1. Future, Inc. reported the following results for the year:
Net income per books $110,000
Federal income taxes 36,170
Life insurance proceeds on key employee 15,000
Tax-exempt interest income 13,000
Net capital loss 25,000
Futureâ€™s taxable income for the year was:
2. Schedule M-3 is used to reconcile:
a. uncertain tax positions
b. U.S. GAAP and IFRS differences
c. Schedule M-1 and Schedule M-2 differences
d. Book income and taxable income differences
3. Assume corporate tax rates are a constant 35%. Elco started operations at the beginning of this year. Its book income is $10 million and its taxable income is $13 million. The difference will give rise to
a. deferred tax liability of $1,050,000
b. deferred tax asset of $1,050,000
c. income taxes payable of $3,500,000
d. income tax expense of $4,550,000
4. Which of the following items are eligible for immediate expensing and 180-month amortization?
(1.) Fee to CPA to handle Subchapter S election
(2.) Refreshments served at organizational meetings
(3.) Underwriting commission
(4.) Legal fees in connection with incorporation
(5.) Recording fees upon transfer of assets to corporation
a. (2), (4), and (5)
b. (1), (2), and (5)
c. (1), (2), (3), (4), and (5)
d. (1), (2), and (4)
5. When comparing corporate and individual taxation the following statements are true, except:
a. Individuals have exemptions and a standard deduction, corporations do not.
b. Both types of taxpayers have percentage limitations on the charitable contribution deduction, coupled with a carryover of the excess contribution.
c. All taxpayers may carry net operating losses back two years, forward 20.
d. Both corporate and individual taxpayers may have a long-term capital loss carryforward.
6. Algernon transferred the following to his controlled corporation in exchange for stock:
Basis Value Amount Remaining on Mortgage
Building $20,000 $50,000
Mortgage on the building $40,000
Cash 10,000 10,000
IBM stock 15,000 12,000
Algernon must recognize a gain of:
7. Minerva, Inc. has one class of stock, owned 20 percent by Mr. Peters, 20 percent by Mrs. Peters, 15 percent by Mrs. Petersâ€™s brother, 10 percent by Mr. & Mrs. Petersâ€™ grandchild, and 35 percent by an irrevocable trust with Mrs. Petersâ€™ son from a previous marriage as
beneficiary. Mr. and Mrs. Peters own the following percentage of Minerva, Inc. directly and constructively:
a. Mr. Peters: 50%; Mrs. Peters: 100%
b. Mr. Peters: 50%; Mrs. Peters: 85%
c. Mr. Peters: 65%; Mrs. Peters: 85%
d. Mr. Peters: 65%; Mrs. Peters: 100%
8. Harold owns 100 percent of Clawson Company. Clawsonâ€™s E&P is $500,000. Harold needs to withdraw $100,000 from the company. Which of the following transactions might be reclassified as a constructive (disguised) dividend?
a. $100,000 bonus; Haroldâ€™s compensation (before the bonus) is $350,000, relatively equal to what other presidents of similarly sized companies earn.
b. $100,000 in return for a promissory note from Harold, due upon demand but not having a fixed due date.
c. $100,000 in return for property Harold would lease to the corporation.
d. $100,000 gift from the corporation to Harold.
e. All of the above.
9. Cookies Corporation distributed land to its sole shareholder. On the date of distribution, the land had a fair market value of $85,000 and an adjusted basis to Cookies of $42,000. What is the amount of Cookiesâ€™ gain on the distribution?
10. Jennifer owns 1,000 shares of Ernie Company. Her adjusted basis in the shares is $100,000. Ernie Company has no earnings and profits. It made a cash distribution to its shareholders, of which Jennifer received $60,000. The result of this distribution to Jennifer is:
a. Jennifer must recognize a $40,000 loss and has a zero basis in the stock
b. Jennifer must recognize $60,000 dividend income and her basis in the stock does not change
c. Jennifer has no recognized gain or loss and her basis in the shares is reduced to $40,000
d. None of the above
11. Tugboats Corporation, a calendar year corporation that began doing business on January 1, 2007, had $35,000 in accumulated earnings and profits on January 1, 2013. Tugboats had an operating loss of $60,000 for the first six months of 2013, but had $10,000 in earnings for the entire year. Tugboats made a distribution of $25,000 cash to its stockholders on April 1, 2013. What is the amount of Tugboatâ€™s accumulated earnings and profits on
January 1, 2014?
12. Jones owns 100 percent of X Corporation. X Corporationâ€™s overall marginal tax rate is 35 percent. Jonesâ€™ overall marginal tax rate is 30 percent. Jones needs $40,000 from the firm. The firm has decided that it either will declare a dividend of $40,000 or will pay Jones a performance-based bonus of $40,000.
a. Overall, it is best if the firm declares the dividend
b. Overall, it is best if the firm pays a bonus
c. Overall, both parties should be indifferent regarding what form the distribution takes
13. The Trap Corporation liquidates. One shareholder, who owned 30 percent of the stock, receives for the stock, inventory worth $90,000 with a basis of $70,000. Trap Corporation will recognize:
a. $20,000 of capital gain
b. $20,000 of ordinary income
c. $20,000 of Sec. 1231 gain
d. No gain
14. Mark receives a liquidating distribution from Arosa Corporation as part of a redemption of all of its stock. Markâ€™s basis for his Arosa stock is $10,000. In exchange for his stock, Mark receives property with a $10,000 basis and a $25,000 fair market value that is subject to a $12,000 mortgage, and also receives cash of $15,000. What is Markâ€™s recognized gain?
15. Prime Corporation liquidates its 80%-owned subsidiary, Bass Corp. Bass Corp. distributes land to its minority shareholder, Shirley, who owns 20% of the Bass Corp. stock. The land received by Shirley has a $55,000 FMV. The land was used in Bass Corp.â€™s business and has an adjusted basis of $50,000 and is subject to a $10,000 liability which is assumed by Shirley. Shirleyâ€™s basis in her stock is $25,000. What gain will Shirley and Bass Corp.
recognize on the distribution of the land?
Shirley Bass Corp.
a. $20,000 gain $ 0
b. $20,000 gain $ 5,000 gain
c. $30,000 gain $15,000 gain
d. $30,000 gain $ 5,000 gain
16. The following statements about property distributions in complete liquidations with liabilities in excess of fair market value are all false, except:
a. A loss may be recognized.
b. The shareholder receives a basis in the property equal to the amount of liability.
c. The distributor recognizes gain equal to the excess of liabilities over basis.
d. Since liabilities exceed fair market value, no depreciation recapture will occur.
17. The stock of Hill Corp. is 60 percent owned by Joe and 40 percent owned by Joeâ€™s brother, Bob. During 2012, Bob transferred land (basis of $300,000; FMV of $320,000) as a contribution to capital to Hill Corp. During March 2013, Hill Corp. adopted a plan of liquidation and subsequently made a pro rata distribution of the land back to the brothers. At the time of the liquidating distribution, the land had a FMV of $160,000. What amount
of loss can be recognized by Hill Corp. on the distribution of land?
18. Holly Wreath, a shareholder in the acquired corporation, turned in 100 shares of common stock with a basis of $4,200. In return she received voting convertible preferred stock worth $4,700 and a debenture with a face value of $1,000 and a value of $850. As a result, Holly must recognize a gain of:
19. The â€œsolely for voting stockâ€ requirement in Type B reorganizations is met in all the following cases, except:
a. The acquiring corporation agrees to assume the acquired corporationâ€™s shareholdersâ€™ expenses but only if directly related to the acquisition.
b. The acquired corporation, on the eve of the acquisition, redeems five percent of its shares for cash.
c. The acquiring corporation pays cash in lieu of fractional shares resulting from the stock for stock exchange.
d. The acquiring corporation assumes the acquired corporationâ€™s legal expenses incurred in connection with the acquisition.
20. Kate owns all the stock in Warbler Corporation. Kate has a basis of $25,000 in the Warbler stock, which currently has a fair market value of $150,000. Warbler is merged into Wren Corporation. Kate receives Wren preferred stock worth $100,000 and common stock worth $50,000. Kate recognizes a gain of:
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