Question 1

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

Accepted Answer

A) True 
 B)False

Question 2

Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000.For income tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.

Accepted Answer

A) True 
 B)False

Question 3

Thrush Corporation files Form 1120, which reports taxable income of $200,000 in the current year.The corporation's tax is $56,250.

Accepted Answer

A) True 
 B)False

Question 4

Rhonda and Marta form Blue Corporation.Rhonda transfers land (basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash.Marta transfers $160,000 cash for 50 shares in Blue Corporation.

Accepted Answer

A) Rhonda's basis in the Blue Corporation stock is $55,000. 
B) Blue Corporation's basis in the land is $55,000. 
C) Blue Corporation's basis in the land is $180,000. 
D) Rhonda recognizes a gain on the transfer of $125,000. 
E) None of the above.

Question 5

Ed, an individual, incorporates two separate businesses that he owns by establishing two new C corporations.Each corporation generates taxable income of $50,000.As a general rule, each corporation will have a tax liability of $11,125.

Accepted Answer

A) True 
 B)False

Question 6

A corporation must file a Federal income tax return even if it has no taxable income for the year.

Accepted Answer

A) True 
 B)False

Question 7

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation, Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

Accepted Answer

A) Adam has taxable income of $50,000. 
B) Camel Corporation has a tax deduction of $50,000. 
C) Adam has no taxable income from the distribution. 
D) Camel Corporation reduces its basis in the land to $150,000. 
E) None of the above.

Question 8

A personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $22,250.

Accepted Answer

A) True 
 B)False

Question 9

Earl and Mary form Crow Corporation.Earl transfers property, basis of $200,000 and value of $1,600,000, for 50 shares in Crow Corporation.Mary transfers property, basis of $80,000 and value of $1,480,000, and agrees to serve as manager of Crow for one year; in return Mary receives 50 shares of Crow.The value of Mary's services is $120,000.With respect to the transfers:

Accepted Answer

A) Mary will not recognize gain or income. 
B) Earl will recognize a gain of $1,400,000. 
C) Crow Corporation has a basis of $1,480,000 in the property it received from Mary. 
D) Crow will have a business deduction of $120,000 for the value of the services Mary will render. 
E) None of the above.

Question 10

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

Accepted Answer

A) True 
 B)False

Question 11

George (an 80% shareholder) has made loans to Mountainview Corporation that become worthless in the current year.George is not employed by Mountainview.

Accepted Answer

A) George is not permitted a deduction for the worthless loans. 
B) The loans provide a nonbusiness bad debt deduction to George in the current year. 
C) The loans provide George with a business bad debt deduction. 
D) George may claim an ordinary loss as to the worthless loans. 
E) None of the above.

Question 12

Penny, Miesha, and Sabrina transfer property to Owl Corporation for 75% of its stock.Nancy, their attorney, receives 25% of the stock in Owl for legal services rendered in incorporating the business.What are the tax consequences of these transactions? How should this transaction have been handled?

Accepted Answer

The answer of Penny, Miesha, and Sabrina transfer property to...

Question 13

Lucinda is a 60% shareholder in Rhea Corporation, a calendar year S corporation.During the current year, Rhea Corporation had gross income of $550,000 and operating expenses of $380,000.In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000.During the year, Rhea Corporation distributed $50,000 to Lucinda.With respect to this information, which of the following statements is correct?

Accepted Answer

A) Rhea Corporation will pay tax on taxable income of $200,000. 
B) Lucinda reports ordinary income of $50,000. 
C) Lucinda reports ordinary income of $120,000. 
D) Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000. 
E) None of the above.

Question 14

The corporate marginal income tax rates range from 15% to 39%, while the individual marginal income tax rates range from 10% to 39.6%.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is incorrect regarding the taxation of C corporations?

Accepted Answer

A) Similar to those applicable to individuals, the marginal tax rate brackets for corporations are adjusted for inflation. 
B) Taxable income of a personal service corporation is taxed at a flat rate of 35%. 
C) A tax return must be filed whether or not the corporation has taxable income. 
D) The highest corporate marginal tax rate is 39%. 
E) None of the above.

Question 16

Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000).Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo.The corporation's stock is distributed equally to Kevin and Nicole.As a result of these transfers:

Accepted Answer

A) Indigo can deduct $25,000 as a business expense. 
B) Nicole has a recognized gain of $55,000 on the transfer of the real estate. 
C) Indigo has a basis of $360,000 in the inventory. 
D) Indigo has a basis of $375,000 in the real estate. 
E) None of the above.

Question 17

When Pheasant Corporation was formed under § 351, Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock.Kristen's basis in the Pheasant stock is $26,000.Three years later, Pheasant Corporation goes bankrupt and its stock becomes worthless.Kristen, who is single, owned the stock as an investment.Kristen's loss is:

Accepted Answer

A) $26,000 capital. 
B) $22,500 ordinary and $3,500 capital. 
C) $3,500 ordinary and $22,500 capital. 
D) $26,000 ordinary. 
E) None of the above.

Question 18

A taxpayer transfers assets and liabilities to a corporation in return for its stock.If the liabilities exceed the basis of the assets transferred, the taxpayer will have a negative basis in the stock.

Accepted Answer

A) True 
 B)False

Question 19

Employment taxes apply to all entity forms of operating a business.As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

Accepted Answer

A) True 
 B)False

Question 20

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is a subtraction on Schedule M-1?

Accepted Answer

A) Book depreciation in excess of tax depreciation. 
B) Excess of capital losses over capital gains. 
C) Proceeds on key employee life insurance. 
D) Income subject to tax but not recorded on the books. 
E) None of the above.

Exam 12: Organization, Capital Structure, and Operating Rules

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000.For income tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.

Thrush Corporation files Form 1120, which reports taxable income of $200,000 in the current year.The corporation's tax is $56,250.

Rhonda and Marta form Blue Corporation.Rhonda transfers land (basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash.Marta transfers $160,000 cash for 50 shares in Blue Corporation.

Ed, an individual, incorporates two separate businesses that he owns by establishing two new C corporations.Each corporation generates taxable income of $50,000.As a general rule, each corporation will have a tax liability of $11,125.

A corporation must file a Federal income tax return even if it has no taxable income for the year.

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation, Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

A personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $22,250.

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

George (an 80% shareholder) has made loans to Mountainview Corporation that become worthless in the current year.George is not employed by Mountainview.

Penny, Miesha, and Sabrina transfer property to Owl Corporation for 75% of its stock.Nancy, their attorney, receives 25% of the stock in Owl for legal services rendered in incorporating the business.What are the tax consequences of these transactions? How should this transaction have been handled?

The corporate marginal income tax rates range from 15% to 39%, while the individual marginal income tax rates range from 10% to 39.6%.

Which of the following statements is incorrect regarding the taxation of C corporations?

A taxpayer transfers assets and liabilities to a corporation in return for its stock.If the liabilities exceed the basis of the assets transferred, the taxpayer will have a negative basis in the stock.

Employment taxes apply to all entity forms of operating a business.As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is a subtraction on Schedule M-1?