Wiley Flashcards
Benson, a singer, owns 100% of the outstanding capital stock of Lund Corp. Lund contracted with Benson, specifying that Benson was to perform personal services for Magda Productions, Inc., in consideration of which Benson was to receive $50,000 a year from Lund. Lund contracted with Magda, specifying that Benson was to perform personal services for Magda, in consideration of which Magda was to pay Lund $1,000,000 a year. Personal holding company income will be attributable to
Benson only.
Lund only.
Magda only.
All three contracting parties.
A corporation will be classified as a personal holding company if (1) it is more than 50% owned by five or fewer individuals, and (2) at least 60% of the corporation’s adjusted ordinary gross income is PHC income. PHC income is generally passive income and includes dividends, interest, adjusted rents, adjusted royalties, compensation for the use of corporate property by a 25% or more shareholder, and certain personal service contracts involving a 25% or more shareholder. An amount received from a personal service contract is classified as PHC income if
(1) some person other than the corporation has the right to designate, by name or by description, the individual who is to perform the services, and (2) the person so designated is (directly or constructively) a 25% or more shareholder.
Here, since Benson owns 100% of Lund Corp. and Lund Corp. contracted with Magda specifying that Benson is to perform personal services for Magda, the income from the personal service contract will be personal holding company income to Lund Corp.
Quigley, Roberk, and Storm form a corporation. Quigley exchanges $30,000 of legal services for 30 shares of stock. Roberk exchanges land with a basis of $10,000 and a fair market value of $100,000 for 100 shares of stock. Storm exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?
Quigley Roberk Storm $0 $0 $0 $30,000 $90,000 $0 $30,000 $90,000 $10,000 $0 $90,000 $0
$30,000
$90,000
$0
This answer is correct. The requirement is to determine the income recognized by Quigley, Roberk, and Storm as a result of their formation of a corporation.
No gain or loss is recognized if property is transferred to a corporation solely in exchange for stock if the transferors of property, in the aggregate, own at least 80% of the stock of the corporation after the exchange. Although the term property includes cash, it does not include services.
Here, although Roberk and Storm transfer property, they own only 110 of the corporation’s 140 outstanding shares after the exchange and fail the 80% control test.
As a result, the formation of the corporation is taxable and Roberk must recognize a gain of $100,000 − $10,000 = $90,000 on the transfer of land.
Of course Storm doesn’t recognize any gain on the transfer of cash, and Quigley must recognize compensation income of $30,000 on the receipt of stock in exchange for services.
Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 ordinary income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be Dale’s basis?
$16,500
$17,500
$18,500
$21,500
This answer is correct. A partner’s beginning basis is increased by the partner’s distributive share of all income items (including tax-exempt income) and is decreased by all loss and deduction items, as well as distributions received from the partnership.
Additionally, a partner’s basis is increased by a net increase in partnership liabilities during the year, or decreased if there is a net decrease in partnership liabilities.
Since Dale is a 50% partner, his beginning basis of $10,000 is increased by his 50% share of ordinary income ($7,500), 50% share of tax-exempt income ($1,000), 50% share of the net increase in partnership liabilities ($3,000), and decreased by the $3,000 distribution that Dale received, resulting in a basis of $18,500.
Initial contribution at formation $ 10,000 Net taxable income 7,500 [$15,000 × 50%] Tax exempt income 1,000 [$2,000 × 50%] Distributions (3,000) [to each partner] Increase in debt responsible for 5,000 [$10,000 × 50%] Reduction in debt responsible for (2,000) [$4,000 × 50%]
Basis at year end
As of January 1, 2019, Kane owned all the 100 issued shares of Manning Corp., a calendar-year S corporation. On the 40th day of 2019, Kane sold 25 of the Manning shares to Rodgers. For the year ended December 31, 2019 (a 365-day calendar year), Manning had $73,000 in non-separately stated income and made no distributions to its shareholders. What amount of non-separately stated income from Manning should be reported on Kane's 2019 tax return? $56,900 $56,750 $54,750 $48,750
Correct! An S corporation’s tax items are allocated to shareholders on a per-share, per-day basis. Since Manning had income of $73,000 for its entire year, its per day income is $73,000/365 = $200. Since there are 100 shares outstanding, Manning’s daily income per share is $200/100 = $2. Since Kane sold 25 of his shares on the 40th day of 2019 and held his remaining 75 shares throughout the year, the amount of income to be reported on Kane’s 2019 return would be determined as follows:
75 shares × $2 × 365 days = $54,750
25 shares × $2 × 40 days = 2,000
$56,750
During the current year, James Elton received a 25% capital interest in Bredbo Associates, a partnership, in return for services rendered plus a contribution of assets with a basis to Elton of $25,000 and a fair market value of $40,000. The fair market value of Elton’s 25% interest was $50,000. How much is Elton’s basis for his interest in Bredbo?
$25,000
$35,000
$40,000
$50,000
This Answer is Correct
Since Elton received a capital interest with a FMV of $50,000 in exchange for property worth $40,000 and services, Elton must recognize compensation income of $10,000 ($50,000 − $40,000) on the transfer of services for a capital interest. Thus, Elton’s basis for his partnership interest consists of the $25,000 basis of assets transferred plus the $10,000 of income recognized on the transfer of services, a total of $35,000
An incorporated exempt organization subject to tax on its unrelated business income
Must make estimated tax payments if its tax can reasonably be expected to be $100 or more.
Must comply with the Code provisions regarding installment payments of estimated income tax by corporations.
Must pay at least 70% of the tax due as shown on the return when filed, with the balance of tax payable in the following quarter.
May defer payment of the tax for up to nine months following the due date of the return.
Must comply with the Code provisions regarding installment payments of estimated income tax by corporations.
Which of the following items should be included on the Schedule M-1, Reconciliation of Income (Loss) per Books with Income per Return, of Form 1120, US Corporation Income Tax Return to reconcile book income to taxable income?
Cash distributions to shareholders.
Premiums paid on key-person life insurance policy.
Corporate bond interest.
Ending balance of retained earnings.
This Answer is Correct
This answer is correct. The requirement is to determine which item should be included on Schedule M-1 of Form 1120 to reconcile a corporation’s book income to taxable income. Generally, Schedule M-1 includes items whose treatment for computing book income differs from their treatment in computing taxable income. This answer is correct since the premiums paid on a key-person life insurance policy would be deducted per books, but would not be deductible for tax purposes because it is an expense of producing tax-exempt income (i.e., the life insurance proceeds if the person dies). The amount of premium would be added back to book income in order to arrive at taxable income on Schedule M-1.
Olson, Wayne, and Hogan are equal partners in the OWH partnership. Olson's basis in the partnership interest is $70,000. Olson receives a liquidating distribution of $10,000 cash and land with a fair market value of $63,000, and a basis of $58,000. What is Olson's basis in the land? $58,000 $60,000 $63,000 $70,000
This Answer is Correct
This answer is correct. A distributee partner can recognize loss only upon the complete liquidation of the partner’s interest and then only if what is received consists of solely money, unrealized receivables, or inventory. Since Olson received land in the liquidating distribution, no loss can be recognized and the land must absorb all of Olson’s remaining partnership basis after it is first reduced by the cash received. Here, Olson’s partnership basis of $70,000 is first reduced by the $10,000 of cash to $60,000, which then becomes the basis for the land to Olson.
During the current year, Dave Burr acquired a 20% interest in a partnership by contributing a parcel of land. At the time of Burr’s contribution, the land had a fair market value of $35,000, an adjusted basis to Burr of $8,000, and was subject to a mortgage of $12,000. Payment of the mortgage was assumed by the partnership. Burr’s basis for his interest in the partnership is $0. $ 5,600. $ 8,000. $23,000.
This Answer is Correct
This answer is correct. Burr’s basis is the $8,000 adjusted basis of the land contributed reduced (but not below zero) by the net decrease in his individual liabilities resulting from the assumption by the partnership of his liabilities (80% × $12,000 = $9,600). Thus, Burr’s basis for the partnership interest is zero. Note that Burr would have to recognize a gain of $9,600 − $8,000 = $1,600.
In January 2019, Martin and Louis formed a partnership with each contributing $75,000 cash. The partnership agreement provided that Martin would receive a guaranteed payment of $20,000 and that partnership profits and losses (computed after deducting Martin’s guaranteed payment) would be shared equally. For the year ended December 31, 2019, the partnership’s operations resulted in a loss of $18,000 after deducting the $20,000 guaranteed payment made to Martin. The partnership had no outstanding liabilities as of December 31, 2019. What is the amount of Martin’s basis for his partnership interest as of December 31, 2019? $46,000 $66,000 $76,000 $86,000
This Answer is Correct
This answer is correct. Generally, a partner’s original basis in the partnership consists of his capital contribution. It is increased by the partner’s distributive share of income, and decreased by distributions from the partnership and the partner’s distributive share of any partnership losses. In this case, Martin’s basis in the partnership is his original contribution of $75,000 less his one-half share of the $18,000 loss. Therefore, his basis is $66,000. The guaranteed payment of $20,000 is already reflected as a deduction in the computation of the partnership’s loss of $18,000, and the receipt of the guaranteed payment must be reported as ordinary income by Martin.
In January 2019, Martin and Louis formed a partnership with each contributing $75,000 cash. The partnership agreement provided that Martin would receive a guaranteed payment of $20,000 and that partnership profits and losses (computed after deducting Martin’s guaranteed payment) would be shared equally. For the year ended December 31, 2019, the partnership’s operations resulted in a loss of $18,000 after deducting the $20,000 guaranteed payment made to Martin. The partnership had no outstanding liabilities as of December 31, 2019. What is the amount of Martin’s basis for his partnership interest as of December 31, 2019? $46,000 $66,000 $76,000 $86,000
This Answer is Correct
This answer is correct. Generally, a partner’s original basis in the partnership consists of his capital contribution. It is increased by the partner’s distributive share of income, and decreased by distributions from the partnership and the partner’s distributive share of any partnership losses. In this case, Martin’s basis in the partnership is his original contribution of $75,000 less his one-half share of the $18,000 loss. Therefore, his basis is $66,000. The guaranteed payment of $20,000 is already reflected as a deduction in the computation of the partnership’s loss of $18,000, and the receipt of the guaranteed payment must be reported as ordinary income by Martin.
In 2019, Garland Corp. contributed $40,000 to a qualified charitable organization. Garland’s 2019 taxable income before the deduction for charitable contributions was $410,000. Included in that amount is a $20,000 dividends-received deduction. Garland also had carryover contributions of $5,000 from the prior year. In 2019, what amount can Garland deduct as charitable contributions? $40,000 $41,000 $43,000 $45,000
This answer is correct. A corporation’s charitable contribution deduction is limited to 10% of its taxable income before the charitable contribution and dividends-received deductions. Since Garland’s taxable income of $410,000 already included a $20,000 dividends-received deduction, $20,000 must be added back to arrive at Garland’s contribution base of $430,000. Thus, Garland’s maximum contribution deduction for 2019 would be $430,000 × 10% = $43,000. Garland would deduct the $40,000 contributed during 2019, plus $3,000 of its $5,000 carryover from 2018. As a result, Garland will have a $2,000 contribution carryover from 2018 to 2020.
An S corporation may
Have both common and preferred stock outstanding.
Have a partnership as a shareholder.
Have a nonresident alien as a shareholder.
Have as many as 100 shareholders.
An S corporation may have as many as 100 shareholders. However, an S corporation cannot have both common and preferred stock outstanding because an S corporation is limited to a single class of stock. Similarly, a partnership is not permitted to be a shareholder in an S corporation because all S corporation shareholders must be individuals, estates, or certain trusts. Additionally, an S corporation cannot have a nonresident alien as a shareholder.
Mike Reed, a partner in Post Co., received the following distribution from Post:
Post’s basis Fair market value
Cash $11,000 $11,000
Land 5,000 12,500
Before this distribution, Reed's basis in Post was $25,000. If this distribution were nonliquidating, Reed's recognized gain or loss on the distribution would be $11,000 gain. $ 9,000 loss. $ 1,500 loss. $0.
This Answer is Correct
This answer is correct. A loss can never be recognized as a result of a pro rata nonliquidating partnership distribution, and a gain will only be recognized if the amount of cash received exceeds the basis of the partner’s partnership interest. If both cash and noncash property are received in a single distribution, the cash reduces the basis of the partner’s interest before the distribution of noncash property. Here, no gain is recognized because the cash distribution ($11,000) does not exceed the basis of Reed’s partnership interest before the distribution ($25,000).
Mike Reed, a partner in Post Co., received the following distribution from Post:
Post’s basis Fair market value
Cash $11,000 $11,000
Land 5,000 12,500
Before this distribution, Reed's basis in Post was $25,000. If this distribution were nonliquidating, Reed's recognized gain or loss on the distribution would be $11,000 gain. $ 9,000 loss. $ 1,500 loss. $0.
This Answer is Correct
This answer is correct. A loss can never be recognized as a result of a pro rata nonliquidating partnership distribution, and a gain will only be recognized if the amount of cash received exceeds the basis of the partner’s partnership interest. If both cash and noncash property are received in a single distribution, the cash reduces the basis of the partner’s interest before the distribution of noncash property. Here, no gain is recognized because the cash distribution ($11,000) does not exceed the basis of Reed’s partnership interest before the distribution ($25,000).
