Taxation of Business Entities
Davis Corp. operated as a C corporation until the start of this year when it elected S corporation status. At the time of the S election, Davis had $3,000 of E&P. During the year, Davis recognized $25,000 of ordinary business income, had $2,500 of dividend income and $1,500 of long-term capital loss. Assume Davis makes a distribution of $30,000. What is the balance in Davis' AAA at year end?
$0
Davis Corp. operated as a C corporation until the start of this year when it elected S corporation status. At the time of the S election, Davis had $3,000 of E&P. During the year, Davis recognized $25,000 of ordinary business income, had $2,500 of dividend income and $1,500 of long-term capital loss. Assume Davis makes a distribution of $28,000. What is the balance in Davis' E&P at year end?
$1,000 Reason: AAA calculated as $25,000 + $2,500 - $1,500 = $26,000. The distribution reduces the AAA, but distributions can NOT cause the AAA to be below $0. The remaining distribution of $2,000 comes out of E&P, leaving $1,000.
Davis Corp. operated as a C corporation until the start of this year when it elected S corporation status. At the time of the S election, Davis had $3,000 of E&P. During the year, Davis recognized $25,000 of ordinary business income, had $2,500 of dividend income and $1,500 of long-term capital loss. Assume Davis makes a distribution of $25,000. What is the balance in Davis' AAA at year end?
$1,000 Reason: AAA calculated as $25,000 + $2,500 - $1,500 = $26,000. The distribution reduces the AAA.
Charlene's adjusted basis in S corporation stock was $10,000. Her share of S corporation losses was $22,000. On the last day of the year, she sells her entire interest in the S corporation. How much loss from the current year operations can Charlene deduct under the basis rules?
$10,000 Reason: $10,000 clears the basis limitation and can be deducted in the current year. The remaining loss is suspended, but due to the sale of the interest, the loss is NOT deductible.
Julius' taxable estate is $10,000,000. Five years ago, Julius made a taxable gift of $1,200,000 and paid gift taxes of $400,000. What is the total of Julius' cumulative transfers?
$11,200,000 Reason: The estate base (cumulative transfers) is the taxable estate plus adjusted gifts or $11,200,000.
Futbol Corporation (located entirely within State A) has federal taxable income of $100,000. This includes a state tax deduction for State A of $10,000. Futbol also earned tax-exempt interest (both Federal and State A) of $1,000. Depreciation calculated under federal rules was $20,000. Depreciation calculated under State A rules was $15,000. Calculate State A taxable income.
$115,000 Reason: $100,000 +$10,000 (state taxes are NOT deductible for state purposes) + $0 muni bond interest (the interest was not included for federal and is not included for State A) + $5,000 (federal depreciation exceeds state A depreciation by $5,000) = $115,000.
Charlie's adjusted basis in S corporation stock was $12,000. His share of S corporation losses was $22,000. How much of the loss clears the basis limitation and what is the treatment of the remaining loss (if any)?
$12,000 clears the basis limit; the remaining $10,000 is suspended Reason: $12,000 clears the basis limitation and can be deducted in the current year. The remaining loss is suspended and can be carried forward indefinitely.
Steven, Jennifer and Randy are all 1/3 shareholders in a calendar year-end S corporation that generated $90,000 of business income this year (not a leap year). Randy suffered some health issues earlier in the year and was required to sell his shares equally to Steven and Jennifer on June 29 to generate some cash to pay his medical bills. How much S corporation business income will be allocated to Randy using the daily method?
$14,795 Rationale: Randy held 1/3 of the stock for 180 days of the year. $90,000/365 days x 180 days x 1/3 = $14,795.
The federal gift tax annual exclusion amount for 2019 is
$15,000 per donee.
Jewel is a shareholder in a calendar year-end S corporation that she formed as an S corporation two years ago. Jewel's basis at the start of the year was $2,000. Her share of ordinary income for this year was $17,000. She was also allocated $2,000 of tax-exempt income as a separately stated item. The S corporation made a $25,000 operating distribution to Jewel. What is the amount of income and character to Jewel and her basis in the S corporation at year-end?
$17,000 ordinary income; $21,000 tax-free return of capital; $4,000 long-term capital gain; her basis is $0 Reason: Her basis before the distribution is $2,000 + $17,000 + $2,000 = $21,000. Thus, the first $21,000 of the distribution is tax-free, reducing her basis to $0. The remaining $4,000 is long-term capital gain. Jewel must recognize her share of ordinary income ($17,000).
Goodbar Inc., a U.S. corporation recognized $400 of U.S.-sourced income and $600 foreign-sourced income (all general category) from its branch in Tunisia. Goodbar has a 40% tax rate in the U.S. and a 30% tax rate (or $180) in Tunisia. What is Goodbar's foreign tax credit?
$180 Reason: Total income = $1,000 x 40% = $400 precredit U.S. taxes. The FTC is limited to $600/$1,000 x $400 = $240. The actual taxes paid to Tunisia are only $180, thus the limitation does not apply.
Marco prepares a new advertising promotion for a client located in London. He spends 100 hours working on the promotion in his office in New York and 50 hours working on the promotion in the London offices of the client. He is paid $30,000 for his services by the client. How will Marco source the compensation he receives?
$20,000 U.S. and $10,000 UK, based on the time worked in each location Reason: Marco must pro-rate the compensation for services based on the time spent in each location working on the project.
Goodbar Inc., a U.S. corporation recognized $400 of U.S.-sourced income and $600 foreign-sourced income (all general category) from its branch in Tunisia. Goodbar has a 40% tax rate in the U.S. and a 45% tax rate (or $270) in Tunisia. What is Goodbar's foreign tax credit?
$240 Reason: Total income = $1,000 x 40% = $400 precredit US taxes. The FTC is limited to $600/$1,000 x $400 = $240. The excess $30 of taxes paid to Tunisia will be carried forward.
Glenda owns shares (50%) in an S corporation (always an S corporation) and also has a separate partnership investment (25% partner). In the current year, the S corporation recognizes $50,000 of ordinary income, but pays no distributions to Glenda. Glenda's basis in the partnership is $20,000. The partnership recognizes only $3,000 of business income, but makes a $14,000 distribution to Glenda. How much income will Glenda include in her current year return from the above investments?
$25,750 Reason: Both the S corporation and partnership income are taxable to Glenda when earned by the entities. Distributions from either entity are generally not taxable. Glenda will recognize $50,000 x 50% plus $3,000 x 25% = $25,750.
Steven, Jennifer and Randy are all 1/3 shareholders in a calendar year-end S corporation that generated $90,000 of business income this year. Randy suffered some health issues recently, and so Steven and Jennifer decide they would like to allocate only 25% of the income to Randy in order to lower his tax liability for the year. How much income will be allocated to Randy?
$30000 Reason: S corporations are required to allocate based on the number of shares owned.
Reynaldo contributes cash of $45,000 and property worth $55,000 (basis = $12,000) to form an S corporation. What is Reynaldo's basis in the S corporation shares?
$57,000 Reason: Substituted basis of $45,000 + $12,000 = $57,000.
Norris Corporation has nexus in State A. Norris has accurately calculated State A's tax base as $100,000. Total allocable income is $5,000 and State A's share of the allocable income is $4,000 (the rest is allocated to other states). State A's apportionment factor is .65. Calculate Norris state taxable income in State A.
$65,750 Reason: State base of $100,000 less total allocable income of $5,000 is $95,000 of apportionable income in State A. $95,000 x.65 = $61,750 of apportioned income to State A + $4,000 of allocated income = $65,750.
Papa received a distribution of land from his S corporation in a liquidating distribution. The land had a fair market value of $67,000 and a basis to the S corporation of $32,000. The S corp was always an S corporation. What is Papa's basis in the land?
$67,000--Reason: Papa takes the FMV as his basis.
Helen owns 51% of Troy Corp., an S corporation with a calendar year-end. Helen receives the following from Troy: wages $62,000; health insurance paid by Troy for Helen $5,600; qualified employee discounts provided to Helen $680; payment of Helen's college tuition to become an engineer of $4,000. What is Helen's taxable compensation based on the above?
$67,600 Reason: Wages and health insurance are both taxable to >2 percent S corporation shareholders. $62,000 + $5,600 = $67,600.
Yazou Corp. was formed as a calendar year S corporation with 3 shareholders. On August 15 of the current year (not a leap year), one of the shareholders sold his shares to a corporation, terminating the S corporation election. Yazou's accounting records reflect business income of $75,000 through August 15 and $45,000 from August 16 through December 31. Calculate Yazou's S corporation short year income, using both the daily method and the specific identification method.
$74,630 under the daily method and $75,000 under specific identification method Reason: 1/1 to 8/15 is 227 days. Thus under the daily method, the S corporation income is $120,000/365 days x 227 days = $74,630. Under specific ID, the income is $75,000.
Ben transfers shares of stock worth $100,000 to a charitable organization during the current year. He originally purchased the stock for $10,000. What is the charitable deduction that Ben will reflect on his gift tax return?
$85,000 Reason: Ben's charitable deduction is the value after the current year exclusion amount of $15,000, which equals $85,000.
Angela's (single individual) gross estate is valued at $10,000,000. She also has the following items to consider: Funeral expenses of $27,000; executor fees of $5,000; attorney's fees of $12,000; a mortgage against the estate property of $200,000; and a donation to a charity out of the estate of $400,000. Angela made gifts (NOT deathbed gifts) in previous years of $600,000. There are no state death taxes. What is the value of Angela's taxable estate?
$9,356,000 Reason: $10,000,000 less administrative expenses ($27,000 + $5,000 + $12,000), less estate debts ($200,000), less any charitable deduction ($400,000) = $9,356,000.
Which of the following would qualify for the charitable deduction for estate taxes? (Check all that apply.)
*A donation to a U.S. charity *A donation to a foreign charity *A donation to a qualified charity made by the executor for which only the amount of the donation was prescribed in the will
Trust Grantor Trustee Corpus Fiduciary duty
*A separate legal entity established by an individual *The individual that establishes a trust *The person that administers a trust *The property contained within a trust *The responsibility to manage a trust for the benefit of a beneficiary or beneficiaries in a balanced manner
Which of the following are reasons that a U.S. taxpayer might need to understand the income sourcing rules? (Check all that apply.)
*In order to determine the proper withholding on payments leaving the U.S. *In order to properly calculate the foreign tax credit limitation *To properly exclude foreign earned income when available under the U.S. tax code
Which of the following are rules that generally apply to calculating the property factor for apportionment? (Check all that apply.)
*Include only business property *Leased property is given an average value of the annual lease payments x eight *Use the average of the beginning balance and ending balance
Match the type of estate with its definition. Probate estate Gross estate
*Property owned by a decedent at the time of death *Fair Value of property owned by a decedent at death + the value of certain automatic property transfers that effect at death
Match the type of compensation with the U.S. tax sourcing rule. Compensation other than fringe benefits Fringe benefit compensation
*Sourced based on time spent in each location *Sourced based on geographic location of employee's principal place of work
Match the type of non-resident income with the type of U.S. taxation applied. *Effectively connected income *Fixed and determinable, annual or periodic payment income
*Subject to net income taxation at U.S. graduated rates *Subject to withholding tax on gross income
Which of the following are deducted from the gross estate to achieve the taxable estate? (Check all that apply.)
*The administrative expenses of the estate *Casualty and theft losses of the estate *The charitable deduction
Which of the following items can reduce the cumulative gift tax? (Check all that apply.)
*The current tax on previous gifts *The unified credit NOT previously deducted
Match the type of income with the U.S. tax sourcing rules for the income. Rents Royalties Gains and losses on real property
*Where the property is located *Where the property is used *Where the property sold is located
The value of the gross estate may be determined: (Check all that apply.)
*at time of death. *6 months after date of death as long as property is not distributed, an election is made by the executor, and the value of the gross estate is lower
Current taxable gifts are current gifts minus: (Check all that apply.)
*marital and charitable deductions. *one half of split gifts. *annual exclusion.
The LIFO recapture tax: (Check all that apply.)
*prevents former C corporations from avoiding built-in gains by using the LIFO method. *is due in four annual installments, starting with the due date of the final C corporation return. *requires a C corporation to include a LIFO recapture amount in income the last year of C corporation status.
Foreign taxes may be translated in U.S. dollars using: (Check all that apply.)
*the average exchange rate for the year. *the exchange rate on the date the tax was paid.
Rank each item in the order in which it is considered for making adjustments to a shareholder's adjusted basis in S corporation stock.
-Contributions made to the S corporation -Share of business income and separately stated items of income or gains -Distributions to shareholders -Share of non-deductible expenses -Share of ordinary losses and separately stated items of loss/expense
Which of the following are required in order for the excess net passive income tax to apply? (Check all that apply.)
-There is accumulated E&P from a prior C corporation at year-end -The S corporation previously operated as a C corporation -Passive investment income > 25% of gross receipts
The net recognized built-in gain for any year is the least of: (Check all that apply.)
-the net unrealized built-in gains at conversion less the net recognized built-in gains in previous years. -taxable income for the year without the DRD and NOL. -the net recognized built-in gains and losses for the year.
Popavich Company has the following average property values: State A = $300,000; State B = $200,000; State C = $600,000. State B has the throwback rule and State C is a non-taxing state. Calculate the property factor for State B.
.18 Reason: State B $200,000/Everywhere $1,100,000 =.18. The throwback rule applies ONLY to sales.
The apportionment factors for Patterson Company are shown in the graphic. Assume that Patterson has no nexus with State B (a non taxing state) and that all sales originate in State A which has the throwback rule and double weights sales. Calculate the State A apportionment factor for Patterson. A B C Total Sales 100 30 40 170 Payroll 20 10 0 30 Property 200 5 5 210
.79 Reason: Factors for State A: Sales factor = 130/170 =.77 x 2 = 1.53. Payroll factor = 20/30 =.67. Property factor = 200/210 =.95 1.53+.67+.95=3.15/4=.79
McCoppin Industries has three employees: Dean, Annie and Kent. Dean works entirely in State A and was paid a salary of $130,000 plus a $30,000 bonus. Annie works entirely in State B and was paid a salary of $80,000. Kent works 60% of the time in State A and 40% of the time in State B and was paid $100,000 in commissions. Calculate McCoppin's payroll factor for State A.
.84 Reason: All of Dean's salary and bonus are included in State A as both are compensation. None of Annie's salary is included in State A. All of Kent's commissions are included in State A, since Kent performed the majority of his services in State A. $130,000 + $30,000 + $100,000 = $260,000 for State A divided by $310,000 = 84 percent.
If Karen's basis in her S Corporation stock is $30,000 and she receives a cash distribution of $40,000, she will report $_______ of ordinary income and $__________ of capital gain income from the distribution.
0 10,000
A shareholder for controlled foreign corporation (CFC) definition purposes must own ______ or more of the stock.
10% Reason: To be counted as a shareholder for owning collectively 50%, the shareholder must own 10% of the voting stock.
S corporations are required to file Form , U.S. Income Tax Return for an S corporation.
1120S
The excess passive investment income tax is applied currently at what rate?
21% Reason: The tax rate is the highest corporate tax rate, currently 21%.
Excess passive investment income for the purposes of the termination of an S corporation election is when passive income is greater than ______.
25% of gross receipts for three consecutive years
The percent of tax assessed on net investment income above a threshold is:
3.8%
The built-in gains tax recognition period is the first________ years a former C corporation operates as an S corporation.
5
Match the treatment of typical non-taxable fringe benefits with the type of S corporation shareholder.
=less than or equal to 2% shareholder---Same as corporations; deductible by the S corporation and non-taxable to the shareholder =greater than 2% shareholder---Deductible by the S corporation, but taxable to the shareholder
Which of the following will automatically create sales and use tax nexus between a state and a business assuming the Wayfair rules are in addition to prior rules?
A business registration or license to do business in the state (assuming the Wayfair criteria is not met)
Which of the following would trigger a generation-skipping tax?
A large value transfer of property from a grandfather decedent to a grandchild beneficiary Reason: Since the transfer skips a generation, it is likely to be subject to the GST.
Which party to a sales transaction generally collects the sales taxes to remit to the state?
A seller with nexus
Which of the following is NOT eligible for the marital deduction?
A terminable interest in property worth $400,000 Reason: A terminable interest in property transferred to a spouse at death is NOT eligible for a martial deduction.
Which of the following transactions is likely to be EXEMPT from sales and use taxes?
A wholesaler buying inventory from a manufacturer to sell to retailers
Select the manner in which a state adopts the federal Internal Revenue Code. (Check all that apply.)
Adopt the current version of the Code Adopt a previous version of the Code
Which of the following are added to current taxable gifts to calculate the gift tax?
All previous taxable gifts Reason: All cumulative gifts are used to form the gift tax base.
Match the nonbusiness income with the typical rule for allocation. Interest and dividends Rental income Royalties
Allocate to the state of commercial domicile Allocate to the state in which the property is located Allocate to the state in which the property is used
Which of the following are NOT included in the payroll factor?
Amounts paid to independent contractors Reason: Amounts paid to independent contractors are NOT part of the payroll factor.
Match the types of income as described for state tax purposes. Business income Nonbusiness income
Apportionable income Allocable income
Rolando works for an S corporation for which he is the sole shareholder. Although he provides an extensive amount of services on behalf of the S corporation, he does not pay himself any salary, electing only to make distributions to himself at year end. How might the IRS treat those distributions?
As salary to the extent of reasonable compensation for Rolando's services
Gouda Corp. is an S corporation with a May 31, year-end. What is the due date and extended due date for Gouda's federal income tax return?
August 15 and February 15 of next year Rationale:The original due date is the 15th day of the third month after year-end and the extension is six months from the due date.
In which entity do entity-level losses NOT flow-through to shareholders?
C corporation
Jane wishes to contribute property and cash to an S corporation. The tax rules that apply are similar to those of a:
C corporation Reason: S corporations are formed in a manner similar to a C corporation and enjoy the same tax free treatment under Section 351.
For tax purposes, an S corporation is organized, reorganized and liquidated in a similar fashion to a:
C corporation Reason: S corporations are organized under state law similar to corporations.
Match the following entities with the alternatives to choose a fiscal year end.
C corporation- Can choose any month end S corporation- Generally must choose a calendar year-end, but may choose a fiscal year end if a business purpose exists Partnership-Restricted to the least deferral based on owners' year-ends
At the end of the tax year, DHG Corp, always an S corporation, made a liquidating distribution of long-term capital gain property to Sue, a 40% shareholder in DHG. The property has a fair market value of $50,000 and DHG's basis in the property is $30,000. Sue's basis in DHG is $8,000 before the distribution. What are DHG's and Sue's gain or loss on the liquidating distribution?
DHG gain of $20,000; Sue's gain is $42,000 Reason: DHG recognizes a $20,000 gain ($50,000 - $30,000). Sue's share is $20,000 x 40% = $8,000 making her basis $16,000. Sue's gain is $50,000 - $16,000 = $34,000 + $8,000 flow through gain = $42,000.
Which of the following are factors used to determine when a business is unitary? (Check all that apply.)
Economies of scale result due to size Centralization of management between companies Functional integration
Samantha and Darren are 50% owners in Black Hat Corp., a calendar year S corporation. Exactly one-half way through the year, Samantha sold her shares to Endora. The financial results of Black Hat using normal accounting rules are as follows: Income through June 30 = $34,000; income from July 1 - Dec 31 = $76,000 for total income for the year of $110,000. All the shareholders would like to limit the tax liability from the S corporation income. Considering these facts, would Endora prefer the daily method or the normal accounting method to allocate income? What method would Samantha prefer?
Endora prefers the daily method. Samantha prefers the normal accounting method. Rationale: Endora and Samantha more or less split the year in half. Since the normal accounting method recognizes a greater share of income in the second half of the year, Samatha would prefer that method. Endora would prefer to allocate the income evenly over the entire year, and thus prefers the daily method.
The LIFO recapture amount is excess of the inventory basis using the ________method, less the inventory basis using the___________ method.
FIFO LIFO
Which of the following are included in the gross estate?
Fair market value of property owned by decedent at death
True or false: The estate tax is a transfer tax while the gift tax is an income tax.
False
True or false: S Corporation distributions are never taxable to shareholders.
False Reason: Distributions are only nontaxable to the extent of the shareholder's basis in her stock.
Which of the following is NOT a method by which income can be allocated between a short S corporation tax year and a short C corporation tax year?
First-in, first-out method Reason: FIFO is an inventory identification method.
Which of the following is a separately stated item for a partnership, but is NOT a separately stated item for an S corporation?
Guaranteed payments:S corporations do NOT have guaranteed payments.
Toastbusters Corp., a calendar year-end S corporation, generates 80% of its income from the sale of toasters. What tax accounting methods would be permitted for Toastbusters? (Check all that apply.)
Hybrid Accrual Reason: Because selling inventory is a material income-producing activity for Toastbusters, they must use the accrual method for gross profits.
HB Corp. is commercially domiciled in State C. HB has sales representative, Hal, in State B. Hal engages in the following activities: I. carries free samples II. drives around State B in his own car and checks in with customers III. makes minor repairs to previously sold items. Which of the above items exceeds the definition of solicitation under PL 86-272?
III only Reason: An employee or representative that makes repairs exceeds to the protection of 86-272.
Which of the following taxes is creditable in the FTC?
Income tax
Which of the following items is NOT business/apportionable income?
Interest income
Which of the following is MOST likely to prevent a valid S corporation election?
Issuing both common and preferred stock, but to the same shareholders Reason: Only a single class of stock is permitted.
Italiano, SpA is a corporation formed under the laws of Italy and operates there. Tomba is a U.S. tax resident that receives dividends from Italiano each quarter. Under U.S. rules, the dividends are sourced from what country?
Italy Reason: Dividends are generally sourced to the residence of the paying party, which in this case is Italiano.
Kileau Corp., a calendar tax-year S corporation, terminated its S corporation status on September 22, 2015 when it failed the shareholder requirements. What is the first date on which Kileau can re-elect S status?
January 1, 2020 Reason: The first day of the fifth tax year after the termination would be the earliest - 1/1/2020.
Toonit, Inc., a May 31 fiscal year-end S corporation, files an S corporation termination on September 1, 2019. Toonit will no longer be treated as an S corporation on:
June 1, 2020, if no termination date is specified
Gopher Hole Inc. wishes to make an S corporation election. Which of the following shareholders prevent Gopher Hole from being eligible to do so? (Check all that apply.)
Kris Robbins Partnership Rabbit Burrow, Inc. (a C corporation) Winnie LaPew, a French Canadian and resident of Quebec, Canada
Hungry, Inc., a calendar year S corporation, wishes to terminate its S election in the current year. In order to do so, Hungry must file a valid termination by no later than__________ 15th of the current year.
March
The due date for a calendar year-end S corporation is:
March 15th
Chaos Corp., a calendar year S corporation, had the following shareholder transactions during the year: Max and Barbara (unrelated) owned 50% each through May 31. On May 31, Barbara sold one-half of her shares to Siegfried. On September 15, Barbara bought all of Max's shares and then on October 31, Barbara bought all but 1% of the shares back from Siegfried (thus after October 31, Barbara owned 99% and Siegfried owned 1%). If Chaos wishes to allocate business income to the different periods based on the normal accounting rules, which shareholders must approve that decision?
Max, Barbara and Siegfried:All shareholders with changing ownership percentages must approve the use of normal accounting rules for allocation
Alice is an independent sales representative in State C for Jonas Corporation, which does NOT have nexus in State C. Alice is careful to limit her activities to those protected under PL 86-272; however, once when Alice was driving to see her Mother in a nearby town, her car suffered a mechanical problem. In order to effect repairs, Alice had to empty her trunk of all the display inventory she carried. Another customer of the repair shop noticed her items, expressed an interest and due to the unexpected circumstances, Alice took the customer's deposit. As soon as Alice finally arrived at her Mother's she forwarded the deposit to the parent company. Does Alice's activity exceed the protection of solicitation under PL 86-272?
No Reason: Alice's activities were all within 86-272 except for accepting the customer deposit; however, 86-272 allows for a de minimis activity that the one-time circumstances probably allow.
Lucy and Desi have 5 children and live in a common law state. In the current year, Lucy gave each of their adult children $20,000 (total = $100,000). Before an annual exclusion, what is the total of gifts made by Lucy if she does NOT elect gift-splitting? If she does elect gift-splitting?
No splitting = $100,000; Splitting = $50,000 Reason: Without gift-splitting, Lucy's total gifts are simply the total gifts she gave ($100,000). With gift-splitting, she can treat each gift as if she gave one-half (with Desi giving the other half) or $50,000.
Lucy and Desi have 5 children and live in a common law state. In the current year, Lucy gave each of their adult children $20,000 (total = $100,000). What is the total taxable gifts after the annual exclusion made by Lucy if she does NOT elect gift-splitting? If she does elect gift-splitting?
No splitting = $25,000; Splitting = $0 Reason: Without gift-splitting, Lucy's total gifts are the total gifts she gave ($100,000) less $15,000 per donee. With gift-splitting, she can treat each gift as if she gave one-half (with Desi giving the other half) less the annual exclusion, leaving zero.
Lucy and Desi have 5 children and live in a common law state. In the current year, Lucy gave each of their adult children $20,000 (total = $100,000). What is the total taxable gifts after the annual exclusion made by Lucy if she does NOT elect gift-splitting? If she does elect gift-splitting?
No splitting = $30,000; Splitting = $0 Reason: Without gift-splitting, Lucy's total gifts are the total gifts she gave ($100,000) less $15,000 per donee. With gift-splitting, she can treat each gift as if she gave one-half (with Desi giving the other half) less the annual exclusion, leaving zero.
Lucy and Desi have 5 children, and live in a community property state. In the current year, Lucy gave each of their adult children $20,000 (total = $100,000). Before an annual exclusion, what is the total taxable gifts made by Lucy if she does NOT elect gift-splitting? If she does elect gift-splitting?
No splitting = $50,000; Splitting = $50,000 Reason: In a community property state, Lucy and Desi are treated as if they both made half the gift, regardless of the gift-splitting election.
Lucy and Desi have 5 children and live in a common law state. In the current year, Lucy gave each of their adult children $20,000 (total = $100,000). Before an annual exclusion, what is the total of gifts made by Lucy if she does NOT elect gift-splitting? If she does elect gift-splitting?
No splitting = $50,000; Splitting = $50,000 Reason: Without electing gift-splitting, Lucy must include all the gifts paid by her since they are in a common law state.
Which of the following is NOT included in a shareholder's at-risk amount for S corporations?
Nonrecourse loan amount in excess of the net fair market value of property used as collateral for the loan Reason: Nonrecourse loans included in the at-risk amount are limited to the net fair market value of the property securing the loan.
Which entity can pay the fewest non-taxable fringe benefits to significant owners?
Partnerships
Which of the following activities exceeds the definition of mere solicitation under PL 86-272? (Check all that apply.)
Running credit checks on prospective customers. Collecting overdue accounts receivables. Maintaining an office other than an in-home office.
Which entity types can generally use either the cash or accrual method of accounting for tax purposes? (Check all that apply.)
S corporation Sole proprietorship Partnership
Foggy Bottom Corp., an S corporation, recognized net long-term capital gains during the year. If the gains are simply lumped together with ordinary business income on Schedule K-1, then the shareholders are going to report the income as ordinary and, as a result, fail to enjoy the preferential tax rates on long-term capital gains. Instead, the S corporation will report the gains as one of its__________ __________ __________ on Schedule K-1.
Separately stated items
JJ Legume is a business that sells outdoor clothing and equipment exclusively through mail order catalogs sent to consumers all over the U.S.. JJ Legume operates its entire business from its home state of State A and does NOT use its own trucks to ship to any customers (preferring the services of FedFast, an express shipping company). State B, in attempt to increase its revenues under the Wayfair decision, attempts to assert nexus against JJ Legume. Legume reported $300,000 of sales in state B. What is the expected result of the case for purposes of sales tax?
State B will prevail under the Wayfair criteria because JJ Legume reported over $100,000 of sales in State B. Reason: Applying the Wayfair economic nexus criteria, Legume has nexus with state B because it reported $300,000 of sales in state B.
Strieby Corp. operates a business with three separate entities as subsidiaries that operate as a unitary business: Matty Corp., Kennedy Corp. and Jackson Corp.. Strieby has arranged operations so that Matty has nexus only with Texas, Kennedy has nexus only with Massachusetts, and Jackson has nexus only with California. Strieby is domiciled in California. Assuming California is unitary state, which entities will be included in the Strieby income tax return?
Strieby, Matty, Kennedy and Jackson will ALL be required to file a California return. Reason: Because all the entities operate as a unitary business and California follows the unitary concept, all the entities will file a single California return.
What are the loss limitations that apply to S corporations? (Check all that apply.)
Tax basis At-risk Passive activity
Which of the following does NOT decrease a shareholder's basis in an S corporation?
The shareholder's share of losses when basis is already zero Reason: A shareholder's basis may never be reduced below zero.
Which of the following is NOT allowed as part of the marital deduction for gift taxes?
Transfer of a life estate in property from one spouse to the other
Regarding royalty payments for intangibles, an intangible is considered used in the country that protects then owner against its unauthorized use.
True
The application of passive activity loss rules is identical for S corporations and partnerships.
True
True or false: A hybrid entity is an entity treated as a flow-through for U.S. purposes and a corporation for foreign tax purposes.
True
True or false: Anita, never married, dies in the current year with cumulative transfers of $4,000,000. Anita will pay NO federal estate taxes.
True
True or false: Weasel Corp. has nexus in State A only. A consumer from State B purchases goods from Weasel, and Weasel is NOT required to collect sales taxes for State B. The consumer from State B owes use tax.
True
True or false: Estates that earn income must file an estate tax return AND an income tax return.
True Reason: Estates that earn income are required to file an income tax return for the estate.
True or false: S corporations are generally required to use a calendar year-end.
True Reason: Unless the corporation can establish a business purpose for an alternative year-end, S corporations must use a calendar year-end.
Which of the following types of entities may serve as an S corporation shareholder?
U.S. resident grantor trust qualified retirement plan trust
Which type of tax concept does NOT respect the separate ownership form and structure of related businesses?
Unitary return Reason: A unitary return state will consolidate related businesses into a single entity irrespective of the legal form or structure.
How many years must a previous S corporation wait after the termination to re-elect S corporation status?
Until the start of the fifth year after the year of termination Reason: It may not re-elect S corporation status until the beginning of the fifth year after the tax year the status was lost.
Which of the following court cases helps establish the definition of nexus for sales and use taxes? (Check all that apply.)
Wayfair
Howie drives over the state line from his home State A into State B to buy furniture. He pays State B sales tax of 4%. He brings the furniture back to his home in State A, where the sales tax rate is 7%, and enjoys it for the next few years. Does Howie owe any additional sales or use taxes?
Yes; Howie owes an additional 3% use tax to State A.
YesMan was organized as a valid S corporation from its inception. During the last four years, virtually all of YesMan's income is passive investment income. When did YesMan's S election involuntarily terminate?
YesMan's S election has not terminated.
The generation skipping tax does NOT apply to many taxpayers due to:
a generous exemption amount Reason: The exemption amount is $11.4 million in 2019, leaving all but the largest transfers below the taxable threshold.
The method to divide nonbusiness income between different states is:
allocation Reason: Items of nonbusiness income are directly allocated to certain states (often the state of commercial domicile).
State taxable income is calculated by multiplying business income by the ________ factor and then adding any nonbusiness income allocated to the state.
apportionment
The first limit applied to S corporation losses is the:
basis limitation-- Reason: Only losses that clear the basis limitation are eligible for the at-risk limitation. Thus, it is the second limit applied. Reason: Only losses that clear the basis and at-risk limitations are eligible for the passive loss limitation. Thus, it is the third limitation applied
S corporation shareholders are not allowed to deduct excess ________ losses.
business
S corporation shareholders are not allowed to deduct excess________ losses.
business
The commercial traveler exception allows:
compensation earned by nonresidents within the US to be treated as sourced outside the US under certain circumstances
A fiduciary entity is granted a deduction for:
current distributions of income
The individual that has died is commonly called the ______ for estate tax purposes.
decedent
A(n) ________ _______deduction is one that can be directly attributed to a particular item of income.
definitely related
A depreciation deduction for a machine used in the production of inventory is liked to be classified as a:
definitely related deduction
The maximum amount distributable by a fiduciary entity is calculated with reference to:
distributable net income (DNI)
Klaus, a German citizen and non-resident for US tax purposes, owns a small business in New York City that imports and sells accessories for various German-manufactured automobiles. Once a month, the business pays its net profits back to Klaus in Germany. The income from this business will be classified as:
effectively connected income
A Form 8832 is used to check the box to:
elect to treat certain entities as corporate or flow-through status for US taxes
The general purpose of a tax treaty is to:
eliminate or reduce the impact of double taxation
Generally, the adjusted gross estate is the gross estate less: (Check all that apply.)
estate administration expenses. debts included in the estate. state death taxes.
The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts, is known as the ________ _________ _________.
fair market value
When an S corporation shareholder receives a property distribution (no previous E&P), the shareholder will reduce their basis in the S corp stock by the:
fair market value of the property received Reason: For the shareholder, the amount of the distribution is the market value of the property.
A controlled ______ ________is a an entity incorporated under foreign law in which U.S. shareholders own more than 50% of the voting stock on any day during the year.
foreign corporation
Bono Corporation has nexus with States A, B, C and D. States A and C are unitary return states. States B and D are separate return states. Bono Corp will need to calculate state taxable income:
four times Reason: State taxable income is likely to differ for each state, unitary or separate, thus requiring four separate calculations.
The value of a remainder interest is:
future payment ÷ (1+r)n
The two tests of U.S. tax residency are the: (Check all that apply.)
green card test. substantial presence test.
The tax rate used to calculate the built-in gains tax is the:
highest current corporate tax rate Reason: The highest (and only) rate is currently 21%.
A transfer that occurs during the lifetime of the individual is known as a(n):
intervivos transfer Reason: An intervivos transfer takes place during a lifetime.
The loss limitation applied after the basis and at-risk limitations:
is the passive loss limitation
Dale and his son, Clark, have a savings account with a small amount of money in it. The terms of the account stipulate that when Dale or Clark die, the account automatically becomes the account solely of the survivor. This arrangement is known as:
joint tenancy with right of survivorship
The taxable estate is the gross estate
less expenses, debts and losses, and charitable and marital deductions. Reason: Gross estate less expenses, debts and losses, less the charitable and marital deduction equals the taxable estate.
Generally, state law classifies business entities as:
limited liability companies.corporations.
Tomato, Inc. made a valid S election some number of years ago. Now it wishes to terminate that election. What percentage of ownership needs to agree with the termination decision?
more than 50%
The marital deduction allows
most transfers between spouses to go untaxed by transfer taxes.
The net gain that an S corporation would recognize if it sold each asset at its fair market value on the first day after converting from a C corporation to an S corporation is the
net unrealized built-in gain
TooEarly, Inc. is a calendar year corporation. On January 3rd of the current year at the request of TooEarly management, Grand Slam Inc., TooEarly's only corporate shareholder, sells all its shares of TooEarly stock to Bill Brady, an individual. On January 5th of the current year TooEarly files for S corporation status. What is the first year TooEarly will be eligible for S corporation treatment?
next year: Because TooEarly had a non-qualified shareholder in the current year, the earliest S corporation treatment is available is the following year.
The minimum connection between a state and a business that subjects the business to the state's taxes is:
nexus
Robustness, Inc., a C corporation, wishes to organize a wholly-owned subsidiary that will operate as an insurance company. Can the subsidiary operate as a valid S corporation?
no:he subsidiary may NOT be an S corporation because (1) it will have a corporate shareholder, and (2) it is an insurance company which is ineligible for S corporation status.
Singh, an Indian citizen, spent all of 2017 and 2018 in the United States. He left the US on January 9th, 2019 and did not return. For tax purposes in 2019, Singh is a
non-resident Reason: Although Singh was in the US more than 183 days under the substantial presence test, he was not in the US for at least 31 days in the current year, and thus fails the substantial presence test.
Ji, an international undergraduate student from China, has been in the US attending a university for over 350 days for each of the last four years (including this year). Under the substantial presence test, Ji will be treated as a:
non-resident Reason: As a student, Ji is exempt from the substantial presence test for a period of five years.
Herbert Tools, Inc. is incorporated in Bermuda. A wholly-owned subsidiary of Herbert, Stephanie Tools Management, is located in Connecticut. Stephanie provides all of the headquarters functions for Herbert. For US tax purposes, Herbert Inc. is a:
non-resident Reason: Herbert is classified as a non-resident based on its country of incorporation.
Juliana was a shareholder in a calendar year S corporation that terminated its S status on May 3. At the time of the termination, Juliana's stock and debt basis were zero, and she had suspended losses of $13,000. Juliana's suspended losses are:
not deductible unless additional basis is created during the PTTP
The gift-splitting election allows
one spouse to treat each gift as if they made a gift of only one-half the gift amount.
A US tax nonresident should consider US income sourcing rules because:
only the US-sourced income of a non-resident is subject to US taxes
Ordinary business income allocated to shareholders by an S corporation is typically treated as
ordinary income NOT subject to self-employment taxes.
Interest is generally sourced from the jurisdiction in which the party _____ the interest resides.
paying
Under a tax treaty, a foreign country will NOT tax a US business unless they conduct business through a:
permanent establishment Reason: Creating a PE requires a fixed place of business or employees in the host country.
For inventory manufactured by the seller, sourcing of the gain on sale of inventory is based on _________ ____________ of the assets used in the manufacturing process.
physical location
The generation-skipping tax is intended to:
prevent the avoidance of transfer taxes by transferring property to a beneficiary more than one generation younger than the decedent
Property inherited at the donor's death ______.
receives a fair market value tax basis
When calculating the ________ factor, include all gross receipts net of any returns and discounts.
sales
Although generally exempt from sales tax, more and more states are taxing __________ in order to increase revenue.
services or service
In the international tax setting, when nexus is determined based on the geographic source of the income that is known as:
source-based jurisdiction
A serial gift is:
spreading a single large gift into a number of smaller annual gifts
An S corporation shareholder's initial (upon formation) basis in the S corp is equal to the:
tax basis of the property transferred less any liabilities on the property assumed by the corporation Reason: S corporation shareholders take the substituted basis (the tax basis in the property prior to the transfer) less liabilities.
Claudio received his green card in October 2019. Claudio will treated as a ______ in 2019.
tax resident Reason: Holding a green card at any time during the tax year mandates tax residency.
Alberto, a tax resident of Peru, has a savings account in a U.S. bank that he occasionally uses to send gifts in U.S. dollars to relatives that live in the U.S.. The savings account pays a nominal amount of interest to Alberto each year. This interest will be ______ to Alberto when credited to his account.
tax-exempt in the U.S. Reason: Interest paid to a nonresident by a U.S. bank is typically exempted from U.S. taxation.
The post-termination transition period (PTTP) for an S corporation ends:
the later of one year after the last day as an S corporation or the filing deadline (including extension) for the last S corporation return
In order to calculate the terminable interest in a life estate, you must know the Section 7520 rate and age of ______.
the life tenant only
Dividends are generally sourced in a manner that is ______ how interest is sourced.
the same as Reason: Both interest and dividends are generally sourced to the residence of the paying party.
The United States taxes ________ income of US residents.
the worldwide Reason: The US taxes the worldwide income of its own residents.
Gross income from the sale of inventory is generally sourced to the location where ____ passes.
title
When an S corporation distributes property that has depreciated in value (fair market value less than basis) to a shareholder, the S corporation will:
treat the distribution as if at FMV, but no loss will be recognized
Bruce and Ivy, a married couple, represented the 100th shareholder in an S corporation. Bruce and Ivy were divorced in the current year, each taking one-half of the S corporation shares they held. Is the S corporation election still allowed?
yes: Former spouses are counted as family members for purposes of counting shareholders for an S corporation, and thus the S corporation retains 100 shareholders.
