Tax Test 3

Alice and Jane form Osprey Corporation. Alice transfers property (basis of $25,000 and value of $200,000) for 50 shares in Osprey Corporation. Jane transfers property (basis of $50,000 and value of $165,000) and agrees to serve as manager of Osprey for one year; in return, Jane receives 50 shares in Osprey. The value of Jane's services to Osprey is $35,000. What gain or income do Alice and Jane recognize on the exchange?

Alice recognizes $0 gain on the transfer. Jane has income of $35000 .

Grady exchanges qualified property, basis of $20,667 and fair market value of $24,800, for 60% of the stock of Eadie Corporation. The other 40% of the stock is owned by Pedro, who acquired it five years ago. Calculate Grady's current income, gain, or loss and the basis he takes in his shares of Eadie stock as a result of this transaction.

Because this transaction does not meet the control of the corporation requirement, Grady has a gain of$4133 and $24800 basis in his shares of stock.

Grady exchanges qualified property, basis of $12,000 and fair market value of $18,000, for 60% of the stock of Eadie Corporation. The other 40% of the stock is owned by Pedro, who acquired it five years ago.

Because this transaction does not meet the control of the corporation requirement, Grady has income of $6000 and$18000 basis in his shares of stock.

Janice and Thom form Level Corporation. Janice transfers equipment (worth $60,000, basis of $40,000) for 50% of the stock in Level. Thom transfers inventory (worth $20,000, adjusted basis of $15,000) and provides services worth $40,000 for 50% of the stock.

Because this transaction meets the control of the corporation requirement, Janice has income of $0 and Thom has income of $40000

Trey, Amy, and Erin incorporate their businesses by forming Whitehead Corporation. As part of a prearranged plan, Trey exchanges his qualified property (basis $500; fair market value $1,000) for 100 shares in Whitehead on May 9, 2019. Amy exchanges her qualified property (basis $1,800; fair market value $2,000) for 200 shares of Whitehead Corporation stock on May 12, 2019, and Erin exchanges her qualified property (basis $2,000; fair market value $3,000) for 300 shares in Green on March 5, 2019.

Because this transaction meets the control of the corporation requirement, Trey has income of $0 and$500 basis in his shares of stock, Amy has income of $0 and $1800 basis in her shares of stock, and Erin has income of $0 and $2000 basis in her shares of stock.

Julio sold his corporation to a competitor, Exeter LLC, for $100,000,000. Julio incorporated his business 17 years ago by investing $500,000 plus his proprietary know-how. There have been no other corporate shareholders. Compute Julio's after-tax cash flow from the sale, assuming he is in the 35% tax bracket (20% long-term capital gain rate) and has no other property sales during the year. Assume the 3.8 percent Net Investment Income Tax applies.

Julio's after-tax cash flow from the sale is $78699000 .

Several years ago, Lowell, who is single, acquired § 1244 stock in Blue Corporation at a cost of $60,000. He sells the Blue stock for $5,000 in the current year.

Lowell's sale of Blue Corporation stock produces a loss that is treated as follows:Ordinary loss of $50000 Capital loss of $5000

Marie and Ethan form Roundtree Corporation with the transfer of the following. Marie performs personal services for the corporation with a fair market value of $80,000 in exchange for 400 shares of stock. Ethan contributes an installment note receivable (basis $25,000; fair market value $30,000), land (basis $50,000; fair market value $170,000) and inventory (basis $100,000; fair market value $120,000) in exchange for 1,600 shares.

Marie has income of $80000 and $80000 basis in her 400 shares of stock and Ethan has income of$0 and $175000 basis in his 1,600 shares of stock.

Martin transfers real estate with an adjusted basis of $260,000 and fair market value of $350,000 to a newly formed corporation in exchange for 100% of the stock. The corporation assumes the liability on the transferred real estate in the amount of $300,000.

Martin has a recognized gain on the transfer of $40000 and a basis of $0 for his stock.

Several years ago, Minjun, who is single, acquired § 1244 stock in Blue Corporation at a cost of $112,400. He sells the Blue stock for $11,240 in the current year. Determine the amount and nature of Minjun's gain or loss recognized this year.

Minjun's sale of Blue Corporation stock produces a total loss of $101160 of which $51160 is treated as a capital loss.

Whether the corporation has a high ratio of current assets to current liabilities.

No, not a factor

Schedule M-1

On the Form 1120, a reconciliation of book net income with Federal taxable income. Accounts for temporary and permanent differences in the two computations, such as depreciation differences, exempt income, and nondeductible items. On Forms 1120S and 1065, this reconciles book income with the owners' aggregate ordinary taxable income.

Alice and Jane form Osprey Corporation. Alice transfers property (basis of $25,000 and value of $200,000) for 50 shares in Osprey Corporation. Jane transfers property (basis of $50,000 and value of $165,000) and agrees to serve as manager of Osprey for one year; in return, Jane receives 50 shares in Osprey. The value of Jane's services to Osprey is $35,000. What is Osprey Corporation's basis in the property transferred by Alice and Jane? How does Osprey treat the value of the services that Jane renders?

Osprey Corporation has a basis of $25000 in the property it acquires from Alice and a basis of $50000 in the property it acquires from Jane. It has a business deduction for the value of the services Jane renders.

Pankraz Corporation, a calendar year taxpayer, is formed on April 1, 2019. In connection with its formation, it incurs organizational expenditures of $54,000. Pankraz wants to claim as much of these expenses as soon as possible.

Pankraz deduction is as follows:Expense: $5,000 - ($54,000 - $50,000) = $1,000. Amortization: ($54,000 - $1,000)/180 months = $294.44 x 9 months = $2,649.99 rounded to $2,650. Therefore, the total deduction is $1,000 + $2,650 = $3,650.

Income tax provision

A synonym for the book-tax expense of an entity for the financial reporting period. Following the "matching principle," all book-tax expense that relates to the net income for the reporting period is reported on that period's financial statements, including not only the current tax expense, but also any deferred tax expense and deferred tax benefit.

Excess of capital losses over capital gains.

Added

Federal income tax per books.

Added

Schedule M-3

An expanded reconciliation of book net income with Federal taxable income . Required of C and S corporations and partnerships/LLCs, with total assets of $10 million or more.

Deferred tax asset

An item created on an enterprise's balance sheet by a temporary book-tax difference, such that a tax benefit is not recognized until a later date, although it already has been reported in the financial statements (e.g., the carryforward of a disallowed deduction).

Deferred tax liability

An item created on an enterprise's balance sheet by a temporary book-tax difference, such that a tax benefit is recognized earlier for tax purposes than it is in the financial accounting records (e.g., the use of an accelerated cost recovery deduction).

Ann and Bob form Robin Corporation. Ann transfers property worth $132,500 (basis of $46,375) for 70 shares in Robin Corporation. Bob receives 30 shares for property worth $53,000 (basis of $10,600) and for legal services (worth $5,300) in organizing the corporation. What gain or income, if any, will the parties recognize on the transfer? What basis do Ann and Bob have in the Robin Corporation stock? What is Robin Corporation's basis in the property and services it received from Ann and Bob?

Ann recognizes no gain or loss of $0 . Bob recognizes ordinary income of $5300 . Ann has a basis of $46375 , and Bob has a basis of $15900 in the stock. Robin Corporation has a basis of $46375 in the property Ann transferred and a basis of $10600 in the property Bob transferred.

Chaz transfers cash of $60,000 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $15,000. The income is credited to its earnings and profits account. The corporation distributes $5,000 to Chaz.

Chaz has a taxable dividend of $5000 and the corporation has a deduction of $0 .

Assume, instead, that Chaz transfers to the corporation cash of $30,000 for stock and cash of $30,000 for a note of the same amount. The note is payable in equal annual installments of $3,000 and bears interest at the rate of 6%. At the end of the year, the corporation pays an amount to meet this obligation.

Chaz has interest of $1800 and a note repayment of $3000 of which $1800 is taxable to Chaz. The corporation has a deduction of $1800 .

In a transaction qualifying under § 351, Kelcy transfers the following assets to Connor Corporation in exchange for all of its stock: equipment (basis $200,000; fair market value $180,000), land (basis $65,000; fair market value $80,000) and machinery (basis $100,000; fair market value $95,000). The alternative approach is not elected.

Connor Corporation has a basis of: $192000 in the equipment, $65000 in the land, and $98000 in the machinery. Kelcy recognizes no gain or loss on the transfer. Kelcy's has a basis of $365000 for his stock.

Compute the income tax liability for the following calendar year corporations. Assume a 21% tax rate.

Corporation A has taxable income of $68,000, therefore its income tax liability for 2019 is $. 14,280 Corporation B has taxable income of $800,000 therefore its income tax liability for 2019 is $. 168,000

Prance, Inc., earns pretax book net income of $1,289,000 in 2018. Prance acquires a depreciable asset that year, and first-year tax depreciation exceeds book depreciation by $128,900. Prance reported no other temporary or permanent book-tax differences. The relevant U.S. Federal corporate income tax rate is 21% and Prance earns an after-tax rate of return on capital of 8%.

Current income tax expense: 243,621 Deferred income tax expense: 27,069 Total income tax expense: 270,690

Interest income from tax-exempt bonds.

Deducted

Life insurance proceeds received as a result of the death of a key employee.

Deducted

Cherry Corporation, a calendar year C corporation, is formed and begins business on 6/1/2019. In connection with its formation, Cherry incurs organizational expenditures of $50,500.

Determine Cherry Corporation's deduction for organizational expenditures for 2019. $6289 Cherry's deduction is as follows:Expense: $5,000 - ($50,500 - $50,000) = $4,500.Amortization: ($50,500 - $4,500)/180 months = $255.56; $255.56 x 7 months = $1,788.92 rounded to $1,789.Therefore, the total deduction is $4,500 + $1,789 = $6,289.

Goose Corporation, a C corporation, incurs a net capital loss of $28,700 for 2019. It also has ordinary income of $22,960 in 2019. Goose had net capital gains of $5,740 in 2015 and $11,480 in 2018.

Determine the amount, if any, of the net capital loss of $28,700 that is deductible in 2019.$0 b. Determine the amount, if any, of the net capital loss of $28,700 that is carried forward to 2020.$17220

Ester transfers land (basis of $200,000 and fair market value of $355,000) to a controlled corporation in return for stock in the corporation. However, shortly before the transfer, Ester mortgages the land and uses the $25,000 proceeds to meet personal obligations. Along with the land, the mortgage is transferred to the corporation.

Ester has a realized gain on the transfer of $155000 and a recognized gain of $25000 .

A corporation does not have to file a Federal income tax return unless it has taxable income.

False

Any corporation that files Schedule M-3 must also file Schedule M-1.

False

For calendar year corporations, the corporate tax return is due March 15 of each year.

False

Members of an affiliated group must file a consolidated return.

False

Nonbusiness bad debts are deducted as ordinary losses, while business bad debts are treated as short-term capital losses.

False

Section 351 is elective if a transaction satisfies the provision's requirements.

False

The basis of property received by a corporation from a nonshareholder as a capital contribution is equal to the basis of the property in the hands of the shareholder, although the basis is subject to a downward adjustment when loss property is contributed.

False

The tax attributes of income and expense items of a C corporation pass through the corporate entity to the shareholders.

False

Yvonne and Simon form Ion Corporation. Yvonne transfers equipment (basis of $110,000 and fair market value of $165,000). Simon invests $130,000 of cash. They each receive 100 shares in Ion Corporation, worth $130,000, but Yvonne also receives $35,000 in cash from Ion.

Ion Corporation has a basis of $145000 in the equipment. Yvonne has a basis of $110000 for her stock and Simon has a basis of $130000 for his stock.

On January 2, Chaz transfers cash of $107,000 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $26,750. The income is credited to its earnings and profits account. The corporation distributes $8,025 to Chaz. How do Chaz and the corporation treat the $8,025 distribution? Assume instead that Chaz transfers to the corporation cash of $53,500 for stock and cash of $53,500 for a note of the same amount. The note is payable in equal annual installments of $5,350 and bears interest at the rate of 6%. No distributions are made during the year to Chaz. However, at the end of the year, the corporation pays an amount to meet the loan obligation(i.e., the annual $5,350 principal payment plus the interest due). Determine the total amount of the payment and its tax treatment to Chaz and the corporation.

How do Chaz and the corporation treat the $8,025 distribution?Chaz has a taxable dividend of $8025 and the corporation has a deduction of $0 . The corporate payment to Chaz totals $8560 . Chaz has interest of $3210 and a note repayment of$5350 of which $3210 is taxable to Chaz. The corporation has a deduction of $3210 .

Complete the following statements regarding stock and security losses.

If stocks and bonds are capital assets in their owner's hands, losses from their worthlessness are governed by § 165 (g)(1). Under this provision, a capital loss materializes as of the last day of the taxable year in which the stocks or bonds become worthless. In addition, no deduction is allowed for a mere decline in value.

In the current year, Pelican, Inc., a calendar year C corporation, incurs $10,000 of meals and entertainment expenses that it deducts in computing net income per the corporation's financial statements. Assume all of the meals and entertainment expenditures are subject to the 100% disallowance rule applicable to such expenditures.

Pelican, Inc., reports the meals and entertainment expenditures on line 11 , Part III . The corporation reports book expense of $10000 in column (a), permanent difference of $10000 in column (c), and tax return deduction of $0 in column (d).

Personal service corporation (PSC)

Provides services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting and the services are substantially performed by shareholder-employees.

Complete the following statements regarding the Schedule M-2.

Schedule M-2 reconciles unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at year-end. Beginning balance plus net income per books, as entered on line 1 of Schedule M-1, less dividend distributions during the year equals ending unappropriated retained earnings .

Ovate, Inc., earns $140,000 in book income before tax and is subject to a 21% Federal income tax rate. Ovate records a single temporary difference. Warranty expenses deducted for book purposes are $8,000 of which only $2,000 are deductible for tax purposes.

Since the warranty expense deducted for book purposes exceeds the amount deductible for tax purposes, the result is a deferred asset. Accordingly, the taxable income is $146,000 ($140,000 + $6,000*). On its income tax return, Ovate reports total Federal tax expense of $30,660 ($146,000 x 21%). On its financial statement, Ovate reports a total tax expense of $29,400 ($140,000 x 21%). This deferred $1,260 ($30,660 - $29,400) book-tax difference is also the difference between the book and tax amount currently deductible for warranty expense ($6,000 x 21%). Ovate has a deferred tax asset of $1260 .

Aqua Corporation purchases nonresidential real property on May 8, 2016, for $1,940,000. Straight-line cost recovery is taken in the amount of $194,000 before the property is sold on November 27, 2019, for $2,910,000. a. Compute the amount of Aqua's recognized gain on the sale of the realty. b. Determine the amount of the recognized gain that is treated as § 1231 gain and the amount that is treated as § 1250 recapture due to § 291.

The amount realized - adjusted basis = realized gain. Adjusted basis equals cost - accumulated depreciation. The gain is computed as follows: $2,910,000 amount realized - $1,746,000 adjusted basis ($1,940,000 - $194,000 accumulated depreciation) = $1,164,000 recognized gain. As result the total gain of $1,164,000 is recognized as follows:§ 1250 gain of $0 which is treated as ordinary income.§ 291 gain of $38,800 which is treated as ordinary income.§ 1231 gain of $1,125,200 ($1,164,000 - $0 - $38,800).

Current tax expense

The book-tax expense that relates to the current reporting period's net income and is actually payable (or creditable) to the appropriate governmental agencies for the current period.

Jocelyn contributes land with a basis of $60,000 and fair market value of $90,000 and inventory with a basis of $5,000 and fair market value of $8,000 in exchange for 100% of Zion Corporation stock. The land is subject to a $15,000 mortgage.

The exchange is tax-free under § 351 because the release of a liability is not treated as boot under § 357(a). As a result, Jocelyn has income of $0 and a basis $50000 in her stock.

Jocelyn contributes land with a basis of $21,500 and fair market value of $32,250 and inventory with a basis of $17,200 and fair market value of $25,800 in exchange for 100% of Zion Corporation stock. The land is subject to a $5,375 mortgage.

The exchange is tax-free under § 351 because the release of a liability is not treated as boot under§ 357(a). As a result, Jocelyn has income of $0 and a basis $33325 in her stock.

Complete the following statements regarding qualified small business stock.

The holder of qualified small business stock acquired after September 27, 2010 may exclude up to 100 % of any gain from the sale or exchange of such stock. Only noncorporate shareholders qualify for the exclusion. To qualify for the exclusion, the taxpayer must have held the stock for more than 5 years and must have acquired the stock as part of an original issue . A qualified small business corporation is a C corporation whose aggregate gross assets did not exceed $50 million on the date the stock was issued and at least 80 % of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses.

A county donates land worth $250,000 to Quarles Corporation as an inducement for Quarles to locate in the county. In addition, the city has agreed to reduce the standard real estate tax rate for Quarles by 25% on newly constructed property in the county. Quarles estimates that the reduction in taxes will save about $180,000 in taxes.

The receipt of the land produces taxable income to Quarles, and the land's basis to the corporation is $250000 . In addition, the real estate tax abatement produces no taxable income to Quarles.

A corporation must make payments of estimated tax unless its tax liability can reasonably be expected to be less than $500.

True

An affiliated group exists when one corporation owns at least 80 percent of the voting power and stock value of another corporation.

True

Contributions by nonshareholders, such as land contributed to a corporation by a civic group or a governmental group to induce the corporation to locate in a particular community, are included in the gross income of a corporation.

True

Corporate taxpayers with total assets of $10 million or more are required to report much greater detail relative to differences between income (loss) reported for financial purposes and income (loss) reported for tax purposes.

True

Generally, an election is binding for subsequent years.

True

If a loan is made in some capacity that qualifies as a trade or business, nonbusiness bad debt treatment is avoided.

True

Losses of one group member can be used to shelter the income of other members.

True

No entity-level Federal income tax is typically assessed on S corporations, limited liability companies (LLCs), or partnerships.

True

Nonbusiness bad debt treatment is limited to noncorporate taxpayers.

True

Nonrecognition of gain occurs only when the shareholder receives stock.

True

One objective of Schedule M-3 is to create greater transparency between corporate financial statements and tax returns.

True

Schedule M-3 is required of corporations with more than $10 million of total assets.

True

Section 351 deals with transfers to controlled corporations.

True

Section 351 provides that gain or loss is not recognized upon the transfer of property to a corporation when certain conditions are met.

True

The income of a C corporation is subject to double taxation.

True

The net income of a proprietorship is subject to the self-employment tax, as are some partnership allocations of income to partners.

True

When money or property is received in exchange for capital stock (including treasury stock), the corporation does not recognize any gain or loss.

True

Gigi transfers real estate (basis of $60,000 and fair market value of $40,000) to Monarch Corporation in exchange for shares of § 1244 stock. Assume that the transfer qualifies under § 351. What is the basis of the stock to Gigi? (Gigi and Monarch do not make an election to reduce her stock basis.)The basis of the stock to Gigi is $ What is the basis of the stock to Gigi for purposes of § 1244?The basis of the stock to Gigi for purposes of § 1244 is $ If Gigi sells the stock for $38,000 two years later, how will the loss be treated for tax purposes?Gigi would have a capital loss of $ and an ordinary loss of $ for tax purposes.

What is the basis of the stock to Gigi? (Gigi and Monarch do not make an election to reduce her stock basis.)The basis of the stock to Gigi is $60000 . What is the basis of the stock to Gigi for purposes of § 1244?The basis of the stock to Gigi for purposes of § 1244 is $40000 . If Gigi sells the stock for $38,000 two years later, how will the loss be treated for tax purposes?Gigi would have a capital loss of $20000 and an ordinary loss of $2000 for tax purposes.

Whether funds loaned to the corporation are used to finance initial operations or capital asset acquisitions.

Yes, a factor

Whether holdings of debt and stock are proportionate (e.g., each shareholder owns the same percentage of debt as stock).

Yes, a factor

Whether payment is contingent upon earnings.

Yes, a factor

Whether the debt instrument bears a reasonable rate of interest and has a definite maturity date.

Yes, a factor