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1 Q Quiz uestion: (TCO 2) Luann is the owner of Pet Grooming Service (a C corporation). D uring the year, t he company had gross income of $150,000 and operating expenses of $97,500, including L uanns salary of $46,500. I n July, Pet sold a capital asset that had been held by the business for two years for a $7,500 loss. D uring the year, Pet paid Luann a dividend of $10,000. W hat is Pets taxable income for the year? Your Answer: $52,500. $48,000. $46,500. $45,000. None of the above. ( ) CORRECT I nstructor Explanation: Pet reports the income and expenses of the business on Form 1120, resulting in net profit (ordinary income) of $52,500 ($150,000 $97,500). Pet also reports a $7,500 LTCL on Schedule D of i ts Form 1120, but is not allowed to deduct any of the capital loss this year. T he LTCL may be carried back three years or forward five years to be offset against capital gains. T he corporation cannot deduct the dividend paid to Luann. Q uestion: (TCO 2) Grocer Services Corporation (a calendar year taxpayer), a wholesale distributor of food, made the following donations to qualified charitable organizations during the year: Food (held as inventory) donated to the OhioChildrens Shelter Passenger van to Ohio Childrens Shelter, to be used to t ransport children to school S tock in Acme Corporation acquired two years ago and held as an investment, donated to Southwest Unive How much qualifies for the charitable contr ibution deduction? Your Answer: I nstructor Explanation: Since Grocer Services is a corporation and the inventory exception is met, one-half of the appreciation on the food may be claimed, or $300 [1/2 of ($8,100 $7,500)]. T herefore, $7,800 ($7,500 + $300 appreciation) is allowed as a deduction. Because the Acme stock is long-term capital gain property and not tangible personalty, the deduction is based on fair m arket value ($6,750). T he deduction for the delivery van, which is not a capital asset, is l imi ted to the lesser of adjusted basis or fair market value ($5,700). T hus, $7,800 + $6,750 + $5,700 = $20,250. Q uestion: (TCO 2) Red Corporation, which owns stock in Blue Corporation, had net operating income of $500,000 for the year. B lue pays Red a dividend of $50,000. Red takes a dividends r eceived deduction of $35,000. W hich of the following statements is correct? Your Answer: I nstructor Explanation: Reds dividends received deduction is 70% of the dividend received ($35,000 $50,000). T he 70% dividends received deduction applies if ownership is less than 20%. Q uestion: (TCO 2) Orange Corporation owns stock in White Corporation and has net operating income of $800,000 for the year. W hite Corporation pays Orange a dividend of $300,000. W hat amount of dividends received deduction may Orange claim if i t owns 18% of White stock (assuming Oranges dividends received deduction is not limited by i ts taxable income)? Your Answer: I nstructor Explanation: The dividends received deduction depends upon the percentage of ownership by the corporate shareholder. I f Orange Corporation owns 18% of White Corporation, Orange would qualify for a 70% deduction, or $210,000 in this case. Q uestion: (TCO 1) Ki rby and Helen form Red Corporation. K i rby t ransfers property, basis of $20,000 and value of $300,000, for 100 shares in Red Corporation. H elen t ransfers property, basis of $40,000 and value of $280,000, and provides legal services in organizing the corporation. T he value of her services is $20,000. In return Helen receives 100 shares in Red Corporation. W ith respect to the t ransfers: Your Answer: I nstructor Explanation: K i rby will not recognize gain on the t ransfer. H elen will have income of $20,000, the value of the services she rendered to the corporation. Red Corporation will have a basis of $40,000 in the property it acquired from Helen. Red Corporation will not have a business deduction of $20,000. I nstead, it must capitalize the $20,000 as an organizational expense. Q uestion: (TCO 1) Earl and Mary form Crow Corporation. Earl t ransfers property, basis of $200,000 and value of $1,600,000, for 50 shares in Crow Corporation. M ary t ransfers property, basis of $80,000 and value of $1,480,000, and agrees to serve as manager of Crow for one year; in return Mary receives 50 shares of Crow. T he value of Marys services is $120,000. W ith r espect to the t ransfers: Your Answer: I nstructor Explanation: Earl will not recognize gain on the t ransfer. M ary will have income of $120,000, the value of the services she will render to Crow. C row will have a business deduction of $120,000. Q uestion: ( TCO 1) Gloria owns 100% of the stock of Mango Corporation. I n the current year Gloria t ransfers an installment obligation, tax basis of $30,000 and fair market value of $70,000, for additional stock in Mango worth $70,000. Your Answer: I nstructor Explanation: An installment obligation qualifies as property under 351. T hus, Gloria recognizes no gain on the t ransfer. M ango has a basis of $30,000 in the installment obligation. Q uestion: (TCO 1) Which of the following is an advantage of issuing long-term debt instead of stock? Your Answer: I nstructor Explanation: Interest paid on long-term debt is deductible by the corporation, whereas, dividend payments are not. Loan repayments are not taxable to the investor unless the repayment exceeds the investors basis in the debt. Q uestion: (TCO 11) Which of the following statements correctly reflects the rules governing interest on an individuals Federal tax deficiency and a claim for refund? Your Answer: I nstructor Explanation: The procedure for determining the rate of interest (option a.) is set forth in 6621(b). T he semiannual rule (option d.) was formerly the case, but quarterly changes and daily compounding are now used. Q uestion: (TCO 11) Vera is audited by the IRS for tax years 2006, 2007, and 2008. Her returns were p repared by the following part ies. Tax Year 2006 2007 2008 Which of the following statements is correct? Your Answer: I nstructor Explanation: Sally may represent Vera for 2006, but such representation may not extend beyond the agent level (option a.). T he same is t rue regarding Wesley, for 2007 (option b.). A lex may r epresent Vera fully for all years (option c.). Q uestion: (TCO 2) Norm is the sole shareholder of Elk, Inc., a C corporation. M axine is the sole shareholder of Moose, Inc., an S corporation. Both businesses were started in 2008, and each business sustained a $10,000 capital loss for the year. W hich of the following s tatements is correct? Your Answer: I nstructor Explanation: A C corporation cannot deduct a capital loss in the year incurred but is allowed to carry such loss back 3 years and forward 5 years. E lk, Inc., was started in 2008, so there is no carryback period. T herefore, the loss may be carried forward five years. I ndividuals cannot carry capital losses back. I f Maxine has any capital gains, she can offset the capital loss against other capital gains. I f she has a net capital loss after offsetting the capital loss against capital gains, she may deduct $3,000 of the loss in 2008. Q uestion: (TCO 2) Scorpio Corporation had $600,000 operating income and $340,000 operating expenses during the year. Scorpio, which owns 15% of Nebula, Inc.'s stock, received a $50,000 dividend from Nebula. Scorpio also had a $50,000 long-term capital gain and a $30,000 short-term capital loss. Compute Scorpio's taxable income for the year. Your Answer: I nstructor Explanation: Operating income Operating expenses Subtotal Dividend received Net capital gain ($50,000 - $30,000) Subtotal Dividends received deduction ($50,000 X 70%) Net profit Q uestion: (TCO 2) Star Corporation, a cash basis and calendar year taxpayer, was formed and began operations on July 1, of the current year. S tar incurred the following expenses during its f irst year of operations (July 1-December 31, 20xx): E xpenses of temporary directors and of organizational meetings Fee paid to the state of incorporation Expenses in printing and sale of stock certificates Legal services for drafting the corporate charter and bylaws Total If Star Corporation makes a t imely election under 248 to amortize qualifying organizational expenses, how much may the corporation deduct for tax year 20xx? Your Answer: I nstructor Explanation: Qualifying organizational expenditures include these i tems: E xpenses of temporary directors and of organizational meetings Fee paid to the state of incorporation Legal services for drafting the corporate charter and bylaws Total Since an appropriate and timely election under 248(c) was made, the amount that Star Corporation may wri te off for the tax year 2008 is determined as follows: (1) I mmediate expensing of first $5,000 (2) A mortization: [($24,000 $5,000) 180] X 6 (months in t ax year) Total $5,000 633 $5,633 Q uestion: (TCO 1) Sarah and Tony (mother and son) form Dove Corporation with the following i nvestment: cash by Sarah of $55,000; land by Tony (basis of $35,000 and fair market value of $45,000). Dove Corporation issues 200 shares of stock, 100 each to Sarah and Tony. T hus, each receives stock in Dove worth $50,000. Your Answer: I nstructor Explanation: The fact that the stock was not in proportion to the value of the property t ransferred (choice a.) does not prevent 351 from applying. Since 351 applies and no boot was received, Tony does not recognize a gain (choice b.). H is basis in the stock is $35,000 plus $5,000, the basis of the stock implicitly gifted by Sarah to Tony (not $50,000 as in choice c.). Q uestion: (TCO 1) In order to induce Mauve Corporation to build a new manufacturing facility in Columbia, South Carolina, the city donates land (fair market value of $150,000) and cash of $50,000 to the corporation. W ithin several months of the donation, Mauve Corporation spends $250,000 (which includes the $50,000 received from Oxford) on the construction of a new plant located on the donated land. Your Answer: I nstructor Explanation: Q uestion: (TCO 2) Tulip Corporation had $750,000 operating income and $510,000 operating expenses d uring the year. T ulip, which owns 25% of Daisy, Inc.s stock, received a $75,000 dividend f rom Daisy. T ulip also had a $45,000 long-term capital gain and a $15,000 short-term capital loss. Compute Tulips taxable income for the year. Your Answer: I nstructor Explanation: Operating income Operating expenses Subtotal Dividend received Net capital gain ($45,000 $15,000) Subtotal Dividends received deduction ($75,000 X 80%) Net profit Q uestion: (TCO 2) Lilac Corporation, a closely held corporation (not a PSC), had $180,000 of active i ncome, $110,000 of portfolio income, and a $195,000 passive loss during the year. How m uch of the passive loss is deductible? Your Answer: I nstructor Explanation: A closely held corporation may offset passive loss against active income, but not against portfolio income. L ilac may deduct only $180,000 of i ts $195,000 passive loss. Q uestion: ( TCO 2) Dur ing the current year, Satellite Corporation (a calendar year taxpayer) had the following income and expenses: I ncome from operations E xpenses from operations $175,000 $150,000 Q ualifying dividends from domestic corporation i n which Satellite owns a 40% interest N OL carryover from prior year $25,000 $5,000 O n October 1, Satellite Corporation made a contr ibution to a qualified charitable organization of $30,000 in cash (not included in any of the above i tems). Determine Satellite Corporations charitable contribution deduction for the current year. Your Answer: I nstructor Explanation: Income from operations Q ualifying dividend Subtotal Less: E xpenses from operations $175,000 25,000 $200,000 $150,000 N OL carryover from prior year L imitation base for contributions A llowable contribution percentage C haritable contribution allowed 5,000 (155,000) $ 45,000 X 10% $ 4,500 T he charitable contribution deduction is based on taxable income determined without r egard to the charitable contribution deduction, any net operating loss carryback or capital loss carryback, and the dividends received deduction. Q uestion: (TCO 1) Tim, a cash basis taxpayer, incorporates his sole proprietorship. He t ransfers the following i tems to newly created Wren Corporation. Cash B uilding Mortgage payable (secured by the building and held for (15 years) With respect to this t ransaction: Your Answer: I nstructor Explanation: Under 357(c) Tim recognizes gain to the extent liabilities (mortgage payable of $135,000) exceed the basis of all assets t ransferred [$110,000 (building) + $20,000 (cash)]. W ren Corporations basis in the building is $115,000 [$110,000 (Tims basis) + $5,000 (gain r ecognized by Tim)]. Q uestion: (TCO 1) Gloria owns 100% of the stock of Mango Corporation. I n the current year Gloria t ransfers an installment obligation, tax basis of $30,000 and fair market value of $70,000, for additional stock in Mango worth $70,000. Your Answer: I nstructor Explanation: An installment obligation qualifies as property under 351. T hus, Gloria recognizes no gain on the t ransfer. M ango has a basis of $30,000 in the installment obligation. Q uestion: (TCO 1) Which of the following is a correct statement regarding 1244 stock: Your Answer: I nstructor Explanation: The ordinary loss t reatment offered under 1244 is available only to the original holder of t he stock. T hus, the advantageous tax t reatment of 1244 is lost upon the t ransfer of the s tock by gift or inheritance. O rdinary loss t reatment is available for both worthless stock as well as stock sold at a loss during the year. Q uestion: (TCO 11) Which statement appearing below does not correctly describe the IRS letter ruling p rocess? Your Answer: I nstructor Explanation: Letter rulings are open to public inspection after identifying details and certain confidential i nformation have been deleted. Such rulings are reprinted and published by Research I nstitute of America and Commerce Clearing House. T hey also are available in electronic document retr ieval services (e.g., WESTLAW). Q uestion: (TCO 11) Which of the following statements, if any, do not reflect the rules governing the negligence accuracy-related penalty? Your Answer: I nstructor Explanation: The penalty rate is 20%. Ba rryownsa30%interestinapartnershipthatearned$300,000thisyear.Healsoowns30% ofthestockinaCcorporationthatearned$300,000duringtheyear.Thepartnershipdidnot makeanydistributionsandthecorporationdidnotpayanydividends.Howmuchincomemust Barryreportfromthesebusinesses? Your Answer: $0 income from the partnership and $0 income from the corporation. $0 income from the partnership and $90,000 income from the corporation. $90,000 income from the partnership and $0 income from the corporation. $90,000 income from the partnership and $90,000 income from the corporation. None of the above. CORRECT ANSWER INCORRECT Instructor Explanation: Barrymustreporthis$90,000shareofthepartnershipsincomeonhis individualtaxreturn.Hewillnotreportanyincomefromthecorporationbecausenodividendswerepaid duringtheyear. Manny,acashbasistaxpayer,incorporateshissoleproprietorship.Hetransfersthefollowingitemsto newlycreatedSageCorporation. Adjusted FairMarket Basis Value Cash $10,000 $10,000 Building 200,000 260,000 Mortgagepayable(securedbythebuildingandheldfor5years) 220,000 220,000 Withrespecttothistransaction: Your Answer: SageCorporationsbasisinthebuildingis$200,000. Mannyhasnorecognizedgain. Mannyhasarecognizedgainof$20,000. Mannyhasarecognizedgainof$10,000. Noneoftheabove. INCORRECT CORRECT ANSWER payableof$220,000)exceedthebasisofallassetstransferred[$200,000(building)+$10,000(cash)]. SageCorporationsbasisinthebuildingis$210,000[$200,000(Mannysbasis)+$10,000(gain recognizedbyManny TherulesofCircular230mustbefollowedby: Instructor Explanation: Under357(c)Mannyrecognizesgaintotheextentliabilities(mortgage Your Answer: Anattorney ACPA. AWalMartcashierwhodoes15taxreturnsperfilingseason. Anenrolledagent. Alloftheabove CORRECT ANSWER INCORRECT Instructor Explanation: AtaxpreparerisinviolationofCircular230ifheorshe: Your Answer: Discussesthecontentofaclientstaxreturnwithafriend. Doesnotsignthetaxreturnthatispreparedasafavorforarelative Filesataxreturnthatincludesamatherror. Alloftheabove. CORRECT ANSWER INCORRECT Instructor Explanation: Penguin Corporation, a C corporation, has two equal shareholders, Bob and Leo. Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 t o each shareholder. Before considering the dividend, Bob is in the 10% marginal tax b racket and Leo is in the 28% marginal tax bracket. Which of the following statements is i ncorrect? Your Answer: $100,000 will be subject to double taxation. CORRECT ANSWER Penguin could have avoided paying corporate tax if, instead of paying a dividend, i t had paid Bob and Leo a salary of $50,000 each (assuming a $50,000 salary for each is r easonable). I NCORRECT A p referential tax rate will apply to the dividend income of both Bob and Leo. I f Penguin had paid Bob and Leo a salary of $50,000 each, Bob would have paid less Federal income tax on his salary than Leo would have paid on his salary. None of the above. I nstructor Explanation: To the extent Bob's dividend income would otherwise be taxed at 105 and 15%, the preferential rate on his dividend is 0%. thus, bob will not pay tax on some of his dividend income and to that extent not all $100,000 is subject to double taxation. Intergalactic Corporation, a personal service corporation, had $50,000 of active income, $90,000 of portfolio income, and a $160,000 passive loss during the year. How much of the passive loss is deductible? $0. CORRECT ANSWER INCORRECT $50,000. $90,000. $160,000. None of the above. I nstructor Explanation: A personal service corporation may not offset passive loss against active income or portfolio income. Jane and Walt form Yellow Corporation. Jane t ransfers equipment worth $950,000 (basis of $200,000) and cash of $50,000 to Yellow Corporation for 50% of its stock. Walt t ransfers a building and land worth $1,050,000 (basis of $400,000) for 50% of Yellows stock and $50,000 in cash. Your Answer: CORRECT Jane recognizes no gain; Walt recognizes gain of $50,000. Jane recognizes a gain of $50,000; Walt has no gain. Neither Jane nor Walt recognizes gain. Jane recognizes a gain of $750,000; Walt recognizes gain of $650,000. None of the above. I nstructor Explanation: Walt recognizes gain to the extent of the $50,000 of boot r eceived. A nn, I rene, and Bob incorporate their respective businesses and form Dove Corporation. A nn exchanges her property (basis of $100,000 and fair market value of $400,000) for 200 shares in Dove Corporation on March 1, 2007. I rene exchanges her property (basis of $140,000 and fair market value of $600,000) for 300 shares in Dove Corporation on April 10, 2007. Bob t ransfers his property (basis of $250,000 and fair market value of $1,000,000) for 500 shares in Dove Corporation on May 15, of this year. Bobs t ransfer is not part of a p rearranged plan with Ann and I rene to incorporate their businesses. What gain, if any, w ill Bob recognize on the t ransfer? Your Answer: $750,000. $1,000,000. CORRECT ANSWER $250,000. $0. INCORRECT None of the above. I nstructor Explanation: The exchange is taxable because Bob did not hold 80% control in Dove after the t ransfer. Carl t ransfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000. The land, w hich has a basis to Carl of $70,000, is worth $160,000. Your Register to View AnswerNSWER Carl will have a gain on the t ransfer of $70,000. CORRECT Carl will have a gain on the t ransfer of $30,000. Cardinal Corporation will have a basis in the land t ransferred by Carl of $70,000. Cardinal Corporation will have a basis in the land t ransferred by Carl of $160,000. None of the above. INCORRECT I nstructor Explanation: The mortgage on the land exceeds Carls basis in the land by $30,000. This amount would be gain under 357(c). In addition, the note payable to Carl does not qualify for nonrecognition under 351; thus, Carl would have additional gain of $40,000. A mount realized: S tock $ 20,000 Note 40,000 Release of mortgage 100,000 $160,000 Less: Basis of land (70,000) Realized gain $ 90,000 Recognized gain ($30,000 + $40,000) $ 70,000 Cardinal Corporation will have a basis of $140,000 in the land [$70,000 (Carls basis in the l and) + $70,000 (gain recognized by Carl with respect to the t ransfer of the land)]. A r t, an unmar r ied individual, t ransfers property (basis of $130,000 and fair market value of $120,000) to Condor Corporation in exchange for 1244 stock. The t ransfer qualifies as a nontaxable exchange under 351. Five years later, Ar t sells the Condor stock for $50,000. W ith respect to the sale, Ar t has: Your Answer: An ordinary loss of $80,000. INCORRECT A n ordinary loss of $70,000 and a capital loss of $10,000. A capital loss of $80,000. A capital loss of $30,000 and an ordinary loss of $50,000. None of the above. CORRECT ANSWER I nstructor Explanation: For purposes of 1244 t reatment, the basis of the stock is only $120,000. When the stock is sold for $50,000, the potential loss under 1244 is $70,000. However, because Art is unmar r ied, the 1244 ordinary loss is limited to $50,000. The r emaining $30,000 loss is capital. W hich of the following statements, if any, do not reflect the rules governing the negligence accuracy-related penalty? Your Answer: The penalty rate is 25%. CORRECT T he penalty is imposed only on the part of the deficiency att r ibutable to negligence. T he penalty applies to all Federal taxes, except when fraud is involved. T he penalty is waived if the taxpayer uses Form 8275 to disclose a return position t hat is reasonable though contrary to the IRS position. None of the above is incorrect. I nstructor Explanation: The penalty rate is 20%. Question: (TCO1)Marytransfersabuilding(adjustedbasisof$15,000andfairmarketvalueof$90,000)toWhite Corporation.Inreturn,Maryreceives80%ofWhiteCorporationsstock(worth$65,000)andan automobile(fairmarketvalueof$5,000).Inaddition,thereisanoutstandingmortgageof$20,000(taken out15yearsago)onthebuilding,whichWhiteCorporationassumes.Withrespecttothistransaction: Marysrecognized gainis$10,000. Marysrecognized gainis$5,000. Maryhasno recognizedgain. WhiteCorporations basisinthebuilding is$15,000. Noneoftheabove. Your Answer: CORRECT ANSWER INCORRECT Instructor Explanation: Asaresultofthetransfer,Maryreceivesbootof$5,000(fairmarketvalueoftheautomobile)andhas additionalgainof$5,000(excessofthemortgageoverthebasisofthebuilding).Sincethesumofthese amountsislessthantherealizedgainof$75,000,$10,000isrecognizedunder351(b).White Corporationsbasisinthebuildingis$25,000[$15,000(Marysbasisinthebuilding)+$10,000(Marys recognizedgain)]. Question: (TCO1)JerrodandKatrinaformSlateCorporation.Jerrodtransfersproperty(basisof$140,000andfair marketvalueof$100,000)whileKatrinatransfersland(basisof$50,000andfairmarketvalueof$80,000) and$20,000ofcash.Eachreceives50%ofSlatesstock.Asaresultofthesetransfers: Your Answer: Thisfactualpatternclearlycomeswithinthescopeof351.Assuch,Jerrodmaynotrecognizethe realizedlossof$40,000(optiona.).Althoughcashwasinvolved,itwasgivenandnotreceivedbyKatrina (optionc.).Itis,therefore,notbootwithinthemeaningofthelaw.SlateCorporationwillhaveabasisof $140,000inthepropertytransferredbyJerrodand$50,000intheland(not$80,000asinoptiond.). Instructor Explanation: Question: (TCO11)Whichofthefollowingstatementscorrectlyreflectstherulesgoverninginterestonan individualsFederaltaxdeficiencyandaclaimforrefund? Your Answer: Instructor Explanation: Theprocedurefordeterminingtherateofinterest(optiona.)issetforthin6621(b).Thesemiannual rule(optiond.)wasformerlythecase,butquarterlychangesanddailycompoundingarenowused. Question: (TCO11)TherulesofCircular230allowsataxpreparerto: Your Answer: Choicea.isafrivolousreturnposition.Choiceb.representsanunconscionablefee. Instructor Explanation: Question: (TCO2)Sage,Inc.,acloselyheldcorporation(notaPSC),hasa$140,000passiveloss,$85,000of activebusinessincome,and$35,000ofportfolioincome.HowmuchofthepassivelosscanSage deduct? Your Answer: I nstructor Explanation: Asacloselyheldcorporation,Sagemayoffset$85,000ofthe$140,000passivelossagainstthe$85,000 ofactivebusinessincome,butmaynotoffsettheremaining$55,000againstportfolioincome.REF: Example15 Points Received: 2 of 2 Question: (TCO 11) The usual three-year statute of limitations on additional tax assessments applies in the following situation(s). Your Answer: I nstructor Explanation: Option a. has no statute of limitations. O ption b. has a seven-year statute of l imitations. O ption d. has a six-year statute of limitations. Points Received: 2 of 2 Question: (TCO 2) Mac is the owner of M aid in Arizona Cleaning Service ( MACS). T his year, t he company had gross income of $300,000 and operating expenses of $195,000. I n J uly, MACS sold a capital asset that had been held by the business for two years for a $15,000 loss. D u r ing the year, Mac withdrew $93,000 from the business for h is personal living expenses. Assuming MACS is a sole proprietorship, how do t hese t ransactions affect M acs taxable income for the year? Your Answer: I nstructor Explanation: M ac reports the income and expenses of the business on Schedule C, resulting in n et profit (ordina ry income) of $105,000 ($300,000 $195,000). H e reports all of the $105,000 net profit from the business on Form 1040, where he computes taxable i ncome for the year. T he $93,000 that M ac w ithdrew from the business has no i mpact on his taxable income. H e also reports a $15,000 LTCL on Schedule D of h is Form 1040, his but deduction is limited to $3,000. T he remaining LTCL of $12,000 ($15,000 $3,000) may be car r ied forwa rd. T he net effect is to increase his t axable income by $102,000 ($105,000 net profit $3,000 LTCL). Points Received: 0 of 2 Quiz 2 Question: (TCO 2) Which,ifany,ofthefollowingisacharacteristicofthePAD? Your Answer: Notapplicablein situationsinvolvingS corporations. Applicableonlyto manufacturedgoods thatareexported fromtheU.S. Canneverapply whentherenditionof personalservicesis involved. Cansometimes applywhensome ofthecomponents ofaproductare manufacturedin foreigncountries. Noneoftheabove. CORRECT Instructor Explanation: Aslongasthedomesticportionoftheproductionissubstantial,DPGRresults(choiced.).PADappliesto mostentitiesincludingScorporations(choicea.).NotonlycanDPGRresultfromtheperformanceof engineeringandarchitecturalservices,butcertainembeddedservicescanqualify(choicec.).Thereare norestrictionsorrequirementsonwherethemanufacturedgoodshavetobesentorsold(choiceb.). Question: (TCO2)MaroonCorporationhasQPAIof$3million,TIof$3.5million,andW2wagesof$100,000.Its PADis: Your Answer: Instructor Explanation: Theusualcalculationof3%ofthelesserofQPAIorTI,whichwouldbe$90,000(3%X$3million),is limitedby50%ofW2wages,or$50,000(50%X$100,000). Question: (TCO2)Which,ifany,ofthefollowingstatementsdoesnotreflecttherulesregardingpartnershipsand PAD? Your Answer: Thepassthroughcannotexceedtwotimes3%oftheshareofQPAI(choicea.).Guaranteedpaymentsdo notcountaswages(choiceb.),butapartnercancountotherW2wagespaid(choicec.).Qualification forPADisdeterminedatthepartnership,notatthepartnerlevel(choiced.). Instructor Explanation: Question: (TCO4)Fiveyearsago,EleanortransferredpropertyshehadusedinhersoleproprietorshiptoBlue Corporationfor100sharesofBlueCorporationinatransactionthatqualifiedunder351.Theassets hadataxbasistoherof$200,000andafairmarketvalueof$350,000onthedateofthetransfer.Inthe currentyear,BlueCorporation(E&Pof$1million)redeems30sharesfromEleanorfor$225,000ina transactionthatqualifiesforsaleorexchangetreatment.Withrespecttotheredemption,Eleanorwill havea: Your Answer: Instructor Explanation: Thetransactionistreatedasareturnofaportionofherinvestment.Sheistreatedashavingsold30of hersharesinBlue(basisof$60,000)for$225,000.Therefore,Eleanorscapitalgainfromthesaleor exchangeis$165,000($225,000$60,000). Question: (TCO4)Brendaowns600sharesofEagleCorporationstockatatimewhenEaglehas1,000sharesof stockoutstanding.TheremainingshareholdersareunrelatedtoBrenda.Whatistheminimumnumberof sharesEaglemustredeemfromBrendasothatthetransactionwillqualifyasadisproportionate redemption? Your Answer: Beforetheredemption,Brendaowns60%oftheoutstandingsharesofEaglestock.Toqualifyasa disproportionateredemption,Brendamustown,aftertheredemption,lessthan48%(80%X60%)ofthe remainingoutstandingsharesofEaglestock.Usingasimplealgebraicformula[i.e.,(600sharesX shares)(1,000sharesXshares)<48%],theminimumnumberofshares(roundeduptothenextwhole number)thatmustberedeemedis231shares. Instructor Explanation: Points Received: 2 of 2 6. Question: (TCO4)Carol,Bonnie,andAnn,sisters,own300shares,300shares,and400shares,respectively,in TealCorporation(E&Pof$800,000).TealCorporationredeemsallofAnnsstockfor$200,000.Ann paid$100ashareforthestockfiveyearsago.AnncontinuedtoserveontheboardofdirectorsofTeal aftertheredemption.Withrespecttotheredemption: Your Answer: AnnhascompletelyterminatedherinterestinTealCorporation;therefore,thetransactionqualifiesasa completeterminationredemptionunder302(b)(3).SinceAnnisnotdeemedtoownthestockofher sisters,hercontinuedemploymentwithTealisnotrelevant.(Stockattributionunder318includesones spouse,children,grandchildren,andparents,butnotsisters.) Instructor Explanation: Points Received: 2 of 2 7. Question: (TCO4)MagentaCorporationacquiredlandina351exchangein2007.Thelandhadabasisof $550,000andafairmarketvalueof$420,000onthedateofthetransfer.MagentaCorporationhastwo equalshareholders,MarkandMegan,whoarefatheranddaughter.MagentaCorporationadoptsaplan ofliquidationinthecurrentyear.Onthisdatethelandhasdecreasedinvalueto$400,000.Magenta Corporationsellsthelandfor$400,000anddistributestheproceedsproratatoMarkandMegan.What amountoflossmayMagentaCorporationrecognizeonthesaleoftheland? Your Answer: Thepropertyhadabuiltinlossof$130,000[$420,000(fairmarketvalue)$550,000(landbasis)]onthe dateitwasacquiredinthe351transfer.Sincethetransferoccurredwithintwoyearsoftheplanof liquidation,ataxavoidancepurposeisassumed.Unlessthereisabusinesspurposefortransferringthe propertytoMagenta,thebuiltinlosslimitationdisallows$130,000oftheloss.Therelatedpartyloss limitationdoesnotapplytoasaleofproperty;therefore,theremaining$20,000lossrealizedduringthe periodMagentaheldthepropertyisrecognized.See,however,362(e)(2)forthepotentialeffectarising frombasisadjustmentswhenlosspropertyiscontributedtoacorporationpursuantto351orasa contributiontocapital.Section361(e)(2)isdiscussedinChapter4. Instructor Explanation: Points Received: 0 of 2 8. Question: (TCO3)WalnutCorporation,acalendaryeartaxpayer,hastaxableincomeof$110,000fortheyear.In reviewingWalnutsfinancialrecordsyoudiscoverthefollowingoccurredthisyear. Federalincometaxespaid $25,000 Netoperatinglosscarryforwarddeductedcurrently 25,000 Gainrecognizedthisyearonaninstallmentsalefromaprioryear 12,000 Depreciationdeductedontaxreturn(ADSdepreciationwouldhavebeen$8,000) 15,000 InterestincomefromWisconsinstatebonds 37,000 WalnutCorporationscurrentE&Pis: Your Answer: Instructor Explanation: TodetermineE&P,theFederalincometaxissubtractedfromtaxableincomeandthenetoperatingloss carryforwardisadded.Thegainrecognizedcurrentlyfromtheprioryearsinstallmentsaleissubtracted. TheexcessofdepreciationdeductedonthetaxreturnoverADSdepreciationandtheinterestfrom Wisconsinstatebondsareadded. Points Received: 2 of 2 9. Question: (TCO3)Thetaxtreatmentofcorporatedistributionsattheshareholderleveldoesnotdependon: Your Answer: Instructor Explanation: Whilethecharacterofdistributedpropertycanimpactthetaxtreatmentofgainrecognizedbythe corporation,itwillhavenoimpactontheshareholder. Points Received: 0 of 2 10. Question: (TCO3)Duringthecurrentyear,BlueCorporationsoldequipmentfor$210,000.Theequipmenthadan adjustedbasisof$140,000atthesaledateandwaspurchasedafewyearsagofor$240,000.MACRS deductionsclaimedontheequipmentduringtheperiodoftimeBlueowneditamountedto$100,000. ADSdepreciationontheequipmentwas$55,000.Asaresultofthesale,whatadjustmenttotaxable incomeisneededtodetermineE&P? Your Answer: Instructor Explanation: Forregularincometaxpurposes,Bluerecognizesagainonthesaleof$70,000($210,000salesprice $140,000adjustedbasis).ForE&Ppurposes,thegainonthesaleis$25,000[$210,000salesprice $185,000adjustedbasis($240,000cost$55,000ADSdepreciation)].AsthegainforE&Ppurposesis $45,000lessthanthegainincludedintaxableincome,areductionof$45,000isrequired. Points Received: 2 of 2 1. Question: (TCO 2) Jay Corporation (a calendar year taxpayer) had the following transactions: Taxableincome Miningexplorationcostsclaimed Percentagedepletionclaimed(thepropertyhadazeroadjustedbasis) Donationofstockheldsince1989asinvestment(basisof$100,000) andfairmarketvalueof$400,000)toaqualifiedcharity For 2007, Jay Corporations AMTI is: Your Answer: Instructor Explanation: AMTI is computed as follows: Taxable income $4,000,000 Adjustments E xcess mining explorations costs [$1,000,000 (amount expensed) $100,000 (amount allowed over a 10-year amortization period)] 900,000 Tax preferences E xcess depletion 2,400,000 A MTI $7,300,000 Points Received: 0 of 2 Question: ( TCO 2) Brown Corporation (a calendar year taxpayer) has $4,000,000 of taxable income and the following t ransactions: AMTI(notincludingadjustedcurrentearnings) Adjustedcurrentearnings BrownCorporationsalternativeminimumtax(AMT)is: YourAnswer: InstructorExplanation: ThepositiveadjustmentforACEis$2,250,000[$8,000,000ACE$5,000,000AMTI(notincludingACE) =$3,000,000X75%=$2,250,000].Thus,AMTIbecomes$7,250,000($5,000,000+$2,250,000). S ince no exemption is allowed when AMTI is $310,000 or more, the AMT base becomes $7,250,000. M ultiplying $7,250,000 by the 20% rate yields a tentative minimum tax of $1,450,000. Deducting the regular corporate income tax of $1,360,000 (34% X $4,000,000) results in AMT of $90,000. PointsReceived: 0of2 Question: (TCO 2) Tidal Corporation, a calendar year taxpayer, has the following results for the year: QPAI of $4 million; TI of $3.1 million; and W-2 wages of $2 million. Not included in TI is an NOL carryover of $1 million from last year. T idals PAD for t his is: YourAnswer: InstructorExplanation: Thetaxableincomelimitationof$2.1million($3.1million$1million)controls.Thus,thePADis$63,000 (3%X$2.1million).TheW2wageslimitationof$1million(50%X$2million)doesnotcomeintoplayas itisgreaterthan$63,000. PointsReceived: 2of2 5. Question: (TCO 4) Manuel, Maria, and Matt, all unrelated, are equal partners of the Meadowlark Partnership. B lack Corporation has 300 shares of stock outstanding. M anuel owns 60 shares of Black stock, M aria owns 90 shares, and Mat t owns 75 shares. Meadowlark Partnership owns the other 75 shares i n Black Corporation. I n applying the 318 att ribution rules: YourAnswer: InstructorExplanation: Apartnerisdeemedtoownstockthatapartnershipownsinproportiontothepartnersinterestinthe partnership.Thus,Manualowns60sharesdirectlyplus25shares,or1/3ofthepartnerships75shares, constructively.Mariaowns115shares(90sharesdirectlyplus25shares,or1/3ofthepartnerships75 shares,constructively).Apartnershipisdeemedtoownallthestockofitspartners.Meadowlark Partnershipthereforeowns300shares(75sharesdirectlyplus225sharesconstructively). PointsReceived: (notgraded) 6. Question: (TCO4)KingbirdCorporation(E&P$160,000)has200sharesofstockoutstanding.ThatstockisheldbyAmata(110shares)andEsteban(90shares),whoare unrelatedindividuals.Kingbirdredeems40ofAmatassharesfor$1,000pershare.Amatapaid$100pershareforherKingbirdstockfiveyearsago.Whichofthe followingstatementsiscorrectwithrespecttothestockredemption? YourAnswer: InstructorExplanation: Thetransactionqualifiesforsaleorexchangetreatmentasadisproportionateredemption.Amatas43.75%(70shares160shares)postredemptioninterestin Kingbirdislessthanboth80%ofherpreredemptioninterest[43.75%<44%(80%X110shares200shares)and50%.Thestockwasheldformorethanoneyear; thus,theresultisalongtermcapitalgainof$36,000[$40,000(amountrealized)$4,000(basisof40sharesredeemed)].ThebasisofAmatasremainingsharesis $7,000(70sharesX$100).ThereductioninKingbirdsE&Pasaresultofthequalifyingstockredemptionislimitedto$32,000[20%(percentageofshares outstandingredeemed)X$160,000(E&Pattimeofredemption). PointsReceived: 2of2 7. Question: (TCO4)OnApril12,2007,CrowCorporationacquiredlandinatransactionthatqualifiedunder351.Thelandhadabasisof$400,000tothecontributing shareholderandafairmarketvalueof$310,000.CrowCorporationadoptedaplanofliquidationonOctober3,2008.OnDecember1,2008,CrowCorporation distributesthelandtoAli,ashareholderwhoowns40%ofthestockinCrowCorporation.Valueofthelandhasdeclinedto$230,000onthedateofthedistribution toAli.CrowCorporationacquiredthelandtouseassecurityforaloanithadhopedtoobtainfromalocalbank.Innegotiatingwiththebankforaloan,thebank requiredtheadditionalcapitalinvestmentasaconditionofitsmakingaloantoCrowCorporation.HowmuchlosscanCrowCorporationrecognizeonthe distributionoftheland? YourAnswer: InstructorExplanation: CrowCorporationhadabusinessreasonforacquiringtheland.Further,thelandwasnotdistributedtoarelatedparty.Thus,thelosslimitationprovisionsdonot applyandtheentirelossof$170,000[$230,000(fairmarketvalue)$400,000(landbasis)]isallowed.See,however,362(e)(2)forthepotentialeffectarisingfrom basisadjustmentswhenlosspropertyiscontributedtoacorporationpursuantto351orasacontributiontocapital.Section361(e)(2)isdiscussedinChapter4. PointsReceived: 0of2 8. Question: (TCO3)BalsaCorporationdistributeslandwithafairmarketvalueof$75,000andanadjustedbasisof$25,000.Thelandissubjecttoaliabilityof$30,000.Whatis thetotaleffectofthedistributionontheE&PofBalsa? YourAnswer: InstructorExplanation: Balsarecognizesgainonthedistributionsincethepropertyisappreciatedinvalue.ThegainincreasesBalsasE&Pby$50,000($75,000fairmarketvalue $25,000adjustedbasisoftheproperty).Inaddition,BalsasE&Pisreducedby$45,000($75,000fairmarketvalue$30,000liability).Theneteffectofthis transactiononBalsasE&Pisa$5,000($50,000increaseless$45,000decrease)increaseinitsE&P. PointsReceived: 0of2 10. Question: (TCO3)EmuCorporation(acalendaryeartaxpayer)hastaxableincomeof$250,000,anditsfinancialrecordsreflectthefollowingfortheyear. Federalincometaxespaid Netoperatinglosscarryforwarddeductedcurrently Gainrecognizedthisyearonaninstallmentsalefromaprioryear Depreciationdeductedontaxreturn(ADSdepreciationwouldhavebeen$20,000) InterestincomefromIowastatebonds EmuCorporationscurrentE&Pis: YourAnswer: InstructorExplanation: TodetermineE&P,theFederalincometaxissubtractedfromtaxableincomeandthenetoperatinglosscarryforwardisadded.Thegainrecognizedcurrentlyfrom theprioryearsinstallmentsaleissubtracted.TheexcessofdepreciationdeductedonthetaxreturnoverADSdepreciationandtheinterestfromIowastatebonds areadded. PointsReceived: 0of2 2. Question: (TCO2)ChevCorporation,acalendaryearcorporation,hasalternativeminimumtaxableincome(beforeanyexemption)of$1.28million.Thecompanyisnota smallcorporation.Iftheregularcorporatetaxis$209,000,Chevsalternativeminimumtaxis: YourAnswer: InstructorExplanation: $47,000.Theexemptionamountiszero.Tentativeminimumtaxis$256,000($1.28milliontimes20%).Thus,theAMTliabilityis$256,000,lesstheregulartax liabilityof$209,000,or$47,000. PointsReceived: 2of2 4. Question: (TCO4)CardinalCorporationhas1,000sharesofcommonstockoutstanding.Johnowns300oftheshares,John'sgrandfatherowns200shares,John'sdaughter owns300shares,andRedbirdCorporationowns200shares.Johnowns60%ofthestockinRedbirdCorporation.HowmanysharesisJohndeemedtoownin CardinalCorporationundertheattributionrulesof318? YourAnswer: InstructorExplanation: Johnisdeemedtoownthesharesofhisdaughterand,sinceheisa50%orgreatershareholderinRedbird,aproportionatenumberofsharesownedbyRedbird. Thus,Johnisdeemedtoown720shares:his300sharesplushisdaughter's300sharesplus120ofRedbird'sshares[200(sharesownedbyRedbird)X60%(John's ownershipinterestinRedbird)].Sharesownedbyagrandparentarenotattributedtoataxpayer. PointsReceived: 2of2 6. Question: (TCO4)Hubertreceivesanontaxablestockdividendof100sharesofpreferredstock(fairmarketvalueof$140,000)fromOwlCorporation,atatimewhenOwlsE& Pis$1million.Asaresultofthestockdividend,Hubertproperlyallocates$20,000ofhiscommonstockbasistothepreferredstock.Twoyearsafterthestock dividend,HubertsellsthepreferredstocktoTomas,anunrelatedparty,for$150,000.OwlsE&Patthetimeofthesaleis$1,200,000.Withrespecttothesaleof thepreferredstock,Huberthas: YourAnswer: InstructorExplanation: Thepreferredstockis306stockandthesaleofsuchstockproducesordinaryincometotheextentofitsfairmarketvalueonthedateofdistributionor$140,000 (the306taint).(Theordinaryincomedoesnotconstitutedividendincome;thus,OwlsE&Pisnotreduced.)The$10,000excessofthesalespriceoverthe 306taintisareturnofcapital,reducingthebasisinthepreferredstockto$10,000.Thereisnolossrecognizedinasaleof306stock;instead,theremainingbasis inthepreferredstockisaddedbacktobasisofHubertscommonstock. PointsReceived: 0of2 7. Question: (TCO4)Joeowns100%ofGreenCorporation(E&Pof$250,000)and100%ofNavyCorporation(E&Pof$300,000).Joesells50sharesinGreen(basisof$10,000) toNavyfor$80,000,itsfairmarketvalue.JoepurchasedthestockinGreensixyearsago.Joehas: YourAnswer: InstructorExplanation: Sections302and304wouldcausetheentire$80,000tobedividendincome.Ifataxpayerhasatleasta50%ownershipintwocorporationsandtransfersstockin onecorporationtotheotherformoneyorproperty,theexchangeistreatedasaredemptionofthestockoftheacquiringcorporation.Theredemptionistested under302forsaleorexchangetreatmentordividendtreatment.Beforethesale,Joeowned100%ofGreenCorporation.Heowns100%afterthesalebecauseof hisconstructiveownershipofallthesharestransferredtoNavyCorporation.Thenotessentiallyequivalentredemptionprovisionsof302(b)(1)andthe disproportionateredemptionprovisionsof302(b)(2)arenotmet;thus,the$80,000isdividendincome. PointsReceived: (notgraded) 9. Question: (TCO3)LilacCorporationdistributespropertytoitssoleshareholder,Greta.Thepropertyhasafairmarketvalueof$250,000,anadjustedbasisof$105,000,andis subjecttoaliabilityof$120,000.CurrentE&Pis$500,000.Withrespecttothedistribution,whichofthefollowingstatementsiscorrect? YourAnswer: InstructorExplanation: ThedividendincomereceivedbyGretaequalsthefairmarketvalueofthepropertyreceived($250,000)reducedbyanyliabilitiestransferredtoher($120,000). Thus,Gretahasreceiveddividendincomeof$130,000.Herbasisinthepropertyisequaltoitsfairmarketvalue,or$250,000.Thecorporationsgainonthe distributionequalstheexcessoffairmarketvalueovertheadjustedbasisoftheproperty,or$145,000($250,000$105,000). PointsReceived: 0of2 10. Question: (TCO3)Thetaxtreatmentofcorporatedistributionsattheshareholderleveldoesnotdependon: YourAnswer: InstructorExplanation: Whilethecharacterofdistributedpropertycanimpactthetaxtreatmentofgainrecognizedbythecorporation,itwillhavenoimpactontheshareholder. PointsReceived: 0of2 (TCO2)Which,ifany,ofthefollowingisacharacteristicofthePAD? Your Answer: NotallowedasadeductionforAMTpurposes. Notallowedtoanelectricutilitythatgenerates,transmits,andretailsto consumers. Canbeavailabletoacontractorwhodoesnotowntheproperty beingconstructed. Notavailablewhenthepropertyproducedandsoldincludesan embeddedservice. Noneoftheabove. CORRECT ANSWER INCORRECT Instructor Explanation: Unlikeamanufacturer,acontractorneednotownthepropertybeing constructed(choicec.).ThePADisallowedforAMTpurposes(choicea.).ThePADwouldbeavailable toanintegratedutilityfortheDPGRattributabletothegeneratingofelectricity(choiceb.).Undercertain circumstances,embeddedservicescanbeDPGR(choiced.). Points Received: 0 of 2 (TCO4)MagentaCorporationacquiredlandina351exchangein2007.Thelandhadabasisof $550,000andafairmarketvalueof$620,000onthedateofthetransfer.MagentaCorporationhastwo equalshareholders,MarkandMegan,whoarefatheranddaughter.MagentaCorporationadoptsaplan ofliquidationinthecurrentyear.Onthisdatethelandhasdecreasedinvalueto$400,000.Magenta Corporationsellsthelandfor$400,000anddistributestheproceedsproratatoMarkandMegan.What amountoflossmayMagentaCorporationrecognizeonthesaleoftheland? Your Answer: $0. $20,000. $150,000. $220,000. Noneoftheabove. nothaveabuiltinlossonthedateofthetransfertothecorporation;thus,thebuiltinlosslimitationdoes notapply.ThebasisofthepropertytoMagentaCorporationis$550,000and,uponasaleoftheproperty for$400,000,MagentaCorporationwouldthereforerecognizethe$150,000loss. Points Received: 2 CORREC T Instructor Explanation: Therelatedpartylosslimitationdoesnotapplytosales.Thepropertydoes of 2 (TCO4)OnJanuary10,GrebeCorporationacquiredina351transactionequipmentwithanadjusted basisof$300,000andafairmarketvalueof$280,000.GrebeCorporationadoptedaplanofliquidation onJuly27.OnNovember15,whenvalueoftheequipmenthaddeclinedto$190,000,GrebeCorporation distributedtheequipmenttoChris,ashareholderwhoowns40%ofthestockinGrebeCorporation. GrebeCorporationneverusedtheequipmentforanybusinesspurposeduringthetimeitownedthe equipment.HowmuchlosscanGrebeCorporationrecognizeonthedistributionoftheequipment? Your Answer: $0. $20,000. $90,000. CORREC T $110,000. Noneoftheabove. Instructor Explanation: Becausethevalueoftheequipmenthaddeclinedby$90,000sincethedateof itsacquisitionbyGrebeandtheequipmentwasdistributedtoanunrelatedparty,GrebeCorporationcan recognizealossof$90,000.Thebuiltinlosslimitationappliestodisallowtheremaining$20,000loss. See,however,362(e)(2)forthepotentialeffectarisingfrombasisadjustmentswhenlosspropertyis contributedtoacorporationpursuantto351orasacontributiontocapital.Section361(e)(2)is discussedinChapter4. Points Received: 2 of 2 (TCO3)Whichofthefollowingfactorswouldindicatethatanadvancepaidbyacorporationtoits shareholderisnotavalidloan: Your Answer: Theshareholderprovidedsecurityfortheadvance. Thecorporationhadahistoryofpayingdividends. Theshareholderhasnotmadeanypaymentsontheloan. Theadvancewasevidencedbyawrittenloanagreement. Noneoftheabove. CORREC T Instructor Explanation: Alloftheoptionslistedexceptc.arefactorswhichindicatethattheadvancepaidbythecorporationisa validloan.Failuretomakeanypaymentsmightsuggestthatitisnotavalidloan. Points Received: 2 of 2 (TCO3)BerryCorporationhasaccumulatedE&Pof$30,000onJanuary1.Duringtheyear,the corporationdistributes$120,000toitssoleshareholder,Jackson(anindividual).BerryCorporationsE& PasofJanuary1,ofthefollowingyearis: Your Answer: $0. ($35,000). $40,000. $85,000. Noneoftheabove. CORREC T Instructor Explanation: The$120,000distributionwillreducethe$85,000balanceinE&Ptozero.Adistributionmaynot generateadeficitinE&P. Points Received: 2 of 2 2. Question: (TCO2)Which,ifany,ofthefollowingstatementsdoesnotreflecttherulesregarding partnershipsandPAD? Your Answer: ThepassthroughofW2wagescannotexceed3%(for2006 and2007)ofapartnersshareofQPAI. IntestingfortheW2wageslimitation,partnerscannotcountany guaranteedpaymentsreceivedfromthepartnership. CORRECT A NSWER IntestingfortheW2wageslimitation,partnerscancountany otherW2wagesseparatelypaid. Apartnerneednotbeinatradeorbusinessinordertoclaima PADpassedthroughfromapartnership. Noneoftheabove. I NCORRE CT Instructor Explanation: Thepassthroughcannotexceedtwotimes3%oftheshareofQPAI (choicea.).Guaranteedpaymentsdonotcountaswages(choiceb.),butapartnercancount otherW2wagespaid(choicec.).QualificationforPADisdeterminedatthepartnership,notat thepartnerlevel(choiced.).Points Received: 0 of 2 3. Question: (TCO2)SilverCorporationhasaveragegrossreceiptsof$5.7million,$4.6million,and$4.8 millioninforthelastthreeyears,respectively.Silveris: Your Answer: Notsubjecttothecorporateincometax. AsmallcorporationwithrespecttotheAMT. NotsubjecttotheAMT. NotasmallcorporationwithrespecttotheAMT. Noneoftheabove. Instructor Explanation: Thecompanydoesnotpassthe$5milliongrossreceiptstest($5.7 million+$4.6million+$4.8million=$15.1millioni3=$5.033million).Points Received: 0 of 2 6. I NCORRECT CORRECT A NSWER Question: (TCO4)Currently,BrownCorporation(E&Pof$400,000)has200sharesofcommonstockoutstanding. Patowns100shares.Hiswife,Abby,owns50shares,andhisdaughter,Kate,owns50shares.Two yearsago,Patcontributed$40,000toBrownCorporationinexchangefor100newlyissuedsharesof nonvotingpreferredstock.Inthecurrentyear,BrownCorporationredeemsPatspreferredstockfor $50,000,itsfairmarketvalue.Withrespecttothedistributioninredemptionofthepreferredstock: Your Answer: Pathasdividend incomeof$10,000. Pathasdividend incomeof$50,000. Pathasalongterm capitalgainof $10,000. Pathasalongterm capitalgainof $50,000. Noneoftheabove. INCORRECT CORRECT ANSWER Instructor Explanation: Asaresultofthestockattributionrules,Patowns100%ofthestockinBrownCorporationbeforeand aftertheredemption.Thus,thedistributiondoesnotsatisfyanyofthequalifyingstockredemption provisions.Instead,theentiredistributionistaxedasdividendincome.The$40,000basisinthe preferredstockredeemedattachestothebasisofPatscommonstock. Points Received: 0 of 2 Question: (TCO 3) As of Janua ry 1, Spruce Corporation has a deficit in accumulated E & P of $37,500. For tax year, cur rent E & P ( all of which accrued ratably) is $20,000 ( prior to any distr ibution). O n July 1, Spruce Corporation distributes $25,000 to i ts sole, noncorporate shareholder. T he amount of the dist ribution that is a d ividend is: Your Answer: I nstructor Explanation: The distribution is taxed to the extent of cur rent E & P ($20,000). Points Received: 2 of 2 Question: (TCO 2) Gem Corporation, a calendar year taxpayer, has AM T I (before adjustment for adjusted cur rent earnings) of $6 million. I f Gem Corporations ACE is $15 m illion, its tentative minimum tax for is: Your Answer: I nstructor Explanation: Gems AM T of $6 million is increased by the $6.75 million ACE adjustment [($15 m illion $6 million) X 75%]. T he total of $12,750,000 is multiplied by the AM T tax r ate of 20% to yield a tentative minimum tax of $2,550,000. N o exemption is a llowed as AM T I is $310,000 or more. Points Received: 2 of 2 Question: ( TCO 4) The gross estate of Kathe ryn, decedent, includes stock in Yellow Corporation and Violet Corporation valued at $300,000 and $460,000, r espectively. K atheryn s adjusted gross estate is $2 million. S he owned 33% of t he Yellow stock and 21% of the Violet stock. I mmediate members of Katheryn s f amily own the remaining shares of both Yellow and Violet. T hose individuals are a lso the sole beneficiar ies of Katheryn s estate. D eath taxes and funeral and a dministration expenses for Katheryn s estate are $300,000. K atheryn had a b asis of $100,000 in the Yellow stock and $110,000 in the Violet stock. Yellow Corporation (E & P of $800,000) distributed land worth $300,000 (basis of $350,000) to Katheryn s estate in redemption of all of the Yellow stock. W hich of t he following is a cor rect statement regarding the tax consequences of this r edemption? Your Answer: I nstructor Explanation: Since there is included in Katheryn s gross estate a 20% or more interest in two o r more stocks, the 35% test is applied by combining the values of the Yellow and V iolet stocks. Section 303, therefore, applies to the redemption [($300,000 + $460,000) i $2,000,000 = 38%], and sale or exchange t reatment results. T he a mount received in redemption of the Yellow stock equals the estate s basis in t he stock (date of death value); thus, no gain or loss is recognized by the estate on t he redemption. W ith respect to Yellow Corporation, the realized loss of $50,000 [ $300,000 (fai r market value) V $350,000 (land basis)] is not recognized on the d istribution of the land. Points Received: 2 of 2 ... View Full Document

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