $50,000 in E&P because of the exchange.

Which of the following statements is true? Multiple Choice A stock redemption is treated as an exchange only if it meets one of three stock ownership tests described in the Internal Revenue Code. All stock redemptions are treated as dividends if received by an individual. A stock redemption not treated as an exchange will automatically be treated as a taxable dividend. All stock redemptions are treated as exchanges for tax purposes.

A stock redemption is treated as an exchange only if it meets one of three stock ownership tests described in the Internal Revenue Code.

loss limitations

A. tax basis B. at risk C. passive activity D. excessive business loss

Which of the following statements best describes current E&P? Multiple Choice Current E&P is an ill-defined tax concept in the Internal Revenue Code and represents a corporation's current-year economic income. Current E&P is another name for a corporation's retained earnings on its balance sheet. Current E&P is an ill-defined tax concept. Current E&P is a precisely defined tax term in the Internal Revenue Code and represents a corporation's economic income.

Current E&P is an ill-defined tax concept in the Internal Revenue Code and represents a corporation's current-year economic income.

Which of the following statements is not considered a timing difference due to separate accounting methods for taxable income and E&P? Multiple Choice Gain on sale of depreciable assets with higher E&P adjusted tax basis Dividends received deduction Section 179 expense Installment gain recognized in current year related to a sale in a prior year

Dividends received deduction

basis=

FMV

distribution of noncash property gain ex:

FV of $200 and $100 mortgage, $100 basis= $100 gain FV of $200 and $300 mortgage, $100 basis= $200 gain (if the FMV is less than liab assumed, the FMV is deemed to be the liab)(e.g. 300-100)

Which of the following statements best describes the tax law approach to recognizing gain or loss realized in an exchange? Multiple Choice Gain or loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code. Gain or loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code. Gain realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code. Loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but gain realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

Gain or loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code.

Paladin Corporation transferred its 90 percent interest to Furman Company as part of a complete liquidation of the company. In the exchange, Paladin received land with a fair market value of $1,000,000. The corporation's basis in the Furman Company stock was $400,000. The land had a basis to Furman Company of $200,000. What amount of gain does Paladin recognize in the exchange and what is its basis in the land it receives? Multiple Choice $600,000 gain recognized and a basis in the land of $400,000 $600,000 gain recognized and a basis in the land of $1,000,000 No gain recognized and a basis in the land of $400,000 No gain recognized and a basis in the land of $200,000

No gain recognized and a basis in the land of $200,000

Which of the following statements is true when property is contributed in exchange for a partnership interest? Multiple Choice Any contributed property in a partnership has a carryover basis, and the character of the property is determined by the way the contributing partner used the property. The partnership's inside basis is typically increased by any gain the partner recognizes from the property contribution. The holding period for a partner's partnership interest depends upon the type of assets a partner contributes. Services are not allowed to be contributed to a partnership in return for a partnership interest. All of these choices are true.

The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.

computing the adj basis

acquisition basis +capital improvements -accumulated depreciation =adj basis

excess business loss limitation

after the other 3 are applied, this is 610k(MFJ) for noncorporate partners

tests to be substantially disproportionate:

both: 1. shareholder does not control the corp after (less than 60%of voting power) 2. shareholders % of voting stock is less than 80% of the % before redemption *review examples of this*

Subtractions from TI

federal income tax expenses related to tax exempt income charitable contributions in excess of TI limitation capital losses nondeductible life insurance premiums entertainments, part of meals, penalties and fines "disallowed"

at risk

for recourse and qualified nonrecourse liabilities

if the mortgage has a tax-avoidance purpose...

gain is recognized (if not, it is deferred)

Which person would generally be treated as a material participant in an activity? Multiple Choice A general partner An LLC member not involved with management of the LLC A participant in a rental activity A limited partner

general

recourse vs. nonrecourse

recourse (to specific partner) nonrecourse (to all partners)

section 1244 stock

small corp (<$1 million) shareholder can recognize up to 50k ordinary loss per year(100k MFJ) *in addition to the 3k capital loss, therefore, a MFJ person could deduct 103k

Sarah, Sue, and AS Incorporated formed a partnership on May 1, 20X9, called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30 percent profits and capital interest while Sue has a 35 percent profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Incorporated holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP, use for 20X9, and which test or rule requires this year-end? Multiple Choice 12/31, majority interest taxable year 9/30, majority interest taxable year 12/31, principal partners test 12/31, least aggregate deferral test

12/31, majority interest taxable year

Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with an FMV and tax basis of $40,000. In addition, Bill contributed equipment with an FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with an FMV and tax basis of $20,000. Also, Chad contributed land with an FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with an FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP? Multiple Choice $175,000 $200,000 $165,000 $140,000

140,000

Which of the following statements about §351 transactions is false? Multiple Choice In the aggregate, the transferors of property to the corporation must collectively own 80 percent of the voting stock of the corporation immediately after the transfers. Only property transferred to a corporation is eligible for deferral. All transfers of property to a corporation must be made simultaneously to qualify for deferral. A transferor of property must receive stock equal to at least 80 percent of the fair value of the property transferred.

A transferor of property must receive stock equal to at least 80 percent of the fair value of the property transferred.

section 351 (deferral of recognition of gain when property is contributed for stock) requirements:

1. must be property (not a service) 2. transferors of property must be in control of the corporation immediately after the transfer (80% or more of voting stock and the property must be at least 10% of the value of the stock received)

A calendar-year corporation has positive current E&P of $500 and a deficit in accumulated E&P of ($1,200). The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is true? Multiple Choice The distribution will not be a dividend because total E&P is a deficit. A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in E&P. The distribution may be a dividend, depending on whether net E&P (current plus accumulated E&P) at the date of the distribution is positive. The distribution will be a dividend because current E&P is positive and exceeds the distribution.

The distribution will be a dividend because current E&P is positive and exceeds the distribution.

Which of the following items will affect a partner's tax basis? Multiple Choice Share of ordinary business income (loss) Share of nonrecourse debt Share of recourse debt Share of qualified nonrecourse debt All of these choices will affect a partner's tax basis.

Which of the following items will affect a partner's tax basis? Multiple Choice Share of ordinary business income (loss) Share of nonrecourse debt Share of recourse debt Share of qualified nonrecourse debt All of these choices will affect a partner's tax basis.

a shareholder who receives property other than stock (boot) in the corporation recognizes a gain

cash contributed +adj basis +gain -FMV boot -liab assumed by corp =tax basis of stock received

tax basis of stock received in 351 exchange:

cash contributed +adj basis of other property contributed +gain recognized -liabilities assumed by corp =tax basis of stock received in 351

computing the amount realized in a property transaction

cash received +FMV of property -liab assumed -selling exp =amount realized

partners initial basis=

cash+property contributed

realized gains and losses from the exchange of contributed property for partnership interest is deferred for tax purpose unless:

debt relief exceeds partners basis (then you must recognize a gain)

negative current E&P, negative accumulated E&P

distributions are a return of capital/capital gain (extent of basis)

negative current E&P, positive accumulated E&P

distributions are dividend income to the extent of accum E&P

positive current E&P, negative accumulated E&P

distributions are dividend income to the extent of current E&P

positive current E&P, positive accumulated E&P

dividend income to the extent of current and accum

tax basis

losses allocated in excess of their basis must be suspended and carried forward indefinitely

distributions of noncash property to shareholders

money received +FMV of property -liabilities assumed by shareholder =amount distributed

partner's initial tax basis when debt:

property contributed +share recourse liab +share nonrecourse liab -debt relief +gain recognized

complete liquidation of a corporation

all liquidation distributions are fully taxable *FMV* corporate shareholders who own >80% of stock do not recognize on the liquidation distributions (look at the example on the back page of Ch. 19 packet)

(Ch. 19 start) G/L realized in a property transaction

amount received -adj basis of property =G/L ex: bottom of the 1st page of Ch. 19 packet

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

A

Which of the following stock distributions would be tax-free to the shareholder? Multiple Choice A non-pro rata stock distribution to shareholders who also own corporate debt. A stock distribution made to only those minority shareholders who opted out of the regular dividend. A 2-for-1 stock split to all holders of common stock. A stock distribution where the shareholder could choose between cash and stock.

A 2-for-1 stock split to all holders of common stock.

How does additional debt or relief of debt affect a partner's basis? Multiple Choice Debt has no effect on a partner's basis. Relief of debt increases a partner's basis. Additional debt increases a partner's basis. Both additional debt and relief of debt increase a partner's basis.

Additional debt increases a partner's basis.

Which of the following amounts is not included in the computation of amount realized in an exchange? Multiple Choice Cash received Adjusted tax basis of property transferred Selling expenses Fair market value of property received

Adjusted tax basis of property transferred

Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation? Multiple Choice Complete liquidations are taxable to all corporate shareholders owning stock of the liquidated corporation representing less than 80 percent or more of voting power and value. Complete liquidations are taxable to all individual shareholders. All complete liquidations are taxable to the shareholders. Complete liquidations are tax-deferred to corporate shareholders owning stock of the liquidated corporation representing 80 percent or more of voting power and value.

All complete liquidations are taxable to the shareholders.

Which of the following items is subject to the net investment income tax when an individual partner is a material participant in the partnership? Multiple Choice Partner's distributive share of dividends Partner's distributive share of interest Partner's distributive share of ordinary business income Both partner's distributive share of dividends and partner's distributive share of interest

Both partner's distributive share of dividends and partner's distributive share of interest

Which of the following entities is not considered a flow-through entity? Multiple Choice C corporation S corporation Partnership Limited liability company (LLC)

C corp

Which of the following statements best describes the tax results to a shareholder in a §351 transaction when liabilities on property transferred to the corporation are assumed by the corporation? Multiple Choice Liabilities assumed by a corporation on a §351 transfer are always treated as boot. Liabilities assumed by a corporation on a §351 transfer are never treated as boot. Liabilities assumed by a corporation on a §351 transfer are treated as boot if the total liabilities assumed exceed the total basis of the assets transferred. Liabilities assumed by a corporation on a §351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.

Liabilities assumed by a corporation on a §351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.

Which of the following would not be classified as a separately stated item? Multiple Choice Charitable contributions MACRS depreciation expense Guaranteed payments Short-term capital gains

MACRS

Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $812,500. Robin's basis in the Cardinal stock was $1,017,500. The land had a basis to Cardinal Company of $1,072,500. What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non-pro rata to Robin, a related person. Multiple Choice No loss recognized by Cardinal and a basis in the land of $1,072,500 to Robin $260,000 loss recognized by Cardinal and a basis in the land of $1,072,500 to Robin No loss recognized by Cardinal and a basis in the land of $812,500 to Robin $260,000 loss recognized by Cardinal and a basis in the land of $812,500 to Robin

No loss recognized by Cardinal and a basis in the land of $812,500 to Robin

Does adjusting a partner's basis for tax-exempt income prevent double taxation? Multiple Choice No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income. No, the partner should not adjust his tax basis by his share of tax-exempt income. Yes, if this basis adjustment is not made, the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest. Yes, if this basis adjustment is not made, the partner will be taxed on the tax-exempt income when he sells his partnership interest and again if the tax-exempt income exceeds $10,000.

No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income.

On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $2,600 in cash and real property with a $3,600 tax basis secured by a $2,600 nonrecourse mortgage. High Air reported a $15,600 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation? Multiple Choice $0, $4,900 $0, $7,800 $0, $15,600 $4,900, $0 None of the choices are correct.

None of the choices are correct.

Which statement best describes the concept of realization as it applies to gain or loss? Multiple Choice Realization is the excess of amount realized over adjusted tax basis. Realization is the result of an exchange of property rights in a transaction. Realization is the excess of adjusted tax basis over amount realized. Realization is the recording of gain or loss on a tax return.

Realization is the result of an exchange of property rights in a transaction.

(Ch. 20 start) owners of flowthrough entities are taxed on the entity-level share of income they are allocated on which form?

Schedule K-1

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder? Multiple Choice The distribution is a return of capital, then a dividend to the extent of the corporation's E&P, and finally gain from sale of stock. The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent of the corporation's E&P. The distribution is a dividend to the extent of the corporation's E&P, then a return of capital, and finally gain from sale of stock. The shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's E&P or a return of capital, followed by gain from sale of stock.

The distribution is a dividend to the extent of the corporation's E&P, then a return of capital, and finally gain from sale of stock.

Which of the following statements best describes the recognition of loss on property transferred to shareholders in complete liquidation of a corporation? Multiple Choice The liquidated corporation always recognizes loss on the distribution of property in complete liquidation of the corporation. The liquidated corporation never recognizes loss on the distribution of property in complete liquidation of the corporation. The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation if the property is distributed to individuals who are not related parties to the corporation. The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation only if the property is distributed to individuals who are related parties to the corporation.

The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation if the property is distributed to individuals who are not related parties to the corporation.

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Incorporated in partial liquidation of the company on December 31, 20X3. Tiara, Incorporated owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50 percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's adjusted tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize because of the transaction? Multiple Choice Tiara recognizes capital gain of $50,000. Tiara does not recognize any dividend income or capital gain. Tiara recognizes dividend income of $50,000. Tiara recognizes capital gain of $25,000.

Tiara recognizes dividend income of $50,000

Carlos transfers property with a tax basis of $920 and a fair market value of $1,335 to a corporation in exchange for stock with a fair market value of $1,140 and $92 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $103 on the property transferred. What is the corporation's tax basis in the property received in the exchange? Multiple Choice $1,048 $1,335 $1,012 $909

$1,012

Amy transfers property with a tax basis of $1,590 and a fair market value of $1,080 to a corporation in exchange for stock with a fair market value of $605 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $475 on the property transferred. What is Amy's tax basis in the stock received in the exchange? Multiple Choice $1,115 $1,015 $1,590 $605

$1,115

Rachelle transfers property with a tax basis of $1,220 and a fair market value of $1,430 to a corporation in exchange for stock with a fair market value of $1,075 and $128 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $227 on the property transferred. What is the corporation's tax basis in the property received in the exchange? Multiple Choice $1,220 $1,430 $1,075 $1,348

$1,348

Husker Corporation reports a deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3? Multiple Choice $100,000 dividend and $100,000 tax-free return of basis $200,000 dividend $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain

$100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain

Montclair Corporation had current and accumulated E&P of $500,000 on December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P adjusted tax basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be: Multiple Choice $150,000 gain recognized and a reduction in E&P of $200,000. No gain recognized and a reduction in E&P of $200,000. No gain recognized and a reduction in E&P of $175,000. $150,000 gain recognized and a reduction in E&P of $175,000.

$150,000 gain recognized and a reduction in E&P of $175,000.

Ashley transfers property with a tax basis of $8,240 and a fair market value of $4,840 to a corporation in exchange for stock with a fair market value of $3,400 and $525 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $915 on the property transferred. What is Ashley's tax basis in the stock received in the exchange? Multiple Choice $3,400 $4,840 $6,800 $8,240

$6,800

Casey transfers property with a tax basis of $2,920 and a fair market value of $7,500 to a corporation in exchange for stock with a fair market value of $5,600 and $860 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $1,040 on the property transferred. Casey also incurred selling expenses of $305. What is the amount realized by Casey in the exchange? Multiple Choice $7,095 $7,195 $7,500 Incorrect $6,235

$7,195

Roy transfers property with a tax basis of $800 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $400 and $50 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $50 on the property transferred. What is Roy's tax basis in the stock received in the exchange? Multiple Choice $500 $700 $800 $750

$700

On 12/31/X4, Zoom, LLC, reported a $46,500 loss on its books. The items included in the loss computation were $21,000 in sales revenue, $6,000 in qualified dividends, $13,000 in cost of goods sold, $41,000 in charitable contributions, $11,000 in employee wages, and $8,500 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return? Multiple Choice ($81,500) ($46,500) ($11,500) ($8,000)

($11,500)

Abbot Corporation reported a net operating loss of $470,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the taxable loss was regular depreciation of $170,000 (E&P depreciation is $75,000), first-year expensing under §179 of $57,000, and a dividends received deduction of $10,700. The corporation's current E&P for 20X3 would be: Multiple Choice ($327,300). ($318,700). ($470,000). ($243,000).

($318,700).

Which of the following statements regarding the process for determining a partnership's tax year-end is true? Multiple Choice Only the partners' profits and interests are relevant when determining if a partnership has a majority interest taxable year. Under the principal partners test, a principal partner is defined as a partner having an interest of 3 percent or more in the profits or capital of the partnership. The least aggregate deferral test utilizes the partners' capital interests to measure the amount of aggregate deferral. A partnership is required to use a calendar year-end if it has a corporate partner. None of the choices are true.

None of the choices are true.

outside vs. inside basis

outside basis: the partner's tax basis in the partnership inside basis: partnership's tax basis in its assets

passive loss

passive loss is limited to passive income -"does not materially participate"

Additions to TI

tax exempt bond interest income life insurance proceeds federal tax refunds increase in cash surrender value of corp-owned life insurance policy DRD NOL deduction Net capital loss carryforward charitable contribution carryforward depreciation add back