HS 321 Module 13

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SAngell3
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HS 321 Module 13
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2012-09-13 22:54:01
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HS 321 Module 13
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  1. Generally, a distribution by a corporation to its shareholders with respect to the corporation's own stock is taxable as a dividend to the extent of the corporation's current and accumulated earnings and profits.

    a) True
    b) False  
    a) True 
  2. A dividend includes a return of paid-in capital to a shareholder.

    a) True
    b) False  
    b) False 

    A dividend does not include a return of capital. It is a taxable distribution to the extent of the corporation's current and accumulated earnings and profits. 
  3. The earnings and profits of a corporation for a given year are generally determined by using the corporation's taxable income as a starting point.

    a) True
    b) False  
    a) True 
  4. "Qualified" dividends are currently taxed to individuals at a maximum rate of 25 percent.

    a) True
    b) False  
    b) False 

    "Qualified" dividends are currently taxed to individual taxpayers at a maximum rate of 15 percent (zero percent for lower-bracket taxpayers). 
  5. A distribution by a corporation can sometimes be taxable as a dividend even if the corporation has no current or accumulated earnings and profits.

    a) True
    b) False  
    b) False 

    A distribution by a corporation that has no current or accumulated earnings and profits cannot be taxable as a dividend. 
  6. When a corporation having no current or accumulated earnings and profits makes a distribution to its shareholders, the distribution is always taxed as a capital gain.

    a) True
    b) False  
    b) False 

    When a corporation with no accumulated or current earnings and profits makes a distribution to its stockholders, the distribution is first applied to reduce the basis of the stock to zero. Any excess is taxed as a capital gain. 
  7. A pro rata redemption among all shareholders of a corporation will not be taxed as a capital transaction.

    a) True
    b) False  
    a) True 
  8. Redemptions in which the shareholder's percentage of ownership in the corporation is not materially affected are taxed as capital transactions.

    a) True
    b) False  
    b) False 

     Redemptions taxed as capital transactions involve situations in which the percentage of ownership is materially affected.
  9. A corporation's redemption of its own stock will be treated as a capital transaction if the distribution is not essentially equivalent to a dividend.

    a) True
    b) False  
    a) True 
  10. A redemption of stock that is substantially disproportionate will not be taxed as a dividend to its shareholders.

    a) True
    b) False  
    a) True 
  11. One requirement for a substantially disproportionate redemption is that immediately after the redemption, the shareholder must own less than one half of the total combined voting power of all classes of outstanding stock entitled to vote.

    a) True
    b) False  
    a) True 
  12. One requirement for a substantially disproportionate redemption is that the redeemed shareholder's percentage of ownership or voting stock after the redemption must be less than 80 percent of his or her percentage ownership of voting stock before the redemption.

    a) True
    b) False  
    • a) True 
    •  
  13. Under the 80 percent test, the reduction in outstanding shares resulting from the redemption is ignored.

    a) True
    b) False  
    b) False 

    The postredemption ratio under the 80 percent test must reflect the reduction in the total number of shares outstanding.
  14. Both the number of shares owned by the redeemed shareholder and the total number of shares outstanding will be affected by a redemption.

    a) True
    b) False  
    a) True 
  15. A distribution in complete redemption of stock is taxed as a dividend.

    a) True
    b) False  
    b) False 

    f a corporation redeems all the stock of a shareholder in a redemption that completely terminates the shareholder's interest in the corporation and the shareholder's family does not own stock in the same corporation, the redemption will be taxed as a sale or exchange. 
  16. Under the family attribution rules, an individual is considered to own all the stock owned by his or her spouse, parents, children, and grandchildren, but not that of his or her grandparents.

    a) True
    b) False  
    a) True 
  17. The attribution rules do not extend to stock owned directly or indirectly by or for a partnership or estate.

    a) True
    b) False  
    b) False 

    The attribution rules apply to stock owned directly or indirectly by or for a partnership or estate. The stock is generally considered as owned proportionately by the entity's partners or beneficiaries.
  18. A shareholder in a family corporation may avoid the family attribution rules if all the stock he or she actually owns is redeemed and certain other requirements are met.

    a) True
    b) False  
    a) True 
  19. Stock owned by a deceased shareholder may be redeemed to pay federal estate taxes and taxed as an exchange only if the value of the decedent's stock exceeds 65 percent of his or her adjusted gross estate.

    a) True
    b) False
    b) False 

    A Sec. 303 redemption to pay death taxes will be allowed if the value of the redeeming corporation's stock included in the gross estate exceeds 35 percent of the adjusted gross estate.
  20. A Sec. 303 redemption will be allowed to the extent that the proceeds from the redemption do not exceed a decedent's basis in stock

    a) True
    b) False
    b) False 

    A Sec. 303 redemption is allowed to the extent the redemption proceeds do not exceed the total of all federal and state death taxes (including interest, if any) and funeral costs and administration expenses allowed as deductions to the estate.
  21. The Magic Missile Corporation has two shareholders. Past earnings and profits totaled $100,000. This year the corporation had earnings and profits of $200,000 and distributed $175,000 to each shareholder. How much of the distribution is taxable as a dividend to each shareholder?

    A) $0
    B) $150,000
    C) $175,000
    D) $100,000
    B) $150,000

    The distribution to each shareholder is taxed as a dividend to the extent of the pro rata earnings and profits of the corporation, both accumulated and current. The combined earnings and profits in this case totaled $300,000. Therefore $150,000 of the distribution to each of the two shareholders is a dividend.
    (this multiple choice question has been scrambled)
  22. Which of the following statements concerning dividends from a corporation to its shareholders is (are) correct?

    I. Cash dividends are generally taxed at a maximum rate of 15 percent under current law.

    II. Dividends of property other than money are considered capital transactions for income tax purposes.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    A) I only

    II is incorrect because a distribution of any type of property in the form of a dividend can be taxed as a dividend and not as a capital transaction.
    (this multiple choice question has been scrambled)
  23. Which of the following transactions between a corporation and its shareholders could result in a taxable distribution to the shareholders?

    I. The corporation sells property to the shareholders at a price equivalent to the fair market value.

    II. The corporation cancels debts that several shareholders owed to it.

    A) Neither I nor II
    B) Both I and II
    C) I only
    D) II only
    D) II only

    I is incorrect because a sale of property at fair market value by a corporation to its shareholders is not treated as a dividend or other taxable distribution made with respect to stock ownership.
    (this multiple choice question has been scrambled)
  24. A shareholder must meet which of the following requirements to avoid having the family attribution rules applied to an IRC Sec. 302 complete redemption?

    I. The shareholder must receive the proceeds in cash at the time the stock is redeemed by the corporation.

    II. The shareholder must repay all debts owed to the corporation at the time the stock is redeemed by the corporation.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    D) Neither I nor II

    I is incorrect because it is immaterial under the attribution rules whether the shareholder receives cash at the time of the redemption.II is incorrect because there is no requirement that the shareholder repay debts to the corporation in order to avoid family attribution.
    (this multiple choice question has been scrambled)
  25. Mrs. Morris sells all or some of her shares in the QT Corporation at a price in excess of her basis. The corporation has only one class of voting common stock. All the following qualify as capital transactions for Mrs. Morris EXCEPT

    A) The corporation redeems all Mrs. Morris's shares in the corporation and none of the remaining shareholders is related to her.
    B) Mrs. Morris sells 25 percent of her shares to Mr. Smith, a stranger, in order to raise capital.
    C) The QT Corporation redeems 200 of Mrs. Morris's 500 shares, and the remaining 500 outstanding shares are owned by her brother.
    D) The corporation redeems the shares that belong to Mrs. Morris, her son is the sole remaining stockholder, and she will be a director of QT.
    D) The corporation redeems the shares that belong to Mrs. Morris, her son is the sole remaining stockholder, and she will be a director of QT.

    Although the corporation redeems all of Mrs. Morris's shares, she is constructively deemed to own the shares belonging to her son and will therefore be denied capital transaction tax treatment on the redemption. She cannot claim a waiver of the family attribution rules because of her status as a director of QT Corporation.
    (this multiple choice question has been scrambled)
  26. All the following statements concerning the attribution rules for determining constructive ownership of stock are correct EXCEPT

    A) Shares of stock owned by an estate are considered as being owned proportionately by its beneficiaries having a direct present interest in the estate.
    B) Shares of stock owned by a partnership are considered as being owned proportionately by the partners.
    C) Shares of stock owned by a father are considered as being owned by his daughter's husband.
    D) Shares of stock owned by a trust are considered as being owned by its beneficiaries in proportion to their actuarial interests in the trust.
    C) Shares of stock owned by a father are considered as being owned by his daughter's husband.

    The attribution rules apply from parent to child and between spouses, but not from a parent to the spouse of a child because the family attribution rules cannot be applied twice in succession.
    (this multiple choice question has been scrambled)
  27. Which of the following statements is correct regarding distributions from a corporation?

    A) Qualified dividends are taxed at a maximum rate of 28%.
    B) Distributions are taxed as a dividend even if the corporation has no earnings and profits.
    C) The starting point for determining the earnings and profits is the corporation's gross receipts.
    D) A pro-rata stock redemption among all shareholders will be taxed as a dividend
    D) A pro-rata stock redemption among all shareholders will be taxed as a dividend






    A is incorrect. In order for a distribution to be taxed as a dividend, the corporation must have earnings and profits.
    B is incorrect. The starting point for determining corporate earnings and profits is the taxable income of the corporation.
    C is incorrect. Qualified dividends are taxed at capital gains rates, the maximum of which is less than 28%
    (this multiple choice question has been scrambled)
  28. Which of the following statements is/are correct regarding distributions from a corporation?
    I. Generally, distributions from a corporation are treated as dividends to the extent the

    corporation has earnings and profits.
    II. Certain stock redemptions are treated as capital transactions rather than dividends.

    A) Neither I nor II.
    B) Both I and II.
    C) Only I.
    D) Only II.
    B) Both I and II.
    (this multiple choice question has been scrambled)
  29. Each of the stock redemptions listed below will be treated as a capital transaction for federal income tax purposes EXCEPT:

    A) Substantially disproportionate redemption.
    B) Proportional capital gain redemption.
    C) Redemption not equivalent to a dividend.
    D) Complete redemption.
    B) Proportional capital gain redemption.


    Section 302 provides four types of redemptions that are treated as capital gains. A proportional capital gain redemption is not an exception under Section 302.
    (this multiple choice question has been scrambled)
  30. Which of the following is a requirement of a substantially disproportionate redemption?
     
    A) After redemption, shareholder must own less than 50% of the total voting power.
    B) Shareholder's ownership percentage of the common stock after the redemption must be less than 70% of the ownership percentage before the redemption.
    C) Shareholder's ownership percentage of the voting stock after the redemption must be less than 60% of the ownership percentage before the redemption.
    D) Shareholder's ownership percentage of the preferred stock after the redemption must be less

    than 80% of the ownership percentage before the redemption.
    A) After redemption, shareholder must own less than 50% of the total voting power.

    B is incorrect. The percentage is 80%.
    C is incorrect. The percentage is 80%.
    D is incorrect. The 80% test does not apply to preferred stock.
    (this multiple choice question has been scrambled)
  31. Which of the following statements is/are correct regarding a redemption not essentially equivalent to a dividend?

    I. A meaningful reduction in a shareholder's interest is required for a redemption to be considered not essentially equivalent to a dividend.

    II. A taxpayer is required to obtain a private letter ruling from the IRS before the redemption will be treated as a capital gain.

    A) Neither I nor II.
    B) Only II.
    C) Only I.
    D) Both I and II.
    C) Only I.





    II is incorrect. A private letter ruling is not required.
    (this multiple choice question has been scrambled)
  32. ABC Company has 200 shares outstanding. Larry owns 160 shares, and Tina and Jan each own 20 shares. How many of Larry's shares must be redeemed for the redemption to be considered substantially disproportionate?

    A) 90
    B) 33
    C) 121
    D) 160
    C) 121







    Larry currently owns 80% of the company. To qualify for a substantially disproportionate redemption, Larry must own less than 50% of the total voting power of the company after the redemption.
    Since Tina and Jan own 40 shares together (20 shares each), Larry must own LESS than 40 shares if he wants to reduce his ownership interest in the company below 50%. Therefore, Larry must redeem at least 121 shares (160 shares owned less 40 shares less one) to reduce his ownership below 50%.
    (this multiple choice question has been scrambled)
  33. The constructive ownership rules attribute ownership of stock from one family member to another in which of the following situations?

    I. From a sister to her brother.
    II. From a father to his daughter.

    A) Only I.
    B) Both I and II.
    C) Only II.
    D) Neither I nor II.
    C) Only II.




    I is incorrect. Stock is not attributed between siblings.
    (this multiple choice question has been scrambled)
  34. David owns 50% of the stock of DaveCo and his grandson, Steven, owns the other 50% of the company.

    Which of the following statements is/are correct regarding this arrangement?

    I. Steve's stock will be attributed to David.
    II. David's stock will be attributed to Steve.

    A) Neither I nor II.
    B) Both I and II.
    C) Only I.
    D) Only II.
    C) Only I.


    II is incorrect. A grandchild's stock is attributed to the grandparent, but the grandparent's stock is not attributed to the grandchild.
    (this multiple choice question has been scrambled)
  35. Assume the following ownership of XYZ Company:

    • Jay - owns 50%
    • Jay's wife - owns 25%
    • Jay's father - owns 15%
    • Jay's sister - owns 10%

    Assuming family attribution rules apply, how much of XYZ Company does Jay own?

    A) 100%
    B) 75%
    C) 90%
    D) 65%
    C) 90%









    Family attribution does not apply to siblings.
    (this multiple choice question has been scrambled)
  36. Which of the following statements is/are correct regarding entity attribution?

    I. Stock owned by a partnership will not be attributed to the partners of the partnership.

    II. Stock owned by an S corporation will be attributed to the shareholders of the S corporation.

    A) Neither I nor II.
    B) Only II.
    C) Both I and II.
    D) Only I.
    B) Only II.



    I is incorrect. Ownership of stock is attributed in proportion to the partner's interest in the partnership.
    (this multiple choice question has been scrambled)
  37. A waiver of family attribution will be allowed in the case of a complete redemption in all of the following situations EXCEPT:

    A) Redeemed shareholder is an officer of the corporation.
    B) Redeemed shareholder does not acquire any prohibited interest in the corporation for a period of 10 years.
    C) Redeemed shareholder is a creditor of the corporation.
    D) Redeemed shareholder files an agreement with the IRS to notify it if any acquisition of a prohibited interest takes place.
    A) Redeemed shareholder is an officer of the corporation.


    A waiver of family attribution will not be allowed if the redeemed shareholder remains an officer of the corporation.
    (this multiple choice question has been scrambled)
  38. The family attribution rules can be waived in the case of a complete redemption, provided that certain requirements are met. A shareholder executing a complete redemption can participate in the corporation's activities in which capacity without jeopardizing this waiver of family attribution?

    A) Creditor of the corporation.
    B) Employee of the corporation.
    C) Director of the corporation.
    D) Officer of the corporation.
    A) Creditor of the corporation.


    A shareholder that redeems his or her shares will be eligible for waiver of the family attribution rules, even if he or she remains a creditor of the corporation.
    (this multiple choice question has been scrambled)
  39. Mrs. Davis sells all or some of her shares in the ABC Corporation at a price in excess of her basis.

    Which of the following sales will be treated as a dividend?

    A) The corporation redeems the shares that belong to Mrs. Davis; her son is the sole remaining shareholder, and she will be an officer of ABC.
    B) The corporation redeems all her shares and none of the remaining shareholders is related to her.
    C) Mrs. Davis sells 35% of her shares to Mr. Johnson, a stranger, in order to raise capital.
    D) ABC Corporation redeems 400 of her 1,000 shares, and the remaining 1,000 shares are owned by her sister.
    A) The corporation redeems the shares that belong to Mrs. Davis; her son is the sole remaining shareholder, and she will be an officer of ABC.







    The attribution rules will apply to this redemption because she will remain an officer of the corporation. Therefore, this redemption will be taxed as a dividend.
    A is incorrect. A sale to an outside party is not a redemption, and will be afforded capital gain treatment. C is incorrect. This qualifies as a substantially disproportionate redemption and will be taxed as a capital
    gain.
    D is incorrect. This qualifies as a complete redemption and therefore will be taxed as a capital gain.
    (this multiple choice question has been scrambled)
  40. Which of the following statements is/are correct regarding a Section 303 stock redemption?

    I. A corporation can accumulate funds for a Section 303 redemption without being subject to the accumulated earnings tax.

    II. The value of the stock must be at least 55% of the adjusted gross estate to qualify for a Section 303 stock redemption.

    A) Both I and II.
    B) Only I.
    C) Neither I nor II.
    D) Only II.
    B) Only I.


    II is incorrect. The value of the stock must be at least 35% of the adjusted gross estate to qualify for a Section 303 stock redemption
    (this multiple choice question has been scrambled)
  41. Section 303 stock redemption is permitted for all of the following expenses EXCEPT:

    A) Administrative expenses.
    B) Federal estate taxes.
    C) Debts of the decedent.
    D) Funeral expenses.
    C) Debts of the decedent.

    A Section 303 redemption only applies to redemptions for federal estate taxes, state death taxes, funeral expenses, and administrative expenses.
    (this multiple choice question has been scrambled)
  42. Assume the following facts:

    • Adjusted gross estate: $800,000
    • Value of closely-held stock: 350,000
    • Administrative expenses: 45,000
    • Federal estate taxes: 80,000
    • Debts of the decedent: 70,000

    What amount of closely held corporate stock can be redeemed under Section 303 so that the redemption will be treated as a capital gain rather than a dividend?

    A) $0
    B) $195,000
    C) $150,000
    D) $125,000
    D) $125,000







    The estate qualifies for Section 303 because the value of the closely held stock exceeds 35% of the
    adjusted gross estate. The amount of the redemption eligible for Section 303 capital gain treatment is $125,000 ($45,000 admin expenses + $80,000 estate tax).
    The calculation of the amount redeemable under Sec. 303 involves two steps. First, the estate must be
    eligible for Sec. 303. The estate is eligible only if the value of the closely held stock exceeds 35% of the adjusted gross estate. In this question the estate qualifies since the value of the stock is over 42% ($300,000 divided by $700,000) of the adjusted gross estate. The second step involves determining the amount redeemable.
    Since the nephew's bequest is liable for estate expenses and death taxes: Funeral and admin expenses $ 35,000
    Federal estate taxes 70,000
    Maximum Sec. 303 redemption $105,000
    (this multiple choice question has been scrambled)

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