REG Roger Flashcards
Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. Magic’s corporate tax rate was 35%. What was Magic’s tax liability as a result of the sale?
The built-in gains tax applies if: (i) a C corporation elects S corporation status and the FMV of its assets exceeds its basis on the election date and (ii) the assets are sold within five years. If both conditions are met, there is a 35% tax on the unrealized built-in gain, which is the difference between the FMV of the corporation’s assets and its basis on the election date. The built-in gains tax is payable by the S corporation, rather than the individual shareholders. The unrealized built-in gain on the asset sold is $45,000 ($85,000 - $40,000), and the tax liability is $15,750 ($45,000 x 35%). The tax of $3,500 on the remaining $10,000 gain ($95,000 - $85,000) is paid by the shareholders as reported on their individual K-1s.
On May 1, 20X1, two months after becoming insolvent, Quick Corp., an appliance wholesaler, filed a voluntary petition for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code. On October 15, 20X0, Quick’s board of directors had authorized and paid Erly $50,000 to repay Erly’s April 1, 20X0 loan to the corporation. Erly is a sibling of Quick’s president. On March 15, 20X1, Quick paid Kray $100,000 for inventory delivered that day.
Which of the following is not relevant in determining whether the repayment of Erly’s loan is a voidable preferential transfer?
a. Erly is an insider.
b. Quick’s payment to Erly was made on account of an antecedent debt.
c. Quick’s solvency when the loan was made by Erly.
d. Quick’s payment to Erly was made within one year of the filing of the bankruptcy petition.
C. When a payment is made more than 90 days prior to the filing of the petition, the creditor must be an insider in order for the transfer to be deemed preferential. A debtor must be insolvent at the time the payment is made, but the debtor’s solvency at the time the earlier loan was made is not relevant.
Roger Corporation purchased 4 pieces of similar office furniture for $18,000 in 20X1. How much can Roger Corporation expense in the year of purchase under IRC 263, de minimus capitalization regulations?
a. $0, since the entire amount of $18,000 must be capitalized and subsequently depreciated.
b. $5,000
c. $9,000
d. $18,000
D. Under section 263, an entity may deduct the cost of an item of property up to either $5,000 per invoice, or $5,000 per item. In this case, since they are purchasing 4 items for $18,000, the price per item is $4,500, which is below the $5,000 safe harbor, therefore all $18,000 may immediately be expensed. If the property had a useful life of 12 months or less, it could also be immediately expensed.
Regarding the calculation of total tax liability on the Corporate Income Tax Return, Form 1120, which of the following statements is true?
a. Business and nonbusiness bad debts are deductible in full using the direct write-off method.
b. Charitable contributions are an exclusion used to determine gross income before special deductions.
c. The foreign tax credit is applied to taxable income before multiplying by the tax rate to determine gross tax liability.
d. The dividends received deduction is an exclusion used to determine gross income before special deductions.
A. For tax purposes, even an accrual basis tax payer is required to recognize bad debts expense in the period in which a receivable is written off, whether business or nonbusiness. Both charitable contributions and the dividends received deduction are special deductions. The foreign tax credit is applied after determining the gross tax liability, not before.
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
a. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
b. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
c. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
d. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.
B. Loss deductions incurred in a trade or business, or in the production of income, are limited to the amount a taxpayer has “at risk”. The amount “at risk” includes the cash and adjusted basis of property contributed by the taxpayer, and the liabilities for which the taxpayer is personally liable (this excludes non-recourse debt). For real estate activities it includes qualified non-recourse debt secured by the real property used in the activity. Excess losses can be carried forward to subsequent years with no time limit, and deducted when the “at risk” amount has increased.
Which of the following rights does a surety have?
I. Right to compel the creditor to collect from the principal debtor.
II. Right to compel the creditor to proceed against the principal debtor’s collateral.
a. Both I and II.
b. I only.
c. II only.
d. Neither I nor II.
D. A surety is primarily liable for the debt along with the principal debtor, so the creditor can demand payment from the surety without first proceeding against the debtor or the collateral.
Which of the following is excluded from gross income on an individual’s 20X14 tax return?
a. 20X14 settlement from an employment discrimination lawsuit
b. Seller of the Year award, in the form of a 20X14 all-expenses-paid vacation
c. Qualified stock options awarded in 20X11, exercised in 20X14
d. Income from the 20X14 sale of illegal drugs
C. Qualified stock options are taxable in the year in which the stock is sold, not either in the year of grant, nor in the year of exercise. While awards for damages due to bodily harm are nontaxable, others, such as for employment discrimination are taxable. An award for performance is taxable, including the fair value of noncash consideration, such as an all-expenses-paid vacation. Income from illegal activities, net of cost of sales but not other expenses, is taxable.
Randolph is a single individual who always claims the standard deduction. Randolph received the following in the current year:
Wages - $22,000
Unemployment compensation - $6,000
Pension distribution (100% taxable) - $4,000
A state tax refund from the previous year - $425
What is Randolph’s gross income?
a. $22,000
b. $28,425
c. $32,000
d. $32,425
C. Each listed item of income would be included in gross income except the state tax refund. The state tax refund would only be included if Randolph itemized deductions in the prior tax year and claimed a deduction for the state taxes.
Quincy, age 67, only had the following deductions on Schedule A:
Mortgage interest: $6,000
Home equity line of credit interest: $3,000
Property taxes: $2,000
Medical expenses: $4,000
Quincy had obtained the line of credit in order to consolidate his credit card debt. No other adjustments or preferences apply. His regular taxable income was $51,100 after his personal exemption of $3,900. Compute Quincy’s alternative minimum taxable income.
Quincy’s AGI may be calculated by adding back the personal exemption and deductions from AGI to his regular taxable income. $51,100 + $3,900 + $6,000 + $3,000 + $2,000 + $4,000 = $70,000. To compute AMTI, add the following adjustments to his regular taxable income: personal exemption of $3,900, home equity line of credit interest of $3,000, property taxes of $2,000, and the difference between 7.5% of AGI ($5,250) and 10% of AGI ($7,000) or $1,750 in medical expenses disallowed for AMT purposes. Therefore, Quincy’s AMTI is $51,100 + $3,900 + $3,000 + $2,000 + $1,750 = $61,750.
A sole proprietor of a farm implement store sold a truck for $15,000 that had been used to make service calls. The truck cost $30,000 three years ago, and $21,360 depreciation was taken. What is the appropriate classification of the $6,360 gain for tax purposes?
a. Ordinary gain.
b. Section 1231 (Property Used in the Trade or Business and Involuntary Conversions) gain.
c. Long-term capital gain.
d. Short-term capital gain.
A. The truck owned by the sole proprietor is Section 1231 property (property used in the trade or business), and this gain is subject to Section 1231 recapture, which states that gains are to be reported as ordinary income to the extent of prior depreciation. In this fact pattern $21,360 of depreciation was previously taken as expense by the sole proprietor, which is greater than the gain to be recognized. Therefore, the entire $6,360 gain is to recaptured as ordinary income.
Martinsen, a calendar-year individual, files a year 1 tax return on March 31, year 2. Martinsen reports $20,000 of gross income. Martinsen inadvertently omits $500 interest income. The IRS may assess additional tax up until which of the following dates?
a. March 31, year 5.
b. April 15, year 5.
c. March 31, year 8.
d. April 15, year 8.
B. The income understatement is less than 25%, so the statute of limitations is only 3 years after the later of the original due date or the actual filing date. If the income understatement is 25% or more, the statue is increased to 6 years.
For a cash basis taxpayer, gain or loss on a year-end sale of listed stock arises on the
a. Trade date.
b. Settlement date.
c. Date of receipt of cash proceeds.
d. Date of delivery of stock certificate.
A. A special rule for listed securities causes gains or losses to be realized on the trade date. The date of delivery of the physical securities would never be considered the appropriate date of sale for a cash basis taxpayer.
An individual had the following gains and losses for the year:
Short-term capital loss: $30,000
Section 1231 loss: $20,000
Long-term capital gain (unrecaptured Section 1250 at 25%): $18,000
Collectibles gain (28% rate): $20,000
Long-term capital gain (15% rate): $15,000
What will be the net capital gain (loss) reported by the individual and at what applicable tax rate(s)?
a. Long-term gain of $3,000.
b. Collectibles gain of $3,000.
c. Long-term gain (unrecaptured Section 1250) of $3,000 at 25% and collectibles gain of $20,000 at 28% rate.
d. Long-term gain (unrecaptured Section 1250) of $8,000 at 25% and long-term gain of $15,000 at 15%.
D. The section 1231 loss is treated as an ordinary loss and does not affect the amount of capital gain or loss recognized. Capital losses will be offset against capital gains, beginning with the gains taxed at the highest rates. As a result, the entire $20,000 gain on collectibles will be offset, leaving a loss of $10,000. It will next be offset against the $18,000 unrecaptured section 1250 gain. The excess $8,000 will be taxed at the 25% rate and there is no loss to offset against the long-term capital gain taxed at 15%, leaving the entire $15,000 gain taxable at 15%.
Horace sells equipment with an adjusted basis of $20,000 to his great-grandson, Matthew, for its fair market value of $15,000. Matthew sells the equipment to an unrelated party for $17,000. What are Matthew’s realized and recognized gain (loss) upon the sale?
Realized Gain (Loss) Recognized Gain (Loss)
a. ($3,000) ($3,000)
b. $2,000 $0
c. $0 $0
d. $2,000 $2,000
B. A realized gain is the difference between the cost of an item and its sales price, or the difference between $17,000 and $15,000, which is $2,000. Since a sale between a grandparent and a grandchild is a related party transaction in which losses are not deductible, a gain on a sale to a third party is only taxable to the extent that it exceeds any losses not allowed on the related party sale. Matthew’s gain of $2,000 does not exceed Horace’s nondeductible loss of $5,000 indicating that Matthew will not recognize any gain.
According to the Securities Act of 1933, which of the following statements is correct regarding an issuer of securities?
a. All securities issuers must provide potential investors with a prospectus containing specified information.
b. An issuer is permitted to advertise an initial offering of securities only through distribution of the prospectus.
c. All securities issuers must register the securities offering with the Securities and Exchange Commission (SEC).
d. If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid.
D. Under the Securities Act of 1933, a company has a duty to disclose information to investors. The disclosure and registration requirements depend on the offering. In any offering type, if the issuer fails to meet these requirements, the purchaser may return the security and request a refund.
