Please answer the following as accurately as possible.
1. A partnership has $1,000 of nonrecourse liabilities and $500 of recourse liabilities. The recourse liabilities are attributable to Karen who is a 50% partner. Karen contributed property with a fair market value of $400 and an adjusted basis of $250 for her interest in the partnership. The first year of business the partnership incurred a $4,000 loss. How much of this loss, if any, may Karen deduct on her tax return?
2. ABC Corporation's tax year ends on October 31, 2008. When is ABC Corporation's income tax return required to be filed?
A. January 31, 2009.
B. January 15, 2009.
C. February 15, 2009.
D. February 31, 2009.
3. Abbot Corporation's tax year ends on June 30, 2008. If Abbot Corporation (a domestic corporation) timely files a Form 7004, Extension of Time to File, what is the extended due date of Abbot Corporation's income tax return for tax year ended June 30, 2008?
A. March 15, 2009.
B. March 30, 2009.
C. April 15, 2009.
D. May 15, 2009.
4. John, Mark, Steve, and Tome ORGANIZE the J M S & T Corporation by transferring the following:
|Transferor||Asset||Transferor's Adjusted Basis||Fair Market Value||Consideration Received|
|John||Land||$50,000||$70,000||37 shares of stock|
|Mark||Equipment||$35,000||$40,000||22 share of stock|
|Steve||Tools||$45,000||$35,000||19 shares of stock|
|Tom||Cash||$40,000||$40,000||22 shares of stock|
|100 shares Total|
The land contributed by John is subject to a mortgage in the amount of $30,000. J M S & T Corporation assumes John's mortgage on the land. The 100 shares represent all of the outstanding stock of J M S & T Corporation. Which of the following is correct?
A. The exchange qualifies for IRC section 351 nontaxable treatment.
B. The exchange does not qualify for IRC section 351 nontaxable treatment.
C. The exchange qualifies for IRC section 351 nontaxable treatment, but John must recognize $30,000 of capital gain.
D. The exchange qualifies for IRC section 351 nontaxable treatment, but John must recognize $20,000 of capital gain.
5. Sky Corporation is a C Corporation. Jake owns 80% of all the outstanding shares of Sky Corporation stock. In 2001, Jake advanced funds to Sky Corporation as a loan. The loan instrument executed between Jake and Sky Corporation is a demand note. The principal balance due on the loan from Sky Corporation is $300,000. After Jake demanded repayment of the outstanding loan on March 20, 2008, Sky Corporation transferred to Jake preferred stock with a fair market value of $325,000 in settlement of the debt. Jake has the right to require Sky Corporation to redeem the preferred stock. Which of the following is true?
A. The transfer of stock to Jake qualifies as a section 351 transfer.
B. The transfer of stock is a nontaxable transaction because Jake is in control of the corporation.
C. The transfer of stock to Jake is a section 1244 Qualified Small Business Stock transaction.
D. Jake must recognize income on the transaction.
6. Iron Corporation incurred net short-term capital gains of $40,000 and net long-term capital losses of $90,000 during 2008. Taxable income from other sources was $500,000. How are the capital gains and losses treated on the 2008 tax return, Form 1120?
A. $3,000 of the excess net long term capital losses are deducted currently and
the $47,000 remainder is carried forward indefinitely.
B. None of the excess net long term capital losses are currently deductible, but may be carried back to the three preceding years and then forward five years as short term capital losses.
C. Excess net long term capital losses are fully deductible in 2008.
D. Excess net long term capital losses of $50,000 are carried back two years and then carried forward 20 years as short term capital losses.
7. The following statements regarding qualified qualified personal service corporations are true EXCEPT:
A. 2 and 3.
B. 3 only.
C. 1 and 3.
D. 4 only.
8. Allen contributes machinery and real property to Jack Corporation that has been in existence for several years as follows:
|Asset||Adjusted Basis||Fair Market Value|
Jack Corporation has two classes of stock - one with voting rights and one without voting rights. In exchange for the machinery and real property, Allen receives stock with a fair market value of $700,000. Immediately after the transfer, Allen owns 75% of the outstanding shares of corporate stock with voting power and 80% of the outstanding shares of each class of nonvoting stock of the stock of the corporation. Which of the following statements is true?
A. $100,000 gain is recognized by Allen.
B. No gain is recognized by Allen.
C. $100,000 loss is recognized by the corporation.
D. $100,000 gain is recognized by Allen and the corporation will recognize a loss in the amount of $100,000.
9. Fran transfers real property and a mortgage to a corporation in exchange for stock. Fran is in control of the corporation immediately after the transfer. Fran now owns 82% of stock. The real property has a fair market value of $500,000 and the mortgage transferred to the corporation is $350,000 Fran has an adjusted basis in the real property of $300,000. What is the amount of income required to be recognized by Fran, if any?
10. Hank transfers land with an adjusted basis of $500,000 to Handy Hank's, Inc. In exchange, he receives shares of stock with a fair market value of $300,000 and cash in the amount of $175,000. Hank owns 51% of all the outstanding stock of Handy Hank's, Inc. immediately after the transfer. What is Hank's deductible loss on the transaction, if any?
B. $25,000 loss.
C. $200,000 loss.
D. $325,000 loss.
11. Carol Corporation and Brown Corporation are domestic corporations. The Carol Corporation owns 25% of the Brown Corporation Carol Corporation's income from business for tax year 2008 is $500,000 and business expenses are $750,000. In addition to the income from business, Carol Corporation also received dividends from Brown Corporation in the amount of $100,000. Carol Corporation's dividend received deduction is:
12. During 2008, Chris Corporation, a domestic corporation, had the following income, expenses and deductions:
|Net Capital Gains||$10,000|
|Expenses, not including Cash Contributions||$65,000|
|Contributions to qualified charities||$20,000|
|Net Operating Loss Carryover from 2007||$30,000|
What is the amount of Chris Corporation's allowable charitable contribution deduction for tax year 2008?
13. Ace Corporation had $700,000 of gross income from business operations and $725,000 of allowable business expenses. It also received $50,000 in dividends from a domestic corporation for which it can take an 80% deduction, ordinarily limited to 80% of its taxable income income before the dividends received deduction. What is Ace Corporation's Net Operating Loss?
14. Westover Health Services, Inc., a personal service corporation, has two shareholders. Westover was incorporated in 2003; and, has made irregular and infrequent distributions to its shareholders. The balance sheet of Westover Health Services, Inc. reflects unappropriated retained earnings in the amount of $800,000 and no marketable securities. Westover has no specific, definite, and feasible plans for use of the earnings accumulation in its business. It has been determined that the amount needed to redeem a deceased shareholder's stock is $500,000. What is the amount of Accumulated Earnings Tax that Westover Health Services, Inc. could be subject to for tax year ended December 31, 2008?
15. Everyday Corporation realized net book income in the amount of $300,000 for tax year ended December 31, 2008. Included in the net book income are the following:
|* Federal Income Tax||$4,000|
|* Excess Capital Losses over Capital Gains||$10,000|
|* Tax Exempt Interest Income||$5,000|
What is Everyday Corporation's taxable income?
16. Walnut, Inc. is a C corporation which was started in 1998. At the beginning of the current year, Walnut, Inc. has accumulated earnings and profits of $100,000. During the current year Walnut, Inc. makes a $5,000 distribution to its 100% shareholder in the first month of each quarter. At the end of the current year, Walnut, Inc. had $150,000 in gross income and $140,000 in allowable expenses from ordinary business operations. Walnut, Inc. also received $5,000 in fully tax-exempt interest from state bonds. What part of the second quarter distribution is treated as a distribution of accumulated earnings and profits?
17. Annual statement Form 1099-DIV must be furnished to recipients of which of the following:
A. Liquidating distributions.
B. Patronage dividends.
C. Both answers A and B.
D. None of the above.
18. Bob Moon forms Moon Enterprises LLC (Limited Liability Company) during the year. What form must Moon Enterprises LLC file in order to elect to be taxed as a C corporation?
A. Form 1065 (U.S. Partnership Tax Return).
B. Form 8832 (Entity Classification Election).
C. Form 1120 (U.S. Corporation Income Tax Return).
D. Form 7004 (Application for Extension of time to file for Corporations).
19. ABC Corporation is dissolved on July 9, 2008. What is the due date, without extensions, for the filing of the final corporate income tax return?
March 15, 2009.
B. December 31, 2008.
C. October 15, 2008.
D. October 9, 2008.
20. Croaker, Inc. is a taxable domestic corporation. Dana Corporation, a large manufacturing corporation, owns 15% of Croaker, Inc.'s outstanding stock. In 2008, Dana Corporation received $100,000 in dividends from Croaker, Inc. Dana Corporation received no other dividends in 2008. Dana Corporation may deduct, within certain limits, what percentage of the dividends received?
21. York, Inc. directly owns stock of Ajax Corporation. To determine if Ajax Corporation is a member of a controlled group with York, Inc. as the common parent, York Inc. must own at least what percentage of the voting and total value of the Ajax Corporation stock?
22. Amanda Jones and Calvin Johnson form Quail Corporation in 2008 by simultaneously making the following transfers.
What is the amount of gain or loss to be reported on these transfers by Amanda and Calvin on their 2008 Federal income tax returns?
Amanda reports a $30,000 gain and Calvin reports a $10,000 loss.
B. Amanda reports a $0 gain and Calvin reports a $0 loss.
C. Amanda reports a $30,000 gain and Calvin reports a $0 loss.
D. Amanda reports a $0 gain and Calvin reports a $10,000 loss.
23. In tax year 2008, Sun Corporation had a $10,000 long-term capital loss and a $5,000 short-term capital gain. In tax year 2004, Sun Corporation reported $1,000 in long-term capital gains and $4,000 in short-term capital gains. Sun Corporation reported no other capital gains or losses in any other tax year. How much net capital loss will be available for Sun Corporation to carry into tax year 2009?
24. In 2008 Green, Inc. had gross receipts from sales of $500,000, dividends of $100,000 from a domestic corporation in which Green, Inc. owned 50% of the stock, and operating expenses of $800,000. What is the 2008 net operating loss for Green, Inc.?
25. Richard Crepe, M.D. owns 100% of the outstanding stock of Crepe Corporation. All of Crepe Corporation's income and expenditures are derived from the medical services provided by Dr. Crepe. At the end of 2008 Crepe Corporation had $10,000 in reportable taxable income. How much federal income tax was Crepe Corporation required to pay for the 2008 year?
26. Rose Corporation is a calendar-year filing corporation that had accumulated earnings and profits at the end of 2007 of $5,000. At the end of 2008 Rose Corporation had current-year earnings and profits of $1,000. On December 31, 2008 Rose Corporation distributed to sole shareholder Paul Rose an automobile purchased for $10,000 with a fair market value of $8,000. Paul Rose assumed a liability on the automobile of $1,000. What amount of dividend paid to Paul Rose must Rose Corporation report as ordinary dividend in Box 1a of Form 1099-DIV?
27. Healey, Inc. owned a parcel of undeveloped land with an adjusted basis of $10,000, an attached liability of $4,000, and a fair market value of $15,000. In 2008 this land was distributed by Healey, Inc. to its sole shareholder who also assumed the liability. Healey, Inc. will recognize how much of a gain on this distribution?
28. In 2008 Omega, Inc. Partially compensates employee Tom Jones with 100 shares of stock. Omega, Inc. stock is selling for $200 per share at the time Tom receives his shares. On December 31, 2008 Tom sells his 100 shares of Omega, Inc. stock for $300 each. How much of an employee compensation expense can Omega, Inc. deduct in 2008 for Tom's 100 shares?
29. Gold Corporation distributes land with a fair market value of $25,000 to its sole shareholder Donna Gold, who assumes the mortgage on the land of $35,000. This land had an adjusted basis to Gold Corporation of $20,000. Gold Corporation must recognize how much of a gain on this distribution?
30. During the 2008 initial year of operations, Robert wholly owned a limited liability company (LLC) that manufactured air compressors that were sold to retail outlets within the United States. The LLC also owned an airplane that was often available for lease. At the end of 2008, the LLC had net income from the manufacturing activity of $100,000, interest income of $5,000, dividend income of $10,000, and a net loss from the airplane leasing activity of $25,000. If Robert had no other items of income or loss in 2008, he should compute his tax liability on which amount?
31. Waco, Inc. reported net capital gains as follows:
|* Tax year 2004 at||$6,000|
|* Tax year 2006 at||$8,000|
|* Tax year 2007 at||$7,000|
In tax year 2008, Waco, Inc. had $40,000 in long-term capital losses and $25,000 in short-term capital gains. How much net capital loss will be available for Waco, Inc. to carry into tax year 2009?
32. Which of the following types of domestic business entities, formed after 1996 cannot be taxed as a corporation?
|1.||An insurance Company.|
|3.||A limited liability company with two or more active members.|
|4.||A limited liability company with two or more active members.|
A. 4 Only.
B. 1, 2, and 4 Only.
C. 3 Only.
D. 2 Only.
33. The Workit Corporation has a loss for the tax year 2008. In computing the net operating loss, which of the following statements is correct regarding either limiting or allowing deductions?
A. The corporation can deduct any NOL carryovers from 2007.
B. A corporation can take the deduction for dividends received, without regard to the limits based on taxable income that normally apply.
C. A corporation cannot figure the deduction for dividends paid on certain preferred stock of public utilities without limits to its taxable income for the year.
D. If a corporation carries forward its NOL, it can carry forward an amount that is more than the corporations taxable income.
34. Joyce and Edward combine their sole proprietorships by forming the Lair Corporation. Joyce transfers land and a building having a combined $50,000 adjusted basis and a $100,000 FMV to the corporation in exchange for 40% of the Lair Corporation stock. Edward transfers equipment with a $60,000 adjusted basis and a $150,000 FMV to the corporation in exchange for 60% of the Lair stock with a par value of $10. Joyce and Edward received no other property than the Lair stock. What is Edward's recognized gain on this transaction?
35. Bob and Charles, as a group, transfer a building with a basis of $100,000 to the ABC Corporation in exchange for 66.67 of each class of stock with a fair market value of $300,000. The other 33.33% of the stock was already issued to Alice. What is the gain, if any, that Bob, Charles, or the ABC Corporation must recognize?
A. Bob and Charles, $-0-, ABC Corporation $-0-.
B. Bob and Charles, $-0-, ABC Corporation $300,000.
C. Bob and Charles, $200,000, ABC Corporation $-0-.
D. Bob and Charles, $-0-, ABC Corporation $200,000.
36. Mr. Smith and Mr. Jones each transfer property with a basis of $10,000 to a corporation in exchange for stock with a fair market value of $30,000. The total stock received by them represents 75% of each class of stock of the corporation. The other 25% of each class of stock was issued earlier to Mr. Brown, an unrelated person. The taxable consequences are:
A. None because it is transfer of property for stock.
B. Mr. Smith and Mr. Jones each recognize a gain of $20,000.
C. Mr. Smith and Mr. Jones each recognize a gain of $30,000.
D. 80% of the transaction is recognized as a taxable gain.
37. The Green Corporation owns 25% of the stock of the Cande Corporation. In 2008, Green Corporation received $10,000 dividends from the Cande Corporation stock. Assuming no other limitations apply, Green Corporation's dividends-received deduction is:
38. The Cole Corporation distributes $75,000 in cash along with land having a $50,000 adjusted basis and a $60,000 FMV to its shareholder. What gain, if any, must Cole Corporation recognize?
39. During the 2008 calendar year, the Lance Corporation made a $40,000 cash distribution to its sole shareholder. Lance Corporation's current year earnings and profits (as of the close of the year and without reduction for distributions during the year) is $25,000. Accumulated earnings and profits is $10,000. What amount of dividend should be reported on Form 1099-DIV issued to the shareholder for the year 2008?
40. Which of the following statements regarding distributions of stock is not true?
A. Distributions of stock and stock rights are never treated as property.
B. Stock rights are distributions by a corporation of rights to acquire its stock.
C. Distributions of stock dividends and stock rights are generally tax free to shareholders.
D. Expenses of issuing a stock dividend are not deductible but must be capitalized.
41. The West Corporation distributes property with a basis of $1,000 and a fair market value of $4,000 subject to a liability of $6,000 to Jeff, a shareholder. What is the gain or loss, if any, the West Corporation must recognize as a result of the distributions?
A. $3,000 gain.
B. $1,000 loss.
C. $5,000 gain.
42. The Warren Corporation, decided to distribute 10 additional shares of its own $10 par stock to each of its 5 employees at year end as a reward for a profitable year. Each employee was to receive 10 shares with a fair market value of $200 per share. Employees were offered a choice of cash or stock dividend. What is the tax effect to Warren Corporation of this distribution?
A. $0, distributions are not taxable.
B. $9,500 gain in distribution of stock.
C. $9,500 gain in distribution of stock.
D. Both B and C above.
43. Which of the following types of domestic business entities, formed after 1996, must be taxed as a corporation?
A. All of the above.
B. 1, 2 and 3 only.
C. 3 only.
D. 2 and 3 only.
44. ABC Company, a corporate taxpayer, has a fiscal year ending September 30. The due date, excluding extension, for filing their return is:
A. January 15.
B. November 15.
C. December 1.
D. December 15.
45. The Smith Corporation realized a long-term capital gain of $10,000, a short-term capital gain of $15,000 and a long-term capital loss of $27,000. What is the amount and character, if any, of carry back or carry forward that the Smith Corporation could deduct?
A. $10,000 long-term gain.
B. $15,000 short-term loss.
C. $2,000 short-term loss.
D. $25,000 long-term loss.
Inst. Form 2553
47. On January 1, 2008, Tom, Dick, and Harry were sole and equal shareholders of ABC, Inc., a calendar year C Corporation. On February 1, 2008, Tom sold all of his interest in the corporation to Dick. On March 1, 2008, Dick decides to convert the corporation to an S Corporation, effective January 1, 2008. Regarding the desired conversion, which of the following statements is true?
A. Since Dick now owns over 51% of the corporation, he can unilaterally prepare
and submit the proper election application, IRS Form 2553.
B. Since the S Corporation election requires consent by 100% of the shareholders, both Dick and Harry must sign the application to elect to be treated as an S Corporation.
C. Since Tom, Dick, and Harry were all shareholders as of January 1, 2008, all three must consent to elect to treat the corporation as an S Corporation.
D. Since there was a change in stock ownership after the beginning of the Corporation's tax year, any election to treat the corporation as an S Corporation will not be effective earlier than January 1, 2009.
48. Bob transfers property worth $50,000 to the Acme Corporation and provides personal services worth $5,000 in exchange for stock valued at $55,000. Immediately after the exchange Bob owns 90% of Acme's outstanding stock. What is Bob's gain if any?
A. No capital gain, no ordinary income.
B. No capital gain, $5,000 ordinary income.
C. No capital gain, $50,000 ordinary income.
D. $5,000 capital gain, no ordinary income.
49. During the 2008 calendar year, the Baker Corporation distributed a dividend in the form of a building to its sole shareholder. The building has a fair market value of $60,000 and an adjusted basis of $20,000. The corporation has sufficient earnings and profits. Not considering any potential tax effect of any taxes on the distribution, the net effect of the transaction on earnings and profits is:
A. An increase of $40,000.
B. An increase of $20,000.
C. A decrease of $40,000.
D. A decrease of $20,000.
50. If a corporation's tax year ends December 31, it generally must file its income tax return:
A. By June 15th of the following year.
B. By April 15th of the following year.
C. By March 15th of the following year.
D. By October 15th of the following year.
51. Generally, if a new corporation is filing a short-period return with a tax year ending on July 31st, when must it file its income tax return?
By October 15th.
B. By November 15th.
C. By December 15th.
D. January 31st of the following year.
52. David Shea transfers real estate with a basis of $40,000 and a FMV of $90,000 to a controlled corporation in return for stock in the corporation. Just before the transfer, David obtains a loan secured by the real estate and uses the $10,000 loan proceeds to buy a new motorcycle. Along with the real estate, the mortgage in transferred to the corporation. Which of the following are true with regard to the tax consequences to David?
A. The mortgage assumed by the corporation does not exceed his basis in this
particular property transferred but because the liability is considered boot,
David has to report a gain.
B. No bona fide business purpose exists for the corporation to assume David's loan.
C. Using the proceeds for personal purposes is like the corporation distributing cash, which would be taxed as boot under normal circumstances.
D. All of the above.
53. Which of the following statements is not true?
A controlled group of corporations must file a consolidated return.
B. In addition to regular income tax, a corporation may be liable for accumulated earnings tax if it accumulates profits instead of distributing them to shareholders.
C. The tentative minimum tax of a small corporation is zero. This means that a small corporation will not owe AMT.
D. Generally, a personal service corporation is one that furnishes personal services performed by employee-owners.
54. Sincere Inc., a C corporation, overestimated how successful it would be in the 2008 tax year. Final calculations show it will have an NOL for 2008 and owe no taxes. It had overpaid its estimated taxes for the year by $700. Sincere Inc. wants its tax refund as soon as possible. What should it do?
File a Form 1120, U.S. Corporation Income Tax Return, as quickly as possible
before the 15th day of the third month after its year ended and wait for the
B. File Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return, as quickly as possible and state on the form that it had overestimated its tax and wishes a quick refund as quickly as possible.
C. File Form 4466, Corporation Application for a Quick Refund, before the 16th day of the third month after its year end, and use it as a worksheet to show that it had overpaid its estimates by $700.
D. Write a letter to the appropriate IRS Service Center and ask for a quick refund of overpaid corporate tax estimates.
55. James Williams is the sole shareholder of Crystal Ball Enterprises, Inc. He received a $100 dividend distribution from his corporation in 2008. Current earnings of Crystal Ball were $1,000. What reporting requirements apply to this distribution?
No reporting requirements apply because the distribution is less than $600.
B. No reporting requirements apply because the distribution is not taxable.
C. Form 1099-DIV should be filed because the distribution is a dividend and is at least $10.
D. Form 1099-MISC should be filed to report miscellaneous income.
56. Rand Corporation distributes land to shareholder. The fair market value of the land exceeds its basis to the corporation. Which of the following statements is true with regard to this transaction?
A. Rand Corporation must
recognize gain on this distribution.
B. Rand Corporation realizes but does not recognize gain on this distribution.
C. Rand Corporation has neither a realized nor a recognized gain on this distribution.
D. The stockholder has a recognized loss on this distribution.
57. Which of the following statements regarding corporate distributions is false?
Under no circumstances may a distribution, whether is cash or property, generate
a deficit in Earnings and Profits.
B. Under no circumstances may a distribution, whether in cash or property, add to a deficit in Earnings and Profits.
C. In a corporate distribution, the Earnings and Profits account is reduced by the amount of money distributed.
D. In a corporate distribution, the Earnings and Profits account is reduced by the lesser of the FMV or the adjusted basis of the property distributed.