Problem 1: Oliver and Wendell are the two equal shareholders of Holmes Inc, an S corporation. It made an S election in its first year of operations. Each shareholder has a $10,000 basis in his stock at the beginning of the year. The corporation has $56,000 of net income from operations for the year and made a cash distribution of $80,000, which was divided equally between the two shareholders. Which of the following is a true statement?
A. The shareholders will have a dividend income.
B. The shareholders will have a capital gain on the distribution.
C. The shareholders will have a positive basis in their stock.
D. None of the above
Problem 2: Parent Corporation formed Subsidiary Corporation on April 1, 2003, by transferring $80,000 cash for 100% of the Subsidiary stock. In the Year 2003 consolidated tax return, CTI included a taxable loss of $(70,000) from Subsidiary. For the Year 2004 consolidated tax return, CTI included a taxable loss of $(50,000) from Subsidiary. No dividends were paid by Subsidiary to Parent in either 2003 or 2004. On January 1, 2005, Parent sold all of the Subsidiary stock to an unrelated buyer for $100,000 cash. What is Parent’s gain on the sale?
A. $ 20,000
B. $ 100,000
C. $ 140,000
D. $ 80,000
Problem 3: Cheesehead Corporation is a U.S. corporation that only does business in foreign countries. During the current year it had taxable income of $600,000 from Foreign Country A and taxable income of $400,000 from Foreign Country B. The income from A was from an active trade or business basket, while the amount from B was from a passive income basket. The amount of foreign taxes paid in each country were as follows:
Country A: $180,000
Country B: $150,000
What is the allowed foreign tax credit for Cheeshead Corporation for the current year?
A. 0
B. $340,000
C. $330,000
D. $316,000
Problem 4: This year Mandy Corporation’s (tax rate = 34%) foreign subsidiary paid it a $700,000 dividend (all of its after tax income.) The subsidiary paid $175,000 of income tax to Country Q. What is the amount of dividend income that Mandy must report in its U.S. tax return?
A. 0
B. $700,000
C. $875,000
D. $360,000
Problem 5: In 2004, Blueberry Inc. engaged in a corporate acquisition of Strawberry Corporation. At the time of the acquisition, Strawberry had a net operating loss (NOL) of $100,000 with seven years remaining in the carryforward period. Assuming that the acquisitions is a taxable acquisition structured as a merger, and it occurs exactly at the middle of the year, how much of the NOL can Blueberry use in its 2004 tax return if its own taxable income for 2004 is $120,000, computed before the NOL is used?
A. $100,000
B. $ 60,000
C. 0
D. $50,000
Problem 6: Barry gave his son shares of stock when his tax basis was $100,000 and its FMV was $120,000. No gift taxes were paid on the transfer. The son sold the stock for $70,000 cash. What is his taxable gain or loss on the sale?
A. $50,000 loss
B. $30,000 loss
C. $15,000 gain
D. $34,000 gain
Problem 7: Colleen gave her 35-year-old grandson a rental property. No gift taxes were paid. His Schedule E for the first year showed a net profit of $30,000 on $80,000 of gross rents. Colleen’s marginal tax rate for that current year was 35%; her grandson’s was 15%. What is the tax savings or tax cost experienced by the “family unit” of Colleen and her grandson for the first year from the “shifting” taking place through this transfer?
A. $ 7,500 net tax savings.
B. $ 12,000 net tax savings.
C. $ 4,500 net tax savings.
D. $ 6,000 net tax savings.