1.

Question : (TCO 2) Barry owns a 60% interest in an S corporation that earned

$150,000 in 2011. He also owns 60% of the stock in a C corporation
that earned $150,000 during the year. The S corporation distributed
$30,000 to Barry, and the C corporation paid dividends of $30,000
to Barry. How much income must Barry report from these
businesses?
Student Answer:

$0 income from the S corporation, and $30,000 income from the
C corporation


$90,000 income from the S corporation, and $30,000 income
from the C corporation


$90,000 income from the S corporation, and $0 income from the
C corporation


$30,000 income from the S corporation, and $30,000 of
dividend income from the C corporation


None of the above
Instructor Explanation: See Chapter 2. Barry must report his $90,000 share ($150,000 x 60%) of
the S corporation's income on his individual tax return. He will report
$30,000 of dividend income from the C corporation.
Points Received: 0 of 5
Comments:


2. Question : (TCO 2) Which statement is incorrect with respect to the treatment
of net operating losses by corporations?
Student Answer:

A corporation may elect to forgo the carryback period, and just
carryforward an NOL.


A corporation may claim dividends received deduction in
computing an NOL.


An NOL is generally carried back 2 years, and forward 20
years.


Unlike individuals, corporations do not adjust their NOLs for net
capital losses or nonbusiness deductions.


None of the above
Instructor Explanation: See Chapter 2. None of the statements are correct with respect to a
corporate NOL.
Points Received: 0 of 5
Comments:


3. Question : (TCO 1) Ava transfers property (basis of $120,000 and fair market
value of $400,000) to Green Corporation for 80% of its stock (worth
$350,000) and a long-term note (worth $50,000), executed by
Green Corporation and made payable to Ava. As a result of the
transfer,
Student Answer:

Ava recognizes no gain.


Ava recognizes a gain of $230,000.


Ava recognizes a gain of $280,000.


Ava recognizes a gain of $50,000.


None of the above
Instructor Explanation: See Chapter 4. A long-term note is treated as boot. Thus, Ava is taxed on
the value of the note received.
Points Received: 0 of 5
Comments:


4. Question : (TCO 1) Harry and Warren form Brown Corporation. Harry transfers
equipment (basis of $210,000 and fair market value of $180,000),
and Warren transfers land (basis of $15,000 and fair market value of
$150,000) and $30,000 of cash. Each receives 50% of Brown's
stock. Which occurs as a result of these transfers?
Student Answer:

Harry has a recognized loss of $30,000; Warren has a
recognized gain of $135,000.


Neither Harry nor Warren has any recognized gain or loss.


Harry has no recognized loss; Warren has a recognized gain of
$30,000.


Brown Corporation has a basis in the land of $45,000.


None of the above
Instructor
Explanation:
See Chapter 4. This fact pattern comes within the scope of 351. As such,
Harry does not recognize the realized loss of $30,000 (contrast with choice
A). Although cash was involved, it was given and not received by Warren
(contrast with choice C). Only boot received triggers gain recognition under
351. Brown Corporation has a basis of $180,000 in the equipment
transferred by Harry ($210,000 carryover basis reduced by the $30,000
built-in loss) and $15,000 in the land (not $45,000 as in choice D)
transferred by Warren.
Points Received: 0 of 5
Comments:


5. Question : (TCO 1) Joe and Kay form Gray Corporation. Joe transfers cash of
$250,000 for 200 shares in Gray Corporation. Kay transfers property
(basis of $50,000 and fair market value of $240,000). She agrees to
accept 200 shares in Gray Corporation for the property and for
providing bookkeeping services to the corporation in its first year of
operation. The value of Kay's services is $10,000. Which occurs
with respect to the transfer?
Student Answer:

Gray Corporation has a basis of $240,000 in the property
transferred by Kay.


Neither Joe nor Kay recognizes gain or income on the
exchanges.


Gray Corporation has a business deduction under 162 of
$10,000.


Gray capitalizes $10,000 as organizational costs.


None of the above
Instructor Explanation: See Chapter 4. Gray Corporation has a basis of $50,000 in the property it
received from Kay. Kay has income of $10,000 on the exchange. Gray
Corporation deducts the $10,000 as a business expense.
Points Received: 5 of 5
Comments:


6. Question : (TCO 11) Maureen, a calendar-year taxpayer subject to a 35%
marginal tax rate, claimed a charitable contribution deduction of
$250,000 for a sculpture that the IRS later valued at $200,000.
Which is the applicable overvaluation penalty?
Student Answer:

$17,500


$14,000


$3,500


$0
Instructor
Explanation:
See Chapter 17. Reported valuation is not at least 150% of correct value.

Points Received: 0 of 5
Comments:


7. Question : (TCO 11) The penalty for substantial understatement of tax liability
does not apply if _____.
Student Answer:

the taxpayer has substantial authority for the treatment taken on
the tax return


the relevant facts affecting the treatment are adequately
disclosed in the return or on Form 8275


the IRS failed to meet its burden of proof in showing the
taxpayer's error


All of the above


None of the above
Instructor Explanation: See Chapter 17. All of the statements do apply for the penalty for
substantial understatement of tax liability.
Points Received: 5 of 5
Comments:


8. Question : (TCO 2) Staff Inc., has taxable income of $10 million this year.
Which is the maximum DPAD tax savings for this C corporation?
Student Answer:

$0


$204,000


$210,000


$306,000


$900,000
Instructor
Explanation:
See Chapter 3. $10 million x 9% x 34% = $306,000.

Points Received: 5 of 5
Comments:


9. Question : (TCO 2) Primeline Inc., has the following items related to the AMT.


Alternative minimum tax base: $102,755,000
Regular corporate tax: $11,125,000
Foreign AMT tax credit: $2,300,000
The corporation's AMT, if any, is _____.
Student Answer:

$0


$7,126,000


$9,426,000


$18,251,000


None of the above
Instructor
Explanation:
See Chapter 3. The AMT is $7,126,000. The tentative minimum tax before
AMT foreign tax credit is $20,551,000 ($102,755,000 x 20%). Thus, the
alternative minimum tax is computed as follows.
Tentative minimum tax before AMT foreign tax credit: $20,551,000
Less AMT foreign tax credit: ($2,300,000)
Tentative minimum tax $18,251,000
Less regular tax: ($11,125,000)
AMT: $7,126,000
Points Received: 0 of 5
Comments:


10. Question : (TCO 3) As of January 1, Spruce Corporation has a deficit in
accumulated E & P of $37,500. For the tax year, current E & P (all
of which accrued ratably) is $20,000 (prior to any distribution). On
July 1, Spruce Corporation distributes $25,000 to its sole,
noncorporate shareholder. The amount of the distribution that is a
dividend is _____.
Student Answer:

$0


$20,000


$25,000


$37,500


None of the above
Instructor
Explanation:
See Chapter 5. The distribution is taxed to the extent of current E & P
($20,000).
Points Received: 0 of 5
Comments:

1. Question : (TCO 3) Walnut Corporation, a calendar-year taxpayer, has taxable
income of $110,000 for the year. In reviewing Walnut's financial
records, you discover the following occurred this year.


Federal income taxes paid: $25,000
Net operating loss carryforward deducted currently: $25,000
Gain recognized this year on an installment sale from a prior year:
$12,000
Depreciation deducted on tax return (ADS depreciation would have
been $8,000): $15,000
Interest income from Wisconsin state bonds: $37,000


Walnut Corporation's current E & P is _____.
Student Answer:

$73,000


$138,000


$142,000


$166,000


None of the above
Instructor
Explanation:
See Chapter 5. To determine E & P, the federal income tax is subtracted from
taxable income and the net operating loss carryforward is added. The gain
recognized currently from the prior year's installment sale is subtracted. The
excess of depreciation deducted on the tax return over ADS depreciation and the
interest from Wisconsin state bonds are added.
Points Received: 5 of 5
Comments:


2. Question : (TCO 3) Which statement is false?
Student Answer:

Most countries that trade with the United States do not impose
a double tax on dividends.


Tax proposals that include corporate integration would eliminate
the double tax on dividends.


The double tax on dividends may make corporations more
financially vulnerable during economic downturns.


Many of the arguments in support of the double tax on
dividends relate to fairness.


None of the above
Instructor
Explanation:
See Chapter 5. All of the statements are true. Many countries (and most
U.S. trading partners) do not impose a double tax on dividends. Instead,
they use various systems of corporate integration that tax dividends only
once. Supporters of corporate integration argue that the double tax on
dividends encourages debt financing, which makes companies vulnerable
during economic downturns. Finally, many of the arguments made by
supporters of the dividend tax system in the United States relate to the
distribution of taxes. In particular, they argue that the benefits of corporate
integration would flow disproportionately to the wealthy.
Points Received: 0 of 5
Comments:


3. Question : (TCO 4) Five years ago, Eleanor transferred property she had used
in her sole proprietorship to Blue Corporation for 1,000 shares of
Blue Corporation in a transaction that qualified under 351. The
assets had a tax basis to her of $100,000, and a fair market value of
$270,000, on the date of the transfer. In the current year, Blue
Corporation (E & P of $800,000) redeems 250 shares from Eleanor
for $220,000 in a transaction that does not qualify for sale or
exchange treatment. With respect to the redemption, Eleanor will
have a _____.
Student Answer:

$195,000 capital gain


$220,000 capital gain


$195,000 dividend


$220,000 dividend


None of the above
Instructor
Explanation:
See Chapter 6. The transaction is treated as a return from her investment,
and she has dividend income to the extent of the entire distribution.
Points Received: 5 of 5
Comments:


4. Question : (TCO 4) Kite Corporation has 1,000 shares of stock outstanding.
Kent owns 250 shares, Kent's father owns 150 shares, Kent's
brother owns 250 shares, and Kent's son owns 50 shares. Plover
Corporation owns the other 300 shares in Kite Corporation. Kent
owns 60% of the stock in Plover Corporation. Applying the 318
stock attribution rules, how many shares does Kent own in Kite
Corporation?
Student Answer:

250


400


450


630


None of the above
Instructor
Explanation:
See Chapter 6. Kent owns 630 shares in Kite Corporations; 250 shares directly
and 380 shares indirectly. Kent owns the shares of his father (150 shares), and
his son (50 shares), and 180 of Plover's shares [300 (shares owned by Plover) x
60% (Kent's ownership interest in Plover)].
Points Received: 0 of 5
Comments:


5. Question : (TCO 5) All of the following statements are true about gains
recognized in a corporate reorganization except _____.
Student Answer:

taxable amounts in reorganization are classified as a dividend
or capital gain


corporate shareholders would prefer taxable amounts in a
reorganization be classified as a capital gain


individuals are taxed at the same rate for dividends and capital
gains


capital gains and dividend income can be totally eliminated in a
corporate reorganization with careful tax planning


All of the above
Instructor Explanation: See Chapter 7. Corporations prefer dividend treatment because of the
dividends received deduction.
Points Received: 0 of 5
Comments:


6. Question : (TCO 5) The French Corporation has assets valued at $1 million
(adjusted basis of $700,000). There are mortgages of $250,000
associated with these assets. Accent Corporation acquires all of
French's assets by exchanging $800,000 of its voting stock, and
assumes $200,000 of French's liabilities. French distributes the
Accent stock and remaining liabilities to its shareholders in
exchange for their French stock, and then liquidates. Which, if any,
statement is correct?
Student Answer:

This restructuring qualifies as a Type A reorganization.


This restructuring qualifies as a Type C reorganization.


The restructuring is taxable because liabilities cannot be
distributed to shareholders in a tax-free reorganization.


Accent recognizes a $50,000 gain on the restructuring.


None of the above
Instructor
Explanation:
See Chapter 7. For a Type C reorganization, at least 80% of the net fair
market value of French's assets must be acquired through voting stock.
The net value of the assets is $750,000 ($1 million - $250,000), and 80%
of this is $600,000. Thus, the transaction qualifies as a Type C
reorganization. The restructuring cannot qualify as a Type A
reorganization because not all of the liabilities were acquired by Accent.
Points Received: 5 of 5
Comments:


7. Question : (TCO 5) Which type of reorganization can be used to divide a
corporation?
Student Answer:

Type A


Type B


Type D


Type E


All of the above
Instructor
Explanation:
See Chapter 7. The Type D reorganization is typically used to divide a
corporation, although it can be used to acquire another corporation.
Points Received: 5 of 5
Comments:


8. Question : (TCO 6) How are the members of a consolidated group affected by
computations related to E & P?
Student Answer:

E & P is computed solely on a consolidated basis.


Consolidated E & P is computed as the sum of the E & P
balances of each of the group members.


Members E & P balances are frozen as long as the
consolidation election is in place.


Each member keeps its own E & P account.
Instructor Explanation: See Chapter 8. There is no such concept as consolidated E & P.
Points Received: 5 of 5
Comments:


9. Question : (TCO 6) Orange's separate taxable income was $175,000, and
Apple's was $125,000. Consolidated taxable income before
contributions was $350,000. Charitable contributions made by the
affiliated group included $30,000 by Orange, and $15,000 by Apple.
Compute the group's charitable contribution deduction.
Student Answer:

$45,000


$35,000


$30,000


$0


None of the above
Instructor Explanation: See Chapter 8. 10% x $350,000 = $35,000.
Points Received: 0 of 5
Comments:


10. Question : (TCO 6) Alb, Bud, and Coe constitute an affiliated group of
corporations. Which tax effect becomes more restrictive if an
election is made to file on a consolidated basis?
Student Answer:

Choice of members' tax accounting methods


Use of the lower tax rate brackets


Use of the $40,000 AMT exemption


Choice of members' tax year-ends
Instructor
Explanation:
See Chapter 8. The others are treated alike even if no election to
consolidate is made, because the controlled group rules apply.
1. Question : (TCO 2) Beige Company has approximately $250,000 in net income
before deducting any compensation or other payment to its sole
owner, Janet (who is single). Assume that Janet is in the 35%
marginal tax bracket. Discuss the tax aspects of each of the
following arrangements. (Ignore any employment tax
considerations.)
(I) Janet operates Beige Company as a proprietorship.
(II) Janet incorporates Beige Company and pays herself a salary of
$150,000 and no dividend.
(III) Janet incorporates the company and pays herself a $150,000
salary and a dividend of $77,750 ($100,000 - $22,250 corporate
income tax).
(IV) Janet incorporates the company, and pays herself a salary of
$250,000.
Student Answer:

I) She would report the total operating income and use the 35% marginal
tax rate . Taxable income $250.000 - (35%)87,500 = $162,500 net income
II) Beige $250,000 - 150,000 = 100,000 - 22,500(corporate tax) = 77,500
Taxable income 8 (39%)=30,225 net income Janet $150,000(taxable
income) - (35% tax)52,500 = 97,500 net income III) Janet $150,000 +
77,500 * 35% = 79,625 net income IV) Janet $250,000 - (35%)87500 =
162,500 net income Beige 0- 22,250(corporate tax) = $22,250 net
operating loss
Instructor Explanation: (I) Janet's tax on $250,000 at 35% is $87,500.
(II) Janet's tax on $150,000 at 35% is $52,500.
Beige's tax on $100,000 at corporate rates is $22,250.
Total tax is $74,750.
(III) Beige's tax on $100,000 at corporate rates is $22,250.
Janet's tax on $77,750 dividend distributed at 15% is $11,663.
Janet's tax on $150,000 salary at 35% is $52,500.
Total tax is $86,413.
(IV) Janet's tax on $250,000 at 35% is $87,500.

Points Received: 30 of 30
Comments:


2. Question : (TCO 11) Congress has set very high goals as to the number of
Forms 1040 that should be filed electronically. Summarize the
benefits of e-filing from the perspectives of both the taxpayer and
the government.
Student Answer:

Both the Government and the taxpayer can benefit from the following: The
taxpayer can get their return very fast and in the form of direct deposit into
their account. Returns are confirmed using an electronic filing system in
which the taxpayer or preparer can be notified almost immediately. The
government can save money on filing and sorting through paper returns.
There is also a plus in the direct payment on any balance due, which would
automatically withdraw the money owed.
Instructor Explanation: The IRS benefits when the e-filing process is used, because the filing
software eliminates math errors and clarifies ambiguous disclosures by
the taxpayer before the return even is accepted by the government.
Taxpayers gain when the e-filing process is used because their returns
are processed by the government in less than half the time needed for
a paper-based return. E-filing can be seen as a green alternative, in
that less paper, ink, and toner might be required to file a return.
Postage costs and the time that one spends waiting in line at the post
office are eliminated. And because most e-filed returns use a direct
deposit system for refunds, the taxpayer has much quicker access to
his or her funds after filing the return. The IRS is encouraging tax
practitioners to eliminate their fees for filing tax returns electronically,
especially for low-income taxpayers, and the agency may provide its
own filing portal to facilitate the free filing idea. Further growth in the
number of e-filed returns may come from those 40 million individuals
who use software to prepare Form 1040, but who then print the return
and mail it to the IRS.

Points Received: 30 of 30
Comments:


3. Question : (TCO 4) Palmer Corporation has 1,000 shares of common stock
outstanding owned by unrelated parties as follows: Jason, 300
shares; Erin, 300 shares; and Dawn, 400 shares. Each of the three
shareholders paid $75 per share for the Palmer stock 10 years ago.
Palmer has $800,000 of accumulated E & P, and $40,000 of current
E & P. In January of the current year, Palmer distributes land held
as an investment (adjusted basis of $260,000, fair market value of
$220,000) to Dawn in redemption of all 400 of her shares. In
December of the current year, Palmer distributes securities held as
an investment (adjusted basis of $90,000, fair market value of
$110,000) to Erin in redemption of 200 of her shares.
(I) What are the tax results to Dawn on the redemption of her
Palmer stock?
(II) What are the tax results to Erin on the redemption of her Palmer
stock?
(III) What gain or loss is recognized by Palmer Corporation on the
two redemptions?
Student Answer:

(I) 400shares(75)=30,000 land FMV 220,000 - 30,000 = 190,000(15%) =
28,500 tax liability (II) 200share(75) = 15,000 land FMV 110,000 - 15,000
= 95,000(15%) = 14,250 tax liability (III) There is no gain/loss recognized
by Palmer Corp.
Instructor Explanation: (I) Dawn has a long-term capital gain of $190,000 [$220,000 (amount
realized) - $30,000 (stock basis)]. The distribution qualifies as a
complete termination redemption under 302(b)(3). Dawn will have a
basis of $220,000 in the land.
(II) Erin has a long-term capital gain of $95,000 [$110,000 (amount
realized) - $15,000 (stock basis)]. The distribution qualifies as a
disproportionate redemption under 302(b)(2). Erin had a 50%
(300/600 shares) ownership in Palmer Corporation prior to the
redemption and a 25% (100/400 shares) ownership after the
redemption. Both the 50% and the 80% [i.e., 25% is less than 40%
(80% x 50%)] tests are met. Erin will have a basis of $110,000 in the
securities.
(III) Palmer Corporation has a disallowed capital loss of $40,000
[$220,000 (fair market value) - $260,000 (adjusted basis)] on the
distribution of the land and a recognized capital gain of $20,000
[$110,000 (fair market value) - $90,000 (adjusted basis)] on the
distribution of the securities. Gains but not losses are recognized in
nonliquidating distributions.

Points Received: 25 of 30
Comments:


4. Question : (TCO 5) Dixon Corporation is acquiring Martin Corporation in a Type
A reorganization by exchanging 40% of its voting stock and $50,000
for all of Martin's assets (value of $850,000 and basis of $600,000)
and liabilities ($200,000). The shareholders of Martin are Tina (650
shares) and Curby (350 shares). They bought their stock for $500
per share. What is the amount of gains or losses that Tina and
Curby will recognize due to the reorganization? What is the value of
the stock they received from Dixon, and what is their basis in the
Dixon stock?
Student Answer:

Martin would recognize a gain of $50,000. Value of the stock received:
650(500) = 325,000 350(500) = 175,000 ______ $500,000 with a basis of
$500,000
Instructor
Explanation:
Tina's basis in her Martin stock is $325,000 (650 x $500), and the value of
her Martin stock is $422,500 [($850,000 - $200,000) x 65%]. She receives
$390,000 in Dixon stock [($850,000 - $200,000 - $50,000) x 65%]. Curby's
basis in his Martin stock is $175,000 (350 x $500), and the value of his
Martin stock is $227,500 [($850,000 - $200,000) x 35%]. He receives
$210,000 in Dixon stock [($850,000 - $200,000 - $50,000) x 35%].The
gain recognized by Tina and Curby on the exchange and their basis in the
Dixon stock is computed as follows.


Realized
Gain
Recognized
Gain
Postponed
Gain
Adjusted Basis
in Cat Stock
Tina $422,500 $32,500 $97,500 $390,000
($325,000) ($32,500) ($65,000)
$97,500 $65,000 $325,000

Curby $227,500 $17,500 $52,500 $210,000
($175,000) ($17,500) ($35,000)
$52,500 $35,000 $175,000



Points Received: 21 of 30
Comments:


5. Question : (TCO 6) In a federal consolidated tax return group, who is
responsible to pay the tax liabilitythe parent, the subsidiaries, or
both? How are these tax-payable amounts determined?
Student Answer:

Each member of a federal consolidated tax return group is jointly liable for
the entire consolidated tax liability, as well as penalties and interest. You
would compute each taxable income of the group as if you were filing a
separate return. There are two groups of taxes that are removed from the
separate returns and receive special treatment. There are inter-company
items: deferrals/restorations, permanent eliminations, and distributions.
Also, group items: capital gains and losses, Sec. 1231 gains and losses,
DPAD, casualty gains and losses, charitable contributions, dividends
received, NOL carryforwards and carrybacks. The remaining separate
incomes are combined with the group for the consolidated taxable income.
Instructor Explanation: All affiliates are responsible for the total federal corporate income tax
liability of the group, on a joint and several basis. This rule applies to
income tax penalties and interest, as well as to any tax audit
settlements that are completed during the year. Starting with the third
tax year of an electing consolidated group, estimated income tax
payments are made on a consolidated basis. In assigning shares of
the total federal corporate income tax liability among group members,
say for purposes of computing an affiliate's E & P balance, the relative
taxable income and relative tax liability methods often are used. Other
methods also are allowed by the regulations.