SEE Part 3, Corporations, S Corporations, Fiduciaries, Estates, and Trusts

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SEE Part 3, Corporations, S Corporations, Fiduciaries, Estates, and Trusts
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2012-04-09 20:03:40
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Q & A over SEE 2005 test
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  1. A domestic limited liability company that has two or more members (without making other elections) is generally treated as a corporation for federal income tax purposes.
    FALSE. A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes.
  2. Whenever a shareholder (or group of shareholders) makes a Section 351 property exchange for stock in a corporation, a statement of all facts relevant to the exchange must be attached to the individual(s) tax returns as well as to the corporate tax return in the year of the exchange.
    TRUE. Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax returns a complete statement of all facts pertinent to the exchange.
  3. A calendar-year corporation that uses the accrual method of accounting may not deduct a charitable contribution paid March 10, 2005, for tax year 2004.
    FALSE. A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Make the choice by reporting the contribution on the corporation’s return for the tax year. A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. The declaration must include the date the resolution was adopted.
  4. Alpha Corporation owns 75% of the voting stock of Sky Net, Inc. Alpha Corporation’s stock ownership in Sky Net, Inc. also represents 75% of the total value of the stock. Sky Net, Inc. is a member of a controlled group with Alpha Corporation as the common parent.
    FALSE.

    • 1. A parent-subsidiary controlled group exists when one or more chains of corporation are connected through stock ownership with a common parent corporation; and
    • · 80% of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and
    • · Parent Corporation must own 80% of at least one other corporation.
  5. Weal, Inc. had taxable income in 2003 of $10,000. Due to a downturn in its core business operations, Weal, Inc. expects to suffer a tax loss in 2004. Weal, Inc. must still make installment payments of estimated tax for the 2004 year.
    • FALSE.
    • Because Weal Inc. will have a tax loss for 2004 it DOES NOT have to make installment payments of estimated tax for the 2004 year because it owes less than $500 in estimated taxes.
  6. If a corporate distribution to a shareholder exceeds earnings and profits (both current and accumulated) and exceeds the shareholder’s basis in the corporate stock, the shareholder has a gain from the sale or exchange of property.
    • TRUE.
    • As long as the corporation has sufficient earnings and profits, distributions are treated as taxable dividends. Amounts that are not considered dividends because of inadequate earnings and profits (as is in this case) are treated as nontaxable returns of capital to the extent of the shareholder's basis for the stock.
    • In effect, the nondividend portion of the distribution is applied to and reduces the basis of the stock. Should the return of capital distribution exceed the shareholder's basis, the excess is treated as a gain from the sale of the stock, normally capital gain if the stock is a capital asset.
  7. If a distribution gives cash or other property to some shareholders and gives stock shares that increase the percentage of interest in the corporation’s assets or earnings and profits to other shareholders, then the distribution of the stock is treated as if it were a distribution of property.
    TRUE

    The distributions of stock dividends and stock rights are generally tax-free to shareholders. However, stock and stock rights are treated as property under the rules discussed earlier under Money or Property Distributions if any of the following apply to their distributions:

    A: Any shareholder has the choice to receive cash or other property instead of stock or stock rights

    B: The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation’s assets or earnings and profits to other shareholders.

    C: The distribution is in convertible preferred stock and has the same result as in (B).

    D: The distribution gives preferred stock to some common stock shareholders and gives common stock to other common stock shareholders.

    E: The distribution is on preferred stock. (An increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right is not a distribution on preferred stock).

    And in this case the distribution gave property to some shareholders and stock shares to others (B) so the distribution is treated as a distribution of property
  8. Only cash distributed as part of a corporate liquidation should be reported on a Form 1099-DIV.
    • FALSE.
    • During the liquidation of a corporation, all of the assets of the corporation must be distributed and reported by the stockholders
  9. Gain or loss generally is recognized on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value.
    • TRUE.
    • Amounts received by shareholders in complete liquidations of a corporation are considered as payment in full for their stock.
    • Each shareholder recognizes gain or loss equal to the difference between NET FAIR MARKET VALUE of the property received (fair market value of the property received less any liabilities assumed or taken subject to by the shareholder) and the basis of the stock surrendered.
  10. ABC Corporation was formed in 1996 and has always been an S corporation. ABC Corporation may be liable for the excess net passive income tax in 2004 if it has passive investment income for the tax year that is in excess of 25% of gross receipts and has taxable income at year-end.
    • FALSE.
    • The passive activity rules apply to Individuals, Estates, Trusts (other than grantor trusts), personal service corporations, and closely held corporations. Even though the rules do no apply to grantor trusts, partnerships and S corporations directly, they do apply to the owners of these entities. With this problem ABC Corporation would not be liable for any excess net passive income but rather the real owner of the property
  11. S corporation elections are made for periods of five years, which may be renewed.
    • FALSE.
    • Once the election is made, it stays in effect until it is terminated. If the election is terminated, the corporation ( or a successor corporation) can make another election on Form 2553 only with IRS consent for any tax year before the 5th tax year after the first tax year in which the termination took effect.
  12. If an S corporation discharges a debt that it owes one if its shareholders, and that shareholder is required to report the amount as income, then the shareholder may increase his/her basis in the stock of the S corporation by the amount reported in income.
    • TRUE.
    • REMEMBER THAT THE S CORPORATION OWES THE DEBT TO THE SHAREHOLDER. SO IF IT DISCHARGES THIS DEBT, THE SHAREHOLDER'S BASIS IN THE STOCK INCREASES
  13. An estate of a domestic decedent or a domestic trust that had no tax liability for the full 12-month 2003 tax year is not required to make estimated tax payments in 2004.
    • TRUE.
    • Generally, you must pay estimated tax if the estate is expected to owe, after subtracting any withholding and credits, at least $1,000 in tax for 2011. You will not, however, have to pay estimated tax if you expect the withholding and credits to be at least: 1) 90% of the tax to be shown on the 2011 return, or 2) 100% of the tax shown on the 2010 return (assuming the return covered all 12 months). And because the trust didn’t have any tax liability for 2003 it means that withholding and credits to be at least 100% of the tax shown for 2003.
  14. Generally, in determining the taxable income for most taxpayers Internal Revenue Code section 469 limits the deduction of losses from passive activities to the amount of income derived from all passive activities. For an estate or trust however, losses from a passive activity owned by the estate or trust can be used to offset portfolio (interest, dividends, royalties, annuities, etc.) income of the estate or trust in determining taxable income.
    • FALSE.
    • Passive Activity rules- A passive activity is any trade or business activity in which the tax payer does not materially participate. To determine material participation, see Publication 925. Rental activities are passive activities regardless of the taxpayer’s participation, unless the taxpayer meet certain eligibility requirements. Individuals, ESTATES, and TRUSTS can offset passive activity losses ONLY against PASSIVE ACTIVITY INCOME. Passive activity losses or credits not allowed in one tax year can be carried forward to the next year. That means that losses from a passive activity owned by the estate or trust CANNOT be offset by portfolio income (interest, dividends, royalties, annuities, etc.)
  15. If you are the beneficiary of an estate that must distribute all its income currently, you must report your share of the distributable net income whether or not you actually received it.
    TRUE.

    If you are the beneficiary of an estate that is required to distribute all its income currently, you must report your share of the distributable net income, whether or not you have actually received the distribution.
  16. If the executor of an estate elects the use of an alternate valuation date and then changes his/her mind, he/she can use the date of death as the valuation date by amending the estate tax return (Form 706) within 1 year of the date of death.
    • FALSE.
    • Generally, if you must file Form 706, the return is due within 9 months after the date of the decedent’s death.
  17. A net operating loss (NOL), was created in the course of conducting the decedents business, which is held by the estate. If the NOL remains unused in the final year of the estate, an unused NOL carryover that would have been allowable to the estate in a later year is allowed to the beneficiaries succeeding to the property of the estate.
  18. A net operating loss (NOL), was created in the course
    of conducting the decedents business, which is held by the estate. If the NOL remains unused in the final year of the estate, an unused NOL carryover that would have been allowable to the estate in a later year is allowed to the beneficiaries succeeding to the property of the estate.
  19. If a husband and wife both agree to gift splitting for gift tax purposes, the liability for the entire gift tax of each spouse is joint and several.
    • TRUE
    • Gift splitting is when you split a gift and half of the gift is from yourself and the other from your spouse and so the liability falls on the both of you
  20. A gift of property directly to an individual may be subject to the generation-skipping transfer tax, even if it is not subject to the gift tax.
    FALSE.

    GSTs have three forms: direct skip, taxable distribution, and taxable termination. 1) A DIRECT SKIP is a transfer made during your life or occurring at your death that is: a. SUBJECT TO THE GIFT OR ESTATE TAX b) Of an interest in property, and c) made to a skip person. So that means that whenever a transfer is subject to the generation-skip transfer tax, it is subject to the gift tax.
  21. A grantor type trust is a legal trust under applicable state law that is not recognized as a separate taxable entity for income tax purposes.
    • TRUE.
    • A grantor type trust is a legal trust under applicable state law that is NOT recognized as a separate (trust) taxable entity for income tax purposes.
  22. Bob Moon forms Moon Enterprises LLC (Limited Liability Company) during the year. What form must Moon Enterprises LLC file in order to elect to be taxed as a C corporation?

    A. Form 1065 (U. S. Partnership Tax Return)
    B. Form 8832 (Entity Classification Election)
    C. Form 1120 (U. S. Corporation Income Tax Return)

    D. Form 7004 (Application for Extension of time to file for corporations)
    • The answer is B.
    • This is quite obvious. Form 8832
    • An eligible entity uses Form 8832 to elect how it will be classified for federa tax purposes, as a corporation, a partnership, or an entity disregarded as separate from its owners.
  23. ABC Corporation is dissolved on July 9, 2004. What is the due date, without extensions, for the filing of the final corporate income tax return?

    A. March 15, 2005

    B. December 31, 2004

    C. October 15, 2004

    D. October 9, 2004
    The answer is C. A corporation that has dissolved must generally file by the 15th of the 3rd month after the date it has dissolved.
  24. Croaker, Inc. is a taxable domestic corporation. Dana Corporation, a large manufacturing corporation, owns 15% of Croaker, Inc.'s outstanding stock. In 2004, Dana Corporation received $100,000 in dividends from Croaker, Inc. Dana Corporation received no other dividends in 2004. Dana Corporation may deduct, within certain limits, what percentage of the dividends received?

    A. 15%

    B. 70%

    C. 80%

    D. 100%
    • The answer is B.
    • Dividend from domestic corporations. A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. If the corporation owns 20% or more of the distributing corporation’s stock, it can, subject to certain limits, deduct 80% of the dividends received.
  25. York, Inc. directly owns stock of Ajax Corporation. To determine if Ajax Corporation is a member of a controlled group with York, Inc. as the common parent, York, Inc. must own at least what percentage of the voting
    and total value of the Ajax Corporation stock?

    A. 51%

    B. 75%

    C. 80%

    D. 100%
    • The answer is C.
    • A parent-subsidiary controlled group exists when one or more chains of corporation are connected through stock ownership with a common parent corporation; and · 80% of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and · Parent Corporation must own 80% of at least one other corporation.
  26. The Lux Corporation incurred $10,000 in start-up costs when it opened for business in 2004. What is the minimum period over which these expenses can be recovered?

    A. 12 months

    B. 36 months

    C. 60 months

    D. 120 months
    • The answer is C.
    • For business start-up and organizational costs paid or incurred before October 23, 2004, you can elect an amortization period of 60 months or more.
  27. Corporations generally must make estimated tax payments if they expect their estimated tax (income tax less credits) to be equal to or more than:

    A. $1

    B. $500

    C. $600

    D. $1,000
    • The answer is B.
    • Corporations generally must make estimated tax payments if they expect their estimated tax( income tax less credits) to be equal to or more than $500 through installment payments.
  28. A corporate payer of an individual shareholder dividend does not have the taxpayer identification number for that shareholder. What backup withholding percentage rate must the corporate payer use for this shareholder’s dividend
    payments?

    A. 15%

    B. 28%

    C. 35%

    D. 39%
    • The answer is B.
    • You generally withhold 28% of certain taxable payments if the payee fails to furnish you with his or her correct taxpayer identification number (TIN). This withholding is referred to as backup withholding. Payments subject to backup withholding include, interest, dividends, patronage dividends, rents, royalties, commissions, nonemployee compensation, and certain other payments you make in the course of your trade or business.
  29. The board of directors of Walden Corporation authorized a year end distribution to its three shareholders. Each distribution would be equal in value but the shareholder could choose to receive the distribution in cash or corporate stock. If a shareholder chose to receive corporate stock, the distribution should be treated as:

    A. A tax free distribution of stock

    B. A distribution of property

    C. A like-kind exchange

    D. None of the above
    • The answer is B.
    • The distributions of stock dividends and stock rights are generally tax-free to shareholders. However, stock and stock rights are treated as property under the rules discussed earlier under Money or Property Distributions if any of the following apply to their distributions:
    • A: Any shareholder has the choice to receive cash or other property instead of stock or stock rights
    • B: The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation’s assets or earnings and profits to other shareholders.
    • C: The distribution is in convertible preferred stock and has the same result as in (B).
    • D: The distribution gives preferred stock to some common stock shareholders and gives common stock to other common stock shareholders.
    • E: The distribution is on preferred stock. (An increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right is not a distribution on preferred stock).

    In this case condition (A) applies because the stockholders have a choice between money or corporate stock.
  30. In 2000, Mark purchased 100 shares of Roman, Inc. for $10 per share. In 2004 Roman, Inc. completely liquidated and distributed $8,000 to Mark. Mark must report income from this distribution as:

    A. Ordinary other income

    B. Dividends

    C. Capital gains

    D. Return of capital
    • The answer is (C).
    • Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of return of capital. They may be paid in one or more installments…Any liquidating distribution you receive is not taxable to you until you have recovered the basis of your stock, in this case ($1,000). After the basis of your stock has been reduced to zero, you must report the liquidating distribution as a capital gain. And so Mark must report income from this distribution as a capital gain
  31. A fiduciary representing a dissolving corporation may file a request for prompt assessment of tax. Generally, this request reduces the time allowed for assessment to:

    A. 12 months

    B. 18 months

    C. 24 months

    D. 30 months
    • The answer is (B).
    • Request for prompt assessment (Charge) of tax- The IRS ordinarily has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any additional tax due. However, as a personal representative, you may request a prompt assessment of tax after the return has been filed. This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. This request can be made for any tax return (except the estate tax return) of the decedent or the decedent’s estate. This may permit a quicker settlement of the tax liability of the estate and an earlier final distribution of the assets to the beneficiaries.
  32. The basis of property you buy is usually its cost. In determining the acquisition basis in C corporation stock, a shareholder must know:

    A. The amount paid in cash or property

    B. The amount paid in cash and debt obligations

    C. The value of provided services and debt obligations assumed

    D. All of the above
    • The answer is (D).
    • 1. The basis of property you buy is usually its cost. In determining the acquisition basis in C corporation stock, a shareholder must know:
    • · The amount paid in cash or property
    • · The amount paid in cash and debt obligations
    • · The value of provided services and debt obligations assumed
  33. Which of the following conditions will prevent a corporation from qualifying as an S corporation?

    A. The corporation has both common and preferred stock

    B. The corporation has 70 shareholders

    C. One shareholder is an estate

    D. All of the above
    • The answer is (A).
    • In order to be an S Corporation the firm must have no more than 100 shareholders, is a domestic corporation, its only shareholders are individuals, estates, exempt organizations…, it has no nonresident alien shareholders, it has only one class of stock (disregarding differences in voting rights). Generally, a corporation is treated as having only one class of stock if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation process, it’s not in the financial service industry
  34. Which of the following statements regarding the built-in gains tax of an S corporation is true?

    A. The built-in gains tax is treated as a loss sustained by the corporation during the same tax
    year

    B. S corporation built-in gains tax can be recognized only in the 10-year period beginning with the year the S election is made

    C. S corporation built-in gains tax is passed through and paid at the shareholder level

    D. None of the above
    • The answer is (B).
    • An S corporation may owe the tax if it has net recognized built-in gain during the applicable recognition period. The applicable recognition period is the 10-year period beginning:
    • · For an asset held when the S corporation was a C corporation, on the first day of the first tax year for which the corporation is an S corporation; or
    • · For an asset with a basis determined by reference to its basis (or the basis of any other property) in the hands of a C corporation, on the date the asset was acquired by the S corporation. So the answer regarding which is true on built-in gain taxes.
  35. Which of the following items is not a separately stated item of a qualifying S corporation?

    A. Interest income

    B. Charitable contributions

    C. Interest expense on business operating loans

    D. Net long term capital gain
    The answer is C.***
  36. Which of the following statements regarding distributions from an S corporation is correct?

    A. Property distributions are applied in a different manner than cash distributions

    B. Absent an election, distributions are considered to come first from accumulated earnings and profits, if the corporation has accumulated earnings and profits from when it was a C corporation

    C. A shareholder’s right to nontaxable distributions from previously taxed income may be transferred to another person

    D. A distribution from the previously taxed income account is tax free to the extent of a shareholder’s basis in his/her stock in the corporation
    • The answer is (D).
    • Amounts that are not considered dividends because of inadequate earnings and profits are treated as nontaxable returns of capital to the extent of the shareholder's basis for the stock.
  37. Pine Street Corporation is an S corporation. The Form
    1120S for 2004 reflects a $3,500 ordinary loss. Mr.
    Jones, the sole shareholder of Pine Street Corporation,
    has a basis in the corporation at January 1, 2004, of
    $1,500. Which of following statements is correct?
    A. Mr. Jones may deduct a $3,500 loss on his
    2004 return

    B. Mr. Jones may deduct a $1,500 loss on his 2004 return and carry back a $2,000 loss to 2002

    C. Mr. Jones may deduct a $1,500 loss on his 2004 return and carry forward a $2,000 loss indefinitely

    D. Mr. Jones may deduct a $1,500 loss on his 2004 return and loses the remaining $2,000 loss
    • The answer is C. Chapter 12 pg. 24 of the book.
    • Each shareholder's distributive share of net losses may not exceed that shareholder's basis in the corporation. Any losses that exceed a shareholder's basis may be carried forward indefinitely to be used when the shareholder's basis is increased.
  38. Which of the following statements regarding the termination of an S corporation election is true?

    A. The election may be revoked with the consent of shareholders who, at the time the revocation is made, hold more than 50% of the number of issued and outstanding shares

    B. The election may be revoked by the board of directors of the corporation only if they are not shareholders

    C. The election terminates automatically if the corporation derives more than 25% of its gross receipts from passive investment income during the year

    D. The election may be revoked by the Internal Revenue Service if there is a history of 10 years of operating losses
    • The answer is (A).
    • A termination election is automatically in place if:
    • · The corporation is no longer a small business corporation as defined in section 1361(b). This kind of termination of an election is effective as of the day the corporation no longer meets the definition of a small business corporation.
    • · The corporation, for each of three consecutive tax years, (a) has accumulated earnings and profits and (b) derives more than 25% of its gross receipts from passive investment income as defined in section 1362 (d)(3)(C). The election terminates on the first day of the tax year beginning after the third consecutive tax year. The corporation must pay a tax for each year it has excess net passive income. The election is revoked. An election can be revoked only with the consent of shareholders who, at the time the revocation is made, hold more than 50% of the number of issued and outstanding shares of stock (including non-voting stock). The revocation can specify and effective revocation date that is on or after the day the revocation is filed. If no date is specified, the revocation is effective at the start of the tax year if the revocation is made on or before the 15th day of the 3rd month of that tax year. If no date is specified and the revocation is made after the 15th day of the 3rd month of the tax year, the revocation is effective at the start of the next tax year. And so the answer is
  39. Frank owned and operated a machine shop. He used the cash method of accounting. At the time of his death in 2004, Frank was owed $5,000 for work his shop had performed. This $5,000 amount was paid prior to Frank’s estate being settled. The sole beneficiary of the estate is Frank’s son Jim, but the $5,000 was not distributed to Jim before the settlement of Frank’s estate. The $5,000 must be included in the income of:

    A. Frank’s final income tax return

    B. Frank’s estate’s income tax return

    C. The income tax return of beneficiary Jim

    D. None of the above
    • The answer is (B)
    • If the decedent accounted for income under the cash method, only those items actually or constructively received before his death are included on the final return. The answer is (B) Frank’s estate’s income tax return
  40. Snickers Trust did not file an estate tax return form 1041 for the 2003 year. At the beginning of 2004 Snickers Trust expects withholding and credits to be less than 90% of the tax reportable at year end. Snickers Trust must pay estimated income tax for 2004 if it expects to owe, after subtracting any withholding and credits, at least what amount?

    A. $100

    B. $600

    C. $1,000

    D. $2,500
    • The answer is (C).
    • Generally, an estate or trust must pay estimated income tax for 2012 if it expects to owe, after subtracting any withholding and credits, at least $1,000 in tax, and it expects the withholding and credits to be less than the smaller of:
    • · 1) 90% of the tax shown on the 2012 tax return, or

    2)100% of the tax shown on the 2011 tax return (110% of that amount if the estate’s or trust’s adjusted gross income on that return is more than $150,000 and less than 2/3 of gross income for 2011 or 2012 is from farming or fishing.)
  41. If an extension is not granted, when must Form 706 be filed to report estate and/or generation-skipping transfer tax.

    A. By the 15th day of the fourth month following the date of death

    B. Within 6 months after the date of death

    C. Within 9 months after the date of death

    D. Within 1 year of the date of death
    • The answer is (C).
    • For estate tax purposes, you may be required to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Generally, if you must file Form 706, the return is due within 9 months after the date of the decedent’s death.
  42. Which of the following statements concerning the deduction for estate taxes by individuals is true?

    A. The deduction for estate tax can be claimed only for the same tax year in which the income in respect of a decedent must be included in the recipient’s income

    B. Individuals may claim the deduction for estate tax whether or not they itemize deductions

    C. The estate tax deduction is a miscellaneous itemized deduction subject to the 2% limitation

    D. None of the above
    • The answer is (A).
    • Estate Tax Deduction- Income a decedent had a right to receive is included in the decedent’s gross estate and is subject to estate tax. This income in respect of a decedent is also taxed when received by the recipient (estate or beneficiary). However, an income tax deduction is allowed to the recipient for the estate tax paid on the income. The deduction for estate tax can only be claimed for the same tax year in which the income in respect of a decedent must be included in the recipient’s income. (This also is true for income in respect of a prior decedent). Individuals can claim this deduction ONLY as an itemized deduction on line 28 of Schedule A (Form 1040). This deduction is not subject to the 2% limit on miscallenous itemized deductions. Estates can claim the deduction on the line provided for the deduction on Form 1041. For the alternative minimum tax computation, the deduction is not included as an itemized deduction that is an adjustment to taxable income.
  43. Which of the following entities are required to file Form 709, United States Gift Tax Return?

    A. An individual

    B. An estate or trust

    C. A corporation

    D. All of the above
    • The answer is (A).
    • Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift tax and GST taxes.
  44. Which of the following statements regarding the annual exclusion for gift taxes is true?

    A. The gift of a present interest to more than 1 donee as joint tenants qualifies for only 1 annual exclusion

    B. A gift of a future interest cannot be excluded under the annual exclusion

    C. The annual exclusion amount for 2004 is$12,000

    D. None of the above
    • The answer is (B).
    • as for (A) any donee that you give a gift to the first $13,000(2011) is excluded. For example if you give three gifts all under $13,000, that means all of them are nontaxable gifts

    as for (C) back in 2005 the annual exclusion amount was $11,000 but for 2011 it is $13,000.

    Gifts of future interest cannot be excluded under the annual exclusion. A gift of a future interest is a gift that is limited so that its use, possession, or enjoyment will begin at some point in the future
  45. As a general rule, a trust may qualify as a simple trust if:

    A. The trust instrument requires that all income must be distributed currently

    B. The trust does not distribute amounts allocated to the corpus of the trust

    C. The trust has no provisions for charitable contributions

    D. All of the above
    • The answer is (D).
    • · The trust instrument requires that all income must be distributed currently;

    · The trust instrument does not provide that any amounts are to be paid, permanently set aside or used for charitable purposes; and

    The trust does not distribute amounts allocated to the corpus of the trust
  46. Amanda Jones and Calvin Johnson form Quail Corporationin 2004 by simultaneously making the following transfers.What is the amount of gain or loss to be reported on these transfers by Amanda and Calvin on their 2004 Federal income tax returns?

    Amanda transfers property with an adjusted basis of $30,000 and a FMV of $60,000 and receives 50% of outstanding stock.

    Calvin transfers property with an adjusted basis of $70,000 and a FMV of $60,000 and receives 50% of outstanding stocks.

    A. Amanda reports a $30,000 gain and Calvin reports a $10,000 loss

    B. Amanda reports a $0 gain and Calvin reports a $0 loss

    C. Amanda reports a $30,000 gain and Calvin reports a $0 loss

    D. Amanda reports a $0 gain and Calvin reports a $10,000 loss
    • The answer is (B).
    • After the transfers that both Amanda and Calvin made to form Quail Corporation constitutes as having control of the corporation (more than 80%) and hence no gain or loss is recongized.

    As a GROUP Amanda and Calvin have control of the corporation and Section 351 (deferral of gain or loss) can be instituted.
  47. Bob and John make the following transfers to Builders Corporation in return for 100% of the stock in the corporation.

    Bob Transferred to Builders $100,000 to Builders. Builders transferred to Bob $10,000 land. And received 80% of Builder's stock.

    John Transferred $30,000 property (basis of $10,000). Builders transferred to John $5,000 cash. John received 20% of Builder's stock.

    What is the amount of gain Bob and John must recognize on the transfers?

    A. Bob must recognize $10,000 gain and John must recognize $25,000 gain

    B. Bob recognizes no gain and John recognizes $5,000 gain

    C. Bob recognizes $10,000 gain and John recognizes $5,000 gain

    D. Bob recognizes $10,000 gain and John recognizes $20,000 gain
    • The answer is (B).
    • Because Bob has control of the corporation (80%) he does NOT realize a gain or deduct a loss, in this case a gain of 10,000 because he is in control of the corporation. John recognizes a $5,000 gain on his transfer of property because he got 20% of stock in exchange of the property AND THEN the corporation transferred $5,000 to John on top of his 20% of stock. Moreover John's basis in the stock is $10,000 because the adjusted basis carries over when an exchange between property and stock happens.
  48. Warren purchased stock in 2002 for $10,00. In 2003 Warren sold this stock to his sister Gail for $8,000. In 2004 Gail sold this stock to an unrelated party for $11,000. How much gain must Gail recognize in 2004 on the sale of this stock?

    A. $0

    B. $1,000

    C. $2,000

    D. $3,000
    The answer is (B).

    When a sale of property is enacted between related persons and there is a loss, the seller of the property cannot deduct the loss.

    However, the buyer's basis in the property is the same as the seller's adjusted basis in the property.
  49. Essex Corporation is a domestic corporation founded in 1998. Essex was originally authorized 100,000 shares with a per share value of $10. In 1998 Essex issued 50,000 shares and retained 50,000 shares. In 2004 the fair market value of an Essex share of stock equaled $100. During 2004 Essex hired a consulting firm to improve its data processing systems at a contracted cost of $20,000. The consulting work was completed in 2004 and the consulting firm agreed to accept 200 shares of Essex stock as payment of the contract. In 2004 Essex Corporation is required to report this transaction as:

    A. $20,000 in ordinary other income

    B. $2,000 in capital loss

    C. $0 nontaxable exchange

    D. $18,000 in capital gain
    • I would go with (C).
    • The reason for it is because the CONSULTING FIRM would need to report the 200 shares of Essex stock as ordinary income as compensation for its SERVICES ($20,000) @ $100 per share.

    But to ESSEX the transaction is an expense to the company that can deducted or capitalized (in this case capitalize because it's adding to the value of its corporation)

    Pg. 2-5 in the book...Stock received for services is considered compensation for such services, and the shareholder must recognize ordinary income equal to the value of the stock received for the services rendered.
  50. Brady Corporation of Cleveland, OH is a multi-national conglomerate. In 1986 Brady Corporation established and owned 100% of the stock of Toms, Inc. of Dayton, OH. Toms, Inc. was established for the purpose of manufacturing rubber gaskets, which Brady Corporation uses in many of its international operations. By the beginning of 2004, Brady Corporation had sold 30% of the outstanding Toms, Inc. stock. In July of 2004 Toms, Inc. declares a dividend and pays $100,000 to Brady Corporation. In 2004 Brady Corporation, subject to certain limits, takes what amount as a dividends received deduction?

    A. $0

    B. $70,000

    C. $80,000

    D. $100,000
    • The answer is (C).
    • REMEMBER THIS ABOUT DIVIDENDS BETWEEN CORPORATIONS!!!:
    • A corporation can deduct, with certain limits 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. If the corporation owns 20% or more of the distributing corporation’s stock, it can, subject to certain limits, deduct 80% of the dividends received.
  51. In tax year 2004, Roberts Corporation made a charitable contribution to a qualified organization of $40,000 in cash plus a vehicle with a fair market value of $15,000. For tax year 2004 Roberts Corporation had $400,000 in total income, $100,000 in total expenses not including the above charitable contributions, and would have a reportable dividend received deduction of $50,000. How much of the charitable contribution can Roberts Corporation deduct for the 2004 tax year?

    A. $15,000

    B. $25,000

    C. $40,000

    D. $55,000
    The answer is (A).

    • A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Figure the taxable income for this purpose WITHOUT the following:
    • · The deduction for charitable contributions
    • · The dividends-received deduction
    • · The deduction allowed under section 249 of the Internal Revenue Code
    • · The domestic production activities deduction
    • · Any net operating loss carry back to the tax year
    • · Any capital loss carry back to the tax year.And so because the taxable income is (400,000 – 100,000 = 300,000) the limit on the deduction is 30,000 which means that Roberts Corporation cannot deduct the $40,000 but can deduct the $15,000 of the FMV of the vehicle it donated.
  52. In tax year 2004, Sun Corporation had a $10,000 long term capital loss and a $5,000 short-term capital gain. In tax year 2000, Sun Corporation reported $1,000 in long-term capital gains and $4,000 in short-term capital gains. Sun Corporation reported no other capital gains or losses in any other tax year. How much net capital loss will be available for Sun Corporation to carry into tax year 2005?

    A. $0

    B. $1,000

    C. $4,000

    D. $5,000
    The answer is (D).

    • A capital loss is carried to other years in the following order:
    • · 3 years prior to the loss year (for 2004) it was 2001 and no capital losses or gains
    • · 2 years prior to the loss year (2002) no capital losses or gains
    • · 1 year prior to the loss year (2003) no capital losses or gains
    • · Any loss remaining is carried forward for 5 years. ($10,000- 5,000) $5,000
  53. As of December 31, 2003, Doyle, Inc. had incurred $6,000 in potential market feasibility costs, $3,600 in legal fees for setting up the corporation, $2,400 in advertising costs for the opening of the business, and $18,000 for the purchase of equipment. Doyle, Inc. began business operations on January 1, 2004. If Doyle, Inc. chooses to amortize its organizational and start-up expenses over the minimum 60-month period, how much can Doyle, Inc. deduct as an amortization expense in 2004?

    A. $1,680

    B. $1,920

    C. $2,400

    D. $6,000
    The answer is (C). pg. 26 Publication 535 Business Expenses.

    • Start-up costs include amounts paid for the following:
    • An analysis or survey or potential markets, products, labor supply, transporation facilities, etc.

    Advertisements for the opening of the business

    Salaries and wages for employees who are being trained and their instructors

    Travel and other necessary costs for securing prospective distributors, suppliers, or customers.

    Salaries and fees for executives and consultants or for similar professional services.

    Examples of organizational costs include:

    The cost of temporary directors

    The cost of organizational meetings

    State incorporation fees

    The cost of legal services.

    That means the only expenses that can be amortized as start-up and organizational costs are the feasibility costs, legal fees and advertisement cost.
  54. In 2004 Green, Inc. had gross receipts from sales of $500,000, dividends of $100,000 from a domestic corporation in which Green, Inc. owned 50% of the stock, and operating expenses of $800,000. What is the 2004 net operating loss for Green, Inc.?

    A. $200,000

    B. $280,000

    C. $300,000

    D. $330,000
    • The answer is (B).
    • Because Green Inc owns more than 20% of the stock it can elect to deduct 80% of the total dividend and giving it 520,000 – 800,000 = (280,000) net operating loss.
  55. Richard Crepe, M.D. owns 100% of the outstanding stock of Crepe Corporation. All of Crepe Corporation’s income and expenditures are derived from the medical services provided by Dr. Crepe. At the end of 2004 Crepe Corporation had $10,000 in reportable taxable income. How much federal income tax was Crepe Corporation required to pay for the 2004 year?

    A. $1,500

    B. $2,500

    C. $3,400

    D. $3,500
    • The answer is (D).
    • Because the Richard Crepe and his Crepe Corporation is a Personal Service Corporation because it is in the health service industry it pays a flat tax rate of 35% meaning that he will have to pay $3,500
  56. Maple Corporation had a net loss per its books for 2004 as follows:
    Gross Sales........................$340,000
    COGS................$150,000
    Deprecaition.......$60,000
    Charitable Contr..$10,000
    Salaries..............$130,000
    Meals and
    Entertainment.....$20,000
    Net Income
    (Loss) per books..($30,000)

    Total per books....$340,000 $340,000

    Maple Corporation uses an accelerated method of depreciation for tax purposes, but not for book purposes. Maple Corporation’s tax depreciation for 2004 will be $75,000. What is the taxable income for federal income tax purposes in 2004 for Maple Corporation?

    A. $(5,000)

    B. $(35,000)

    C. $(25,000)

    D. $(20,000)
    The answer is (C).

    Because Maple Corporation has a taxable loss, it CANNOT deduct any charitable contributions since the limitation on charitable deduction CANNOT exceed 10% of its taxable INCOME (NOT OR LOSS).

    • And so the deductions add up to :
    • 150,000+ 75,000+ 130,000+ 10,000 = $365,000
    • Net Loss: 340,000- 365,000 = ($25,000)
  57. Rose Corporation is a calendar-year filing corporation that had accumulated earnings and profits at the end of 2003 of $5,000. At the end of 2004 Rose Corporation had current-year earnings and profits of $1,000. On December 31, 2004 Rose Corporation distributed to sole shareholder Paul Rose an automobile purchased for $10,000 with a fair market value of $8,000. Paul Rose assumed a liability on the automobile of $1,000. What amount of dividend paid to Paul Rose must Rose Corporation report as an ordinary dividend in Box 1a of Form 1099-DIV?

    A. $6,000

    B. $7,000

    C. $8,000

    D. $10,000
    The answer is (A). pg. 3-16 in the book.

    The amount of the distribution that the shareholder includes in his or her income and the corporation reports in Form 1099-DIV is the value of any property received(FMV-liability) TO THE EXTENT THE DISTRIBUTION IS OUT OF E&P.

    And so because Rose Corp. had a total E&P of $6,000 they can only report that much as dividends paid out to Paul Rose.
  58. Charles Watson owns 100% of the outstanding shares of Watson Corporation. Charles Watson acquired these shares in 1998 for $5,000. Watson Corporation had total earnings and profits at the end of 2004 of $10,000. On December 31, 2004, Watson Corporation distributed $8,000 in cash and property with a fair market value of $7,000 to Charles Watson. In 2004 how much in capital gain must Charles Watson report from this distribution?

    A. $0

    B. $5,000

    C. $10,000

    D. $15,000
    The answer is (A). pg. 3-3 of the book

    As long as the corporation has sufficient earning and profits, distributions are treated as taxable dividend. Amounts that are not considered dividends becasue of inadequate earnings and profits are treated as nontaxable returns of capital to the extent of the shareholder's basis for the stock. In effect, the nondividend portion of the distribution is applied to and reduces the basis of the stock. Should the return of capital distribution exceed the shareholder's basis, the excess is treated as gain from the sale of the stock.

    And so because Charles Watson got a total distribution of $15,000. $10,000 of that amount is treated as a taxable dividend and since he had a basis of $5,000, the remaining 5,000 is seen as a nontaxable return of capital and now Charles has an adjusted basis of $0 in Watson Corp. and no capital gain.
  59. Hampshire, Inc., a calendar year taxpayer, had an accumulated earnings and profits balance at the beginning of 2004 of $20,000. During the 2004 year, Hampshire, Inc. distributed $30,000 to its sole individual shareholder. On December 31, 2004 Hampshire, Inc. reported taxable income of $50,000, federal income taxes of $7,500, and had tax exempt interest on municipal bonds of $2,500. What is Hampshire, Inc.’s accumulated earnings and profits balance at the beginning of 2005?

    A. $15,000

    B. $25,000

    C. $30,000

    D. $35,000
    The answer is (D). pg. 3-5 in the book

    The calculation of current and earnings and profits is as follows:

    • Current taxable income (or net operating loss)
    • + Exempt and nondefferable income
    • -Items not deductible in computing taxable income*
    • +Deductions not permitted in computing E&P
    • =Current earnings and profits (or deficit)
    • *Federal Income Taxes
    • Charitable Contributions
    • Expenses related to tax-exempt income
    • Premiums paid on key-person life insurance policies
    • Excess of capitall losses over capital gains
    • Related party losses and expenses

    • And so Current E&P = 50,000+2,500-7500-30,000 = 15,000
    • In order to find out ACCUMULATED E&P simply add 2004's current E&P to the accumulated E&P of 2003 and it is $35,000
  60. Healey, Inc. owned a parcel of undeveloped land with an adjusted basis of $10,000, an attached liability of $4,000, and a fair market value of $15,000. In 2004 this land was distributed by Healey, Inc. to its sole shareholder who also assumed the liability. Healey, Inc. will recognize how much of a gain on this distribution?

    A. $0

    B. $1,000

    C. $5,000

    D. $10,000
    The answer is (C). pg. 3-18

    When property subjected to a liability is distributed, the corporation is relived of any obligation. In such case, the effect to the corporation is the same as if it had sold the property for cash equal to the liability and paid off the debt...If the liability does not exceed the property's fair market value, it is ignored for gain recognition purposes and the fair market value is used.

    However, when the liability exceeds both the FMV and adjusted basis of the property, the corporation must recognize the gain equal to the excess of the liability over the adjusted basis.
  61. Arnold acquired 10 shares of Klesco, Inc. stock in 2000 for $50 per share. Klesco, Inc. decided in 2004 to reacquire all of its outstanding stock, which it did for $200 per share. What amount of capital gain in 2004 must Arnold report on the redemption of his Klesco, Inc. stock?

    A. $0

    B. $500

    C. $1,500

    D. $2,000
    • The answer is (C).
    • This one is pretty simple:
    • Arnold's basis in the stock is $500 (10 shares @ $50 per share).

    Klesco buys back its outstanding stock for $200 per share and buys back all 10 of Arnold's shares 200*10 = $2,000 (amount recongized by Arnold) - $500 (adjusted basis) = $1,500
  62. Sarah contracted with Downing Corporation to perform engineering services in 2004. Her contract specified she would receive $100,000 for the services rendered. Upon completion of her contract, Sarah decided to accept a payment offer from Downing Corporation of $60,000 in cash and 1,000 shares of their stock. At the time she was paid, Downing Corporation stock was trading for $45 per share. If Sarah reported on her 2004 individual return the appropriate amount for her services, what would be her basis in her 1,000 shares of Downing Corporation stock?

    A. $0

    B. $40,000

    C. $45,000

    D. None of the above
    The answer is (C). pg. 2-7 in the book

    Because Sarah's only contribution to Downing Corporation was services, Sara is treated as simply receiving compensation in the form of property, and must report income equal to the value of the stock. In addition, Sarah's basis in the stock will be equal to the value reported as income.
  63. Kevin, the 100% owner of an S corporation has an adjusted basis in stock before losses and deductions at the end of 2004 in the amount of $12,000. The 2004 corporate return shows a $20,000 ordinary loss and a $5,000 charitable contribution expense. What are the allowable losses and deductions Kevin may claim on his 2004 tax return?

    A. $12,000 ordinary loss and $0 contribution expense

    B. $7,000 ordinary loss and $5,000 contribution expense

    C. $9,600 ordinary loss and $2,400 contribution expense

    D. $12,000 ordinary loss and $5,000 contribution expense
    I would have gone with (D). pg. 12-24

    Each shareholder's distributive share of net losses may not exceed that shareholder's basis in the corporation. Any losses that exceed a shareholder's basis may be carried forward indefinitely to be used when the shareholder's basis is increased.
  64. John Smith died on March 30, 2004. From January 1, 2004 to March 30, 2004, $2,000 in medical bills had been paid by John. The following additional medical bills were incurred and paid by the executor out of John’s estate:

    1) From March 31, 2004, to December 31, 2004, in the amount of $5,000.

    2) From January 1, 2005, to March 30, 2005, in the amount of $5,000.

    3) From March 31, 2005, to April 6, 2005, in the amount of $3,000. The executor of John’s estate may elect to deduct what amount of the medical expenses (subject to percentage limitations) on John’s final income tax return, Form 1040, if deductions are itemized.

    A. $2,000

    B. $7,000

    C. $12,000

    D. $15,000
    The answer is (C).

    Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). However, if medical expenses for the decedent are paid out of the estate during the 1-year period beginning with the day after death, you can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred. If you make the election, you can claim all or part of the expenses on the decedent’s income tax return (if deductions are itemized) rather than on the federal estate tax return (Form 706). You can deduct expenses incurred in the year of death on the final income tax return… So the expenses the executor can include in John Smith’s last tax return is the $2,000 + 5,000 + 5,000 = 12,000. The medical expense from March 31, 2005 to April 6, 2005 is outside the 1-year window and is not included in John’s return but rather the estate’s.
  65. An estate has distributable net income of $12,000 consisting of $6,000 in rents, $4,000 in dividends, and $2,000 in taxable interest. Rob and his three sisters are equal beneficiaries of this, their father’s estate. A stipulation allocates dividends first to Rob. The personal representative distributed the income under the provisions of the will. In what amount and what character is the distribution to Rob?

    A. $0 rents, $4,000 dividend, and $0 taxable interest

    B. $0 rents, $3,000 dividend, and $0 taxable interest

    C. $1,500 rents, $1,000 dividend, and $500 taxable interest

    D. $1,000 rents, $1,000 dividend, and $1,000 taxable interest
    I would have gone with (C).

    Because the will stipulates that Rob and his 3 sisters are equal beneficiaries all income is distributed equally.
  66. Harry, a single person, died in 2004. The executor does not elect the alternate valuation date. Given the following information, determine the value of Harry’s gross estate.
    FMV at date of death
    Certificate of
    Deposit.......................$100,000

    Mortgage Receivable
    on sale or property.......$2,000,000

    Paintings and
    Collectibles..................$30,000

    Household goods
    and personal effects......$20,000

    A. $2,600,000
    B. $2,650,000
    C. $2,620,000
    D. $2,120,000
    • The answer is (B).
    • Sections 2033 through 2044 identify the various types or property that are includible in a decedent's gross estate. It requires the inclusion of any property interest owned by the decedent at date fo death.

    That means all of Harry's property is included in the his gross estate.
  67. Jack, a single individual, made the following gifts in 2004.

    Payments directly to sister's qualifying college for tuition...........$15,000

    Payment directly to sister's qualifying college for room and board.$25,000

    Cash to nephew................$10,000

    Cash to brother.................$30,000

    What is the gross amount of gifts that Jack must include on his 2004 Form 709, United States Gift Tax Return?

    A. $80,000

    B. $40,000

    C. $65,000

    D. $55,000
    The answer is (D). Publication 950


    Read the question closely and it's asking for the GROSS AMOUNT of gifts. This is before you take the annual exclusion of each gift and get the taxable amount of gifts. And because the payment to the qualifying college for tuition is exludable under the educational exclusion clause it is not a transfer subject to the gift tax.
  68. George and Helen are husband and wfie. During 2004, George gave $30,000 to his brother and Helen gave $22,000 to her niece. George and Helen both agree to split the gifts they made during the year. What is the taxable amount of gifts, after the annual exclusion, each must report on Form 709?

    A. George and Helen each have taxable gifts of $15,000

    B. George has a taxable gift of $19,000 and Helen has a taxable gift of $11,000

    C. George and Helen each have taxable gifts of $4,000

    D. George has a taxable gift of $8,000 and Helen has a taxable gift of zero
    The answer is (C).

    Now remember that when a couple decides to gift split each gift that they give will be divided among both of them and liability is split as well after any amount over the annual exclusion. And remember that the annual exclusion is applied to EACH gift.

    So the $22,000 gift is split amount George and Helen and each have a gift of $11,000 that they made and since it's under the annual exclusion the entire gift is nontaxable.

    The $30,000 is split among George and Helen and each have $15,000 and because the annual exclusion in 2004 was $11,000 (right now it's $13,000) both George and Helen have a taxable gift of $4,000 ($15,000-$11,000)
  69. The trust instrument for RJC Trust is silent as to the allocation of capital gains. In 2004 RJC Trust, a simple trust had taxable interest income of $4,000, capital gains of $3,000, paid a fiduciary fee of $625, and had tax exempt interest of $1,000. If the general rule to determine the allocation of the capital transaction is applied, what amount of taxable income is distributed to the beneficiaries in 2004?

    A. $6,500

    B. $6,375

    C. $3,500

    D. $3,375
    The answer is (C). pg. 14-3 in the book.

    One common difference between fiduciary accounting income and taxable income is the classification of fiduciary capital gains. Typically, capital gains represent an increase in the value of the principal of the fiduciary and are not available for distribution to income beneficiaries.

    This means that the TOTAL TRUST INCOME does not include the capital gains of $3,000

    Moreover, you need to figure out the the fiduciary fee that is taxable.

    What you do is find the TOTAL TRUST INCOME ($5,000) and the TAXABLE TRUST INCOME ($4,000) and divide the taxable trust income by the total trust income to derive the percentage of the fiduciary fee that is deductible.

    Hence $4,000/$5,000 = .8*625 = $500

    And so the amount that is distributed to beneficiaries is $4,000 - $500 = $3,500
  70. In 2004, Exeter Trust had taxable interest of $2,000, capital gains of $6,000, and a fiduciary fee of $1,000. The trust instrument allocates capital gains to income. At the end of 2004, the fiduciary retains $3,000 and distributes $4,000. What is the distributable net income (DNI) of Exeter Trust for 2004?

    A. $4,000

    B. $4,375

    C. $7,000

    D. $7,375
    The answer is (C). Chapter 14

    This particular trust instrument allocates capital gains to income and NOT to the principal or corpus of the trust. So that means it's included in the DNI

    Remember that the DNI is separate from how much the trustee may actually distribute. Regardless of how much the fiduciary retains the DNI still remains $8,000($6,000+$2,000) - $1,000 = $7,000.

    To go further because the trust has a DNI of $7,000, it can only claim a $4,000 distribution deduction and the retained $3,000 will be reported by and taxed to the Trust.
  71. The Wilder Trust is a complex trust with a controlling instrument that specifically allocates capital transactions to the corpus of the trust. The instrument goes on to state that $2,000 will be set aside out of gross income for charitable purposes and that $10,000 in income is required to be distributed each year. At the end of 2004 the Wilder Trust had $20,000 in gross income, which included $5,000 in capital gains. If there was no other information to consider, what would the Wilder Trust’s income distribution deduction be for 2004?

    A. $18,000

    B. $13,000

    C. $10,000

    D. $5,000
    The answer is (C). Chapter 14

    This one is simple. Wilder Trust is a complex and it specifically states that $10,000 in income is distributed. The $10,000 is the distribution deduction.
  72. In 2002 Thomas Hatch established the TWH Trust. TWH is a revocable trust. Thomas contributed cash, a significantstock portfolio and tax exempt bonds to this trustwhen he established it. In 2004 the TWH Trust had income consisting of $5,000 in taxable interest, $3,000 in ordinary dividends, and $2,000 in tax exempt interest. Thomas has never relinquished dominion and control of the TWH Trust. What amount of TWH Trust’s income is taxable to Thomas Hatch in 2004?

    A. $10,000

    B. $8,000

    C. $5,000

    D. $0
    The answer is (B). Chapter 14

    This one seems pretty self-explanatory. You are looking for the TAXABLE income for Thomas' trust. Simply add the taxable interest and ordinary dividends to come to $8,000. Do not include the tax-exempt interest.
  73. John is the sole shareholder of Maple Corporation, aqualified S corporation. At January 1, 2004, John has a basis in Maple Corporation of $2,000. The corporation’s 2004 tax return shows the following:

    Ordinary Income................$10,000

    Interest Income.................$1,000

    Nondeductible Expenses......$2,000

    Real Estate rental
    losses...............................$5,000

    Section 179 deduction.........$1,500

    Distributions to
    Mr. Maple...........................$3,000

    What is Jonn's basis in Maple Corporation at the end of 2004?


    A. $0

    B. $3,500

    C. $4,500

    D. $1,500
    The answer is (D). pg. 12-26

    Shareholder's basis in the S Corporation Stock includes initial basis or investment ($2,000)

    • PLUS:
    • 1.basis of additional capital contributions
    • 2.share of taxable income ($10,000+$1,000)
    • 3.Share of nontaxable income and gains
    • 4.gain recognized by the partner (when cash plus market value of noncash assets received exceed basis)

    • LESS:
    • 1.Cash distributions received ($3,000)
    • 2.market value of noncash distributions received
    • 3.Share of net loss (real estate rental loss of $5,000)
    • 4.Share of separately stated expenses, but not to exceed basis first in stock and second in debt due from the S corporation
    • 5.Share of nondeductible expenses and losses, but not to exceed basis " " "
    • 6.Dispositions of ownership interest.

    • $2,000 + 10,000 + 1,000 = 13,000
    • 13,000-2,000 = 11,000
    • 11,000-5,000 = 6,000
    • 6,000-1500 = 4500
    • 4500-3000 = 1500
  74. XYZ Corporation is a qualified S corporation. In 2004, its books and records reflected the following transactions:

    Business Income....................$500,000

    Real Estate rental loss............$($20,000)

    Interest income.....................$5,000

    Salaries and wages.................$(50,000)

    Depreciation
    (without Section 179 expense)..$(40,000)


    Section 179 expense................$(10,000)

    Other business deductions.........$(300,000)


    What is XYZ’s ordinary income (loss) to be reported on its 2004 Form 1120S?

    A. $85,000

    B. $110,000

    C. $115,000

    D. $105,000
    • The answer is (B).
    • Instructions to Form 1120S pg. 16(Section 179 deduction)
    • Do not include any Section 179 expense deduction on Form 1065 Line 14. This amount is not deducted by the corporation. Instead, it is passed through to the shareholders in box 11 of Schedule K-1


    Also the corporation does not deduct real estate losses, it too is also separately stated on the Schedule K-1.

    • Moreover on page 12-19 in the book
    • Interest income is also a separately stated income because it is considered investment (portfolio) income and is not added to Combined Ordinary Income REMEMBER THIS!
    • So here's how it goes:
    • 500,000-50,000-40,000-300,000 = 110,000
  75. Robert owns 100 shares of Oswald, Inc. stock he purchased in 1998 for $10 per share. The 100 shares that Robert owns represent all of the outstanding Oswald, Inc. stock. In 2004, Oswald, Inc. redeems 25 of Robert’s shares for $50 per share. Oswald, Inc. had earnings and profits in 2004 of $100,000. Robert must report what amount of capital gain from this 2004 redemption of his Oswald, Inc. stock?

    A. $0

    B. $1,000

    C. $4,000

    D. $5,000
    The answer is (A). pg. 4-3 in the BOOK

    • A quick look at a redemption reveals that it has the same characteristics as an ordinary sale: the stock of the shareholder is exchanged for property of the corporation. In such case, the transaction normally would receive capital gain treatment. Upon closer scrutiny, however, the transaction may have an effect that more closely resembles a dividen than a sale. That this may be true is easily seen in the classic example in which a corporation redeems a portion of its SOLE shareholder's stock. Although the shareholder surrenders stock as part of the exchange, like a dividend distribution, the interest of the shareholder in corporate assets as well as the shareholder's control over corporate affairs is completely affected.
    • And in this case Robert still owns 100% of Oswald, Inc. outsanding stock and interest and the transaction is merely a dividend distribution and NOT a capital gain
  76. In 1998 Adam purchased 100 shares of Call Corporation stock for $50 per share. During 2004 Call Corporation completely liquidated. After paying its liabilities, Call Corporation distributed to its shareholders $10,000 in cash and appreciated property sold for $90,000. Adam’s portion received a liquidating distribution from Call Corporation of $10,000. Adam must report what amount of capital gains income from this distribution?

    A. $4,500

    B. $5,000

    C. $22,500

    D. $25,000
    The answer is (B). pg. 5-3 in the BOOK

    Under the general liquidation rules prescribed by Section 331, amounts received by shareholders in complete liquidation of a corporation are considered as payment in full for their stock. Each shareholder recongizes gain or loss equal to the difference between the NET FMV of the property received and the basis of the stock surrendered.
  77. In 2004 Omega, Inc. partially compensates employee Tom Jones with 100 shares of stock. Omega, Inc. stock is selling for $200 per share at the time Tom receives his shares. On December 31, 2004 Tom sells his 100 shares of Omega, Inc. stock for $300 each. How much of an employee compensation expense can Omega, Inc. deduct in 2004 for Tom’s 100 shares?

    A. $0

    B. $10,000

    C. $20,000

    D. $30,000
    • The answer is (C).
    • Omega, Inc. can only deduct $20,000 as an employee expense to Tom Jones because that was the FMV of the shares at the time Tom was compensated.
  78. Gold Corporation distributes land with a fair market value of $25,000 to its sole shareholder Donna Gold, who assumes the mortgage on the land of $35,000. This land had an adjusted basis to Gold Corporation of $20,000. Gold Corporation must recognize how much of a gain on this distribution?

    A. $5,000

    B. $10,000

    C. $15,000

    D. $25,000
    The answer is (C). pg. 3-18

    • Thus, when the liability exceeds both the fair market value and the basis of the property, the corporation must recognize the gain equal to the excess of the liability over the basis.
    • $35,000-$20,000 = $15,000
  79. During the 2004 initial year of operations, Robert wholly owned a limited liability company (LLC) that manufactured air compressors that were sold to retail outlets within the United States. The LLC also owned an airplane that was leased to corporate clients. At the end of 2004, the LLC had net income from the manufacturing activity of $100,000, interest income of $5,000, dividend income of $10,000, and a net loss from the airplane leasing activity of $25,000. If Robert had no other items of income or loss in 2004, he should compute his tax liability on which amount?

    A. $75,000

    B. $85,000

    C. $90,000

    D. $115,000
    The answer is (C).

    Because you are computing Robert's tax liability and not the partnership's, include all items.
  80. Waco, Inc. reported net capital gains as
    follows:

    Tax year 2000 at $6,000

    Tax year 2002 at $8,000

    Tax year 2003 at $1,000

    In tax year 2004, Waco, Inc. had $40,000 in long-term capital losses and $25,000 in short-term capital gains. How much net capital loss will be available for Waco, Inc. to carry into tax year 2005?

    A. $0

    B. $6,000

    C. $14,000

    D. $15,000
    • The answer is (B).
    • Remember that capital losses can be offset by current-year capital gains and capital gains from the last 3 calendar years.

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