Chapter 18 MC

Question 1

A C corporation in the manufacturing business having $50,000 of taxable income for the year will pay federal income taxes in the amount of

Answer 1

(A) $7,500
(A). The 15 percent tax bracket applies to the first $50,000 of corporate taxable income. Therefore the tax is $7,500 ($50,000 x .15).

Question 2

Ben and John formed a corporation. John transferred $60,000 in cash to the corporation. Ben transferred property with a basis of $30,000 and a fair market value of $80,000. The corporation paid him $20,000 in cash. They each received back 50 percent of the stock of the corporation. How much gain will Ben recognize?

Answer 2

(A) $20,000
(A). When property is transferred in a tax-free incorporation, there is no recognition of gain or loss to the transferor if only stock is received in exchange. However, gain will be recognized to Ben to the extent of money or other property received ($20,000).

Question 3

Which of the following statements concerning the income taxation of corporations is (are) correct? I. Any corporation can fully deduct the dividends it receives each year from other corporations. II. A corporation can only use capital losses to offset capital gains.

Answer 3

(B) II only

(B). I is incorrect because the dividends-received deduction, if available, is generally less than 100 percent.

Question 4

A newly formed corporation will have gross income in the current taxable year of $100,000. Which of the following would be fully deductible by the corporation for the current taxable year?

I. All of the organizational expenses incurred in forming the corporation

II. the payment of common stock dividends out of current earnings and profits

Answer 4

(D) Neither I nor II
(D). I is incorrect because organizational expenses in excess of the deductible limit permitted under section 195 of the Internal Revenue Code must be amortized over a 180-month period. II is incorrect because dividends paid are not deductible regardless of the amount of the corporation’s earnings and profits.

Question 5

Which of the following statements concerning the personal-holding-company tax is (are) correct? I. One requirement to be treated as a personal holding company is that more than 50 percent of the value of the company’s stock must be held by five or fewer individuals. II. The personal-holding-company tax can be avoided by the payment of dividends by the company.

Answer 5

(C). Both I and II are correct.

Question 6

All the following statements concerning the accumulated-earnings tax are correct EXCEPT

Answer 6

(D) Accumulations of $350,000 or less will automatically be considered as held for the reasonable needs of the business.
(D). The accumulated-earnings tax credit (or exemption) is $250,000 ($150,000 for professional service corporations).

Question 7

Which of the following statements concerning S corporations is (are) correct?

I. An S corporation may have only two classes of stock-preferred and common.

II. The electing corporation must be a domestic corporation with no more than 50 shareholders.

Answer 7

(D) Neither I nor II
(D). I is incorrect because an S corporation may not have preferred stock. II is incorrect because an S corporation may have up to 100 shareholders.