REG Mini Exam 2 Flashcards
MCQ-10584 Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain? 1. $0 2. $15,000 3. $10,000 4. $5,000
Choice “3” is correct. Property acquired as a gift generally retains the rollover cost basis that it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift. Since there were no gift taxes paid, Pat’s basis for computing a gain is the rollover cost (basis), $10,000.
Choices “1”, “4”, and “2” are incorrect, per the explanation above.
MCQ-10513 Diana Kalyvas received a painting as a gift from her sister, Joanna, on April 1 of the current year. The painting had a fair market value of $5,000 at the date of gift, and Joanna had purchased the painting twenty years prior for an amount of $7,000. After holding the painting for three months, Diana realized that she would rather have the money for the value of the painting than the painting itself, so she sold the painting to her neighbor for $4,500 on July 4. On her current year income tax return, Diana should report: 1. A short-term capital loss of $2,500. 2. A long-term capital loss of $500. 3. A long-term capital loss of $2,000. 4. A short-term capital loss of $50
Choice “4” is correct. The basis of the painting depended upon what Diana eventually sold the painting for. The gain basis of $7,000 would have applied if Diana had sold the painting above $7,000, but that did not happen in this case. The basis of $5,000 (FMV at the date of gift) applied because Diana sold the painting for less than the FMV at the date of gift and at the date of the gift the FMV of the gift was less than the donor’s basis in the gift. Further, although the holding period for the donee typically includes the donor’s holding period, this case is an exception to the rule. The holding period starts with the gift date when the FMV at the date of gift is used as the basis. Therefore, the sale resulted in a short-term capital loss of $500.
Choice “1” is incorrect. Although the loss is a short-term capital loss, the basis of the painting on the date of sale was $5,000, not $7,000 (as discussed above).
Choice “2” is incorrect. The holding period began on April 1 because the fair market value at the date of the gift was used as the basis.
Choice “3” is incorrect. The holding period began on April 1. Also Diana’s basis in the painting was $5,000, due to the sale in the amount of $4,500. This answer incorrectly calculates the loss as the difference between Joanna’s purchase price (the gain basis) and the FMV at the date of gift.
MCQ-09988
Which of the following qualifies as a like-kind exchange?
1, Investment land for building to be used in a trade or business.
2. Inventory of a retail hardware store for inventory of a plumbing wholesaler.
3. General partnership interest for a limited partnership interest.
4. Rental house for a house to be used as a principal residence.
Choice “1” is correct. Investments in business assets such as land and building qualify for like-kind exchange treatment.
Choices “2” and “3” are incorrect. Like-kind business exchange is not available for inventory, investments in bonds, partnerships and corporation stock.
Choice “4” is incorrect. Personal use property is not eligible for the deferral that is part of a like-kind exchange.
MCQ-09989
Which of the following is not §1231 property?
1. A building used in a business and held more than 12 months.
2. Land used in a business and held more than 12 months.
3. Equipment used in a business and held more than 12 months.
4. Equipment used in a personal use activity and held more than 12 months.
Choice “4” is correct. Personal use property does not qualify as Section 1231 property.
Choices “3”, “2”, and “1” are incorrect. Depreciable personal and real property used in the taxpayer’s trade or business and held over 12 months qualifies as Section 1231 property.
MCQ-10512 Which of the following are capital assets? I. Interest in a partnership. II. Accounts receivable. III. Stocks and bonds. IV. Literary compositions held by the original artist. 1. II only. 2. I, II, and III. 3. Both I and III. 4. I, III, and IV
Choice “3” is correct. A capital asset includes property (real and personal) held by the taxpayer for investment or for personal use.
Capital assets include:
Personal automobile of the taxpayer.
Furniture and fixtures in the taxpayer’s home.
Stock and bonds.
Real and personal property not used in a trade or business.
Interest in a partnership.
Goodwill of a corporation.
Purchased (as opposed to created) copyrights, literary, musical, or artistic compositions.
Musical compositions held by the original artist.
Other assets held for investment.
Non-capital assets include:
Property normally included in inventory or held for sale.
Depreciable personal and real property used in a business.
Accounts and notes receivable arising from sales or services in a business.
Copyrights, literary, musical, or artistic compositions held by the original artist.
Treasury stock.
Choices “4”, “1”, and “2” are incorrect, based in the above information.
MCQ-10588
Among which of the following related parties are losses from sales and exchanges not
recognized for tax purposes?
1. Grandfather and granddaughter.
2. Brother-in-law and sister-in-law.
3. Ancestors, lineal descendants, and all in-laws.
4. Father-in-law and son-in-law.
Choice “1” is correct. Losses from sales and exchanges are not recognized for tax purposes between grandfather and granddaughter.
Rule: Losses are disallowed on sales between related parties. “Related” includes brothers and sisters, husband-wife, lineal descendants (father, son, grandfather), and entities that are more than 50% owned by individuals, corporations, trusts and/or partnerships.
Choices “4”, “2”, and “3” are incorrect, because losses from sales and exchanges are recognized for all “in-laws.”
MCQ-14756
White Company acquires a machine (seven-year property) on January 10 of the current year, at a cost of $1,950,000. It was the only purchase of machinery White made in the current year. White makes the election to expense the maximum amount under Section
179. No election is made to use the straight-line method. Determine the total Section 179 deduction related to the machine for the current year assuming White has taxable income of $1,700,000 and assuming the rules in effect for the year 2021:
1. $1,050,000
2. $0
3. $1,950,000
4. $1,700,000
Choice “1” is correct.
2021 maximum allowable Section 179 deduction
1,050,000
Reduction:
Purchases
1,950,000
2021 excess property phase-out threshold
(2,620,000)
Excess
0
Allowable Section 179 deduction
1,050,000
Choices “4”, “2”, and “3” are incorrect. The maximum Section 179 deduction is $1,050,000.
MCQ-10586 Clark and Hunt organized Jet Corp. with authorized voting common stock of $400,000. Clark contributed $60,000 cash. Both Clark and Hunt transferred other property in exchange for Jet stock as follows: Other property Adjusted basis Fair market value Percentage of Jet stock acquired Clark $50,000 $100,000 40% Hunt 120,000 240,000 60% What was Clark's basis in Jet stock? 1. $160,000 2. $110,000 3. $100,000 4. $0
Choice “2” 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 “1” is incorrect. When property is contributed to form a corporation, it is contributed at its adjusted basis, not at its fair market value.
Choice “3” is incorrect. The amount of cash that Clark contributed must also be considered in determining Clark’s basis in Jet stock.
Choice “4” is incorrect. Clark contributed both cash and property. Thus, Clark’s basis in Jet’s stock is greater than zero.
MCQ-10016
Swan, Inc. is an accrual basis taxpayer. Swan uses the aging approach to calculate the
reserve for bad debts. During the year, the following transactions associated with bad debts
occur:
Credit sales $200,000
Collections on credit sales 150,000
Amount added to the reserve 40,000
Beginning balance in the reserve 0
Bad debts written off during the year 30,000
The amount of the deduction for bad debt expense for Swan for the year is:
1. $70,000
2. $50,000
3. $30,000
4. $40,000
Choice “3” is correct. Only actual bad debts written off are deductible for tax purposes, as the allowance method or any other type of estimated bad debt method is not permissible.
Choice “1” is incorrect. This answer combines the actual write-offs with the increase in the reserve (estimated amounts). Only actual write-offs are deductible for tax purposes.
Choice “2” is incorrect. This answer is the difference between the credit sales and cash collected, not the actual bad debts written off during the year.
Choice “4” is incorrect. This is the amount added to the reserve during the year. Only actual amounts written off are deductible. The addition to the reserve is an estimate.
MCQ-09997
Emerald Corporation, an accrual basis taxpayer, was formed and began operations on July
1, Year 1. The following expenses were incurred during the first tax year (July 1 to
December 31, Year 1) of operations:
Expenses of temporary directors and of organizational meetings $5,000
Fee paid to the state of incorporation 600
Accounting services incident to organization 1,200
Legal services for drafting the corporate charter and bylaws 2,800
Expenses incident to the printing and sale of stock certificates 1,000
Assume Emerald Corporation makes an appropriate and timely election under §248(c) and
the related regulations. What is the maximum organizational expense Emerald may write-off
for the first tax year?
1. $960
2. $5,153
3. $153
4. $5,187
Choice “2” is correct.
Organizational meetings
5,000
State incorporation fees
600
Accounting for expenses incident to organization
1,200
Legal fees drafting bylaws
2,800
Qualified “start-up” expenses
9,600
Expensed immediately
(5,000)
Remainder
4,600
Amortization Period
÷ 180
months
Amortization expense/month
25.56
Months of operation (July − Dec.)
× 6
Total Amortization expense
153.36
Total write-off:
Expense maximum
5,000
Amortized amount
153
Total write-off
5,153
Organizational expenses are eligible for an immediate 5,000 deduction, with the remainder amortized over 180 months. (Note: The $5,000 is reduced as the total cost exceeds 50,000 for each item.)
Note that expenses related to the issuance of the corporation’s stock (the expenses for printing and sale of stock certificates, $1,000) are not amortizable.
Choice “1” is incorrect. This answer is derived by using the eligible expenses amortized over 60 months beginning with the month of starting business (old rule).
Choice “3” is incorrect. The amount of $153 only includes the amortization component of the write-off in the year. The expense of $5,000 is an additional write-off.
Choice “4” is incorrect. This answer applies the proper expensing/amortizing rules but includes the $1,000 for printing and sale of stock certificates as eligible expenses.
MCQ-14761
For 2019, Hammond Corporation reported book income of $2,300,000. Included in that amount was corporate bond interest income of $100,000, municipal bond interest income of $200,000, $80,000 for meals expense, $500,000 for corporate federal income tax expense,
$150,000 state income tax expense, $75,000 of rental expense, and $20,000 for life insurance premiums on an officer’s life (corporation is the beneficiary). Further, the company collected $50,000 in advance rents during the year. In Hammond’s Schedule M-1
of Form 1120 for the current year, which reconciles book income to taxable income, what amount should be reported as taxable income?
1. $2,670,000
2. $2,710,000
3. $2,860,000
4. $2,660,000
Choice “2” is correct. Taxable income of $2,710,000 is calculated as follows:
Book income
2,300,000
Additions:
Federal income tax expense
500,000
50% of meals
40,000
Life insurance premiums
20,000
Advance rents collected
50,000
Subtractions:
Municipal bond interest income
(200,000)
Taxable income
2,710,000
Choice “1” is incorrect. This amount fails to make an adjustment to increase book income by 50% of the meals expenses paid, which are only 50% deductible. Food and beverage provided by a restaurant is temporarily 100% deductible for 2021 and 2022.
Choice “3” is incorrect. This amount adds the state income tax paid back to the book income in error. State income taxes are deductible expenses on the federal corporate income tax return.
Choice “4” is incorrect. This amount neglects to include the $50,000 advance rents received as taxable income.
MCQ-10004 Which of the following types of income is not considered personal holding company income? 1. Interest. 2. Dividends. 3. Royalties. 4. Bonuses.
Choice “4” is correct. Bonuses are not considered personal holding company income.
Choices “2”, “1”, and “3” are incorrect. Dividends, interest, and royalties are considered personal holding company income.
MCQ-10523
Jordan Corporation has two stockholders. Jordan derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its shareholders. Jordan is a:
1. Corporation subject to tax only on income not distributed to stockholders.
2. Personal holding company.
3. Regular investment company.
4. Personal service corporation subject to accumulated earnings tax.
Choice “2” is correct. Personal holding company status applies if a corporation is owned more than 50% by five or fewer individuals at any time during the last half of the tax year and at least 60% of the adjusted ordinary gross income for the tax year is personal holding company income (which would include income from investments in stocks and securities).
Choice “1” is incorrect. The corporation in the question is a personal holding company. The description of this option seems close to that of a personal holding company, but it is not exactly. A “C corporation” (of which a personal holding company is one) is subject to tax on all of its taxable income, regardless of whether it is distributed to its shareholders. However, in a personal holding company, if the income is then NOT distributed to the shareholders, the corporation is subject to an ADDITIONAL tax on personal holding company income not distributed (the tax is self-assessed).
Choice “3” is incorrect. A regular investment company is a corporation that is registered under the Investment Company Act of 1940 (also includes some venture capital companies). In order to qualify as a regular investment company, at least 90% of the corporation’s gross income must be qualified investment source income. It must distribute currently at least 90% of its dividend and interest income. The benefit of this type of corporation is that if all requirements are met, the corporation is not taxed on distributions to its shareholders.
Choice “4” is incorrect. The accumulated earnings tax is imposed on corporations whose accumulated (retained) earnings are in excess of $250,000 ($150,000 if the corporation is a personal service corporation) if improperly retained instead of being distributed as earnings to the shareholders. The corporation in the question is not a personal service corporation, which is a company that provides personal services (e.g., medical, accounting, legal, etc.) performed by the shareholder.
MCQ-10393
In the filing of a consolidated tax return for a corporation and its wholly owned subsidiaries, intercompany dividends between the parent and subsidiary corporations are:
1. Fully taxable.
2. Included in taxable income to the extent of 80%.
3. Included in taxable income to the extent of 20%.
4. Not taxable.
Choice “4” 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 “3”, “2”, and “1” are incorrect. The regulations require elimination of intercompany dividends in consolidation.
MCQ-10549
During the year, Bereft Corp., which is not a dealer in securities, realized taxable income of
$175,000 from its business operations. During the year, Bereft also sustained a capital loss of $52,000 from the sale of marketable securities it purchased 10 years ago. Bereft did not realize any other capital gains or losses in the current year or in past years. In Bereft’s
income tax return, what is the proper treatment of the $52,000 long-term capital loss?
1. Use $3,000 of the loss to reduce the current year taxable income, and carry $49,000 of the capital loss forward for 3 years.
2. Use $3,000 of the loss to reduce the current year taxable income, and carry $49,000 of the capital loss forward for 5 years.
3. Use the entire $52,000 capital loss in the current year to reduce taxable income to $123,000.
4. Carry the $52,000 capital loss carryforward for five years.
Choice “4” is correct. Capital gains are taxed at the same rate as ordinary income for corporations. However, capital losses can only be used to offset capital gains. Any capital loss not utilized in the year of generation is carried back 3 years to offset prior capital gains and then carried forward for 5 years. In this example the corporation has no net capital gains in any previous year. As such, no carryback period is available.
Choices “2” and “1” are incorrect. The $3,000 deduction for capital losses against ordinary income available for individuals is not available for corporations.
Choice “3” is incorrect. Corporate capital losses can only be used to offset capital gains.
