Federation Tax Quiz and Short Q&A



(TCOs 1 and 8) Sarah and Emily form Red Corporation with the following investments: Sarah transfers computers worth $200,000 (basis of $80,000), and Emily transfers real estate worth $180,000 (basis of $40,000) and services (worth $20,000) rendered in organizing the corporation. Each is issued 600 shares in Red Corporation. With respect to the transfers, (Points : 5)
Sarah has no recognized gain; Emily recognizes income/gain of $160,000.
Neither Sarah nor Emily recognizes gain or income.
Red Corporation has a basis of $60,000 in the real estate.
Emily has a basis of $60,000 in the shares of Red Corporation.
None of the above

Question 2. 2. (TCOs 1 and 8) Hunter and Warren form Tan Corporation. Hunter transfers equipment (basis of $210,000 and fair market value of $180,000), and Warren transfers land (basis of $15,000 and fair market value of $150,000) and $30,000 of cash. Each receives 50% of Tan’s stock. As a result of these transfers, (Points : 5)
Hunter has a recognized loss of $30,000; Warren has a recognized gain of $135,000.
Neither Hunter nor Warren has any recognized gain or loss.
Hunter has no recognized loss; Warren has a recognized gain of $30,000.
Tan Corporation has a basis in the land of $45,000.
None of the above

Question 3. 3. (TCOs 1, 8, and 9) Eagle Corporation owns stock in Hawk Corporation and has taxable income of $160,000 for the year before considering the dividends received deduction. Hawk Corporation pays Eagle a dividend of $200,000, which was considered in calculating the $160,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk’s stock? (Points : 5)
None of the above

Question 4. 4. (TCOs 1 and 8) Emerald Corporation, a calendar year C corporation, was formed and began operations on July 1, 2010. The following expenses were incurred during the first tax year (July 1 through December 31, 2010) of operations:
Expenses of temporary directors and of organizational meetings $9,000
Fee paid to the state of incorporation $1,000
Accounting services incident to organization $2,500
Legal services for drafting the corporate charter and bylaws $3,500
Expenses incident to the printing and sale of stock certificates $4,000

Assuming a § 248 election, what is the Emerald’s deduction for organizational expenditures for 2010? (Points : 5)
None of the above

Question 5. 5. (TCOs 1 and 9) Beige Corporation (a calendar year taxpayer) has taxable income of $150,000, and its financial records reflect the following for the year.
Federal income taxes paid $75,000
Net operating loss carry forward deducted currently $35,000
Gain recognized this year on an installment sale from a prior year $22,000
Depreciation deducted on tax return (ADS depreciation would have been $5,000) $20,000
Interest income on Iowa state bonds $4,000

What is Beige Corporation’s current E & P? (Points : 5)
None of the above

Question 6. 6. (TCOs 1 and 9) Stacey and Andrew each own one half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1. If Parakeet’s current E & P is $60,000, how much is allocated to Andrew’s distribution? (Points : 5)
None of the above

Question 7. 7. (TCOs 1 and 10) Which, if any, of the following can be eligible shareholders of an S corporation? (Points : 5)
A resident alien
A foreign corporation
A nonqualifying trust
None of the above

Question 8. 8. (TCOs 1 and 10) Samantha owned 1,000 shares in Evita, Inc. an S corporation, that uses the calendar year. On October 11, 2010, Samantha sells all of her Evita stock. Her basis at the beginning of 2010 was $60,000. Her share of the corporate income for 2010 was $22,000, and she receives a distribution of $37,000 between January 1 and October 11, 2010. What is her basis at the time of the sale? (Points : 5)

Question 9. 9. (TCOs 1 and 10) On January 1, 2010, Kinney, Inc. an electing S corporation, has $4,000 of AEP and a balance of $10,000 in AAA. Kinney has two shareholders, Erin and Maine, each of whom owns 500 shares of Kinney’s stock. Kinney’s 2010 taxable income is $5,000. Kinney distributes $6,000 to each shareholder on February 1, 2010, and distributes another $3,000 to each shareholder on September 1. How is Erin taxed on this distribution? (Points : 5)
$500 dividend income
$1,000 dividend income
$1,500 dividend income
$3,000 dividend income
None of the above

Question 10. 10. (TCOs 1 and 10) Lott Corporation in Macon, Georgia, converts to S corporation status in 2010. Lott used the LIFO inventory method in 2009 and had a LIFO inventory of $420,000 (FIFO value of $550,000). How much tax must be added to the 2009 corporate tax liability, assuming that Lott is subject to a 35% tax rate? (Points : 5)
None of the above

1. You’re probably of the opinion that the distinction between separately stated and non-separately stated income is one of the most confusing concepts that you’ve encountered this week. For Congress to come up with something this confusing, you know it must have had a good reason (or at least we’d like to think so!). Think about the concept for a moment. What is the broad tax policy behind separating these two categories of income? What is Congress trying to achieve? What problems does it prevent? What problems does it cause?
2. In enacting Subchapter S of the Code, Congress decided to give a certain group of corporations a break from the burden of double taxation. Given this fact, there MUST be limitations on the corporations that can select S corporation status! Provide an example of one such limitation, including the text of the Code section that provides the limitation


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