Ninja REG January 8 2016

Question 1

1. Packer Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception. Starr was a 50% shareholder in Packer throughout the current year and had a $10,000 tax basis in Packer stock on January 1. During the current year, Packer had a $1,000 net business loss and made an $8,000 cash distribution to each shareholder. What amount of the distribution was includible in Starr’s gross income?

A. $8,000
B. $7,500
C. $4,000
D. $0

Answer 1

Answer: D – Since Packer Corp. has been an S corporation since its inception, it has no accumulated E&P. Distributions by S corporations with no accumulated E&P are tax-free up to the adjusted basis of the stock with any excess taxable as capital gains. In this case, the $8,000 distribution did not exceed Starr’s basis and, therefore, was not taxable.

   Basis on January 1                $10,000
   Pro rata share of current loss
     (50% x $1,000)                     (500)
   Distribution                       (8,000)
                                     ——–
   Basis on December 31               $1,500

Question 2

2. Rich is a cash-basis, self-employed air-conditioning repairman with gross business receipts of $20,000. Rich’s cash disbursements were as follows:

Air-conditioning parts $2,500
Yellow Pages listing 2,000
Estimated federal income taxes on self-employment income 1,000
Business long-distance telephone calls 400
Charitable contributions 200

What amount should Rich report as net self-employment income?

A. $15,100
B. $14,900
C. $14,100
D. $13,900

Answer 2

Answer: A – Rich should report $15,100 as self-employment income. His gross self-employment income of $20,000 can be reduced by eligible business deductions for air-conditioning parts of $2,500, the Yellow Pages listing of $2,000, and business long-distance calls of $400, which results in a net self-employment income of $15,100
Estimated federal income tax on self-employment income cannot be considered as a deduction in determining net self-employment income. Charitable contributions are an itemized deduction on Schedule A of IRS Form 1040 and not considered in determining self-employment income.

Question 3

3. Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, a debtor will be denied a discharge in bankruptcy if a debtor:

A. fails to list a creditor.
B. owes alimony and support payments.
C. cannot pay administration expenses.
D. refuses to satisfactorily explain a loss of assets.

Answer 3

Answer: D – The intention of Chapter 7 of the Bankruptcy Code is to extinguish the debts of an individual and give that individual a second chance. Honest mistakes are tolerated, such as the failure to list a creditor, particularly a minor creditor, in the case of numerous personal creditors as is often the case in a Chapter 7 proceeding. The fact alimony or support is owed is not fatal to the Bankruptcy proceeding and the lack of funds to pay administrative expenses is not a bar to bankruptcy discharge. However, a known asset that has been “lost” since the bankruptcy proceeding was initiated and known to creditors and/or others is suspect to most reasonable persons, usually indicating an intention to hide or illegally retain the asset that should otherwise be available to creditors for discharge of legitimate debts. As such, a satisfactory explanation of the loss of known assets must be established to the court’s satisfaction