(TCO 2) Barry owns a 60% interest in an S corporation that earned $150,000 in 2011. He also owns 60% of the stock in a C corporation that earned $150,000 during the year. The S corporation distributed $30,000 to Barry, and the C corporation paid dividends of $30,000 to Barry. How much income must Barry report from these businesses?
Student Answer:
$0 income from the S corporation, and $30,000 income from the C corporation
$90,000 income from the S corporation, and $30,000 income from the C corporation
$90,000 income from the S corporation, and $0 income from the C corporation
$30,000 income from the S corporation, and $30,000 of dividend income from the C corporation
None of the above
2.
Question :
(TCO 2) Which statement is correct regarding the taxation of C corporations?
Student Answer:
The due date for a corporate income tax return (ignoring extensions) is the 15th day of the third month following the close of the corporation’s tax year.
A corporation with taxable income of less than $500 need not file a tax return.
The alternative minimum tax does not apply.
In general, the required annual payment for corporate estimated taxes is 90% of the corporation’s final tax for the current year.
None of the above
3.
Question :
(TCO 1) Dawn and William form Orange Corporation. Dawn transfers equipment worth $475,000 (basis of $100,000) and $25,000 cash to Orange Corporation for 50% of its stock. William transfers a building and land worth $525,000 (basis of $200,000) for 50% of Orange’s stock and $25,000 cash. Discuss the result of these transfers.
Student Answer:
Dawn recognizes a gain of $375,000; William recognizes a gain of $325,000.
Dawn recognizes a gain of $25,000; William recognizes no gain.
Neither Dawn nor William recognizes gain.
Dawn recognizes no gain; William recognizes a gain of $25,000.
None of the above
4.
Question :
(TCO 1) Kevin owns 100% of the stock of Cardinal Corporation. In the current year, Kevin transfers an installment obligation (basis of $30,000 and fair market value of $200,000) for additional stock in Cardinal worth $200,000. Which gain, if any, will Kevin recognize on the transfer?
Student Answer:
Kevin recognizes no taxable gain on the transfer.
Kevin has a taxable gain of $170,000.
Kevin has a taxable gain of $180,000.
Kevin has a basis of $200,000 in the additional stock he received in Cardinal Corporation.
None of the above
5.
Question :
(TCO 1) Earl and Mary form Yellow Corporation. Earl transfers property ($200,000 and value of $1,600,000) for 50 shares in Yellow Corporation. Mary transfers property (basis of $80,000 and value of $1,480,000) and agrees to serve as manager of Yellow for 1 year; in return, Mary receives 50 shares of Yellow. The value of Mary’s services is $120,000. With respect to the transfers, _____.
Student Answer:
Mary will not recognize gain or income
Earl will recognize a gain of $1,400,000
Yellow Corporation has a basis of $1,480,000 in the property it received from Mary
Yellow will have a business deduction of $120,000 for the value of the services Mary will render
None of the above
6.
Question :
(TCO 11) Harold, a calendar-year taxpayer subject to a 35% marginal tax rate, claimed a charitable contribution deduction of $18,000 for a sculpture that the IRS later valued at $10,000. Which is the applicable overvaluation penalty?
Student Answer:
$0
$560
$2,800
$3,500
7.
Question :
(TCO 11) The privilege of confidentiality applies to a CPA tax preparer concerning the client’s information relative to _____.
Student Answer:
financial accounting tax accrual work papers
a tax research memo used to determine an amount reported on the tax return
building a defense against a penalty assessed for the use of a tax shelter
building a defense against a charge brought by the SEC
None of the above
8.
Question :
(TCO 2) Staff Inc., has taxable income of $10 million this year. Which is the maximum DPAD tax savings for this C corporation?
Student Answer:
$0
$204,000
$210,000
$306,000
$900,000
9.
Question :
(TCO 2) A corporation has the following items related to the AMT.
Alternative minimum tax base: $98,502,900
Regular tax: $11,201,520
Foreign AMT tax credit: $1,400,000
The corporation’s AMT, if any, is _____.
Student Answer:
$0
$7,099,060
$8,703,900
$18,300,580
None of the above
10.
Question :
(TCO 3) As of January 1, Spruce Corporation has a deficit in accumulated E & P of $37,500. For the tax year, current E & P (all of which accrued ratably) is $20,000 (prior to any distribution). On July 1, Spruce Corporation distributes $25,000 to its sole, noncorporate shareholder. The amount of the distribution that is a dividend is _____.
Student Answer:
$0
$20,000
$25,000
$37,500
None of the above
1.
Question :
(TCO 3) Walnut Corporation, a calendar-year taxpayer, has taxable income of $110,000 for the year. In reviewing Walnut’s financial records, you discover the following occurred this year.
Federal income taxes paid: $25,000
Net operating loss carryforward deducted currently: $25,000
Gain recognized this year on an installment sale from a prior year: $12,000
Depreciation deducted on tax return (ADS depreciation would have been $8,000): $15,000
Interest income from Wisconsin state bonds: $37,000
Walnut Corporation’s current E & P is _____.
Student Answer:
$73,000
$138,000
$142,000
$166,000
None of the above
2.
Question :
(TCO 3) Which statement regarding constructive dividends is not correct?
Student Answer:
Constructive dividends do not need to be formally declared or designated as a dividend.
Constructive dividends need not be paid pro rata to the shareholders.
Corporations that receive constructive dividends may not use the dividends received deduction.
Constructive dividends are taxable as dividends only to the extent of earnings and profits.
All of the above
3.
Question :
(TCO 4) Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $100,000, and a fair market value of $270,000 on the date of the transfer. In the current year, Blue Corporation (E & P $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a _____.
Student Answer:
$195,000 capital gain
$220,000 capital gain
$195,000 dividend
$220,000 dividend
None of the above
4.
Question :
(TCO 4) Cardinal Corporation has 1,000 shares of common stock outstanding. John owns 400 of the shares, John’s father owns 300 shares, John’s daughter owns 200 shares, and Redbird Corporation owns 100 shares. John owns 70% of the stock in Redbird Corporation. How many shares is John deemed to own in Cardinal Corporation under the attribution rules of §318?
Student Answer:
400
600
700
1,000
None of the above
5.
Question :
(TCO 5) One of the tenets of U.S. tax policy is to encourage business development. Which Code section does not support this tenet?
Student Answer:
§ 351, which allows entities to incorporate tax-free
§ 1031, which allows the exchange of stock of one corporation for stock of another
§ 368, which allows for tax-favorable corporate restructuring through mergers and acquisitions
§ 381, which allows the target corporation’s tax benefits to carry over to the successor corporation
All of the above
6.
Question :
(TCO 5) The French Corporation has assets valued at $1 million (adjusted basis of $700,000). There are mortgages of $250,000 associated with these assets. Accent Corporation acquires all of French’s assets by exchanging $800,000 of its voting stock, and assumes $200,000 of French’s liabilities. French distributes the Accent stock and remaining liabilities to its shareholders in exchange for their French stock, and then liquidates. Which, if any, statement is correct?
Student Answer:
This restructuring qualifies as a Type A reorganization.
This restructuring qualifies as a Type C reorganization.
The restructuring is taxable because liabilities cannot be distributed to shareholders in a tax-free reorganization.
Accent recognizes a $50,000 gain on the restructuring.
None of the above
7.
Question :
(TCO 5) Which type of reorganization can be used to divide a corporation?
Student Answer:
Type A
Type B
Type D
Type E
All of the above
8.
Question :
(TCO 6) How are the members of a consolidated group affected by computations related to E & P?
Student Answer:
E & P is computed solely on a consolidated basis.
Consolidated E & P is computed as the sum of the E & P balances of each of the group members.
Members E & P balances are frozen as long as the consolidation election is in place.
Each member keeps its own E & P account.
9.
Question :
(TCO 6) Which corporation is not eligible for consolidated return status?
Student Answer:
Tax-exempt charitable corporations
Insurance companies
Corporations formed outside the United States
Partnerships
All of the above
10.
Question :
(TCO 6) Members of a controlled group share all but which tax attribute?
Student Answer:
The lower tax rates on the first $75,000 of taxable income
The $40,000 AMT exemption
The §179 depreciation amount allowed
All of the above
1.
Question :
(TCO 2) During the current year, Pet Palace Company had operating income of $510,000 and operating expenses of $400,000. In addition, Pet Palace had a long-term capital gain of $30,000. How does Lucinda, the sole owner of Pet Palace Company, report this information on her individual income tax return under the following assumptions?
(I) Pet Palace is a proprietorship, and Lucinda does not withdraw any funds from the company during the year.
(II) Pet Palace is an LLC, and Lucinda does not withdraw any funds from the company during the year.
(III) Pet Palace is an S corporation, and Lucinda does not withdraw any funds from the company during the year.
(IV) Pet Palace is a regular corporation, and Lucinda does not withdraw any funds from the company during the year.
2.
Question :
(TCO 11) Congress has set very high goals as to the number of Forms 1040 that should be filed electronically. Summarize the benefits of e-filing from the perspectives of both the taxpayer and the government.
3.
Question :
(TCO 4) Palmer Corporation has 1,000 shares of common stock outstanding owned by unrelated parties as follows: Jason, 300 shares; Erin, 300 shares; and Dawn, 400 shares. Each of the three shareholders paid $75 per share for the Palmer stock 10 years ago. Palmer has $800,000 of accumulated E & P, and $40,000 of current E & P. In January of the current year, Palmer distributes land held as an investment (adjusted basis of $260,000, fair market value of $220,000) to Dawn in redemption of all 400 of her shares. In December of the current year, Palmer distributes securities held as an investment (adjusted basis of $90,000, fair market value of $110,000) to Erin in redemption of 200 of her shares.
(I) What are the tax results to Dawn on the redemption of her Palmer stock?
(II) What are the tax results to Erin on the redemption of her Palmer stock?
(III) What gain or loss is recognized by Palmer Corporation on the two redemptions?
4.
Question :
(TCO 5) Shelton Corporation and Davis Corporation want to join forces as one corporation because their businesses are complementary. They would like the resulting corporation to have a new name, because both of them have been involved in high profile lawsuits due to environmental issues. Shelton is a manufacturer with a basis in its assets of $2 million (value of $2.9 million) and liabilities of $500,000. Davis is a distributor of a variety of products including those of Shelton’s. Its basis in its assets is $1.2 million (value of $2 million) and it has liabilities of $400,000. Given these facts, which type of reorganization would you suggest for Shelton and Davis?
5.
Question :
(TCO 6) In a federal consolidated tax return group, who is responsible to pay the tax liability—the parent, the subsidiaries, or both? How are these tax-payable amounts determined?
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