1. Glen and Michael are equal partners in Trout Enterprises, a calendar-year partnership. During the year, Trout Enterprises had gross income of $400,000 and operating expenses of $220,000. In addition, the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000. During the year, Glen withdrew $60,000 from the partnership, and Michael withdrew $60,000. Discuss the impact of this information on the taxable income of Trout, Glen, and Michael.
a) Trout pays tax on $0 income, Glen's taxable income increases by $60,000, and Michael's taxable income increases by $60,000.
b) Trout pays tax on $280,000 income, Glen's taxable income increases by $60,000, and Michael's taxable income increases by $60,000.
c) Trout pays tax on $0 income, Glen's taxable income increases by $200,000, and Michael's taxable income increases by $200,000.
d) Trout pays tax on $0 income, Glen's taxable income increases by $140,000, and Michael's taxable income increases by $140,000.
e) None of the above
2. Which statement is correct regarding the taxation of C corporations?
a) 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.
b) A corporation with taxable income of less than $500 need not file a tax return.
c) The alternative minimum tax does not apply.
d) In general, the required annual payment for corporate estimated taxes is 90% of the corporation's final tax for the current year.
e) None of the above
3. 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.
a) Dawn recognizes a gain of $375,000; William recognizes a gain of $325,000.
b) Dawn recognizes a gain of $25,000; William recognizes no gain.
c) Neither Dawn nor William recognizes gain.
d) Dawn recognizes no gain; William recognizes a gain of $25,000.
e) None of the above
4. 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?
a) Kevin recognizes no taxable gain on the transfer.
b) Kevin has a taxable gain of $170,000.
c) Kevin has a taxable gain of $180,000.
d) Kevin has a basis of $200,000 in the additional stock he received in Cardinal Corporation.
e) None of the above
5. Kirk and Madison form May Corporation. Kirk transfers property (basis of $20,000 and value of $300,000) for 100 shares in May Corporation. Madison transfers property (basis of $40,000 and value of $280,000) and provides legal services in organizing the corporation. The value of her services is $20,000. In return, Madison receives 100 shares in May Corporation. With respect to the transfers, _____.
a) Kirk will recognize gain
b) Madison will not recognize any gain or income
c) May Corporation will have a basis of $280,000 in the property it acquired from Madison
d) May will have a business deduction of $20,000
e) None of the above
6. Maureen, a calendar-year taxpayer subject to a 35% marginal tax rate, claimed a charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $200,000. Which is the applicable overvaluation penalty?
a) $17,500
b) $14,000
c) $3,500
d) $0
7. The privilege of confidentiality applies to a CPA tax preparer concerning the client's information relative to _____.
a) financial accounting tax accrual work papers
b) a tax research memo used to determine an amount reported on the tax return
c) building a defense against a penalty assessed for the use of a tax shelter
d) building a defense against a charge brought by the SEC
e) None of the above
8. Lemon Inc., has taxable income of $13 million this year. Which is the maximum DPAD tax savings for this Corporation?
a) $132,600
b) $265,200
c) $273,000
d) $409,500
e) None of the above
9. Silver Corporation has average gross receipts of $5.6 million, $4.6 million, and $4.7 million in 2008, 2009, and 2010, respectively. Silver is _____.
a) not subject to the corporate income tax
b) a small corporation with respect to the AMT
c) subject to the AMT
d) not a small corporation with respect to the AMT
e) None of the above
10. Which does not increase the E & P of a corporation?
a) Dividends received deduction
b) Collection of proceeds from an insurance policy on the life of a key employee
c) Federal income tax refund
d) Charitable contributions in excess of 10% limitation
e) None of the above
11. Berry Corporation has accumulated E & P of $30,000 on January 1. During the year, the corporation distributes $120,000 to its sole shareholder, Jackson (an individual). Berry Corporation's E & P as of January 1 of the following year is _____.
a) $0
b) ($35,000)
c) $40,000
d) $85,000
e) None of the above
12. Which statement is false?
a) Most countries that trade with the United States do not impose a double tax on dividends.
b) Tax proposals that include corporate integration would eliminate the double tax on dividends.
c) The double tax on dividends may make corporations more financially vulnerable during economic downturns.
d) Many of the arguments in support of the double tax on dividends relate to fairness.
e) None of the above
13. Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 100 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $200,000, and a fair market value of $350,000, on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 30 shares from Eleanor for $225,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a _____.
a) $165,000 dividend
b) $165,000 capital gain
c) $225,000 dividend
d) $225,000 capital gain
e) None of the above
14. Ember Corporation has 500 shares of stock outstanding: Zoe owns 170 shares, Leticia owns 95 shares, and Samuel owns 55 shares. Sage Partnership owns the other 180 shares in Ember Corporation. Zoe, Leticia, and Samuel, all unrelated, are equal partners of the Sage Partnership. In applying the stock attribution rules under § 318, _____.
a) Zoe owns, directly and indirectly, 350 shares in Ember Corporation
b) Samuel owns, directly and indirectly, 115 shares in Ember Corporation
c) Leticia owns, directly and indirectly, 95 shares in Ember Corporation
d) Sage Partnership owns, directly and indirectly, 180 shares in Ember Corporation
e) None of the above
15. All of the following statements are true about corporate reorganization except _____.
a) taxable amounts for shareholders are classified as a dividend or capital gain
b) reorganizations receive treatment similar to corporate formations under § 351
c) the transfers of stock to and from shareholders qualify for like-kind exchange treatment
d) the value of the stock received by the shareholder less the gain not recognized (postponed) will equal the shareholder's basis in the stock received
e) All of the above
16 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?
a) This restructuring qualifies as a Type A reorganization.
b) This restructuring qualifies as a Type C reorganization.
c) The restructuring is taxable because liabilities cannot be distributed to shareholders in a tax-free reorganization.
d) Accent recognizes a $50,000 gain on the restructuring.
e) None of the above
17 In which type of divisive corporate reorganization do the shareholders receive stock in another corporation without relinquishing any of their stock in the original corporation?
a) Type A consolidation reorganization
b) Reverse Type B reorganization
c) Type D split-off reorganization
d) Type D split-up reorganization
e) None of the above
18. Deer Corporation was acquired last year by Lobo Corporation in a transaction causing an ownership change. At the time of the acquisition, the fair market value of Deer was $1.5 million, and the federal long-term tax-exempt rate was 5%. In the current year, Lobo has $600,000 of taxable income and excess credits carryovers from Deer amounting to $40,000. Which is Lobo's federal income tax for the year if Lobo is in the 34% tax bracket?
a) $178,500
b) $96,000
c) $55,000
d) $27,540
e) None of the above
19. Which corporation is not eligible for consolidated return status?
a) Tax-exempt charitable corporations
b) Insurance companies
c) Corporations formed outside the United States
d) Partnerships
e) All of the above
20. Members of a controlled group share all but which tax attribute?
a) The lower tax rates on the first $75,000 of taxable income
b) The $40,000 AMT exemption
c) The §179 depreciation amount allowed
d) All of the above
21. 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.
22. The client has decided to dispute the revenue agent's report. What is the tax advisor's next step?
23. Fred is the sole shareholder of Ponce Corporation, having a basis of $90,000 in 1,000 shares of Ponce common stock. Last year, Ponce (E & P of $500,000) issued a dividend of 2,000 shares of preferred stock to Fred. On the date of distribution, the fair market values per share of the common and preferred stocks were $160 and $20, respectively. In the current year, Ponce (E & P of $720,000) redeems all of Fred's preferred stock for its fair market value of $40,000.
(I) What are the tax consequences of the preferred stock dividend to Fred?
(II) What are the tax consequences of the stock redemption to Fred?
(III) What are the tax consequences of the stock redemption to Ponce?
24. 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?
25. 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?