R3-1 Flashcards

Question

Dart Corp., a calendar year domestic C corporation, is not a personal holding company. For purposes of the accumulated earnings tax, Dart has accumulated taxable income for Year 1. Which step(s) can Dart take to eliminate or reduce any Year 1 accumulated earnings tax? I. Demonstrate that the "reasonable needs" of its business require the retention of all or part of the Year 1 accumulated taxable income. II. Pay dividends by March 15, Year 2. a. Neither I nor II. b. II only. c. Both I and II. d. I only.

Answer 1

Choice "c" is correct. Dart can take both actions to eliminate or reduce any Year 1 accumulated earnings tax. A corporation that can demonstrate that its reasonable business needs require it to accumulate earnings can escape the accumulated earnings tax on the portion reasonably accumulated. Dividends paid by the 15th day of the third month after the close of the corporation's tax year reduce the accumulated earnings subject to the accumulated earnings tax. Choices "d", "b", and "a" are incorrect. Each of these answers treats either I or II (or both) incorrectly.

Answer 2

Choice "a" is correct. Eastern's alternative minimum taxable income before the ACE adjustment (and ignoring the exemption allowable) is $306,000: Taxable income $ 300,000 Adjustment for regular tax accelerated depreciation 1,000 Tax preference for private activity bond interest 5,000 AMTI $ 306,000 Choices "d", "b", and "c" are incorrect. Both the adjustment for accelerated depreciation and the preference for private activity bond interest are addbacks to taxable income to arrive at AMTI.

Answer 3

Choice "c" is correct. Under certain conditions a taxpayer may take a credit against its U.S. income tax for foreign income taxes paid. Choice "b" is incorrect. The dividends-received deduction (not exclusion) reduces taxable income; it is not a tax credit. Choice "d" is incorrect. State income taxes reduce taxable income; they are not tax credits. Choice "a" is incorrect. Accelerated depreciation reduces taxable income; it is not a tax credit.

Answer 4

Choice "d" is correct. The imposition of the accumulated earnings tax does not depend on the number of shareholders a corporation has. Choice "a" is incorrect. Partnerships are not liable for the accumulated earnings tax, but most corporations are potentially liable. Choice "b" is incorrect. Corporations that make distributions in excess of accumulated earnings are not liable for the accumulated earnings tax. There would be no accumulated earnings left to tax. Choice "c" is incorrect. Personal holding companies are not liable for the accumulated earnings tax.

Answer 5

Choice "c" is correct. Distributions out of the sum of current and accumulated earnings and profits are taxable as dividends to the recipients. Accumulated E&P at 1/1/Year 1 $ 120,000 Earnings in Year 1 160,000 Taxable dividends to recipients 280,000 Excess distributed 80,000 Total distributed $ 360,000 Any excess reduces the shareholder's basis in Dahl stock, and any amount beyond that required to reduce the shareholder's basis to zero is treated as received on the sale or exchange of the stock and is capital gain. Choices "d", "a", and "b" are incorrect, per the above calculation and explanation.

Answer 6

Choice "c" is correct. The formation of a corporation under these conditions is a nontaxable event. Clark's basis will be the $60,000 cash he contributed plus the $50,000 adjusted basis of the non-cash property for a total of $110,000. Choice "b" is incorrect. Clark contributed both cash and property. Thus, Clark's basis in Jet's stock is greater than zero. Choice "d" is incorrect. The amount of cash that Clark contributed must also be considered in determining Clark's basis in Jet stock. Choice "a" is incorrect. When property is contributed to form a corporation, it is contributed at its adjusted basis, not at its fair market value.

Answer 7

Choice "c" is correct. A taxpayer does not extend the time for payment of tax by extending the filing deadline for the return. If there is tax owed when the return is filed, interest must be paid at the rate prescribed by IRC §6621; therefore, Bass was subject to pay interest on the $400 tax payment made in Year 3. There is no delinquency penalty if the taxpayer files its return, pays at least 90% of the tax due by the due date, and pays the balance due on or before the extended due date (all of which Bass Corp. complied with). Choices "b", "a", and "d" are incorrect, per the above discussion.

Answer 8

Choice "c" is correct. Edge should use the annualized income method for calculating its estimated tax payments. Edge cannot use the preceding year method because it did not have an income tax liability in the preceding taxable year. Choices "b", "d", and "a" are incorrect, per the above discussion.

Answer 9

Choice "b" is correct. If the prior omission was nonfraudulent, the statute of limitations cannot be reopened after it has expired. To mitigate the unfair effects of the statute of limitations in some rare cases, a tax year can be reopened to avoid hardship for the taxpayer or the IRS. In the case in which an item is ruled deductible in a subsequent year after having been taken in a year now closed by the statute of limitations, the IRS will reopen the statute of limitations to disallow the deduction in the previous year. Choices "a", "c", and "d" are incorrect. Each of these answers incorrectly addresses I and/or II.

Answer 10

Choice "c" is correct. I. Interest is normally included in personal holding company income, but only if it is included in the receiving corporation's gross income. Since interest income from tax-exempt obligations is not included in gross income, it is not personal holding company income. II. Dividend income from unrelated domestic corporations is personal holding company income. Choices "a", "b", and "d" are incorrect. Each of these answers treats I or II incorrectly.

Answer 11

Choice "d" is correct. A dividend paid in property other than money is taxable to an individual taxpayer to the extent of the property's fair market value, but not in excess of the current and accumulated earnings and profits of the distributing corporation. In this case the fair market value of the dividend is $200,000. It is taxable to the extent that Kent had current earnings ($60,000) plus accumulated earnings and profits ($125,000) plus any gain generated on the distribution itself ($50,000); thus the dividend is taxable to the extent of $200,000. Choice "b" is incorrect. The maximum taxable amount of a property dividend is equal to the sum of both current earnings and profits and accumulated earnings and profits (plus any gain to the corporation on the distribution itself). Choice "a" is incorrect. A dividend paid in property other than money is taxable to an individual taxpayer to the extent of the property's fair market value (not its basis). However, the taxable dividend amount is no more than the current and accumulated earnings and profits of the distributing corporation (plus any gain to the corporation on the distribution itself). Choice "c" is incorrect. This answer did not take into account the gain generated on the distribution of the appreciated property.

Answer 12

Choice "a" is correct. The acquisition of a controlling (usually 80%) interest by one corporation in the stock of another corporation solely for stock is a tax-free (Type B) reorganization. Choice "c" is incorrect. King need not acquire 100% of Jaxson's stock, just a controlling interest. Choice "b" is incorrect. There is no specific amount of acquiring corporation stock that must be issued in a tax-free reorganization; the acquiring corporation must acquire 80% or more of the target's stock, however. Choice "d" is incorrect. There is no requirement that Jaxson surrender assets for the reorganization to qualify as tax-free.

Answer 13

Choice "b" is correct. Only 50% of business meal and entertainment expense is deductible. Choices "d", "c", and "a" are incorrect. Each of these is an incorrect percentage.

Answer 14

Choice "b" is correct. Book net income $ 300,000 Nondeductible bad debt expense 80,000 Dividends received deduction _(35,000)_ $ 345,000 Choice "d" is incorrect. The bad debt expense taken on the allowance method is disallowed. For tax purposes, the corporation must use the direct write-off method. In addition, Kelly Corp. is allowed a 70% dividends received deduction. Choice "c" is incorrect. Only 70% of the DRD is allowed as a deduction. Choice "a" is incorrect. Kelly Corp. is allowed a 70% DRD.

Answer 15

Choice "d" is correct. Year 4 to Year 5, Taylor will carry its NOL back two years and forward until it is used (but not more than 20 years). Carrying the NOL back to Year 4 to Year 5 absorbs $70,000 of the $200,000 NOL generated in Year 6 leaving $130,000 to be absorbed in Year 7 and later years. Choice "a" is incorrect. Taylor does not waive the two year carryback; therefore, the NOL will carry back to the second preceding tax year. Choice "c" is incorrect. The NOL carryback goes first to the second preceding tax year (Year 4), not the third preceding year (Year 3). Choice "b" is incorrect. The NOL carryback goes first to the second preceding tax year (Year 4), not the fifth preceding year (Year 1).

Answer 16

Choice "d" is correct. The deduction is an ordinary and necessary business expense treated just as any other compensation expense is treated. Axis is an accrual basis taxpayer, and the deduction is taken on the return for the year in which the expense accrued because it was paid within 2-1/2 months of year-end. Choice "b" is incorrect. The bonus was declared 11-1/2 months into the taxable year, so the amount, while not precisely known, could be determined with reasonable accuracy. Choice "a" is incorrect. The deduction accrued is in Year 1 and is taken on the Year 1 return. An accrual-basis taxpayer deducts expenses in the year in which they accrue, not the year in which they are paid. Choice "c" is incorrect. Since none of the recipient employees are shareholders of Axis, the bonus will not be a disguised dividend.

Answer 17

Choice "c" is correct. Tapper's college matching contributions are deductible; Tapper made the contributions; the employees merely directed the proceeds. The Board's authorized contribution is also deductible since it satisfies the two rules under which an accrual-basis corporation can deduct an accrued contribution: 1) it was authorized to a qualified charity by Board resolution before the end of the taxable year and 2) it was paid by the 15th day of the 3rd month after the end of the taxable year of accrual. Choices "d", "b", and "a" are incorrect. Based on the above explanation, both items are allowable as charitable contributions.

Answer 18

Choice "c" is correct. The costs of organizing the corporation are expensable (subject to the $5,000 limitation) and amortizable, but the costs of selling stock are not. The only expense listed that qualifies for expense/amortization is the legal fees for drafting the corporate charter; the others relate to the sale of stock. Choices "b", "d", and "a" are incorrect. These are expenses of selling the corporation's stock and are not a cost of organizing the corporation and therefore cannot be amortized.

Answer 19

Choice "c" is correct. A significant advantage of consolidated tax returns is the ability to offset gains and losses among group members as if they were a single taxpayer. Choice "a" is incorrect. Corporations need not have audited financial statements issued on a consolidated basis to file a consolidated tax return. Choice "b" is incorrect. 100% of dividends received by the parent are eliminated on a consolidated tax return. Choice "d" is incorrect. The common parent must own directly or indirectly 80% of the total voting power of all corporations included in the consolidated tax return.

Answer 20

Choice "b" is correct. Dividends received from other group members are eliminated from the parent's taxable income in consolidation; no dividends received deduction is allowed. Since the parent eliminates the subsidiary dividends in consolidation, they are effectively not taxable. Choices "c", "a", and "d" are incorrect. The regulations require elimination of intercompany dividends in consolidation.

Answer 21

Choice "a" is correct. Rule: The penalty for underpayment of federal estimated taxes is not deductible. Choices "d", "b", and "c" are incorrect, per the above rule.

Answer 22

Choice "b" is correct. The general business credit combines several nonrefundable tax credits and provides rules for their absorption against the taxpayer's liability. Choice "a" is incorrect. The foreign tax credit does not combine more than one credit. Choice "d" is incorrect. The minimum tax credit does not combine more than one credit. Choice "c" is incorrect. The enhanced oil recovery credit does not combine more than one credit.

Answer 23

Choice "a" is correct. Blink cannot use the 100% of preceding tax year method in Year 2 because it did not pay income tax in Year 1. Blink can use the annualized income method. Choices "c", "d", and "b" are incorrect. Each of these answers treats I and/or II incorrectly.

Answer 24

Choice "c" is correct. The property distributed by Tank is treated as if it were sold to the shareholder at its fair market value on the date of distribution. Tank recognizes gain to the extent of the fair market value ($30,000) over the adjusted basis ($20,000) or $10,000. Choice "a" is incorrect. Gain is computed as the difference between the FMV and adjusted basis of the property. Choice "b" is incorrect. Gain is not equal to the adjusted basis of the property. Choice "d" is incorrect. Gain is recognized.

Answer 25

Choice "c" is correct. Both requirements listed are necessary in a Type B reorganization. In a Type B reorganization, the target is acquired using the stock of the acquiring corporation or the acquiring corporation's parent (triangular acquisition). In a Type B reorganization, the acquiring corporation must be in control of the target immediately after the acquisition. Choices "d", "a", and "b" are incorrect. Each of these answers treats I or II incorrectly.

Answer 26

Choice "a" is correct. The Year 1 return of a calendar year corporation is due on March 15, Year 2, so the statute of limitations begins on the next day, March 16, Year 2. Rule: The statute of limitations for assessments runs from the date of the filing of the return, or, if later, the due date of the return. Choices "d", "b", and "c" are incorrect, per the above rule.

Answer 27

Choice "a" is correct. Intercompany dividends are eliminated when preparing a consolidated return. The $20,000 came from income of Dow and is reported as part of consolidated income. The receipt of the dividend by Tech is not included again. Choice "b" is incorrect. As the two corporations file a consolidated return, 100% of the dividends are eliminated, not taxable. Choice "d" is incorrect. This answer is 70% of the $20,000 dividend. 100% of the dividend is eliminated when a consolidated return is filed. Choice "c" is incorrect. This answer is 30% of the $20,000 dividend. 100% is eliminated upon consolidation. This answer assumes Tech is entitled to a 70% dividends received deduction.

Answer 28

Choice "b" is correct. The $10,000 dividend is from an unrelated corporation. This means less than 20% of the company is owned. A 70% dividends received deduction is available. Taxable income $ 70,000 Less: Dividends received deduction (70% × 10,000) _(7,000)_ Taxable income $ 63,000 Income tax 15% × $50,000 $ 7,500 + [25% × ($63,000 − $50,000)] _3,250_ Total $ 10,750 Choices "a", "d", and "c" are incorrect. The $10,000 dividend is from an unrelated corporation. [This means less than 20% of the company is owned. A 70% dividends received deduction is available.]

Answer 29

Choice "b" is correct. Taxable dividend income is paid out of the corporation's current or accumulated earnings and profits. Since Kee had a deficit, only current earnings and profits of $10,000 are available for dividends. Choice "a" is incorrect. Taxable dividend income is paid out of the corporation's current or accumulated earnings and profits; it is not based solely on the distributed property's fair market value (cash in this instance). Choice "d" is incorrect. Taxable dividend income is paid out of the corporation's current or accumulated earnings and profits; it is not calculated as the difference between current E&P and the cash distributed. Choice "c" is incorrect. Taxable dividend income is paid out of the corporation's current or accumulated earnings and profits.

Answer 30

Choice "b" is correct. Carr has no taxable income because he transferred property to Flexo in a transaction that qualifies as nontaxable. Choices "a", "d", and "c" are incorrect. Beck and Carr have no taxable income because they transferred property to Flexo. However, Adams' contribution of services is not "property" for this purpose, so the receipt of stock is taxable

Answer 31

Choice "b" is correct. Under the accrual basis of accounting, when you include an amount in gross income on the basis of a reasonable estimate, and you later determine the exact amount, the difference (if any) is taken into account in the tax year in which the determination is made. Therefore, in this case, the additional $2,000 is included in Brun's Year 2 income. Choice "d" is incorrect. There is no requirement to file an amended return as a result of an inaccurate but reasonable estimate of income in a prior year. Choice "a" is incorrect. There is no requirement to notify the IRS. Choice "c" is incorrect. The additional $2,000 must be included in income in Year 2. The 25% rule cited pertains to unintentional underreporting of income and its effect on the statute of limitations, increasing it from 3 to 6 years.

Answer 32

Choice "d" is correct. The M-1 reconciliation of book income to taxable income would be as follows: Book income $ 140,000 Federal income tax expense deductible from book income, but not deductible for tax purposes _40,000_ 180,000 50% × $50,000 meals and entertainment expenses not deductible for tax purposes, but deductible from book income _25,000_ Taxable income $ 205,000 Choice "a" is incorrect. 50% of the $50,000 meals and entertainment expenses are disallowed for tax purposes. Choice "c" is incorrect. The $40,000 federal income tax expense is not deductible for tax purposes. Choice "b" is incorrect. The $40,000 federal income tax expense and 50% of the $50,000 meals and entertainment expenses are not deductible for tax purposes.

Answer 33

Choice "a" is correct. When computing a corporation's income tax expense for estimated income tax purposes, both corporate tax credits and the alternative minimum tax should be taken into account. Choices "c", "d", and "b" are incorrect. Each of these answers treats one of the above items incorrectly.

Answer 34

Choice "b" is correct. Rule: In a tax-free incorporation, the percentage for "control" is 80%, (i.e., control exists if the transferor/shareholder owns at least 80% of the total voting power and at least 80% of the total number of shares of all other classes of stock). Choices "a", "c", and "d" are incorrect, per the above rule.

Answer 35

Choice "c" is correct. The corporation generally deducts its liquidation expenses (i.e., filing fees, professional fees) on its final tax return. Choice "a" is incorrect. These expenditures are deductible by the liquidating corporation, not its shareholders. Choice "b" is incorrect. These expenditures are ordinary deductions, not capital losses. Choice "d" is incorrect. These expenditures are deductible by the liquidating corporation, on its final tax return.

Answer 36

Choice "b" is correct. Organizational costs are amortizable over a minimum period of 15 years (180 months). In addition, subject to a $50,000 total expenditure limitation, a $5,000 deduction is allowed in Year 1. Allowable costs in connection with the corporate organization are legal fees to obtain the corporate charter, necessary accounting services, expenses of temporary directors, and incorporation fees paid to the state. Organizational costs exclude stock issue costs and commissions paid to underwriters to help sell the shares. Only the legal fees of $41,000 qualify as organizational costs. $41,000 − $5,000 = $36,000/180 months = $200 × 6 months = $1,200 + $5,000 (expense in Year 1) = $6,200.

Answer 37

Choice "a" is correct. Income before special deductions includes sales, dividends received and cost of sales. It excludes the dividends received deduction, which is a "special" deduction. Sales $ 500,000 Cost of sales _(250,000)_ Gross profit 250,000 Dividends received _25,000_ Income before special deductions $ 275,000 Choice "b" is incorrect. Cost of sales must be deducted. Choice "c" is incorrect. Cost of sales must be deducted and 100%, not 80%, of the dividends received are included in income before special deductions. Choice "d" is incorrect. The $25,000 dividend must be included in income before special deductions.

Answer 38

Choice "a" is correct. Rent revenue under the accrual basis would include the cash received ($50,000) plus the increase in the rent receivable ($10,000 = $35,000 - 25,000), or $60,000. In addition, the $5,000 nonrefundable rent deposit is additional rent revenue, for a total of $65,000. Choice "d" is incorrect. This answer ignores the change in the rent receivable account and the nonrefundable deposit. Choice "c" is incorrect. This answer ignores the rent receivable account. Choice "b" is incorrect. This answer ignores the nonrefundable deposit.

Answer 39

Choice "c" is correct. If a corporation owns 80% or more of another corporation, the dividends received deduction is 100% as the dividend income is eliminated in consolidation. Therefore, the net amount of dividend income is $0. Choice "b" is incorrect. 100% of the dividend is eliminated, not included in the consolidated tax return. Choice "a" is incorrect. This answer is 80% of the dividend received. In a consolidated return, 100% of the dividend is eliminated. Choice "d" is incorrect. This answer is 70% of the dividend received. In a consolidated return, 100% of the dividend is eliminated.

Answer 40

Explanation ## Footnote Choice "a" is correct. The charitable contribution deduction is limited to 10% of taxable income before the dividends received deduction and the charitable contribution deduction. 10% ($410,000 + $20,000) = $43,000. The deduction consists of $40,000 from the current year and $3,000 from the prior year contribution carryover. That leaves a $2,000 carryover from Year 1 to Year 3

Answer 41

Choice "b" is correct. Rule: Unused capital losses of a corporation that are carried back or forward are treated as short-term capital losses whether or not they were short-term or long-term when sustained. Capital losses can only be used to offset capital gains up to the amount of the carryback or carryover, not ordinary income. Choices "a", "c", and "d" are incorrect, per the above rule.

Answer 42

Choice "a" is correct. An accrual basis employer may deduct bonuses paid to nonshareholder employees in the year of accrual if the bonuses are subsequently paid within 2 ½ months after the close of the tax year. Since the $50,000 accrued at year-end Year 1 was paid by March 15, Year 2 (2 ½ months), the $50,000 accrual is deductible as compensation expense. The additional $10,000 bonus paid on March 1, Year 2 is also deductible in Year 1, even though it was not accrued at year-end Year 1. Therefore, the total compensation is $600,000 + $10,000, or $610,000. Choice "d" is incorrect. The additional $10,000 of bonus that was paid by March 15 of the next year is deductible in Year 1. Choice "c" is incorrect. Both the $50,000 accrual and the additional $10,000 bonus paid is deductible, assuming it is paid by March 15, Year 2. Choice "b" is incorrect. This answer assumes that the candidate is subtracting the entire $60,000 of bonus paid by March 15 from deductible compensation expense. This is incorrect because both the $50,000 accrual and the additional $10,000 paid by March 15, Year 2 are deductible.

Answer 43

Choice "c" is correct. The $40,000 gain realized by Potter ($100,000 − $60,000) on the sale to Sly is an intercompany gain that is eliminated in consolidation. Therefore, the Year 1 consolidated return gain is $0. In Year 2 when Sly sells the land to an outside party, the full gain of $65,000 is recognized ($125,000 − $60,000 original basis) on the consolidated return. Choice "d" is incorrect. The $40,000 gain on the sale from Potter to Sly is intercompany gain and would be eliminated during consolidation. Once the sale is completed from Sly to another party (not in the consolidated return), the full $65,000 gain would be recognized in the tax return. Choice "b" is incorrect. The gain recognized by Sly on the sale should be calculated as the difference between the original basis to Potter, $60,000, and not the fair market value of $75,000. Choice "a" is incorrect. The Year 1 gain in this question is utilizing the fair market value of the land instead of the basis. The gain reported in Year 2 is also incorrect as discussed in the explanation to choice "b" above.

Answer 44

Explanation ## Footnote Choice "c" is correct. The earned income credit can only be claimed by individuals, not corporations. Choice "a" is incorrect. Corporations can claim the foreign tax credit. Choice "d" is incorrect. Corporations can claim the alternative fuel production credit. Choice "b" is incorrect. Corporations can claim the general business credit.

Answer 45

Choice "b" is correct. A corporation is a personal holding company (PHC) if (1) at any time during the last half of the taxable year more than 50% of the value of the outstanding stock is owned by 5 or fewer individuals, and (2) at least 60% of its adjusted ordinary gross income for the year is investment-type income. Choice "d" is incorrect. A PHC is subject to the regular tax on corporate income as well as a 20% tax on its undistributed PHC income. Choice "c" is incorrect. As a personal holding company, Acme is not subject to the accumulated earnings tax. Choice "a" is incorrect. A regulated investment company must be registered under the Investment Company Act of 1940 or file an election to be a regulated investment company.

Answer 46

Choice "d" is correct. Rule: Shareholders treat property received in a complete liquidation of a corporation as full payment for their stock. Therefore, the shareholder must recognize capital gain or loss equal to the difference between the fair market value of the property received and the basis of the stock surrendered. Choices "b", "c", and "a" are incorrect, per the above rule.

Answer 47

Choice "b" is correct. For the accumulated earnings tax, in this case, accumulated taxable income would equal taxable income ($400,000) minus federal income taxes ($100,000) minus the minimum accumulated earnings credit ($250,000) for manufacturing companies or $50,000. Choice "a" is incorrect. Generally, the accumulated earnings tax is imposed when a corporation has accumulated earnings in excess of $250,000. Thus, the amount of earnings subject to the accumulated earnings tax must first be reduced by the $250,000. Choice "d" is incorrect. Federal income tax is subtracted from the earnings of a corporation in calculating the amount of excess earnings subject to the accumulated earnings tax. Choice "c" is incorrect. Accumulated taxable income is $400,000. This amount ($400,000) minus federal income tax ($100,000) minus the credit of $250,000 equals $50,000, which is the excess subject to the accumulated earnings tax.

Answer 48

Choice "c" is correct. This is a Type A reorganization in the form of a consolidation (e.g., A + B = C). Generally, no gain or loss is recognized by the shareholders of the various corporations except when they receive cash or other consideration in addition to the stock or securities. In addition, no gain or loss is recognized by the acquired corporations or the acquiring corporation pursuant to a tax-free reorganization. Choices "b", "a", and "d" are incorrect, per the above explanation.

Answer 49

Choice "c" is correct. If a corporation's tentative minimum tax exceeds the regular tax, the excess amount is the alternative minimum tax which is payable in addition to the regular tax. Choice "a" is incorrect. There is no carryback of the alternative minimum tax. Choice "d" is incorrect. There is no carryback of the alternative minimum tax. Choice "b" is incorrect. The excess amount is added to the regular tax to get the total tax liability.

Answer 50

Choice "d" is correct. Dividend income is distributions to shareholders first out of current earnings and profits, then out of accumulated earnings and profits. After earnings and profits have been depleted, the distribution is a liquidating return of capital. Since there is a total of $140,000 in earnings and profits ($80,000 + $60,000), $140,000 is dividend income. The remaining $40,000 is a liquidating return of capital. Choice "c" is incorrect. Distributions are considered dividends to the shareholders to the extent a corporation has current or accumulated earnings and profits. Therefore, the dividend treatment is limited to $140,000 of the distribution. Choice "a" is incorrect. The corporation had accumulated earnings and profits of $60,000 that must also be considered. Choice "b" is incorrect. Distributions from a corporation to its shareholders are considered dividend income to the extent the corporation has current and accumulated earnings and profits. Any additional amounts are a return of capital and any excess beyond capital are considered capital gain.

Answer 51

Choice "c" is correct. When a corporation makes multiple distributions during the taxable year, current E&P is first allocated to each distribution on a pro rata basis; then, accumulated E&P is applied in chronological order beginning with the earliest distribution. In this example, where there are two distributions made by Bridge, the current and accumulated E&P are allocated as follows: March distribution $20,000 Current E&P − $20,000 (March distribution) / $40,000 (total distributions) × $10,000 (Current E&P) = Amount out of Current E&P 5,000 Accumulated E&P = allocate first come first serve = chronological until either Acc E&P is used up or entire distribution is dividend. Here $15,000 Accumulated E&P = $15,000 remaining distribution; thus use $0 remaining in Accumulated E&P 15,000 Entire distribution is a dividend 20,000 July distribution 20,000 Current E&P − $20,000 (July distribution)/$40,000 (total distributions) × $10,000 (Current E&P) = Amount out of Current E&P 5,000 Accumulated E&P = all used in March distribution = 0 Dividend amount 5,000 Choices "d", "a", and "b" are incorrect per the above explanation.

Answer 52

Choice "d" is correct. Tan's tax liability is calculated as follows: Tan's regular tax liability $ 210,000 Plus: Tan's AMT ($240,000 − 210,000)\* 30,000 Plus: Tan's PHC tax\*\* 65,000 Tan's tax liability $ 305,000 \*Tan will pay alternative minimum tax (AMT) to the extent that AMT exceeds regular tax. \*\*Tan will pay personal holding company tax in addition to its regular and alternative minimum taxes. Choices "a", "b", and "c" are incorrect, per the above explanation.

Answer 53

Choice "b" is correct. As a general rule, a shareholder who contributes property to a corporation in exchange for common stock will not recognize gain or loss if immediately after the transaction when the transferring shareholders (there can be more than one transferor) own at least 80% of the corporation and the shareholder does not receive any boot. In this case, Dole as the sole shareholder owns more than 80% but receives boot, cash of $40,000. Therefore, Dole will recognize gain to the lesser of cash received or realized gain as follows: Amount Realized\* $ 100,000 Adjusted basis\*\* (35,000) Realized Gain $ 65,000 Recognized gain = Lesser of realized gain ($65,000) or boot received ($40,000) $ 40,000 \*Amount Realized = Cash $40,000 + Common stock $60,000 \*\* Adjusted basis = the adjusted basis (NBV) of the building = $35,000 Choices "a", "c", and "d" are incorrect per the above explanation.

Answer 54

Choice "b" is correct. When a corporation distributes assets to a shareholder, the corporation recognizes a gain as if it had sold the asset. The gain is calculated as follows: Amount realized - greater of FMV of asset = $30,000 or the amount of liability assumed by the shareholder $ 40,000 Less: Adjusted basis of property sold (25,000) Realized and recognized gain $ 15,000 Choices "d", "c", and "a" are incorrect per the above explanation.

Answer 55

Choice "d" is correct. Net capital losses are not allowable deductions for corporations. A corporation can only use capital losses to offset capital gains. Further, the deduction for charitable contributions may be limited in some cases, and no charitable contribution deduction is allowed in calculating the NOL. The facts of this question indicate that there are no reported capital gains or losses or charitable contributions for any of the consolidated entities; therefore, we know that we are able to use the total income (loss) identified in the facts to calculate the net operating loss. When entities file consolidated income tax returns, 100% of their net income (losses) is consolidated. The facts do not indicate that any inter-company transactions exist; therefore, there are no elimination entries to make before consolidating the net income (loss). The consolidated net operating loss is calculated as follows: ParentCo. $ 50,000 SubOne (60,000) SubTwo (40,000) NOL $ (50,000) Choice "c" is incorrect. A consolidated net loss of $50,000 exists, as calculated above. Choice "a" is incorrect. A consolidated net loss of $50,000 exists, as calculated above. Choice "b" is incorrect. The income from ParentCo. ($50,000) is netted with the losses from the subsidiaries ($100,000) to arrive at the consolidated net operating loss of $50,000.

Answer 56

Rule: A Net Operating Loss (NOL) exists if there is a net loss on the following tax returns: Form 1040, Line 41 for Individuals Form 1041, Line 22 for Estates and Trusts Form 1120, Line 28 for Taxable C Corporations A net operating loss exists on tax returns of taxable entities. Choice "a" is correct. Per the above rule, trusts and estates are entitled to a net operating loss deduction. Trusts and estates can be taxable entities, even though, at times, they may also have pass-through effects. Choice "b" is incorrect. Partnerships are pass-through entities; thus, they do not pay tax at the entity level. Therefore, NOLs are not allowed at the partnership level. [Note: If the partnership has a pass-through loss, however, an NOL may exist, for example, on the personal tax return of an individual partner.] Choice "d" is incorrect. S corporations are pass-through entities; thus, they do not pay tax at the entity level. Therefore, NOLs are not allowed at the S corporation level. [Note: If the S corporation has a pass-through loss, however, an NOL may exist, for example, on the personal tax return of an individual shareholder.] Choice "c" is incorrect. Not-for-profit organizations are not taxable entities (although they may generate some taxable income, called unrelated business taxable income); therefore, they do not generate net operating losses, unless it is only for the unrelated business taxable income effect (which may create an NOL for the unrelated business taxable income portion only). Thus, choice "a" is the best answer to this question.

Answer 57

Rule: Filing a consolidated return is a privilege afforded to affiliated groups of corporations (Code Sections 1501 and 1504(b)), and it can only be filed if all of the affiliated corporations consent to such a filing. An affiliated group has ownership through a common parent. The common parent must directly own at least 80% of the voting power of at least one of the affiliated (includible) corporations and at least 80% of the value of the stock of that corporation, and the other corporations not controlled by the parent must be controlled under the 80% ownership test by an includible corporation. Not all corporations are allowed the privilege of filing a consolidated return. Examples of those that are denied the privilege include: S corporations, Foreign corporations, Most real estate investment trusts (REITs), Some insurance companies, and Most exempt organizations. Choice "d" is correct. To summarize the facts in the question, the ownership percentage rules are met for all corporations. A, C, and D are all C corporations, and B Corp is an S corporation. Jans owns A and B; A owns C; and B owns D. Per the rules above, S corporations are denied the privilege of filing a consolidated return. Therefore, B Corp. cannot file a consolidated return. A and C may file a consolidated return, as Jans controls A, and A controls C in the required percentages and both are includible corporations. However, the control of D rests with B, an S corporation. Therefore, D cannot be consolidated with A or C, and because B cannot file a consolidated return (as it is an S corporation), D cannot file consolidated with B. Therefore, A and C may file as a group, but B and D may not file as a group. Choice "a" is incorrect. Per the above rules, D cannot file as a group with A and C, as the control of D rests with B, an S corporation that is not deemed an includible corporation. Choice "c" is incorrect. A and C may file a consolidated return, as Jans controls A, and A controls C in the required percentages and both are includible corporations. The control of D rests with B, an S corporation. Therefore, D cannotbe consolidated with A or C, and because B cannot file a consolidated return (as it is an S corporation), D cannot file consolidated with B. Therefore, A and C may file as a group, but B and D may not file as a group. Choice "b" is incorrect. A and C may file a consolidated return, as Jans controls A, and A controls C in the required percentages and both are includible corporations. The control of D rests with B, an S corporation. Therefore, D cannot be consolidated with A or C, and because B cannot file a consolidated return (as it is an S corporation), D cannot file consolidated with B. Therefore, A and C may file as a group, but B and D may not file as a group.

Answer 58

Rules: A net operating loss (NOL) for corporations is the excess of deductions over gross income; however, the dividends received deduction is allowed to be deducted before calculating the NOL. The dividends received deduction (DRD) for entities that are controlled 0% to \<20% (which is how a Fortune 500 corporation would be controlled) is the LESSER of 70% of dividends received or 70% of taxable income computed without regard to the DRD, and NOL deduction, or any capital loss carryback (but this does not apply in the case when deducting the full DRD results in an NOL). Choice "b" is correct. Applying the rules above, Brown's net operating loss is calculated as follows: Gross income before dividends $ 900,000 Add: Dividends received 100,000 Less: Deductions (excluding DRD) (1,100,000) Less: DRD (70,000) [$100,000 × 70%] NOL $ 170,000 Choice "d" is incorrect. The dividends received deduction ($70,000 in this case) is allowed to be deducted before calculating the NOL [$900,000 + $100,000 − $1,100,000 = ($100,000)]. Choice "c" is incorrect. The DRD is 70% of the dividends received ($70,000), not 30% (or, $30,000) [$900,000 + $100,000 − $1,100,000 − $30,000 = ($130,000)]. Choice "a" is incorrect. The DRD for ownership of a Fortune 500 company is 70% of the dividends received, not 100% [$900,000 + $100,000 − $1,100,000 − $100,000 = ($200,000)].

Answer 59

Choice "b" is correct. The Schedule M-1 reports the reconciliation of income (loss) per books to income (loss) per the tax return [Note: It reports both permanent and temporary differences that are discussed in the Financial textbook for deferred taxes.]. Items that are included on this schedule are those that are (1) reported as income for book purposes but not for tax purposes; (2) reported as an expense for book purposes but not for tax purposes; (3) reported as taxable income for tax purposes but not as income for book purposes; and (4) reported as deductible for tax purposes but not as an expense for book purposes. The only option above that falls into one of these four categories is option b. Premiums paid on a key-person life insurance policy are proper GAAP expenses for book purposes, but they are not allowable deductions for tax purposes. Choice "c" is incorrect. Cash distributions to shareholders are not reported on the income statement for book purposes and are not deductible for tax purposes. They do not enter into the calculation of income in either case and are not reported on the Schedule M-1. Cash distributions actually are reported on Schedule M-2, which is a reconciliation of unappropriated retained earnings. Choice "d" is incorrect. Corporate bond interest is not reported differently for GAAP and tax purposes. It is included as income for GAAP purposes and for tax purposes. Therefore, no reconciliation of book income to taxable income is required for this item. Choice "a" is incorrect. The ending balance of retained earnings is not reported on a GAAP income statement, nor is it included as part of taxable income. Therefore, it is not part of the Schedule M-1. Unappropriated retained earnings are reconciled on Schedule M-2 of the Form 1120.

Answer 60

Choice "d" is correct. A stock dividend is a distribution by a corporation of its own stock to its shareholders. Stock dividends are generally not taxable unless the shareholder has a choice of receiving cash or other property, and the facts indicate that this is a nontaxable 10% dividend. The basis of a nontaxable stock dividend, where old and new shares are identical, is determined by dividing the basis of the old stock by the number of new shares. The calculation is as follows: Original basis of 1,000 shares $ 22,000 Divided by new # of shares [1000 × 1.1] ÷ 1,100 Basis per share after 10% stock dividend $ 20.00 Choice "b" is incorrect. This choice divides the original basis of $22,000 by the old number of shares, without considering the 10% stock dividend. [$22,000 / 1,000 = $22/share] Choice "a" is incorrect. This choice uses the fair market value rather than the proper basis as the allocation base for the stock, but it does use the proper (new) amount of shares after the stock dividend. [$33,000 / 1,100 shares = $30/share] Choice "c" is incorrect. This answer choice uses the fair market value rather than the proper basis as the allocation base for the stock, and it also improperly uses the old number of shares, without considering the stock dividend. [$33,000 / 1,000 shares = $33/share]

Answer 61

Choice "c" is correct. Corporate taxable income is calculated as follows for a corporation: Choice "a" is incorrect. The dividends received deduction allows for a special deduction of 80% of the dividends received from a 20% to \<80% owned domestic corporation, not 100% of the dividends received (which applies only to ownership of 80% or more). [$600,000 + $100,000 − $400,000 − $100,000 DRD = $200,000] Gross income $ 600,000 Dividend income 100,000\* Operating expenses (400,000) Dividends received deduction (80,000) [80% DRD] Taxable income $ 220,000 \* Note that the "gross income" amount for the calculation of taxable income should include dividend income; however, it does not appear that the $100,000 of dividends is included in the $600,000 gross income amount given. If it were, the answer options would be $100,000 less than they are. Choice "d" is incorrect. The dividends received deduction allows for a special deduction of 80% of the dividends received from a 20% to \<80% owned domestic corporation, not 70% of the dividends received (which applies only to ownership of 0% to \<20%). [$600,000 + $100,000 − $400,000 − $70,000 DRD = $230,000] Choice "b" is incorrect. This answer option does not include the special dividends received deduction [$600,000 + $100,000 − $400,000 − $0 DRD = $300,000].

Answer 62

Choice "a" is correct. While the cash basis of accounting is used for tax purposes by most individuals, qualified personal service corporations (which are treated as individuals for purposes of these rules), and taxpayers whose average annual gross receipts do not exceed $1,000,000, the accrual basis method of accounting for tax purposes is required for the following: The accounting purchase and sales of inventory (and inventories must be maintained) Tax shelters Certain farming corporations (other farming or tree-raising businesses may generally use the cash basis) C Corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner PROVIDED the business has GREATER than $5 million of average annual gross receipts for the three-year period ending with the prior tax year Choice "d" is incorrect. A C corporation with average annual sales for the past three years of less than $1,000,000 would not be required to file income taxes using the accrual basis method of accounting, as generally, taxpayers whose annual average annual gross receipts do not exceed $1,000,000 are exempt from the requirement. Choice "c" is incorrect. A service company with more than $1,000,000 in annual sales will generally not be required to file income taxes using the accrual basis of accounting because it likely has not met the test of $5 million in average annual gross receipts for the three-year period ending with the prior tax year. The facts do not disclose all relevant information; however, remember, the BEST answer is what we are looking for (and that is choice option "a"). Choice "b" is incorrect. Personal service corporations are treated as individuals for purposes of the rules for accrual basis tax reporting; therefore, personal service corporations (regardless of the amount of gross receipts), may use the cash basis of reporting for income tax purposes.

Answer 63

Choice "a" is correct. A dividend to a preferred shareholder is based on that shareholder's fixed percentage at purchase. Preferred shareholders are not common equity owners of a corporation, and they only get paid based on their preferred percentage; therefore, any dividend payments to a preferred shareholder are considered dividend income to the preferred shareholder. Preferred shareholders are paid in full before common shareholders receive dividends. Common shareholders are residual owners of a corporation and share in the retained earnings ("earnings and profits" is the tax term) of the corporation as well as the net assets. A "dividend" distribution to a common shareholder may or may not be classified as a taxable dividend. A dividend is defined by the Internal Revenue Code as a distribution of property by a corporation out of its earnings and profits (E & P). Dividends come first from current E&P and then from accumulated E&P. Any distributions in excess of current or accumulated E&P are first return of capital (up to the basis of the common stock) and then capital gain distribution. In this case, the facts tell us that the company has a deficit in accumulated E&P as of the beginning of the year and that current E&P is $25,000. The facts do not tell us the amount of common shareholder capital in the corporation, but none of the answer choices provide for capital gain distributions, so we have to assume that the capital is in excess of the balance of the distribution after the current E&P is allocated. Because preferred shareholders are paid first, the $20,000 paid to them reduces available current E&P to distribute to $5,000 [$25,000 - $20,000]. The preferred shareholders are taxed on $20,000 of dividends. The common shareholders would report $5,000 in dividend income (the remaining amount of current E&P) and would have $5,000 in return of capital [$5,000 + $5,000 = $10,000 paid to the common shareholders]. Choice "b" is incorrect. Please refer to the discussion above for choice "a". $20,000 is taxable to the preferred stockholders as dividend income. However, there is not enough E&P to provide for $10,000 of dividend income to the common shareholders. After the preferred shareholders are paid their $20,000, only $5,000 of E&P is available for distribution as a taxable dividend. The balance of the common shareholder distribution ($5,000) is return of capital. Choice "d" is incorrect. Please refer to the discussion above for choice "a". As mentioned, preferred shareholders are paid before common shareholders are paid. This answer choice incorrectly assumes that the common shareholders are allocated their $10,000 first as dividend income and the preferred shareholders receive the balance of E&P ($15,000) as dividend income. Choice "c" is incorrect. Please refer to the discussion above for choice "a". The corporation has $25,000 of available E&P from which to distribute to the shareholders. Distributions are deemed to come from current E&P first and then from accumulated E&P (of which there is zero in this case). Only the excess is allocated to return of capital (to the extent of capital) and then to capital gain distribution, if excess remains.

Answer 64

Choice "b" is correct. A C corporation has considerable flexibility in choosing an accounting period. A C corporation generally has the same choice of accounting periods as do individual taxpayers. All of the other forms have some limitations (and these are identified in the textbook in chapters R3 and R4). Choice "d" is incorrect. An S corporation must adopt the calendar year unless a valid business purpose for a different taxable year is established. There are thus some restrictions on S corporations. Choice "c" is incorrect. A partnership is significantly limited in what accounting period (taxable year) it can select. Generally, a calendar year is required, unless the partnership meets a set of rules or unless the partnership can establish a valid business purpose for a different taxable year. For example, if one or more of the partners having a majority interest in the partnership's capital and profits have the same taxable year, the partnership must use that taxable year. If the partners owning a majority interest in partnership profits and capital do not have the same taxable year, the partnership must use the same taxable year as all of its "principal" partners. If neither of those two rules applies, the partnership must use the taxable year that results in the least aggregate deferral of income to the partners. Choice "a" is incorrect. A personal service corporation must generally use a calendar year unless a valid business purpose for a different taxable year is established. There are also other restrictions.

Answer 65

Choice "a" is correct. No gain or loss is recognized by either the parent corporation (Forrest) or the subsidiary corporation (Diamond) when the parent, who owns at least 80% of the stock (Forrest owns 100% of the stock), liquidates its subsidiary. The parent assumes the basis of the subsidiary's assets as well as any unused NOL carryover, capital loss carryover, or charitable contribution carryover. Choice "b" is incorrect. The $70,000 is the difference between the $270,000 adjusted basis of the property received in the distribution and Forest's $200,000 basis in the Diamond stock. That difference does not represent the amount of gain recognized by Forrest on the distribution. Choice "d" is incorrect. The $270,000 is the adjusted basis to Diamond of the property received in the distribution. That amount does not represent the amount of gain recognized by Forrest on the distribution. Choice "c" is incorrect. The $500,000 is the fair market value of the property received in the distribution. That amount does not represent the amount of gain recognized by Forest on the distribution.

Answer 66

Choice "d" is correct. Payments for cancelling a lease ($30,000) are rental income in Year 1. The two month's rent for November and December ($5,000 for each month) are rental income. In addition, the last month's rent ($5,000, which is not indicated is a refundable security deposit) is rental income. The total is $45,000. Choice "b" is incorrect. The $10,000 is everything but the payment for cancelling the lease and the last month's rent. Those amounts should be included in the rental income in Year 1. Choice "c" is incorrect. The $15,000 is everything but the payment for cancelling the lease. That amount should be included in the rental income in Year 1. Choice "a" is incorrect. The $40,000 is everything but the last month's rent. That amount should be included in the rental income in Year 1.

Answer 67

Choice "a" is correct. With a 15% ownership, the percentage for the dividends-received deduction is 70%, or $2,100 (70% x $3,000). Choice "c" is incorrect. With a 15% ownership, the percentage for the dividends-received deduction is 70%, not 100% ($3,000). Choice "b" is incorrect. With a 15% ownership, the percentage for the dividends-received deduction is 70%, not 80% (80% x $3,000 = $2,400). Choice "d" is incorrect. There will be a dividends-received deduction with a 15% ownership.

Answer 68

Choice "d" is correct. This question is a simple financial accounting Account Analysis Format (BASE mnemonic, or AAF) question for the accounts payable account. The purchases are a plug and can be determined as follows: Beginning balance $ 64,000 (given) Add: Purchases 441,000 (plug) Subtract: Cash payments _(455,000)_ (given) Ending balance $ 50,000 (given) Choice "a" is incorrect. This choice is incorrect per the analysis above. The $469,000 appears to be the $455,000 cash payments plus the $64,000 beginning of year balance less the $50,000 end of year balance. If the AAF format is rearranged (not the suggested way of working with an AAF), that is backwards. Choice "b" is incorrect. This choice is incorrect per the analysis above. The $505,000 appears to be the $455,000 cash payments plus the $50,000 end of year balance. Choice "c" is incorrect. This choice is incorrect given the analysis above. The $519,000 appears to be the $455,000 cash payments plus the $64,000 beginning of year balance.

Answer 69

Choice "b" is correct. The C corporation's income before net long-term capital loss is $90,000 ($150,000 + $35,000 - $95,000). For a corporation, a net long-term capital loss is not deductible in the current year (3-year carryback and 5-year carryforward allowed), so the taxable income is the same amount. Choice "c" is incorrect. The $65,000 is the $90,000 less the $25,000 net long-term capital loss. The net long-term capital loss is not deductible in the current year, but it may be carried back 3 years and forward 5 years. Choice "d" is incorrect. The $87,000 is the $90,000 reduced by a $3,000 long-term capital loss. Unfortunately, the $3,000 deduction is available only for individuals, not for C corporations. Choice "a" is incorrect. The $115,000 is the $90,000 plus the $25,000 net long-term capital loss. The net long-term capital loss should not be deducted or added.

Answer 70

Choice "d" is correct. Taxable income is accounting (book) income adjusted for other items. In this question, the book income is $150,000. That book income includes $50,000 federal income tax expense, and that amount should be added back for taxable income. The $5,000 interest income from municipal bonds should be subtracted because it is not taxable, and the $10,000 excess capital losses over capital gains should be added back because the excess is not a deduction in the current year. The net result is $205,000. Choice "a" is incorrect. The $185,000 is the $205,000 with the $10,000 excess capital losses subtracted and not added. Choice "c" is incorrect. The $195,000 is the $205,000 with the $10,000 ignored. Choice "b" is incorrect. The $215,000 is the $205,000 with the $5,000 interest income from municipal bonds added and not subtracted.

Answer 71

Rule: The taxable amount of a dividend to a shareholder from a corporation's earnings and profits is the amount received in cash or the fair market value of the property received. Rule: The general rule is the payment of a dividend does not create a taxable event, unless the distribution is appreciated property. When the distribution is of appreciated property, the corporation recognizes gain as if the property were sold at fair market value. Choice "c" is correct. If Brisk Corp. were to distribute $200,000 of accumulated earnings and profits in cash as a dividend, the shareholder would recognize $200,000 in dividend income, and the corporation would reduce its earnings and profits by $200,000. If, instead, the dividend were the $200,000 FMV land with a basis of $75,000, the shareholder would still recognize $200,000 of dividend income (the FMV of the property received, as per the above rule), but the corporation would recognize a gain of $125,000 on the distribution ($200,000 FMV - $75,000 basis, per the above rule), the corporation's earnings and profits would increase $125,000, and the corporation would reduce its earnings and profits by the $200,000 dividend distribution. Thus, Brisk's taxable income would increase if the land were distributed, but the shareholder's taxable income would not change.

Answer 72

Choice "a" is correct. Absent information to the contrary, we should assume this distribution is in the form of a dividend (especially because Fox is the sole shareholder). If the shareholder is an individual, the taxable amount of a property dividend from a corporation's earnings and profits is the fair market value of the property received (and the property's basis then becomes that fair market value). In this case, the shareholder is also taking on the responsibility for the mortgage on the property, but this affects only the amount of taxable income, as the debt is reported as a separate line item and does not affect the basis of the land. The tax journal entry follows and indicates that the basis of the land is $38,000: Debit (Dr) Credit (Cr) Land $ 38,000 Debt $ 3,000 Taxable income 35,000 Choice "d" is incorrect. This is the amount of the taxable income on the dividend ($35,000), not the basis in the land, as per the above journal entry. Choice "b" is incorrect. This amount of $30,000 is the basis of the land on the corporation's books. In a dividend situation, assets are transferred from the corporation using the fair market value of the assets at the date of distribution. Choice "c" is incorrect. This amount of $27,000 was arrived at by using the basis of the land on the corporation's books ($30,000) and subtracting the mortgage assumed by the shareholder ($3,000). As is discussed in the explanation of the answer for item "a" (above), the fair market value should be used as the basis, and the debt does not have an effect on basis (debt affects taxable income, as shown in the journal entry above).

Answer 73

Choice "a" is correct. While the cash basis of accounting is used by most taxpayers for tax purposes, the accrual basis method of accounting for tax purposes is required for the following: The accounting for purchases and sales of inventory, Tax shelters, Certain farming corporations, and C corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner provided the business has greater than $5 million average annual gross receipts for the three-year period ending with the tax year. The information in the facts tells us that Dart does not maintain inventory, so the first item that requires accrual method of accounting does not apply. However, the facts also tell us that Dart is a C corporation with average annual gross receipts in excess of $20 million for the last three years (all of its sales are via credit card, which is turned into cash immediately; thus, gross receipts for the year are over $20 million). The fourth requirement above indicates that accrual method of accounting for tax purposes is required if a C corporation has annual average gross receipts in excess of $5 million for the three-year period ending with the tax year-thus, Dart must use the accrual method of accounting for tax purposes. Choices "c", "b", and "d" are incorrect, per the above explanation.

Answer 74

Rule: There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. Choice "a" is correct. X and Y form Z Corporation so that each receives a 50% interest in the corporation. X contributes $50,000 in cash, and Y contributes land worth $70,000 and receives $20,000 from the corporation [note that each has contributed a net $50,000]. Z Corporation will record the basis of the land at the basis of Y ($40,000) plus any cash it paid to secure the land ($20,000), or $60,000 total basis. Per the above general rule, the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. As there is no indicated debt on the land nor any gain recognized by Y on the transfer [because X and Y own at least 80% of the voting stock immediately after the transaction, the basis is the adjusted net book value of Y ($40,000) plus any cash Z Corporation pays for the land ($20,000). [Note that we have not addressed the shareholder consequences in this question.] Choice "c" is incorrect. The answer includes only Y's $40,000 basis in the land. Z Corporation will record the basis of the land at the basis of Y ($40,000) plus any cash it paid to secure the land ($20,000), or $60,000 total basis. Choice "d" is incorrect. This answer option is the amount of fair market value each shareholder was to contribute to form the corporation at inception. Because Y contributed land worth $70,000, the corporation paid Y $20,000 in cash to make each shareholder contribute $50,000 in FMV of assets. Choice "b" is incorrect. This answer option is the amount of the fair market value of the land at the date of transfer. Per the above general rule, the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. Refer to the calculation for answer option "a".

Answer 75

Rule: An affiliated group of corporations may elect to be taxed as a single unit, thereby eliminating intercompany gains and losses. To be entitled to file a consolidated return, all the corporations in the group (1) must have been members of an affiliated group at some time during the tax year and (2) must have filed a consent (the act of filing a consolidated return qualifies as consent). An affiliated group means that a common parent owns (1) 80% or more of the voting power of all outstanding stock and (2) 80% or more of the value of all outstanding stock of each corporation. Rule: Not all corporations are allowed the privilege of filing a consolidated return. Examples of those denied the privilege include S corporations, foreign corporations, most real estate investment trusts (REITs), some insurance companies, brother-sister corporations where an individual (not a corporation) owns 80% or more of the stock of two or more corporations, and most exempt organizations. Choice "b" is correct. An affiliated group of corporations may file a consolidated return (electing to be taxed as a single unit and eliminating intercompany gains and losses). This answer option comes right out and defines the entities as an "affiliated group," thereby removing the need to determine if the group is actually affiliated! Choice "d" is incorrect. Per the above rule, not all corporations are allowed the privilege of filing a consolidated return. Examples of those denied the privilege include S corporations, foreign corporations, most real estate investment trusts (REITs), some insurance companies, brother-sister corporations where an individual (not a corporation) owns 80% or more of the stock of two or more corporations, and most exempt organizations. Choice "a" is incorrect. Per the above rule, an affiliated group means that a common parent owns (1) 80% or more of the voting power of all outstanding stockand (2) 80% or more of the value of all outstanding stock of each corporation. In this answer option, the parent owns partnerships, not corporations [and, even if it did own corporations, the percentage ownership is too small at "more than 10%"]. Choice "c" is incorrect. Per the above rule, an affiliated group means that a common parent owns (1) 80% or more of the voting power of all outstanding stockand (2) 80% or more of the value of all outstanding stock of each corporation. In this answer option, the parent owns only "more than 50%" of the controlled corporations.

Answer 76

Rules: Distributions from corporations to shareholders are taxable to such shareholders if the distributions are classified as dividends. A dividend is defined by the IRC as a distribution of property by a corporation out if its earnings and profits. An individual shareholder will be taxed on dividends in cash for the amount received and on dividends of property for the fair market value of the property received. Distributions are deemed to come from earnings and profits first. Any distribution in excess of earnings and profits ("E&P," accumulated and current) is treated as a nontaxable return of capital that reduces the shareholder's basis in the stock. Distributions in excess of basis are capital gain distributions taxable as capital gains instead of dividends. Choice "b" is correct. Per the above rules, an individual shareholder will be taxed on dividends in cash for the amount received and on dividends of property for the fair market value of the property received, but any distribution in excess of earnings and profits (accumulated and current) is treated as a nontaxable return of capital that reduces the shareholder's basis in the stock. The corporation has $70,000 in current and accumulated earnings and profits. Therefore, the shareholders will be taxed on the $20,000 in cash received plus the $60,000 in FMV of the property received ($80,000), but only to the extent there is E&P, and that means a taxable amount of dividends of $70,000. The remaining $10,000 will either be a nontaxable return of capital (assuming basis exists), a taxable capital gain (assuming no basis exists), or something in between (assuming basis is positive but less than $10,000). [Note: The question indicates that the basis of the property equals the fair market value. This avoids the impact on the E&P on the corporation's books for the gain on the dividend to the shareholders and keeps the E&P at $70,000.] Choice "c" is incorrect. This answer option incorrectly includes only the cash received ($20,000) as the dividend and excludes the property received. Choice "a" is incorrect. This answer option incorrectly includes only the fair market value of the property received ($60,000) as the dividend and excludes the cash received. Choice "d" is incorrect. This answer option includes both the $20,000 cash received and the $60,000 fair market value of the property received [$20,000 + $60,000 = $80,000], but it (incorrectly) does not limit the dividend income to the total amount of corporate E&P, which is $70,000.

Answer 77

Rules: There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. A shareholder recognizes gain when at least 80% of the voting stock is not owned by the shareholders immediately after the transaction and there is no taxable boot (cash is withdrawn or cancellation of debt exists) on the transaction. Choice "b" is correct. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. Applying the information in the fact pattern and the above rules, there is no "shareholder gain" on this transaction. Further, there is no indication of any debt being assumed by the corporation. Thus, Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors. Choice "d" is incorrect. Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors. Choice "c" is incorrect. This answer option incorrectly adds the fair market value of the baseballs ($1,000) to the basis of the bats ($5,000). Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors. Choice "a" is incorrect. This answer option incorrectly adds the fair market value of the baseballs ($1,000) to the fair market value of the bats ($7,000). Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.

Answer 78

Rule: While the cash basis of accounting is used by most taxpayers for tax purposes, the accrual basis method of accounting for tax purposes is required for the following: The accounting for purchases and sales of inventory, Tax shelters, Certain farming corporations, and C corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner provided the business has greater than $5 million average annual gross receipts for the three-year period ending with the tax year. Choice "c" is correct. The facts tell us that the shareholders would like to change the status to a C corporation using the same year end as the S corporation (June 30). Per the above rule, C corporations with greater than $5 million average annual gross receipts must use the accrual basis of accounting for tax purposes. When this corporation changes to a C corporation status, therefore, it must report on the accrual basis of accounting for tax purposes. It will be able to stay on the June 30 year end, as the shareholders desire. Choice "a" is incorrect. The year will be June 30 (not December 31) with the accrual (not cash) basis of accounting. Choice "d" is incorrect. The year will be June 30 (not December 31), but the accrual basis of accounting will be used. Choice "b" is incorrect. The year will be June 30, but the accrual (not cash) basis of accounting will be used.

Answer 79

Choice "d" is correct. The accumulated earnings tax can be imposed on regular corporations not classified as personal holding companies. Choice "a" is incorrect. The accumulated earnings tax can be imposed on regular corporations (C corporations) or on personal service corporations. Choice "b" is incorrect. The accumulated earnings tax may be imposed on a corporation whose accumulated (retained) earnings is in excess of $250,000 (less for personal service corporations) and for which no justified reason for the retention exists. Choice "c" is incorrect. A parent-subsidiary group is not a requirement for the imposition of the accumulated earnings tax.

Answer 80

Choice "b" is correct. Distributions in complete liquidation of a corporation are subject to two levels of taxation. First, the corporation must recognize gain or loss as if it sold the assets for the fair market value. The gain on the sale would be the fair market value of $162,000 less $90,000 basis for a gain of $72,000. Secondly, the shareholders would report gain or loss determined by the difference between the fair market value of the assets received and the shareholders' adjusted basis of the stock. Choices "d", "a", and "c" are incorrect, per the above explanation.

Answer 81

Choice "a" is correct. Certain items are treated differently for book and tax purposes. The corporation's book income was $500,000. For tax purposes, the $25,000 of municipal bond interest income is non-taxable, the $100,000 of federal income tax expense is non-deductible, and both the $10,000 of political party contributions and the $8,000 tax penalty are nondeductible. Book income $ 500,000 Federal taxes (add) 100,000 Political expenses (add) 10,000 Penalties (add) 8,000 Municipal bond income (subtract) _(25,000)_ $ 593,000 Choices "b", "d", and "c" are incorrect, per the above calculation.

Answer 82

Choice "c" is correct. For tax purposes, if elected, a maximum expense deduction of $5,000 is allowed for organizational costs in the year of organization. The remainder must be amortized over 180 months. The book income of $435,000 must be adjusted for the difference between the book amortization and tax amortization allowed. Book amortization would be $5,000 per year ($50,000 divided by 10 years). Tax amortization/expense is calculated as follows: $ 50,000 (5,000) expensed $ 45,000 ÷ 180 months 250 per month Tax expense/amortization would be $8,000 in this year ($50,000 − 5,000 ÷ 45,000/180 = 250 x 12 = 3,000 + 5,000 initial expense). The difference would be a $3,000 higher tax deduction than book. Thus, $435,000 less 3,000 = $432,000. Choice "a" is incorrect. This answer assumes 100% of the organizational expenses are deductible in the first year instead of the $5,000. Choice "b" is incorrect. The book income must be adjusted for the book/tax difference due to the different amortization methods. Choice "d" is incorrect. This answer deducted only $3,000 from book income, disregarding the initial $5,000 immediate deduction.

Answer 83

Choice "a" is correct. The percentage threshold limit for charitable contributions for a corporation is 10% of adjusted taxable income. Total taxable income is calculated before the deduction of any charitable contributions, the dividends received deduction, any net operating loss carryback, or any capital loss carryback. Thus, the $300,000 must be adjusted to add back the charitable contribution deduction of $12,000 plus the $10,000 of dividend income not included in the $300,000. The base equals $322,000. Choice "d" is incorrect. This answer does not take into account the dividend income not included in the $300,000. Choice "b" is incorrect. This answer considers operating income without adjustments. Choice "c" is incorrect. This answer reduced the $322,000 for the $7,000 dividends received deduction that Roger Corp. is entitled to, but this should not go into the calculation of the allowable charitable contribution deduction.

Answer 84

Choice "c" is correct. In a corporate liquidation, distributions are subject to two levels of taxation. First, the corporation must recognize gain or loss as if it sold the assets for the fair market value. Second, the shareholders would report gain or loss determined by the difference between the fair market value of the assets received and the shareholders' adjusted basis of the stock. The gain at the corporate level would be calculated as the combined fair market value of $145,000 less the combined basis of $90,000 or $55,000. Choices "b", "d", and "a" are incorrect, per the above explanation.

Answer 85

Choice "a" is correct. Capital gains are taxed at the same rate as ordinary income for a corporation. However, capital losses can only be used to offset capital gains. Any amount not utilized in the year of generation can either be carried back 3 years to offset prior capital gains or carried forward for 5 years. Choice "c" is incorrect. The capital loss cannot be used to offset the taxable income from operations. Choices "b" and "d" are incorrect. The $3,000 rule is only available to individual taxpayers and not corporations. The inclusion of this in both answers makes them both incorrect. The appropriate carryback and carryforward rule is 3 back and 5 forward.

Answer 86

Choice "c" is correct. The dividends received from Ronald Corp. and Fence Corp. are subject to the 70% DRD (thus 30% would be taxable). The dividends from Donald Corp. are subject to the 80% DRD (thus 20% would be taxable). The total DRD is $11,000 x 70% plus $6,000 x 80% = $12,500. Choice "d" is incorrect. The receipt of these dividends by Buster-Copper Corp. qualifies for the dividends received deduction. Choice "b" is incorrect. This amount is obtained by taking the total dividends of $17,000 x 70% DRD; however the Donald Corp. dividends are subject to the 80% DRD. Choice "a" is incorrect. This amount is obtained by taking the total dividends of $17,000 x 80% DRD; however the Ronald and Fence Co., dividends are only eligible for the 70% DRD.

Answer 87

Rule: IRC Section 351 controls the taxation of transfers to controlled corporations. No gain or loss is recognized to the transferors/shareholders on the property transferred if certain conditions are satisfied. Choice "d" is correct. The transaction in this question does not satisfy the conditions of Section 351, and gain or loss can be recognized for each of the shareholders. For Section 351 to apply, the shareholders contributing property, including cash, must own, immediately after the transaction, at least 80% of the voting stock and at least 80% of the nonvoting stock of the corporation. A shareholder who contributes only services (Quigley in this question) is not counted as part of the control group. Thus, only Roberk and Storm are counted, and they together own only 70 shares out of the 100 shares (70%). The $25,000 of legal fees to Quigley is compensation for services rendered and is recognized as income by Quigley. A gain of $90,000 (the fair market value of the land of $100,000 - its adjusted basis of $10,000) is recognized to Roberk. Storm bought shares for cash and has no gain. Choice "c" is incorrect. This is what would happen if Section 351 applies to all of the transferors/shareholders. Choice "a" is incorrect. Storm recognizes no gain of any kind since he/she merely bought shares for cash. Choice "b" is incorrect. Quigley recognizes gain since transferors who contribute only services are not counted as part of the control group for Section 351 purposes. Gain is recognized by transferors who are not part of the control group.

Answer 88

Choice "b" is correct. A C corporation (a regular corporation) must pay federal income tax. A C corporation is not a pass-through entity like the other entities listed. Choice "c" is incorrect. A general partnership is a pass-through entity and does not pay federal income tax. Choice "a" is incorrect. A limited partnership is a pass-through entity and does not pay federal income tax. Choice "d" is incorrect. A joint venture is a pass-through entity (a joint venture is similar to and is treated as a partnership) and does not pay federal income tax. A joint venture is a combination of two or more (tax) persons who jointly seek a profit from some business venture without designating themselves as an actual partnership or corporation.

Answer 89

Rule: IRC Section 162 controls the deductibility of trade or business expenses. There is nothing special about advertising costs, except for certain foreign advertising costs. Any business expenses have to be reasonable and related to the taxpayer's business activities. Choice "a" is correct. Advertising costs which are in the nature of selling expenses (which these expenses appear to be) are deductible if they are reasonable and are related to the taxpayer's business activities. Choice "d" is incorrect. Advertising costs are expensed, not amortized over 15 years (180 months). Amortization over such a period is for goodwill and covenants not to compete, for example. Choice "c" is incorrect. Advertising costs are expensed, not amortized over 36 months. Choice "b" is incorrect. Advertising costs are expensed, not amortized over 60 months.

Answer 90

Rule: IRC Sections 1501 and 1504 allow certain combinations of corporations (an affiliated group) to file a consolidated income tax return. An affiliated group is one or more chains of corporations connected through stock ownership with a common parent if that parent directly owns stock possessing at least 80% of the total voting power of at least one of the other corporations and having a value equal to at least 80% of the total value of the stock of the corporation. Choice "d" is correct. Since Silver owns 85% of the voting stock and fair market value of Gold, they can file a consolidated return. Choice "b" is incorrect. A consolidated return, not two separate returns, is appropriate with the 85% ownership. Choice "a" is incorrect. A consolidated return, not two separate returns, is appropriate with the 85% ownership. The timing of the merger has nothing to do with the decision. Choice "c" is incorrect. A consolidated return is appropriate with the 85% ownership. The timing of the merger has nothing to do with the decision.

Answer 91

## Footnote ^{Choice "c" is correct.} ^{Rule: A qualifying corporate reorganization is tax-free to all corporations involved and to all their shareholders.} ^{Choices "d", "b", and "a" are incorrect, per the above rule.}

Answer 92

Choice "a" is correct. Intangibles such as goodwill, licenses, franchises, trademarks and covenants not to compete may be amortized using the straight line basis over a period of 15 years, starting with the month of acquisition. Note, the difference for GAAP purposes: Intangible assets with indefinite lives are subject only to an impairment test, and intangible assets with finite lives are amortized over those lives and also subject to an impairment test. Choice "d" is incorrect. The time certain does not impact the amortization period. Choice "c" is incorrect. The option to extend does not impact the amortization period. Choice "b" is incorrect. 17 years is longer than required to amortize intangible assets.

Answer 93

Choice "c" is correct. Corporations making contributions to recognized charitable organizations are allowed a maximum deduction of 10% of their taxable income. Taxable income is calculated before the deduction of: (1) any charitable contribution; (2) the dividends received deduction; (3) any net operating loss carryback; (4) any capital loss carryback; or, (5) U.S. production activities deduction. Revenues $ 200,000 Dividends Received 20,000 Less: Operating expenses (75,000) Income before the dividends received deduction 145,000 x 10% Maximum allowable charitable deduction $ 14,500 Note: Excess charitable contributions not allowed as a deduction due to the 10% limitation may be carried forward up to five years. Choice "d" is incorrect. The full $15,000 would not be allowed due to the 10% limitation illustrated above. Choice "b" is incorrect. The dividends received are considered in taxable income for purposes of the 10% limitation. Choice "a" is incorrect. The 10% limitation is applied before the dividends received deduction.

Answer 94

Choice "c" is correct. Corporations are required to pay estimated taxes on the fifteenth day of the fourth, sixth, ninth, and twelfth months of their tax year. One-fourth of the estimated tax is due with each payment. Unequal quarterly payments may be made using the annualized income method. Choice "d" is incorrect. The annualized income method should be used. Choice "b" is incorrect. The annualized income method should be used. Choice "a" is incorrect. Using the past three years could yield an estimated tax liability lower than required.

Answer 95

Choice "a" is correct. Dividends are a distribution of property by a corporation out of its earnings and profits (E&P). Dividends come from current E&P and then from accumulated E&P. If current E&P is positive and accumulated E&P is negative, distributions are dividends only to the extent of current E&P. Any excess distribution above E&P reduces the shareholders basis in the stock, if any. If the shareholder has no basis, then the excess distribution is reported as a capital gain. Choice "c" is incorrect. A distribution is a dividend to the extent of E&P. Choice "b" is incorrect. The dividend would be the distribution to the extent of E&P, not the distribution above E&P. Choice "d" is incorrect. The full distribution can only be a dividend if the corporation has sufficient E&P.

Answer 96

Choice "d" is correct. The general rule is that distributions are taxable dividends to the extent of current earnings and profits (E&P) by year end and to the extent of accumulated E&P as of the distribution date. If both are positive and if distributions exceed the sum of current E&P and accumulated E&P, then the distributions in excess of the sum are treated as a return of capital. In this example, both current E&P and accumulated E&P are positive (the total is $50,000), and total distributions during the year are $80,000; so, $50,000 of the total distributions will be taxable dividends. Choices "c", "b", and "a" are incorrect per the above rule.

Answer 97

Choice "d" is correct. Post-August 10, 1993, acquisitions of goodwill, covenants not-to-compete, franchises, trademarks, and trade names must be amortized on a straight-line basis over a fifteen-year period (180 months) beginning with the month of acquisition. So, both the $50,000 acquisition of the goodwill and the $13,000 acquisition of the covenant not-to-compete – for a total cost of $63,000 -- are amortized over the fifteen-year period statutory cost recovery period. Choices "a", "c", and "b" are incorrect per the above rule.

Answer 98

Choice "d" is correct. C corporations are allowed a maximum charitable contribution deduction of 10% of taxable income computed before the following deductions: Any charitable contribution, The dividend received deduction, Any net operating loss carryback, Any net capital loss carryback, and The U.S. production activities deduction. Accrued charitable contributions not paid by the end of the year are deductible in the year of accrual if (i) the board of directors authorizes the contribution during the tax year and (ii) the accrual-basis corporation pays the accrued amount by the fifteenth day of the third month (generally 2½ months) following the end of the tax year. Any amount in excess of the "10% limitation" may be carried forward for five years. In this question, the corporation has: (i) an $8,000 unexpired charitable contribution carryover from the previous year, (ii) -0- charitable contributions paid during the current year, and (iii) a $15,000 contribution which the board of directors authorized by the end of the year and which the corporation paid by the fifteenth day of the third month following the end of the tax year. Hence, the deduction before application of the "10% limit" is $23,000: $8,000 + 0 + $15,000. However, the taxable income before the five deductions listed above is $200,000. So, the deduction is limited to $20,000: the lesser of (i) the $23,000 amount before application of the "10% limit" or (ii) $20,000 which is 10% of the $200,000 taxable income before the five deductions listed above. Choices "c", "b", and "a" are incorrect per the above rule and per the above computations.

Answer 99

Explanation ## Footnote Choice "c" is correct. Business gifts are deductible up to a maximum deduction of $25 per recipient per year. Computation: 5 x lesser of (i) $15 value of each gift or (ii) $25 maximum per recipient per year $ 75 9 x lesser of (i) $30 value of each gift or (ii) $25 maximum per recipient per year 225 1 x lesser of (i) $100 value of the gift or (ii) $25 maximum per recipient per year 25 Amount deductible for business gifts $ 325 Choices "b", "a", and "d" are incorrect per the above rule and per the above computations.

Answer 100

Choice "a" is correct. The stock in each corporation is a capital asset. The general rule is that a loss on the sale or exchange of a capital asset will be a capital loss (either a short-term capital loss or a long-term capital loss, depending upon the holding period). However, a special rule applies to "section 1244 small business stock." When a corporation's stock is sold or becomes worthless, an original stockholder can be treated as having an ordinary loss (fully deductible), instead of a capital loss, up to $50,000 ($100,000 if married filing jointly) for the year. Any loss(es) in excess of this amount is (are) a capital loss. In this question, the taxpayer, who is not married, during the year has $68,000 of losses from the sale of section 1244 small business stock. As such, the taxpayer will treat as an ordinary loss $50,000 of the total loss; the taxpayer will treat as a capital loss the remaining $18,000 of the total loss. Choices "b", "d", and "c" are incorrect per the above rule.

Answer 101

Choice "d" is correct. Azure's taxable income is calculated as follows: Pretax book income $ 543,000 Depreciation for tax purposes in excess of book depreciation (20,000) Rent income for tax purposes in excess of book rent income 36,000 Fines expensed for book purposes but not deductible for tax purposes 10,000 Municipal bond interest not taxable for tax purposes (25,000) Taxable income $ 544,000 Choices "a", "c", and "b" are incorrect per the above calculation.

Answer 102

Choice "a" is correct. All costs of issuing stock are not eligible to be deducted or amortized as an organizational expenditure or start-up cost. Choice "d" is incorrect. All incorporation costs are eligible to be deducted or amortized as an organizational expenditure. Choice "c" is incorrect. All temporary director fees are eligible to be deducted or amortized as a start-up cost. Choice "b" is incorrect. All organizational meeting costs are eligible to be deducted or amortized as an organizational expenditure.

Answer 103

Choice "d" is correct. Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods. Choice "c" is incorrect. In periods of rising prices, the LIFO method results in ahigher cost of sales and lower taxable income when compared to the FIFO method. Choice "b" is incorrect. The taxpayer is not required to receive permission each year from the Internal Revenue Service to continue the use of the LIFO method. Choice "a" is incorrect. The LIFO method can be used for tax purposes only if the LIFO method is used for financial statement purposes.

Answer 104

Choice "c" is correct. The maximum Section 1244 loss that can be deducted by a single taxpayer in any year is $50,000. All losses designated as Section 1244 losses are ordinary by definition. Note that most of the information in this question is not required to solve for the correct answer. Choices "a", "b", and "d" are incorrect per the above explanation.

Answer 105

Choice "d" is correct. Generally, this is a nontaxable transaction. However, the liabilities assumed by the corporation of $12,000 are in excess of the basis of the property contributed of $6,000. The amount of the excess, which is $6,000 ($12,000 − $6,000) is a gain that must be recognized. Note that the fact that this is an S Corporation does not affect the answer. The rules for the formation of an S Corporation are the same as for a C Corporation. Choices "b", "a", and "c" are incorrect per the above explanation.

Answer 106

Choice "c" is correct. The selection of an accounting method for tax purposes is made on the initial tax return by using the chosen method. Choice "a" is incorrect. The selection of an accounting method for tax purposes is not made by filing a request for a private letter ruling from the IRS. A private letter ruling is a request for the IRS to rule in advance on a special set of facts. Choice "b" is incorrect. The selection of an accounting method for tax purposes does not have to be first approved by the company's board of directors. Choice "d" is incorrect. The selection of an accounting method for tax purposes does not have to be disclosed in the company's organizing documents.

Answer 107

Choice "a" is correct. First, the long-term capital gain of $14,000 is netted with the long-term capital loss of $8,000. This results in a net long-term capital gain of $6,000. Next, the short-term capital gain of $6,000 is netted with the short-term capital loss of $4,000. This results in a net short-term capital gain of $2,000. Now add the net long-term capital gain of $6,000 and the net short-term capital gain of $2,000 to arrive at a net capital gain of $8,000. This amount is reduced by the $5,000 worthless stock. So the final net capital gain is $3,000. Note that the Section 1244 loss of $10,000 does not affect this calculation because it is an ordinary loss and not a capital loss. Choices "c", "b", and "d" are incorrect per the above explanation.

Answer 108

Choice "b" is correct. Corporate distributions are taxable dividends first to the extent of current earnings and profits (E&P) and then to the extent of accumulated E&P. Current and accumulated E&P are not netted. Current E&P is $15,000 and there is no accumulated E&P. So only $15,000 of the $18,000 distribution is a taxable dividend. Note that the remaining $3,000 distribution is a nontaxable return of capital up to shareholder basis. After that, it is a taxable capital gain distribution. Choice "c" is incorrect. $0 would only be correct if there were not any current or accumulated E&P. Choice "d" is incorrect. $3,000 is the amount of the distribution in excess of current E&P. This is the amount of the distribution that is not a taxable dividend. Choice "a" is incorrect. $18,000 is the entire distribution. However, it is only a taxable distribution to the extent of current and accumulated E&P.

Answer 109

Choice "b" is correct. With respect to a timely filed return, the general rule is that the IRS can assess additional tax within three years from the later of the return's due date (plus extensions, if any) or the date the return was filed. A taxpayer's inadvertently overstating deductions in an amount equal to 15% of gross income will not trigger any of the exceptions to the general rule. Choice "c" is incorrect. There is no statute of limitations when a taxpayer willfully attempts to evade tax in filing income tax returns. Choice "d" is incorrect. A six year statute of limitations applies when a taxpayer omits from gross income an amount in excess of 25% of the gross income stated on the income tax return. For purposes of the "six year" statute, gross income is not reduced by cost of goods sold. Choice "a" is incorrect. There is no statute of limitations when the IRS files (actually, "executes") a substitute income tax return when the IRS learns that a taxpayer failed to file a return.

Answer 110

Explanation ## Footnote Choice "b" is correct. Unlike individuals, corporations may not deduct any capital losses in excess of capital gains in a year. Choices "d", "c", and "a" are incorrect, per the above rule.

Answer 111

Choice "c" is correct. The building had an adjusted basis of $350,000 and $400,000 proceeds were received for it. That results in a taxable gain of $50,000, because none of it was deferred. The $100,000 received for lost profits is taxable as well. The total taxable amount is $150,000 ($50,000 + $100,000). Choice "b" is incorrect. $0 would be the taxable amount just on the building if the gain were deferred. Choice "a" is incorrect. $50,000 is the taxable amount of the proceeds for the building only. Choice "d" is incorrect. $100,000 is the taxable amount of the proceeds for lost profits only.

Answer 112

Choice "b" is correct. First, the long-term capital gains and losses are netted to arrive at a net long-term capital loss of $12,000. Next, the short-term capital gains and losses are netted to arrive at a net short-term capital loss of $36,000. The next step is to net the net long-term capital loss of $12,000 with the net short-term capital loss of $36,000. This results in a net capital loss of $48,000. None of that loss is currently deductible against ordinary income. It can be carried back three years and forward five years. Choice "c" is incorrect. $3,000 is the deductible amount of capital loss against ordinary income for an individual, not a corporation. Choice "d" is incorrect. $12,000 is just the net long-term capital loss. Choice "a" is incorrect. $48,000 is the net capital loss, but it is not deductible against ordinary income.

Answer 113

Choice "a" is correct. A personal service corporation (PSC) is primarily involved in the performance of one of the following fields: accounting, law, consulting, engineering, architecture, health, and actuarial science. Choices "b", "d", and "c" are incorrect, per the above rule.

Answer 114

Explanation ## Footnote Choice "c" is correct. Porter's transfer is not taxable because the 80% control test is met. The corporation's basis in the property is the basis of $50,000. Corley's transfer is taxable because the 80% control test is not met. The corporation's basis in the property is $500,000. The corporation's total basis in the properties is $550,000 ($50,000 + $500,000). Choice "a" is incorrect. $700,000 would be correct if the basis of both properties used fair market value. Choice "b" is incorrect. $450,000 would be correct if Porter's property used fair market value and Corley's property used carryover basis. Choice "d" is incorrect. $300,000 would be correct if the basis of both properties used carryover basis.