Question 1

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000.How much is Sparrow's income tax liability for the year?

Accepted Answer

A) $42,650 
B) $42,800 
C) $45,650 
D) $62,400 
E) None of the above

Question 2

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 (basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

Accepted Answer

A) These transfers are fully taxable and not subject to § 351. 
B) Ron's basis in his stock is $27,000. 
C) Ron's basis in his stock is $6,000. 
D) Brad's basis in his stock is $20,000. 
E) None of the above.

Question 3

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

Accepted Answer

A) Wren Corporation is not permitted a deduction for the loans. 
B) The loans result in a nonbusiness bad debt deduction to Wren Corporation. 
C) The loans provide Wren Corporation with a business bad debt deduction. 
D) Wren claims a capital loss due to the uncollectible loans. 
E) None of the above.

Question 4

Nick exchanges property (basis of $100,000; fair market value of $3 million), for 65% of the stock of Yellow Corporation.The other 35% of the stock is owned by Gloria who acquired it several years ago.What are the tax consequences to Nick?

Accepted Answer

The answer of Nick exchanges property (basis of $100,000; fair...

Question 5

Rick transferred the following assets and liabilities to Warbler Corporation. $\begin{array}{lrr} &&\text { Fair Market }\
&\text { Adjusted Basis }&\text { Value }\
\text { Building } & \$ 210,000 & \$ 225,000 \
\text { Equipment } & 45,000 & 75,000 \
\text { Trucks } & 15,000 & 30,000 \
\text { Mortgage (held for four years) on building } & 30,000 & 30,000
\end{array}$ ? In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).

Accepted Answer

A) Rick has a recognized gain of $60,000. 
B) Rick has a recognized gain of $75,000. 
C) Rick's basis in the stock of Warbler Corporation is $270,000. 
D) Warbler Corporation has the same basis in the assets received as Rick does in the stock. 
E) None of the above.

Question 6

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer, Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

Accepted Answer

A) Leah recognizes ordinary income of $70,000. 
B) The § 1245 depreciation recapture potential carries over to Crow Corporation. 
C) The § 1245 depreciation recapture potential disappears. 
D) Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000. 
E) None of the above.

Question 7

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

Accepted Answer

A) True 
 B)False

Question 8

In structuring the capitalization of a corporation, the tax law is neutral for the investor as to debt versus equity financing.

Accepted Answer

A) True 
 B)False

Question 9

Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000), executed by Green Corporation and made payable to Jane.As a result of the transfer:

Accepted Answer

A) Jane recognizes no gain. 
B) Jane recognizes a gain of $75,000. 
C) Jane recognizes a gain of $270,000. 
D) Jane recognizes a gain of $320,000. 
E) None of the above.

Question 10

Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year.Aaron, who owns 25% of Eagle, will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Accepted Answer

A) True 
 B)False

Question 11

Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation.In the current year, Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib.Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

Accepted Answer

A) True 
 B)False

Question 12

Carol and Candace are equal partners in Peach Partnership.In the current year, Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses) and distributed $25,000 to each partner.Peach must pay tax on $75,000 of income.

Accepted Answer

A) True 
 B)False

Question 13

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000.Even though § 351 applies, Tina may recognize her realized loss of $10,000.

Accepted Answer

A) True 
 B)False

Question 14

Eileen transfers property worth $200,000 (basis of $190,000) to Goldfinch Corporation.In return, she receives 80% of the stock in Goldfinch Corporation (fair market value of $180,000) and a long-term note (fair market value of $20,000) executed by Goldfinch and made payable to Eileen.Eileen recognizes gain on the transfer of:

Accepted Answer

A) $0. 
B) $10,000. 
C) $20,000. 
D) $190,000. 
E) None of the above.

Question 15

Similar to like-kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) Schedule M-2 is used to reconcile net income computed for financial accounting purposes with taxable income reported on the corporation's tax return. 
B) The corporate return is filed on Form 1120S. 
C) Corporations can receive an automatic extension of nine months for filing the corporate return by filing Form 7004 by the due date for the return. 
D) A corporation with total assets of $7.5 million or more is required to file Schedule M-3. 
E) None of the above.

Question 17

Don, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year.The Tax Court has held that $200,000 represents unreasonable compensation.Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Accepted Answer

A) True 
 B)False

Question 18

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

Accepted Answer

A) True 
 B)False

Question 19

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?

Accepted Answer

The answer of How is the transfer of liabilities in...

Question 20

Joe and Kay form Gull Corporation.Joe transfers cash of $250,000 for 200 shares in Gull Corporation.Kay transfers property with a basis of $50,000 and fair market value of $240,000.She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation.The value of Kay's services is $10,000.With respect to the transfer:

Accepted Answer

A) Gull Corporation has a basis of $240,000 in the property transferred by Kay. 
B) Neither Joe nor Kay recognizes gain or income on the exchanges. 
C) Gull Corporation has a compensation deduction of $10,000. 
D) Gull capitalizes $10,000 as organizational costs. 
E) None of the above.

Exam 12: Organization, Capital Structure, and Operating Rules

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000.How much is Sparrow's income tax liability for the year?

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 (basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

Nick exchanges property (basis of $100,000; fair market value of $3 million), for 65% of the stock of Yellow Corporation.The other 35% of the stock is owned by Gloria who acquired it several years ago.What are the tax consequences to Nick?

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer, Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

In structuring the capitalization of a corporation, the tax law is neutral for the investor as to debt versus equity financing.

Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000) , executed by Green Corporation and made payable to Jane.As a result of the transfer:

Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year.Aaron, who owns 25% of Eagle, will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Carol and Candace are equal partners in Peach Partnership.In the current year, Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses) and distributed $25,000 to each partner.Peach must pay tax on $75,000 of income.

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000.Even though § 351 applies, Tina may recognize her realized loss of $10,000.

Similar to like-kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

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

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?