MCQ's Subunit 11 Oct 2023

Question 1

Wonder, Inc., had 2023 taxable income of $200,000 exclusive of the following:

On what amount of taxable income should Wonder compute tax?

A. $205,000
B. $212,000
C. $202,500
D. $200,000

Answer 1

A. $205,000

The sale of the land and the sale of machinery used in the business are Sec. 1231 transactions, if held more than 1 year. Since the gain and loss net to a gain of $12,000, they are a long-term capital gain and loss. The capital losses on the securities are fully deductible because they do not exceed the $12,000 net Sec. 1231 gain.

Question 2

For the year ended December 31, 2023, Atkinson, Inc., a calendar-year corporation, had gross income of $260,000 including dividend income of $100,000 from 25%-owned unaffiliated domestic corporations. Business deductions for 2023 amounted to $170,000. The dividends were not from debt-financed portfolio stock. What is Atkinson’s dividends-received deduction for 2023?

A. $0
B. $58,500
C. $100,000
D. $65,000

Answer 2

B. $58,500

A corporation is allowed a deduction for 65% of dividends received from unaffiliated domestic corporations of which it owns at least 20% and less than 80% of the stock. The dividends-received deduction is limited to 65% of taxable income before inclusion of the dividends-received deduction, qualified business income deduction, net operating loss deduction, capital loss carrybacks, and certain adjustments for extraordinary dividends.

Note that if there is a net operating loss after the dividends-received deduction, the deduction is not limited by taxable income.

Question 3

In the current year, Brown, a C corporation has gross income (before dividends) of $900,000 and deductions of $1,100,000 (excluding the dividends-received deduction). Brown received dividends of $100,000 from a Fortune 500 corporation during the current year. What is Brown’s net operating loss?

A. $100,000
B. $150,000
C. $130,000
D. $200,000

Answer 3

B. $150,000

A corporation is allowed a DRD equal to 50% of dividends received from domestic corporations in which the receiving corporation owns less than 20% of both value of and voting stock of the distributing corporation. The limit of the deduction based on percentage of taxable income before dividends-received deduction, etc. does not apply if the corporation has a current net operating loss (NOL), or if a NOL results from the DRD. Brown is permitted the full DRD of $50,000 ($100,000 dividends received from a domestic corporation × 50% for less than 20% ownership). Brown’s NOL is $150,000 ($900,000 gross income before dividends + $50,000 dividends after deduction – $1,100,000 deductions excluding DRD). Because the question stem does not state the ownership percentage, it is assumed to be less than 20%. It is important that you are prepared for related situations when taking the CPA exam, and able to select the best possible answer.

Question 4

If a corporation’s charitable contributions exceed the limitation for deductibility in a particular year, the excess

A. Is not deductible in any future or prior year.
B. May be carried back or forward for 1 year at the corporation’s election.
C. May be carried forward to a maximum of 5 succeeding years.
D. May be carried back to the preceding year.

Answer 4

C. May be carried forward to a maximum of 5 succeeding years.

A corporation may carry unused charitable contributions forward for 5 years. Current contributions are deducted before carryovers. Carryovers are applied on a FIFO basis. Carrybacks of excess charitable contributions are not permitted.

Question 5

In 2023, Kara Corp. incurred the following expenditures in connection with the repurchase of its stock from shareholders:

The total of the above expenditures deductible in 2023 is

A. $0
B. $100,000
C. $400,000
D. $500,000

Answer 5

B. $100,000

Interest expense incurred on business borrowings is deductible in the period in which it is paid or accrued. However, other expenses related to a stock repurchase or reorganization are not deductible.

Question 6

John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral’s retained earnings at January 1, 2023, amounted to $1 million. For the year ended December 31, 2023, Ral’s book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:

What amount should Ral deduct for key employee and group life insurance premiums in computing taxable income for 2023?

A. $0
B. $3,000
C. $4,000
D. $7,000

Answer 6

C. $4,000

Ral Corp. may deduct the premiums paid for group term life insurance. However, no deduction is allowed for premiums paid for life insurance for which the corporation is the beneficiary.

Question 7

Pope, a C corporation, owns 15% of Arden Corporation. Arden paid a $3,000 cash dividend to Pope. What is the amount of Pope’s dividends-received deduction?

A. $3,000
B. $1,950
C. $1,500
D. $0

Answer 7

C. $1,500

The dividends-received deduction is available only to corporations. The deduction is based on the distributee corporation’s percentage ownership of the distributing corporation and may be limited to taxable income. The deduction percentage is 50% for corporations with less than 20% ownership in the distributing corporation. Pope’s deduction is $1,500 ($3,000 dividend × 50%).

Question 8

The costs of organizing a corporation in 2023

A. May be deducted in full in the year in which these costs are incurred even if paid in later years.

B. May be deducted only in the year in which these costs are paid.

C. May be amortized over a period of 180 months, even if these costs are capitalized on the company’s books.

D. Are nondeductible capital expenditures.

Answer 8

C. May be amortized over a period of 180 months, even if these costs are capitalized on the company’s books.

A corporation is deemed to elect to deduct $5,000 of organizational expenses (subject to a phase-out) and amortize the remaining expenditures over a period of 180 months, beginning with the month in which the corporation starts business.

Question 9

In 2023, Stone, a cash-basis taxpayer, incorporated her CPA practice. No liabilities were transferred. The following assets were transferred to the corporation:

Immediately after the transfer, Stone owned 100% of the corporation’s stock. The corporation’s total basis for the transferred assets is

A. $40,500
B. $30,500
C. $30,000
D. $34,500

Answer 9

B. $30,500

The basis of property acquired by a corporation in connection with a Sec. 351 transaction is the same as the basis in the hands of the transferor (shareholder), increased by the amount of gain recognized by the transferor on such transfer. Since Stone did not receive any boot, she did not recognize any gain. Thus, the corporation’s total basis in the transferred assets is the same as that in Stone’s hands, or $30,500 ($500 cash + $30,000 adjusted basis).

Question 10

A personal services corporation may deduct payments made to owner-employees only in the year in which the

A. Corporation is formed.
B. Expense is accrued on the books and records of the corporation.
C. Corporation makes a valid S election.
D. Owner-employee includes it in income.

Answer 10

D. Owner-employee includes it in income.

A payment made to the owner-employee is only deductible by the personal services corporation for the year the owner-employee includes it in income. This prevents the deduction by the corporation in the current year and the tax on the income charged to the owner-employee from being deferred to the following year.

Question 11

Clark and Hunt organized Jet Corp. with authorized voting common stock of $400,000. Clark contributed $60,000 cash. Both Clark and Hunt transferred other property in exchange for Jet stock as follows:

What was Clark’s basis in Jet stock?

A. $0
B. $160,000
C. $100,000
D. $110,000

Answer 11

D. $110,000

This series of exchanges is presumed to qualify for nonrecognition treatment under Sec. 351 as the contributors, immediately after the exchange, are in control of the corporation. Therefore, Clark’s basis in stock will be the value of cash transferred ($60,000) plus the adjusted basis of the other property ($50,000), or $110,000.

Question 12

Julia transferred a building with a basis of $175,000 and a FMV of $250,000 to an S corporation in exchange for all of its stock. The FMV of the stock was $80,000. The building had a mortgage attached of $190,000, which was assumed by the corporation. What is Julia’s realized and recognized gain on the exchange?

Answer 12

Realized Gain $95,000 Recognized Gain $15,000

The amount of realized gain is the FMV of the stock received plus the liability assumed by the corporation minus the basis in the property transferred. Thus, the realized gain is $95,000 ($80,000 + $190,000 – $175,000). Section 351 applies even if the corporation assumes the shareholder’s liability or takes property subject to a liability in the exchange. The liabilities assumed by the corporation are treated as recognized gain by Julia to the extent they exceed the adjusted basis of all property contributed. Thus, the recognized gain is $15,000 ($190,000 – $175,000).

Question 13

Which of the following entities may adopt any tax year end?

A. Trust.
B. S corporation.
C. Partnership.
D. C corporation.

Answer 13

D. C corporation.

A corporation, generally, may elect either a calendar or fiscal tax year. A personal service corporation (PSC) is required to use a calendar tax year. An exception exists for a valid business purpose or a PSC that makes “minimum distributions.” Each subsidiary included in a consolidated return must adopt the parent’s tax year. Though exceptions exists for the other answer selections, C corporations are the best answer and CPA candidates are expected to make similar decisions during the exam.

Question 14

In April, A and B formed X Corp. A contributed $50,000 cash, and B contributed land worth $70,000 (with an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each receive 50% of the corporation’s stock. What is the tax basis of the land to X Corp.?

A. $60,000
B. $70,000
C. $50,000
D. $40,000

Answer 14

A. $60,000

The basis of land to X Corp. is the adjusted basis to B ($40,000) increased by B’s recognized gain ($20,000). B’s realized gain is $30,000. Recognized gain is the lesser of boot received ($20,000) and realized gain.

Question 15

Brown Corp., a calendar-year taxpayer, was organized and actively began operations on July 1, 2023, and incurred the following costs:

Brown wishes to amortize its organizational costs over the shortest period allowed for tax purposes. In 2023, what amount should Brown deduct for the amortization of organizational expenses (excluding any immediate expensing allowed)?

A. $2,000
B. $3,000
C. $1,500
D. $2,500

Answer 15

C. $1,500

A corporation is deemed to make an election to amortize its organizational expenses over at least 180 months starting with the month in which it begins business. Organizational expenditures are those incurred incidental to the formation of the corporation. Specifically excluded are expenditures connected with issuing or selling stock and with transferring assets to the corporation. Here only the legal fees to obtain corporate charter are organizational costs and are amortized for a half year. The annual amortization is $3,000 [$45,000 × (12/180)]. The amortization expense for 2023 is only for 6 months (July - December) equaling $1,500 ($3,000 annually × 50%).

Question 16

Gero Corporation had operating income of $160,000 after deducting $10,000 for contributions to State University, but not including dividends of $2,000 received from nonaffiliated taxable domestic corporations (not from debt-financed portfolio stock). In computing the maximum allowable deduction for contributions, Gero should apply the percentage limitation to a base amount of

A. $162,000
B. $172,000
C. $171,000
D. $170,000

Answer 16

B. $172,000

In tax year 2023, the charitable contribution deduction is limited to 10% of a corporation’s taxable income (TI) computed before the charitable contribution deduction, dividends-received deduction (not dividends income), and capital loss carryback. Gero’s base amount is $172,000 ($160,000 operating income + $10,000 contributions + $2,000 dividends).

Question 17

During 2023, Ral Corp. exchanged 5,000 shares of its own $10 par common stock for land with a fair market value of $75,000. As a result of this exchange, Ral should report in its 2023 tax return

A. No gain.
B. $25,000 Sec. 1245 gain.
C. $25,000 Sec. 1231 gain.
D. $25,000 ordinary income.

Answer 17

A. No gain.

A corporation does not recognize any gain or loss on the sale or exchange of its own stock, including treasury stock. Ral Corp. should report no gain.

Question 18

Austin is the sole owner of Backyard BBQ, an S corporation. Austin transferred property with a FMV of $70,000 and a basis of $50,000 to the corporation. No stock or boot was received in the exchange. What is Austin’s realized and recognized gain on the transfer?

Answer 18

Realized Gain $20,000 Recognized Gain $0

Section 351 can apply to contributions of property to a corporation even if the corporation issues no stock in the exchange, such as capital contributed by a sole shareholder. Because Austin owns 100% of the corporation and Sec. 351 applies, none of the $20,000 realized gain is recognized.

Question 19

In the case of a corporation that is not a financial institution, which of the following statements is true with regard to the deduction for bad debts?

A. Either the allowance method or the direct charge-off method may be used, if the election is made in the corporation’s first taxable year.

B. On approval from the IRS, a corporation may change its method from direct charge-off to allowance.

C. A corporation is required to use the direct charge-off method rather than the allowance method.

D. If the allowance method was consistently used in prior years, the corporation may take a deduction for a reasonable addition to the allowance for bad debts.

Answer 19

C. A corporation is required to use the direct charge-off method rather than the allowance method.

The allowance method is not allowed. The corporation must use the direct charge-off method or the nonaccrual-experience method. Exception applies to certain financial institutions.

Question 20

Placebo Corp. is an accrual-basis, calendar-year corporation. On December 13, 2023, the board of directors declared a 2%-of-profits bonus to all employees for services rendered during 2023 and notified them in writing. None of the employees own stock in Placebo. The amount represents reasonable compensation for services rendered and was paid on March 13, 2024. Placebo’s bonus expense may

A. Not be deducted on Placebo’s tax return because payment is a disguised dividend.

B. Not be deducted on Placebo’s 2023 tax return because the per-share employee amount cannot be determined with reasonable accuracy at the time of the declaration of the bonus.

C. Be deducted on Placebo’s 2024 tax return.

D. Be deducted on Placebo’s 2023 tax return.

Answer 20

D. Be deducted on Placebo’s 2023 tax return.

Under Sec. 404, certain contributions paid by an employer are subject to being treated as deferred compensation and are deductible in the year of payment. This limitation is applicable if the deduction would otherwise be allowed under Sec. 162(a). The deduction is required in the payment year unless distributed within 2 1/2 months after year end (i.e., March 15 for a calendar-year corporation). Because the present amount was paid on March 13, the time of receipt was within the allocated period of time, and the compensation can be deducted as a business expense under Sec. 162 in 2023.

Question 21

When a corporation has an unused net capital loss that is carried back or carried forward to another tax year,

A. It is treated as a short-term capital loss whether or not it was short term when sustained.

B. It retains its original identity as short term or long term.

C. It can be used to offset ordinary income up to the amount of the carryback or carryover.

D. It is treated as a long-term capital loss whether or not it was long term when sustained.

Answer 21

A. It is treated as a short-term capital loss whether or not it was short term when sustained.

A net capital loss for the corporation may be carried back 3 years and forward 5 years. A capital loss carried back or forward to other taxable years is treated as a short-term capital loss in each such taxable year.

Question 22

Beta, a C corporation, reported the following items of income and expenses for the year:

What is Beta’s taxable income for the year?

A. $200,000
B. $300,000
C. $235,000
D. $250,000

Answer 22

C. $235,000

Corporation income tax is calculated by subtracting deductions from gross income. Deductions from corporate gross income for ordinary and necessary business expenses are allowed. A 65% dividends-received deduction (DRD) is allowed if the corporation owns 20% or more but less than 80% of the distributing corporation. Thus, there is a $65,000 DRD ($100,000 × 65%). So, taxable income is $235,000 ($600,000 gross income + $100,000 dividend income – $400,000 operating expenses – $65,000 DRD).

Question 23

During 2023, Mr. Hill and Mr. Dale formed a corporation to which Hill transferred a patent right that had a fair market value to him of $25,000 and a zero adjusted basis. Dale transferred a building that had a fair market value of $100,000 and an adjusted basis to him of $75,000. In return, Hill received 250 shares and Dale 750 shares of the corporation’s 1,000 outstanding shares of its only class of stock. As a result of this transaction, what should Mr. Dale report?

A. An ordinary gain of $25,000.
B. A capital gain of $25,000.
C. A Section 1250 gain of $25,000.
D. Neither a gain nor a loss.

Answer 23

D. Neither a gain nor a loss.

If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. The requirements are that the transfer be by one or more persons, solely in exchange for stock, and the transferor(s) must be in control of the corporation immediately after the exchange. Section 368(c) defines control as the ownership of at least 80% of both the voting and nonvoting stock. Since Hill and Dale collectively received all the shares, the control requirement is met. Hill and Dale meet these criteria so the transfer qualifies under Sec. 351(a). No gain or loss is recognized. The difference in value of property contributed for equal shares may cause other tax consequences depending on the underlying facts; e.g., Dale may have made a gift to Hill, or Hill may have received compensation from Dale or the corporation.

Question 24

Baker Corp., a calendar-year C corporation, realized taxable income of $36,000 from its regular business operations for calendar-year 2023. In addition, Baker had the following capital gains and losses during 2023:

Baker did not realize any other capital gains or losses since it began operations. What is Baker’s total taxable income for 2023?

A. $42,000
B. $40,500
C. $46,000
D. $38,500

Answer 24

D. $38,500

For corporations, all capital gains (short-term and long-term) are taxed at the corporation’s regular tax rate. The capital gain net income ($2,500) in addition to the business income ($36,000) results in total taxable income of $38,500.

Question 25

Wright Corporation reported $100,000 of book income before income taxes for the year ended December 31, 2023. The income statement disclosed the following information:

What should Wright report as its taxable income for 2023?

A. $115,000
B. $105,000
C. $118,000
D. $103,000

Answer 25

C. $118,000

Business gifts are limited to $25 for each gift. Dividends received from foreign corporations are eligible for the dividends-received deduction only if the corporation is subject to U.S. income tax. No deduction is allowed for life insurance premiums on a policy covering the life of an officer if the corporation is directly or indirectly a beneficiary. Wright’s taxable income is

Note that the portion of Christmas gifts added back is the excess deduction taken in computing book income. Also, the dividends were included in book income, but no dividends-received deduction is allowed.

Question 26

Andi Corp. issued $1 million face amount of bonds in 2018 and established a sinking fund to pay the debt at maturity. The bondholders appointed an independent trustee to invest the sinking-fund contributions and to administer the trust. In 2023, the sinking fund earned $60,000 in interest on bank deposits and $8,000 in net long-term capital gains. All of the trust income is accumulated with Andi’s periodic contributions so that the aggregate amount will be sufficient to pay the bonds when they mature. What amount of trust income was taxable to Andi in 2023?

A. $68,000
B. $60,000
C. $8,000
D. $0

Answer 26

A. $68,000

If a corporation establishes a sinking fund under the control of a trustee for the payment of its debt, any gain arising from the fund must be included in income of the corporation. Andi must include both the interest and the net long-term capital gains.

Question 27

During 2023, Anna transferred land with an adjusted basis to her of $20,000 and a fair market value of $56,000 to Elm Corporation in exchange for 100% of Elm Corporation’s only class of stock. The land was subject to a liability of $26,000, which Elm assumed for legitimate business purposes. The fair market value of Elm’s stock at the time of the transfer was $30,000. What is the amount of Anna’s recognized gain?

A. $0
B. $10,000
C. $6,000
D. $36,000

Answer 27

C. $6,000

The general rule of Sec. 351 is that no gain is recognized if a shareholder transfers property in exchange for stock of a corporation as long as the shareholder(s) involved in the transaction control(s) the corporation immediately after the exchange. Control is defined in Sec. 368(c) as 80% of the voting power and 80% of all classes of nonvoting stock. Anna received 100% of Elm Corporation’s stock and therefore has control immediately after the exchange. But Sec. 357(c) provides that gain must be recognized by the shareholder to the extent that liabilities assumed, or taken subject to, by the corporation exceed the adjusted basis of all property transferred. The liability on the land exceeded the adjusted basis of the land Anna transferred by $6,000 ($26,000 liability assumed – $20,000 adjusted basis). Thus, Anna must recognize a gain of $6,000.

Question 28

Quigley, Roberk, and Storm form a corporation. Quigley exchanges $25,000 of legal fees for 30 shares of stock. Roberk exchanges land with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Storm exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?

Answer 28

Quigley $25,000 Roberk $90,000 Storm $0

Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and immediately after the exchange, such person or persons control the corporation. Control is ownership of at least 80% of the voting stock and at least 80% of the nonvoting stock; however, stock exchanged for services is not counted toward the 80%. Since Quigley received his stock for services, only Roberk and Storm are counted toward control, and they only own 70% of the stock. Therefore, Sec. 351 does not apply. The $25,000 of legal fees contributed by Quigley is recognized as compensation for services, Roberk must recognize a gain of $90,000 ($100,000 FMV land – $10,000 AB land), and Storm recognizes no gain because his shares were paid for with cash.

Question 29

In 2023, Garland Corp. contributed $40,000 to a qualified charitable organization. Garland’s 2023 taxable income before the deduction for charitable contributions was $410,000. Included in that amount was a $20,000 dividends-received deduction. Garland also had carryover contributions of $5,000 from the prior year. In 2023, what amount can Garland deduct as charitable contributions?

A. $43,000
B. $41,000
C. $45,000
D. $40,000

Answer 29

A. $43,000

The charitable contribution deduction for corporations is limited to 10% of the taxable income computed before the charitable contribution deduction, dividends-received deduction, and capital loss carryback. Garland’s charitable contribution deduction should be $43,000 [($410,000 + $20,000) × 10%].

Question 30

Craig transferred a tractor truck and two trailers to ZYX Transport. The truck and trailers had a basis of $160,000. Craig received stock worth $150,000, property with a FMV of $20,000, and $25,000 in cash. What is Craig’s recognized gain if this was a Sec. 351 exchange?

A. $25,000
B. $45,000
C. $20,000
D. $35,000

Answer 30

D. $35,000

In a Sec. 351 exchange, Craig recognizes gain realized to the extent of money and the FMV of other property (except the stock of the corporation) received in the exchange. The total gain realized in the exchange is $35,000 ($150,000 + $20,000 + $25,000 – $160,000) and includes the stock received. Because the realized gain of $35,000 is less than the boot received of $45,000 ($25,000 cash + $20,000 FMV of property), the gain recognized by Craig is limited to $35,000.

Question 31

A C corporation must use the accrual method of accounting in which of the following circumstances?

A. The business is a personal service business with over $75 million in sales.

B. The business is a service company and has over $10 million in sales.

C. The business has more than $50 million in average sales.

D. The business had average sales for the past 3 years of less than $10 million.

Answer 31

C. The business has more than $50 million in average sales.

The cash method may be used only by PSCs, S corporations, and C corporations that have average annual gross receipts of not more than $29 million in the 3 preceding tax years.

Question 32

In 2023, Geyer, Inc., a calendar-year corporation, had net income (loss) per books of $(60,000). Included in Geyer’s gross revenues were taxable dividends of $20,000 received from an unrelated 20%-owned domestic corporation. What is Geyer’s NOL that may be carried forward to 2024?

A. $70,000
B. $60,000
C. $80,000
D. $73,000

Answer 32

D. $73,000

An NOL generated in 2021 and later may be carried forward indefinitely to the succeeding taxable years. In computing the NOL, the dividends-received deduction (DRD) is computed without regard to the 65%-of-taxable-income limitation.

Question 33

A C corporation incurred a $438,000 capital loss in Year 4 and has the following tax information:

What amount of capital loss is available for carryover to future tax years?

A. $427,000
B. $438,000
C. $406,000
D. $410,000

Answer 33

D. $410,000

A corporation may use capital losses only to offset capital gains each year. A corporation must carry the excess capital loss back 3 years and forward 5 years and characterize all carryovers as short-term capital losses (regardless of character). A capital loss can be carried back to the extent it does not increase or produce a net operating loss in the tax year to which it is carried. For Year 2, the C corporation recognized taxable income of $17,000 ($21,000 capital gain – $4,000 operating loss). As such, the capital loss carried back to Year 2 is limited to $17,000; otherwise, a net operating loss would be produced. Therefore, a $410,000 capital loss ($438,000 Year 4 capital loss – $17,000 utilized in Year 2 – $11,000 utilized in Year 3) is available for carryover to future tax years.

Question 34

With regard to carrybacks and carryovers of a corporation’s capital losses, which of the following statements is false?

A. If you carry capital losses from 2 or more years to the same year, you should deduct the loss from the latest year first.

B. There is no offset against ordinary income for a corporation.

C. When figuring the current year’s net capital loss, you cannot use any capital loss carried from another year.

D. You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it.

Answer 34

A. If you carry capital losses from 2 or more years to the same year, you should deduct the loss from the latest year first.

If capital losses are carried from 2 or more years to the same year, the loss should be deducted from the earliest year first. When that loss is fully deducted, the loss from the next earliest year should be deducted.

Question 36

In Year 4, Bach sold a painting for $50,000 purchased for his personal use in Year 1 at a cost of $20,000. In Bach’s Year 4 income tax return, the sale of the painting should be treated as a transaction resulting in

A. No taxable gain.
B. Section 1231 (capital gain-ordinary loss rule) gain.
C. Ordinary income.
D. Long-term capital gain.

Answer 36

D. Long-term capital gain.

The gain upon the disposition of the painting is taxable because Bach recognized income as defined in Sec. 61(a)(3) from “dealings in property.” Since Bach held the painting for over one year, the gain recognized from the sale of the painting will be long-term capital gain.

Question 37

“Bear” Wall is a dealer in stocks. She sells them to customers in the ordinary course of business. “Bull” Street is in the business of trading stocks for his own benefit. He buys and sells stocks as his sole means of support and business activity. Which of the following statements is true?

A. Stocks held by “Bear” are not capital assets, but stocks held by “Bull” are capital assets.

B. Stocks held by both “Bull” and “Bear” are capital assets.

C. Stocks held by “Bear” are capital assets, but stocks held by “Bull” are not capital assets.

D. Stocks held by neither “Bull” nor “Bear” are capital assets.

Answer 37

A. Stocks held by “Bear” are not capital assets, but stocks held by “Bull” are capital assets.

Capital assets are defined as all property held by a taxpayer which is not excluded by Sec. 1221. One exclusion is the stock in trade of a taxpayer properly included in inventory, or property held primarily for sale to customers in the ordinary course of a trade or business. A dealer in stock does hold the stock primarily for sale to customers in the ordinary course of business (unless the dealer “identifies” the stock as an investment by the close of the business day of acquisition). Accordingly, the stocks held by “Bear” are not capital assets.
Cases have held that a person who trades stocks for his or her own account is entitled to capital gain or loss on the transactions. The stocks of a trader are not considered held for sale to customers, so stocks held by “Bull” are capital assets.

Question 38

Spring Valley, Inc., had the following activity for the current year:

What is the amount of charitable contributions Spring may deduct in the current year?

A. $26,000
B. $24,000
C. $20,000
D. $0

Answer 38

D. $0

A charitable contribution is limited to 10% of taxable income. Since Spring has a net operating loss in the current year, the allowed charitable contribution deduction is zero.

Question 39

A C corporation has the following capital gains and capital losses for Years 1 and 2:

If the C corporation had no capital gains or losses prior to Year 1, what is the minimum net capital gain that can be reported for Year 2?

A. $50,000
B. $425,000
C. $75,000
D. $25,000

Answer 39

D. $25,000

Corporations cannot take a net capital loss deduction. Instead, capital losses can only offset capital gains. Capital losses in excess of capital gains are nondeductible in the current year and are carried back 3 years and forward 5 years. The $50,000 net capital loss arising in Year 1 ($250,000 capital gain – $300,000 capital loss) is carried forward to Year 2 and offsets the realized capital gain of $75,000 ($425,000 capital gain – $350,000 capital loss), resulting in a $25,000 net capital gain for Year 2.

Question 40

Wingate Corporation had the following income and expenses for 2023:

What is Wingate Corporation’s net operating loss for 2023?

A. $(13,250)
B. $(6,500)
C. $(11,500)
D. $0

Answer 40

B. $(6,500)

A net operating loss is the excess of deductions over gross income, with certain modifications. When a current NOL exists or an NOL results from the DRD, one modification is that the dividends-received deduction is computed without regard to the limitation of 50% of taxable income. Consequently, Wingate’s taxable income is computed as follows:

Question 41

The Sunra Corporation had the following data available for the current year:

Sunra’s taxable income for the current year is

A. $11,200
B. $12,700
C. $11,300
D. $10,600

Answer 41

C. $11,300

Section 63(a) defines taxable income as gross income less deductions allowed. Section 162 allows a deduction for ordinary and necessary business expenses. Section 170 allows a deduction for contributions made to qualified charitable organizations, limited to 10% of taxable income computed before the charitable contribution deduction and the dividends-received deduction. In this case, the limit applies because taxable income before charitable and dividends-received deductions is $14,000 ($40,000 + $2,000 – $28,000), and the $1,400 limit is less than actual contributions. Section 243 allows a deduction for dividends received from 20% or more (but less than 80%) owned domestic corporations of 65% of the dividends received, which is $1,300 ($2,000 × 65%). Sunra’s taxable income is

Question 42

Sal used a building in his business that cost $200,000. In September Year 1, Sal sold the building to Benno for $100,000 cash. Benno also agreed to assume Sal’s $150,000 mortgage and pay Sal’s $5,000 accrued real estate taxes. The total depreciation claimed on the building (including Year 1 depreciation) was $30,000. Sal paid $10,000 selling expenses on the sale. What was Sal’s realized gain or loss on the sale of the building?

A. $70,000 loss.
B. $75,000 gain.
C. $65,000 gain.
D. $80,000 loss.

Answer 42

B. $75,000 gain.

The gain from a sale or exchange of property is the excess of the amount realized from the sale or exchange over the property’s adjusted basis. The adjusted basis of an asset is generally its original cost plus the cost of any capital improvements to the property and less any depreciation or depletion. The amount realized on a sale or exchange is the total services received. The amount realized also includes any liabilities that are assumed by the buyer and liabilities to which the property traded is subject. The amount realized is the sales price less any selling expenses. Sal’s gain is calculated as follows:

Question 43

The following transfers were made by Ed during 2023. What is the gross amount of gifts?

A. $36,000
B. $52,000
C. $15,000
D. $31,000

Answer 43

D. $31,000

If you are required to file a return to report noncharitable gifts and you made gifts to charities, you must include all of your gifts to charities on the return. The $21,000 and the $14,000 are not considered gifts and are not included in total gifts. Therefore, Ed must only include the $16,000 contribution to the United Way and the $15,000 paid directly to his niece.

Question 44

In 2023, Acorn, Inc., had the following items of income and expense:

The dividends were received from a corporation of which Acorn owns 30%. In Acorn’s 2023 corporate income tax return, what amount should be reported as taxable income before special deductions?

A. $505,000
B. $525,000
C. $275,000
D. $250,000

Answer 44

C. $275,000

The dividends received deduction (DRD) and net operating losses (NOLs) are special deductions. Thus, taxable income before special deductions includes all items of gross income and deductions except for the DRD and NOL. Taxable income before special deductions is $275,000 [($500,000 – $250,000) + $25,000].

Question 45

A C corporation has a net loss from operations of $500,000; a long-term capital gain of $20,000; and a short-term capital loss of $50,000 for the current year. What is the corporation’s loss for the year?

A. ($500,000)
B. ($530,000)
C. ($483,000)
D. ($497,000)

Answer 45

A. ($500,000)

The corporation’s loss is the net operating loss of $500,000. NOLs that arise in the current year may be carried forward indefinitely, but no carryback is allowed. The carryover is limited to 80% of taxable income for the year it is carried to. Any excess continues to carry over to future years until exhausted. Corporations cannot take a net capital loss deduction. Instead, capital losses can only offset capital gains. Capital losses in excess of capital gains are nondeductible in the current year. Nondeductible net capital losses can be carried back 3 years and forward 5 years [Sec. 1212 (a)].

Question 46

In 2023, Best Corp., an accrual-basis, calendar-year C corporation, received $100,000 in dividend income from the common stock that it held in an unrelated, less-than-20%-owned, domestic corporation. The stock was not debt-financed and was held for over a year. Best recorded the following information for 2023:

Best’s dividends-received deduction on its 2023 tax return was

A. $100,000
B. $50,000
C. $45,000
D. $65,000

Answer 46

C. $45,000

Best Corp. has less than 20% ownership. Therefore, Best Corp. is entitled to a dividends-received deduction equal to the lesser of (1) 50% of the dividend received (50% × $100,000 dividend = $50,000) or (2) 50% of taxable income excluding any NOL deduction, any capital loss carryback, and the DRD itself [50% × ($100,000 dividend – $10,000 operating loss) = $45,000]. Hence, Best Corp. is entitled to a DRD of $45,000.

Question 47

Snow Corporation owns a 20% interest in Hail Corporation, a domestic corporation. For 2023, Snow Corporation had gross receipts of $390,000, operating expenses of $400,000, and dividend income of $120,000 from Hail Corporation. The dividends were not from debt-financed portfolio stock. What is Snow Corporation’s dividends-received deduction for 2023?

A. $60,000
B. $24,000
C. $78,000
D. $71,500

Answer 47

D. $71,500

A corporation is allowed a deduction for 65% of dividends received from unaffiliated domestic corporations of which it owns at least 20% and less than 80% of the stock. The dividends-received deduction is limited to 65% of taxable income before inclusion of the dividends-received deduction, QBID, net operating loss deduction, capital loss carrybacks, and certain adjustments for extraordinary dividends. (Note this deduction is 50% of taxable income for dividends from less than 20%-owned corporations.) Sixty-five percent of Snow’s dividend income is $78,000. However, 65% of the taxable income before the dividends-received deduction is $71,500. This limit restricts the dividends-received deduction that can be claimed.

Question 48

Kisco Corp.’s taxable income for 2023 before taking the dividends-received deduction was $70,000. This included $10,000 in dividends from a less than 20%-owned taxable domestic corporation. Given the 21% corporate tax rate, what would Kisco’s income tax be before any credits?

A. $14,700
B. $13,650
C. $16,800
D. $12,600

Answer 48

B. $13,650

A corporation may deduct an applicable percentage of dividends received from a domestic taxable corporation depending on the value and percentage of voting stock of the distributing corporation owned by the distributee.

Kisco may deduct $5,000. Thus, taxable income after the special deduction is $65,000 ($70,000 – $5,000). Income tax is $13,650 ($65,000 × 21%).

Question 49

For 2023, Able Corporation had $700,000 of gross income from business operations and $750,000 of allowable business expenses. It also received $100,000 in dividends from a domestic corporation for which it can take a 65% deduction. Based on this information, compute Able’s net operating loss for 2023.

A. $(15,000)
B. Able Corporation did not have an NOL for 2023.
C. $(50,000)
D. $(150,000)

Answer 49

A. $(15,000)

A net operating loss is the excess of deductions over gross income, with certain modifications. One modification is that the dividends-received deduction is computed without regard to the limitation of 65% of taxable income if taking the full 65% deduction creates or increases an NOL. Also, a deduction for a net operating loss carryover is not allowed in computing a current NOL. Consequently, Able Corporation’s NOL is computed as follows:

Question 50

Sam is a CPA and a partner in the firm of Taxes-R-Us, LLP. One of Sam’s former partners is under investigation by the Office of Professional Responsibility for disreputable conduct. Sam has been asked by the Office of Professional Responsibility to provide information regarding his former partner. Sam must provide all the information requested unless

A. He has credible evidence that his former partner is not guilty of the disreputable conduct.

B. He believes in good faith and on reasonable grounds that the information requested is privileged or that the request is of doubtful legality.

C. The conduct in question relates to one of Sam’s clients.

D. The partnership agreement prohibits him from providing the information. The conduct in question relates to one of Sam’s clients.

Answer 50

B. He believes in good faith and on reasonable grounds that the information requested is privileged or that the request is of doubtful legality.

Information or records properly and lawfully requested by a duly authorized officer or employee of the IRS must be promptly submitted. However, if reasonable basis exists for a good-faith belief that the information is privileged or the request is not proper and lawful, the practitioner is excused from submitting the requested information.

Question 51

Jackson Company has net income for the current year of $5,000. Included are dividends received of $10,000. Jackson owns 75% of the domestic company. The amount of the dividends-received deduction (DRD) available to Jackson is

A. $5,000
B. $10,000
C. $7,500
D. $6,500

Answer 51

D. $6,500

As a 75% owner, Jackson is entitled to deduct 65% of the dividends. A DRD may produce or increase a NOL.

$10,000 * .65 = $6,500

Question 52

Which of the following entities must include in gross income 100% of dividends received from unrelated taxable domestic corporations in computing regular taxable income?

Answer 52

Personal Service Corporations = Yes
Personal Holding Companies = Yes

A dividend received by one from another member of a group filing a consolidated return is eliminated. The recipient adjusts its taxable income to eliminate the dividend from the group’s consolidated taxable income. Otherwise, all dividends constitute gross income. Distinguish inclusion from the deduction from gross income received from taxable domestic corporations.

Question 53

Fact Pattern:
Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:

The building was subject to a $10,000 mortgage that was assumed by Ace.
What was Lind’s basis in Ace stock?

A. $40,000
B. $30,000
C. $0
D. $82,000

Answer 53

B. $30,000

In a Sec. 351 transaction, the shareholder’s basis in the transferred stock equals the shareholder’s adjusted basis in the contributed property minus boot received, money received, liabilities assumed by the corporation, and the FMV of property received, plus gain recognized by the shareholder. Therefore, Lind’s basis in Ace stock is $30,000 ($40,000 adjusted basis – $10,000 liabilities assumed). All of the other answers are incorrect because Lind’s basis in the Ace stock is the adjusted basis of the contributed property minus the liabilities assumed.

Question 54

How are a C corporation’s net capital losses used?

A. Deducted from the corporation’s ordinary income only to the extent of $3,000.

B. Deductible in full from the corporation’s ordinary income.

C. Carried forward indefinitely.

D. Carried back 3 years and forward 5 years.

Answer 54

D. Carried back 3 years and forward 5 years.

A net capital loss is not allowed as a deduction for a C corporation. However, the loss may be carried back 3 years and forward 5 years.

Question 55

Dole, the sole owner of Enson Corp., transferred a building to Enson. The building had an adjusted tax basis of $35,000 and a fair market value of $100,000. In exchange for the building, Dole received $40,000 cash and Enson common stock with a fair market value of $60,000. What amount of gain did Dole recognize?

A. $0
B. $5,000
C. $40,000
D. $65,000

Answer 55

C. $40,000

The amount realized equals $65,000 [$40,000 cash + $60,000 stock – $35,000 adjusted basis]. However, Sec. 351(a) states that no gain or loss shall be recognized on the transfer of assets to a corporation solely in exchange for stock. Because Dole received $40,000 cash in addition to stock, he must recognize gain under Sec. 351(b) to the extent of the cash received. Therefore, $40,000 of the $65,000 realized gain is recognized.

Question 56

In 2023, Tilden, Inc., had gross income from business operations of $500,000 and allowable business expenses of $625,000. Tilden also received $150,000 in dividends from Jefferson Corporation. Tilden owns 23% of the voting power and value of Jefferson. What is the amount of Tilden’s 2023 net operating loss?

A. $(125,000)
B. $0
C. $(50,000)
D. $(72,500)

Answer 56

D. $(72,500)

Section 172(c) defines a net operating loss as the excess of deductions over gross income, with certain modifications. One modification is that the dividends-received deduction is computed without regard to the 65% of taxable income limitation in Sec. 246(b). Thus, Tilden’s NOL is $72,500 as computed below.

Question 57

In 2023, Pine Corporation had losses of $20,000 from operations. It received $180,000 in dividends from a 25%-owned domestic corporation. Pine’s taxable income is $160,000 before the dividends-received deduction. What is the amount of Pine’s dividends-received deduction?

A. $104,000
B. $180,000
C. $117,000
D. $0

Answer 57

A. $104,000

A corporate deduction for dividends received from domestic taxable corporations is allowed. Pine Corporation may deduct 65% of dividends received from a domestic corporation in which Pine owned between 20% and 80% of the stock. This dividends-received deduction is limited to 65% of taxable income. Without regard to the limitation, Pine could deduct $117,000 ($180,000 × 65%). Pine, however, is limited to a $104,000 deduction ($160,000 taxable income × 65%). Thus, Pine’s dividends-received deduction is $104,000.

Question 58

Laura transferred property with a basis of $110,000 to a C corporation in exchange for the following:

What is Laura’s recognized gain on the transfer?

A. $20,000
B. $30,000
C. $40,000
D. $0

Answer 58

A. $20,000

The FMV of nonqualified preferred stock is treated as boot received and is not counted as stock towards the 80%-ownership test. Laura recognizes gain to the extent of boot received in the exchange. To the extent Laura received corporate stock (voting and nonvoting) in exchange for property, and because Laura had control of the corporation immediately after the exchange, nonrecognition is required for the voting and nonvoting stock.

Question 59

In 2023, Geyer, Inc., a calendar-year corporation, had net income (loss) per books of $(60,000). Included in Geyer’s gross revenues were taxable dividends of $20,000 received from an unrelated 20%-owned domestic corporation. What is Geyer’s NOL that may be carried forward to 2024?

A. $80,000
B. $70,000
C. $60,000
D. $73,000

Answer 59

D. $73,000

An NOL generated in 2018 or later may be carried forward indefinitely to the succeeding taxable years. In computing the NOL, the dividends-received deduction (DRD) is computed without regard to the 65%-of-taxable-income limitation.

Question 60

A C corporation has gross receipts of $150,000, $35,000 of other income, and deductible expenses of $95,000. In addition, the corporation incurred a net long-term capital loss of $25,000 in the current year. What is the corporation’s taxable income?

A. $65,000
B. $87,000
C. $90,000
D. $115,000

Answer 60

C. $90,000

Net capital gains (NCGs) constitute gross income. However, a corporation’s capital losses are deductible only to the extent of capital gains, whether they are short- or long-term. Therefore, a net capital loss is not deductible in the tax year incurred. The corporation has taxable income of $90,000 ($150,000 + $35,000 – $95,000).

Question 61

Wonder, Inc., had 2023 taxable income of $200,000 exclusive of the following:

On what amount of taxable income should Wonder compute tax?

A. $200,000
B. $202,500
C. $205,000
D. $212,000

Answer 61

C. $205,000

The sale of the land and the sale of machinery used in the business are Sec. 1231 transactions, if held more than 1 year. Since the gain and loss net to a gain of $12,000, they are a long-term capital gain and loss. The capital losses on the securities are fully deductible because they do not exceed the $12,000 net Sec. 1231 gain.

Question 62

Based on the following information, what is the amount of Corporation X’s net operating loss for the current year?

A. $0
B. $72,500
C. $75,000
D. $8,750

Answer 62

B. $72,500

Section 172(c) defines a net operating loss as the excess of deductions over gross income, with certain modifications. One modification is that the dividends-received deduction is computed without regard to the Sec. 246(b) limitation of 65% of taxable income. Also, a deduction for a net operating loss carryover is not allowed in computing a current NOL. Consequently, Corporation X’s NOL is computed as follows:

Question 63

Maddie and Roxie each own 50% stock in POX, an S corporation. Maddie will assume Roxie’s responsibilities while Roxie takes an extended leave in exchange for 35% of Roxie’s stock ownership, valued at $55,000. Maddie’s services are valued at $40,000. What is the treatment and recognized gain for Maddie on the transfer?

Answer 63

Treatment = Gross income
Recognized Gain = $55,000

The FMV of stock received for services is gross income to the shareholder. Stock exchanged for services is not counted towards the 80% required ownership test for Sec. 351. In addition, a stock transfer between owners does not qualify for Sec. 351 treatment.

Question 64

How much of Corporation A’s 2022 net operating loss of $100,000 may be deducted in 2023 if Corporation A’s taxable income before the net operating loss deduction is $81,000?

A. $100,000
B. $80,000
C. $64,800
D. $81,000

Answer 64

C. $64,800

NOLs for tax years 2018, 2019, and 2020 may be carried back 5 years and carried forward indefinitely. However, starting in 2021, the 80% of taxable income limitation applies to these carryovers. Therefore, the deduction is limited to $64,800 (80% of $81,000).

Question 65

Feld, the sole stockholder of Maki Corp., paid $50,000 for Maki’s stock in Year 1. In Year 2, Feld contributed a parcel of land to Maki but was not given any additional stock for this contribution. Feld’s basis for the land was $10,000, and its fair market value was $18,000 on the date of the transfer of title. What is Feld’s adjusted basis for the Maki stock?

A. $50,000
B. $52,000
C. $60,000
D. $68,000

Answer 65

C. $60,000

A shareholder recognizes no gain on the voluntary contribution of capital to a corporation. The contribution of capital merely increases the shareholder’s basis in the corporation. The shareholder’s basis is increased by the basis in the property contributed, not by the fair market value. Feld will recognize no gain on the contribution and his basis for the Maki stock is

Question 66

Which of the following is not taken into account when determining if a gain or loss should be recognized on the transfer of property to a corporation in exchange for a controlling interest in stock of the corporation?

A. Ownership of at least 80% of the total number of shares of all other classes of stock.

B. Holding period of contributed assets.

C. Receipt of money in addition to stock.

D. Ownership of at least 80% of the total combined voting power of all stock entitled to vote.

Answer 66

B. Holding period of contributed assets.

Section 351(a) provides that no gain or loss is recognized if one person or more transfers property to a corporation solely in exchange for stock in such corporation and if, immediately after the exchange, such person(s) is(are) in control of the corporation. Control is defined in Sec. 368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock. In a Sec. 351 exchange, the holding period of property transferred is not taken into account when determining the amount of the recognized gain or loss (although it may determine character if gain or loss is recognized).

Question 67

During 2023, Dowdy, a C corporation, realized a long-term capital gain of $8,000 from the sale of a tract of land, a short-term capital gain of $6,000 from the sale of stock of Ornery Corporation, and a long-term capital loss of $18,000 from the sale of U.S. government securities. What amount of the long-term capital loss may Dowdy deduct on its 2023 income tax return?

A. $14,000
B. $18,000
C. $8,000
D. $0

Answer 67

A. $14,000

A corporation may deduct capital losses only to the extent of capital gains (without regard to whether they are short- or long-term). Therefore, Dowdy can deduct only $14,000 of its net long-term capital loss in the current year. The remaining $4,000 long-term capital loss will be carried back 3 years and carried over to the next 5 years.

Question 68

A corporate taxpayer’s capital gains and losses are as follows:

What amount of capital loss deduction is the taxpayer entitled to use to offset against ordinary income?

A. $12,000
B. $3,000
C. $48,000
D. $0

Answer 68

D. $0

Corporate taxpayers are not permitted to deduct net capital loss against ordinary income.

Question 69

On New Year’s Eve, Hal sent three bottles of champagne to the three owners of the Day & Night Cleaners to thank them for their business during the year. Each bottle of champagne cost $75. Each of the owners took the champagne home. Earlier in the year, Hal had given a video game to the 10-year-old son of one of the owners. The value of the game was $50. To show his appreciation to another customer for his business, Hal gave the customer tickets to a football game. The value of the tickets for the customer was $100. What is the total amount Hal can deduct as business gifts?

A. $75
B. $100
C. $375
D. $125

Answer 69

A. $75

Expenditures for business gifts are deductible. The deduction is limited to $25 per recipient per year. Hal may deduct $75 ($25 × 3 recipients) for business gifts. The gift to the son of one of the owners is considered given to the owner; therefore, the total gift of both the champagne and the video game is limited to $25. The football tickets are considered entertainment and, therefore, cannot be deducted.

Question 70

The following information pertains to treasury stock sold by Lee Corporation to an unrelated broker in the current year:

What amount of capital gain should Lee recognize in the current year on the sale of this treasury stock?

A. $41,000
B. $0
C. $20,000
D. $21,000

Answer 70

B. $0

A corporation does not recognize gain or loss on the receipt of money or other property in exchange for its stock, including treasury stock. Therefore, no gain or loss is recognized by Lee as a result of the treasury stock sale.

Question 71

Caddo Corporation is owned by three engineers, all of whom are employed by the corporation. It primarily performs civil engineering activities with respect to construction projects. During the current year, Caddo Corporation earned $150,000 of taxable income. Caddo has not elected to be taxed under Subchapter S. What is Caddo’s current-year regular tax liability?

A. $31,500
B. $15,000
C. $18,000
D. $52,500

Answer 71

A. $31,500

Caddo Corporation is a personal service corporation. Section 448(d)(2) defines a personal service corporation as a corporation substantially all of the activities of which involve the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and whose stock is owned by employees who perform the services. Under Sec. 11(b)(2), the taxable income of a personal service corporation is taxed at a flat rate of 21%. Therefore, Caddo Corporation’s current-year tax liability is $31,500 ($150,000 × 21%).

Question 72

Pope, a C corporation, owns 15% of Arden Corporation. Arden paid a $3,000 cash dividend to Pope. What is the amount of Pope’s dividends-received deduction?

A. $3,000
B. $1,500
C. $1,950
D. $0

Answer 72

B. $1,500

The dividends-received deduction is available only to corporations. The deduction is based on the distributee corporation’s percentage ownership of the distributing corporation and may be limited to taxable income. The deduction percentage is 50% for corporations with less than 20% ownership in the distributing corporation. Pope’s deduction is $1,500 ($3,000 dividend × 50%).

Question 73

A CPA who fraudulently performs a professional service will

A. Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements.

B. Be liable only to third parties in privity of contract with the CPA.

C. Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the material misrepresentation.

D. Probably be liable to any person who suffered a loss as a result of the fraud.

Answer 73

D. Probably be liable to any person who suffered a loss as a result of the fraud.

Because fraud involves moral corruption, the courts permit all reasonably foreseeable users of an accountant’s work product to bring suit. The distinctive feature of fraud is scienter, that is, intentional misrepresentation or reckless disregard for the truth (sometimes found in gross negligence).

Question 74

John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral’s retained earnings at January 1, 2023, amounted to $1 million. For the year ended December 31, 2023, Ral’s book income, before federal income tax, was $300,000. Included in the computation of this $300,000 was the following:

What portion of the dividend revenue net of the dividends-received deduction should be included in Ral’s 2023 taxable income?

A. $650
B. $200
C. $500
D. $350

Answer 74

C. $500

A corporation may deduct an applicable percentage of dividends received from a domestic taxable corporation. The applicable percentage depends on the value and percentage of voting stock of the distributing corporation owned by the distributee.

Ral may deduct $500. Thus, $500 of the dividends received is included in taxable income.

Question 75

Mr. A owned 75% of the voting stock and 85% of the nonvoting stock of Corporation Y. Mr. A transferred property with a fair market value of $90,000 and an adjusted basis of $70,000 to Y for an additional 5% of the voting stock and 5% of the nonvoting stock. What is the amount of gain to be recognized by Mr. A?

A. $20,000
B. $8,000
C. $0
D. $10,000

Answer 75

C. $0

If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. The requirements are that the transfer be made by one or more persons solely in exchange for stock, and the transferor(s) must be in control of the corporation immediately after the exchange. Section 368(c) defines control as the ownership of at least 80% of both the voting and nonvoting stock. After the transaction, Mr. A owns 80% (75% + 5%) of the voting stock and 90% (85% + 5%) of the nonvoting stock. He therefore meets the criteria and qualifies under Sec. 351(a). No gain or loss is recognized.

Question 76

Under the rules for long-term contracts, which of the following proposed projects may use the completed-contract method?

A. $28 million, 3-year project of a qualified small business construction company.

B. $2 million, 18-month county road project of a construction company with $87 million gross receipts last year and $8 million for each of the 2 previous years.

C. $35 million home construction project.

D. Federal interstate construction project lasting 3 years.

Answer 76

C. $35 million home construction project.

Receipts and expenditures are accounted for, under the completed-contract method, in the tax year in which the contract is completed. The method is allowed only for a construction contract of a small business if expected to take no longer than 2 years to complete or home construction projects. A small business is one with average annual gross receipts not greater than $29 million for the 3 preceding tax years. Any non-housing project lasting 3 years does not qualify. Any non-housing project by a large business does not qualify. Only the home construction project qualifies for use of the completed-contract method.

Question 77

John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral’s retained earnings at January 1, 2023, amounted to $1 million. For the year ended December 31, 2023, Ral’s book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:

What amount should Ral deduct for key employee and group life insurance premiums in computing taxable income for 2023?

A. $3,000
B. $7,000
C. $4,000
D. $0

Answer 77

C. $4,000

Ral Corp. may deduct the premiums paid for group term life insurance. However, no deduction is allowed for premiums paid for life insurance for which the corporation is the beneficiary.

Question 78

A C corporation has gross receipts of $150,000, $35,000 of other income, and deductible expenses of $95,000. In addition, the corporation incurred a net long-term capital loss of $25,000 in the current year. What is the corporation’s taxable income?

A. $90,000
B. $115,000
C. $87,000
D. $65,000

Answer 78

A. $90,000

Net capital gains (NCGs) constitute gross income. However, a corporation’s capital losses are deductible only to the extent of capital gains, whether they are short- or long-term. Therefore, a net capital loss is not deductible in the tax year incurred. The corporation has taxable income of $90,000 ($150,000 + $35,000 – $95,000).

Question 79

In 2023, Rock Corporation made contributions totaling $20,000 to qualified charitable organizations. Due to the 10% limit, it could deduct only $15,000 of the contributions on its return. Which of the following statements is true regarding the excess contributions of $5,000?

A. Charitable contributions in excess of the limit may, subject to limitations, be carried over to each of the following 5 years.

B. A contribution carryover, subject to limitations, is used before the deduction of contributions for the carryover year.

C. Charitable contributions in excess of the limit may, subject to limitations, be carried over to each of the following 20 years.

D. Charitable contributions in excess of the limit may, subject to limitations, be carried back to each of the 3 prior years.

Answer 79

A. Charitable contributions in excess of the limit may, subject to limitations, be carried over to each of the following 5 years.

Excess charitable contributions may be carried over to each of the succeeding 5 years, subject to certain limitations. The total deductions for charitable contributions of a corporation may not exceed 10% of the taxable income computed before special deductions in 2023.

Question 80

With regard to the treatment of capital losses by a corporation, other than an S corporation, which of the following statements is false?

A. If a corporation has a net capital loss it cannot deduct the loss in the current year.

B. When figuring a current-year net capital loss, you must include any capital loss carried from another year.

C. When a corporation carries a long-term net capital loss to another year, it is treated as a short-term loss.

D. A corporation may not carry a capital loss from, or to, a year during which it is an S corporation.

Answer 80

B. When figuring a current-year net capital loss, you must include any capital loss carried from another year.

A corporation’s capital losses are deductible only to the extent of capital gains, whether they are short- or long-term. A net capital loss is not deductible in the tax year incurred. Net capital loss (NCL) = CLs (ST + LT) – CG (ST + LT). When figuring a current-year net capital loss, capital losses carried from other years are not included.

Question 81

Mary Martinson is a CPA. One of her clients is suing her for common law negligence, alleging that she failed to follow federal tax law when preparing the current year’s tax return. Which of the following statements is true?

A. Martinson cannot incur tort liability if she has committed criminal tax fraud.

B. If Martinson failed to follow federal tax law, she would undoubtedly be found to have committed the tort of fraud.

C. Martinson’s failure to follow federal law results in tort liability.

D. Martinson is not bound by federal tax law unless she is a member of the AICPA.

Answer 81

C. Martinson’s failure to follow federal law results in tort liability.

A CPA is a professional who must adhere to professional standards of care in the performance of his or her work. A CPA must perform in accordance with that degree of accounting knowledge and skill expected of an ordinary reasonable person who is a CPA. Whether the CPA has met the required standard is partly determined by compliance with (1) generally accepted auditing standards (GAAS), (2) PCAOB standards in a public-company audit, (3) other applicable auditing standards, or (4) statutes that establish the standard of conduct for a reasonable person. Failure to follow such standards results in liability for damages proximately caused by his or her negligence.

Question 82

For the year ended December 31, 2023, Kelly Corp. had net income per books of $300,000 before the provision for federal income taxes. Included in the net income were the following items:

If no bad debt was written off, what is Kelly’s taxable income for the year ended December 31, 2023?

A. $380,000
B. $330,000
C. $250,000
D. $355,000

Answer 82

D. $355,000

First, a 50% dividends-received deduction (DRD) is allowed if the corporation owns less than 20% of the distributing corporation. Thus, there is a $25,000 DRD ($50,000 × 50%). Second, the deductibility of bad debts is limited to the direct write-off method. The allowance method is not allowed except for certain financial institutions. Therefore, $80,000 must be added back to the financial net income. Thus, the taxable income for 2023 is $355,000 ($300,000 – $25,000 + $80,000).

Question 83

Trio Corporation was formed in 2010 by Jordan, Karen, and Lois. These three shareholders have owned all of the corporation’s stock as follows: Jordan owns 500 shares, Karen owns 100 shares, and Lois owns 100 shares. In 2023, Jordan contributed property worth $90,000 to the corporation in exchange for an additional 300 shares. Jordan’s basis in the contributed property was $20,000. Jordan will recognize

A. Gain on the exchange because he received only 30% of the stock outstanding after the exchange.

B. No gain because he has sufficient stock ownership after the exchange.

C. Gain because the transfer is not to a newly formed corporation.

D. No gain because transfers to a corporation by a shareholder in exchange for a stock interest are nontaxable regardless of the transferor’s stock ownership.

Answer 83

B. No gain because he has sufficient stock ownership after the exchange.

Section 351 states that no gain or loss is recognized when property is transferred to a corporation in exchange for the corporation’s stock if the person(s) transferring the property is(are) in control of the corporation immediately after the transfer. “Control” is defined by the Code as at least 80% ownership of the corporation’s voting and nonvoting stock. Because Jordan meets the control test, he recognizes no gain on the receipt of the Trio Corporation stock.

Question 84

During 2023, Sweetheart Corporation had the following income and expenses:

What is the amount of Sweetheart’s charitable contribution deduction for 2023?

A. $51,200
B. $68,000
C. $59,000
D. $90,000

Answer 84

B. $68,000

Charitable contributions made to qualified organizations and paid within the taxable year may be deducted from taxable income. A corporation’s charitable deduction is limited to 10% of taxable income computed before the charitable contribution deduction, capital loss carryback, and the dividends-received deduction. Sweetheart’s charitable contribution deduction for the year is $68,000 as computed below.

Question 85

Kevin, a single taxpayer, has a taxable income of $332,000. His share of the income from a law firm LLC is $50,000, and his share of W-2 wages is $70,000. Under Sec. 199A, what is Kevin’s deductible amount for the law firm LLC?

A. $0
B. $320,000
C. $64,000
D. $35,000

Answer 85

A. $0

The law service is a specified service trade or business from which the taxpayer is not allowed to claim the deduction when taxable income exceeds the upper threshold. Because Kevin has a taxable income greater than $232,100, the disallowance rule applies. Thus, Kevin cannot take a Sec. 199A deduction.

Question 86

In 2023, its first year of operations, Rowley Corporation, not a dealer in securities, realized taxable income of $128,000 from the operation of its business. In addition to its regular business operations, it realized the following gains and losses from the sale of marketable securities:

What is Rowley’s total taxable income for 2023?

A. $124,000
B. $114,000
C. $128,000
D. $134,000

Answer 86

C. $128,000

A corporation may deduct capital losses only to the extent of capital gains (without regard to whether they are short or long term). Therefore, Rowley may deduct only $22,000 of its capital losses since capital gains are $22,000 ($10,000 short term and $12,000 long term). The $14,000 balance of the capital losses may be carried forward 5 years. Rowley’s total taxable income is