EA2 Study Unit 12.1-12.6 Corporations Questions PDF

EA2 Study Unit 12.1-12.6 Corporations - Questions 4)A group of six individuals organizes an LLC to conduct a software publishing business in Florida. The LLC wishes to be taxed as an S corporation. No individual is specifically authorized to make the election. What individual(s) is(are) required to...

EA2 Study Unit 12.1-12.6 Corporations - Questions 4)A group of six individuals organizes an LLC to conduct a software publishing business in Florida. The LLC wishes to be taxed as an S corporation. No individual is specifically authorized to make the election. What individual(s) is(are) required to make the election? A.Any officer. Answer (A) is incorrect.\ Any officer is not exclusively authorized to make the election. **B.Every member of the entity.** **Answer (B) is correct.\ An eligible entity may elect its classification on Form 8832. The election must be signed by every member of the entity, or any officer, manager, or member of the entity who is authorized to make the election. Since no member is authorized to make the election, every member must sign the election for it to be effective. The election must include all required information and the entity's taxpayer identification number. A copy of Form 8832 must be attached to the entity's tax return for the election year.** C.Any manager or officer. D.President. === 10)In 2023, Panda Corp. has passive losses of \$250,000 from a rental activity. Its active business income is \$150,000 and its portfolio income is \$50,000. What is Panda Corp.'s 2023 taxable income if (a) Panda is a closely held corporation, and (b) Panda is a personal service corporation? A. (a) \$200,000 (b) \$50,000 B. (a) \$50,000 loss (b) \$200,000 **C. (a) \$50,000 (b) \$200,000** **Answer (C) is correct.\ A closely held corporation can offset net active income with its passive activity loss. However, it cannot offset its portfolio income with its passive activity loss. The closely held corporation has \$50,000 of portfolio income left. The personal service corporation receives no benefit for its passive loss and has \$200,000 taxable income (\$150,000 active + \$50,000 portfolio income).** D. (a) \$50,000 (b) \$50,000 === 15)In what circumstance would income earned by a foreign company in the United States NOT be considered U.S. source income? A.Inventory manufactured and sold by a U.S. distributor to a foreign corporation shipped FOB destination. B.Inventory manufactured and sold by a U.S. distributor to a foreign corporation shipped FOB shipping point. C.Inventory purchased and resold by a U.S. distributor to a foreign corporation shipped FOB shipping point. **D.Inventory purchased and resold by a U.S. distributor to a foreign corporation shipped FOB destination.** **Answer (D) is correct.\ Gross income from the sale of inventory purchased for resale is sourced on the basis of where the sale occurs. Because the title passes in a foreign jurisdiction, the income is not U.S. source.** === 18)Which of the following statements is **false** with respect to withholding on nonresident aliens and foreign corporations? A.Winnings from wagers on blackjack, baccarat, craps, roulette, or big-6 wheel are not subject to income tax withholding or 30% withholding tax. Answer (A) is incorrect.\ They are all correct statements with respect to withholding on nonresident aliens and foreign corporations. **B.Generally, income is from United States sources if it is paid by any domestic or foreign businesses located in the United States.** **Answer (B) is correct.\ Under Reg. 1.1441-4(a), no withholding is required for income received by a foreign corporation if the income is effectively connected with the conduct of a trade or business within the U.S. Income is considered effectively connected with the conduct of a trade or business within the U.S. only if the income items satisfy an "asset use" test or if the trade or business activities were a material factor in the production of the income.** C.Income effectively connected with the conduct of a trade or business in the United States is usually not subject to withholding if certain conditions are met. D.Generally, fixed or determinable annual or periodic income from within the United States is subject to withholding unless specifically exempted under the Internal Revenue Code or a tax treaty. 6)Amanda Jones and Calvin Johnson form Quail Corporation during the year by simultaneously making the following transfers: Share- holder; Adjusted Basis of Property Transferred; Fair Market Value of Property; Percentage of Stock Received Amanda \$30,000; \$60,000; 50% Calvin \$70,000; \$60,000; 50% What is the amount of gain or loss to be reported on these transfers by Amanda and Calvin on their federal income tax returns? A.Amanda reports a \$30,000 gain, and Calvin reports a \$10,000 loss. Answer (A) is incorrect.\ A Sec. 351 transfer solely in exchange for stock does not allow the transferor to realize a gain or loss. B.Amanda reports a \$30,000 gain, and Calvin reports a \$0 loss. C.Amanda reports a \$0 gain, and Calvin reports a \$10,000 loss. **D.Amanda reports a \$0 gain, and Calvin reports a \$0 loss.** **Answer (D) is correct.\ Section 351 requires no gain or loss to be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock (including treasury stock) in the corporation and, immediately after the exchange, such person(s) control the corporation. This nonrecognition treatment is mandatory, not elective. Since Amanda and Calvin transfer property solely in exchange for stock, no gain is recognized by Amanda and no loss is recognized by Calvin.** === 3)Mr. Bass transferred a building that had an adjusted basis to him of \$300,000 and a fair market value of \$500,000, to Corporation C in exchange for 100% of C's only class of stock. The building was subject to a mortgage of \$100,000, which C assumed for bona fide business purposes. The fair market value of the stock on the date of transfer was \$400,000. What is the amount of gain to be recognized by Mr. Bass? **A.\$0** **Answer (A) is correct.\ If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. The requirements are that the transfer be by one or more persons, solely in exchange for stock, and that the transferor(s) be in control of the corporation immediately after the exchange. Section 368(c) defines control as the ownership of at least 80% of the voting and nonvoting stock. Mr. Bass meets these criteria so the transfer qualifies under Sec. 351(a). No gain or loss is recognized.** **Note that Sec. 357(a) provides that the transfer of the mortgage on the building does not prevent the exchange from qualifying under Sec. 351(a), since the purpose of the liability assumption was not tax avoidance, but had a valid business purpose, and because the amount of the mortgage did not exceed the adjusted basis of the property.** B.\$100,000 Answer (B) is incorrect.\ No gain is recognized on the assumption of the liability since the mortgage does not exceed the adjusted basis of the property transferred. C.\$300,000 D.\$200,000 === 4)In a Sec. 351 transaction, Mr. Miller transferred assets with an adjusted basis of \$76,000 and a fair market value of \$80,000 to Way View Corporation in exchange for its capital stock with a fair market value of \$72,000. What is Mr. Miller's recognized gain or loss? A.\$(4,000) Answer (A) is incorrect.\ Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock (including treasury stock) in the corporation and, immediately after the exchange, such person(s) is(are) in control of the corporation. The realized loss on this transaction is \$4,000 (\$72,000 FMV of stock received -- \$76,000 AB of property transferred). However, due to Sec. 351, this loss is not recognized. **B.\$0** **Answer (B) is correct.\ Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, such person(s) control the corporation. Thus, the correct answer is \$0.** C.\$4,000 D.\$(8,000) === 2)Mr. Jacobs transferred an office building to Booda Corporation in exchange for 100% of Booda's only class of outstanding stock and \$60,000 cash. The building had an adjusted basis of \$300,000 and a fair market value of \$500,000. The building was subject to a mortgage of \$240,000, which Booda assumed for valid business reasons. The fair market value of Booda's stock on the date of transfer was \$200,000. What is the amount of Mr. Jacobs's recognized gain? **A.\$60,000** **Answer (A) is correct.\ Section 351(a) provides for nonrecognition of gain or loss if a person transfers property to a corporation solely in exchange for stock in the corporation and if immediately after the exchange such person is in control (owns at least 80% of the stock). Since money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money received. A gain is not recognized on the assumption of liabilities because Sec. 357(c) provides that gain is reported only if the liabilities assumed by the corporation (\$240,000) exceed the adjusted basis of the property transferred (\$300,000). Mr. Jacobs's recognized gain is \$60,000, the cash received.** B.\$140,000 C.\$200,000 D.\$0 Answer (D) is incorrect.\ A gain is recognized on the transfer. === 3)Mr. Brown transferred an office building to Corporation J in exchange for 100% of Corporation J's stock and \$30,000 cash. The building had an adjusted basis of \$150,000 and a fair market value of \$250,000. The building was subject to a mortgage of \$120,000, which Corporation J assumed for valid business reasons. The fair market value of Corporation J's stock on the date of the transfer was \$100,000. What is Mr. Brown's recognized gain? A.\$100,000 B.\$70,000 C.\$0 Answer (C) is incorrect.\ A gain is recognized on the transfer. **D.\$30,000** **Answer (D) is correct.\ Section 351(a) provides for nonrecognition of gain or loss if a person transfers property to a corporation solely in exchange for stock in the corporation and if immediately after the exchange such person is in control (owns at least 80% of the stock). Since money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money received. A gain is not recognized on the assumption of liabilities because Sec. 357(c) provides that gain is reported only if the liabilities assumed by the corporation exceed the adjusted basis of the property transferred. Mr. Brown's recognized gain is \$30,000, the cash received.** === Wilson exchanged his land, which has a fair market value of \$45,000 and an adjusted basis of \$35,000, for 80% of the stock of Weston Corporation. The stock has a fair market value of \$70,000. Wilson also received land with an adjusted basis of \$15,000 to Weston and a fair market value of \$22,000. Each piece of land is for productive use at Weston. What is the amount of Wilson's recognized gain on this transaction? A.\$35,000 B.\$70,000 C.\$57,000 Answer (C) is incorrect.\ The gain does not equal the fair market value of the stock plus the fair market value of the land received less the adjusted basis of the land given (\$70,000 FMV stock + \$22,000 FMV land -- \$35,000 AB land). **D.\$0** **Answer (D) is correct.\ Since both pieces of land are property held in productive use in a trade or business, the like-kind exchange rules apply. Those rules state that neither gain nor loss is recognized when a property held for productive use in a trade or business or for investment is exchanged for like-kind property. Application of those principles would create, in essence, a transfer to a controlled corporation, coupled with a like-kind exchange of land. In this case, Wilson would recognize no gain on the combined transfer.** === 1)Mr. Smith and Mr. Jones each transfer property with a basis of \$10,000 to a corporation in exchange for stock with a fair market value of \$30,000. The total stock received by them represents 75% of each class of stock of the corporation. The other 25% of each class of stock was issued earlier to Mr. Brown, an unrelated person. The taxable consequences are A.80% of the transaction is recognized as a taxable gain. B.None because it is transfer of property for stock. Answer (B) is incorrect.\ Mr. Smith and Mr. Jones must recognize a gain of \$20,000 (\$30,000 FMV -- \$10,000 adjusted basis). C.Mr. Smith and Mr. Jones each recognize a gain of \$30,000. **D.Mr. Smith and Mr. Jones each recognize a gain of \$20,000.** **Answer (D) is correct.\ Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, such person(s) control the corporation. Mr. Smith and Mr. Jones combined do not have control over the corporation; therefore, Sec. 351 treatment does not apply. Mr. Smith and Mr. Jones must recognize a gain of \$20,000 (\$30,000 FMV -- \$10,000 adjusted basis).** === 2)Westover Health Services, Inc., a personal service corporation, has two shareholders. Westover was incorporated 17 years ago and has made irregular and infrequent distributions to its shareholders. The balance sheet of Westover Health Services, Inc., reflects unappropriated retained earnings in the amount of \$800,000 and no marketable securities. Westover has no specific, definite, and feasible plans for use of the earnings accumulation in its business. It has been determined that the amount needed to redeem a deceased shareholder's stock is \$500,000 for estate taxes and administrative expenses. What is the amount of Accumulated Earnings Tax that Westover Health Services, Inc., could be subject to for tax year ended December 31, 2023? A.\$30,000 B.\$0 **C.\$60,000** **Answer (C) is correct.\ The corporation is allowed an Accumulated Earnings Credit for the greater of \$150,000 or the reasonable needs (if there is a definite plan for its use) of the business but not both. The \$500,000 qualifies as reasonable needs. The accumulated earnings tax is \$60,000 \[(\$800,000 unappropriated retained earnings -- \$500,000 reasonable needs) × 20% accumulated earnings tax rate\].** D.\$130,000 === 4)Ms. M transferred a building to Corporation C. The building had a basis to M of \$15,000 and a fair market value of \$90,000. In addition, an outstanding mortgage of \$20,000 on the building was assumed by C upon the transfer. In return, M received 80% of C's only class of outstanding stock (fair market value of \$65,000) and a car with a fair market value of \$5,000. What is Ms. M's recognized gain on the transaction? **A.\$10,000** **Answer (A) is correct.\ Section 351(a) provides for nonrecognition of gain or loss if a person transfers property to a corporation solely in exchange for stock in the corporation and if immediately after the exchange such person is in control (owns at least 80% of the stock). If other property or money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money plus the fair market value of other property received \[Sec. 351(b)\]. Also, Sec. 357(c) provides that if the liabilities transferred or assumed (\$20,000) are greater than the basis of all the property transferred (\$15,000), the excess is treated as a gain from the sale or exchange of property. Ms. M's recognized gain is \$10,000 \[\$5,000 other property (car) + \$5,000 excess of mortgage over basis\].** B.\$5,000 C.\$0 D.\$25,000 === 5)Joyce and Edward combine their sole proprietorships by forming the Lair Corporation. Joyce transfers land and a building having a combined \$50,000 adjusted basis and a \$100,000 FMV to the corporation in exchange for 40% of the Lair Corporation stock. Edward transfers equipment with a \$60,000 adjusted basis and a \$150,000 FMV to the corporation in exchange for 60% of the Lair stock with a par value of \$10. Joyce and Edward received no other property then the Lair stock. What is Edward's recognized gain on this transaction? **A.\$0** **Answer (A) is correct.\ Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and immediately after the exchange such person(s) control the corporation. Joyce and Edward combined have control over the corporation; therefore, no gain is recognized on the contribution of property.** B.\$150,000 C.\$90,000 Answer (C) is incorrect.\ Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock (including treasury stock) in the corporation and immediately after the exchange such person(s) is(are) in control of the corporation. D.\$60,000 === 3)The Snow Corporation, a calendar-year taxpayer, estimates at the end of March 2023 that its federal income tax for 2023 will be \$800,000. It pays \$200,000 of estimated tax by April 15, 2023, and pays another \$200,000 on June 15, 2023. At the end of August 2023, a recalculation shows that its 2023 tax is expected to be \$900,000. Which of the following is true? A.Payment due September 15 -- \$200,000; payment due December 15 -- \$300,000. B.Payment due September 15 -- \$200,000; payment due December 15 -- \$200,000; payment due March 15, 2023 -- \$100,000. **C.Payment due September 15 -- \$275,000; payment due December 15 -- \$225,000.** **Answer (C) is correct.\ Section 6655(e) requires that the estimated payment in the subsequent quarter be large enough so that 100% of the shortfall is paid in. A corporate taxpayer who continues to use the annualization exception for making its estimated tax payments will, in later quarters, have paid in 100% of the tax due on the new annualized income. If this amount is paid in when income is increasing, 100% of the shortfall will be paid in as is required by Sec. 6655(e). Although Snow correctly estimated its first two tax payments, the amount of estimated tax for the year increased to \$900,000. Since Snow should have made quarterly payments of \$225,000 (\$900,000 ÷ 4), it must adjust the next quarterly payment by the amount of the shortfall. Therefore, the payment due September 15 is \$275,000 (\$225,000 quarterly payment + \$50,000 shortfall), and the payment due December 15 is \$225,000.** D.Payment due September 15 -- \$250,000; payment due December 15 -- \$250,000. Answer (D) is incorrect.\ Section 6655(e) requires that the estimated payment in the subsequent quarter be large enough so that 100% of the shortfall is paid in. A corporate taxpayer who continues to use the annualization exception for making its estimated tax payments will in later quarters have paid in 100% of the tax due on the new annualized income. If this amount is paid in when income is increasing, 100% of the shortfall will be paid in as is required by Sec. 6655(e). === 7)The accumulated earnings tax A.Applies to personal holding companies only. **B.Is 20% of accumulated taxable income.** **Answer (B) is correct.\ The accumulated earnings tax is applied to accumulated taxable income, defined in Sec. 535(a) as taxable income subject to certain limitations. The rate of this tax is 20%.** C.Applies to partnerships. D.Can be avoided by paying sufficient stock dividends. Answer (D) is incorrect.\ A corporation cannot avoid the tax through the payment of stock dividends. A plan to distribute stock dividends does not qualify as reasonable needs of the business since such dividends do not involve the use of funds. === 14)If otherwise qualified, a "large corporation" (defined as a corporation with at least \$1 million of modified taxable income in any of the last 3 years) may use all of the following methods to figure all four required installments of estimated tax EXCEPT A.The annualized income installment method. B.The 25% of the corporation's income tax for the current year method. **C.The 25% of the corporation's income tax for the preceding year method.** **Answer (C) is correct.\ Section 6655(d)(2) provides that a large corporation will not be considered to have underpaid its income tax if it pays 100% of the tax shown on the return for the tax year. A large corporation is defined by Sec. 6655(g)(2) as a corporation having \$1 million or more taxable income during any of its 3 preceding tax years. Large corporations may not use the option of paying 100% of the tax shown on the return for the preceding year.** D.The adjusted seasonal installment method. Answer (D) is incorrect.\ The adjusted seasonal installment method is allowable to compute estimated taxes. === 15)Kari Corp., a manufacturing company, was organized on January 2, 2023. Its 2023 federal taxable income was \$400,000, and its federal income tax was \$84,000. What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2023 if Kari takes only the minimum Accumulated Earnings Credit? **A.\$66,000** **Answer (A) is correct.\ The accumulated earnings tax is applied to accumulated taxable income, which is taxable income subject to certain adjustments. Federal income taxes are deducted as an adjustment to taxable income.** **Without showing a reason for the accumulation, the minimum Accumulated Earnings Credit is \$250,000 for non service corporations. The credit is a negative adjustment to taxable income in computing ATI. ATI is \$66,000 (\$400,000 taxable income -- \$84,000 federal income tax -- \$250,000 minimum Accumulated Earnings Credit).** B.\$0 Answer (B) is incorrect.\ Some of the income is subject to the accumulated earnings tax. C.\$166,000 D.\$316,000 === 18)WEB Corporation, a calendar-year corporation, estimated its income tax for the current year to be \$40,000. WEB deposited the first two estimated tax installments on April 15 and June 15 in the amount of \$10,000 each (25% of \$40,000). On July 1, WEB estimated its tax to be only \$25,000. How much estimated tax should WEB Corporation pay on September 15? A.\$10,000 **B.\$2,500** **Answer (B) is correct.\ Under Sec. 6655(d), the minimum installment is 25% of the required annual payment (the lesser of 100% of current tax or 100% of preceding year's tax). Although WEB correctly estimated its first two tax payments, the amount of estimated tax for the year decreased. Since WEB has already paid \$20,000 (\$10,000 × 2) in taxes, it owes only \$5,000 (\$25,000 new estimated tax amount -- \$20,000 tax already paid). Thus, each of the remaining two payments must be at least \$2,500 (\$5,000 amount owed ÷ 2 remaining payments).** C.\$6,250 Answer (C) is incorrect.\ The amount of taxes to be paid if an equal amount is paid each quarter is \$6,250. D.\$5,000 ===