Law question data bank

75
Olga’s proprietorship earned a net profit of $95,000 during the year and she withdrew $70,000 of this profit. Olga must report $70,000 net income from the proprietorship on her individual income tax return (Form 1040).

a. True
b. False

76. 2
Rose is a 50% partner in Wren Partnership. During the year, Wren earned net profit of $100,000 ($210,000 gross income – $110,000 operating expenses) and distributed $20,000 to each partner. Rose must report Wren Partnership profit of $20,000 on her Federal income tax return.

a. True
b. False

77. 3
Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. Robin earned net profit of $350,000 ($520,000 gross income – $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

a. True
b. False

78. 4
Donald owns a 60% interest in a partnership that earned $230,000 in the current year. He also owns 60% of the stock in a C corporation that earned $230,000 during the year. Donald received $50,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $188,000 of income on his individual income tax return for the year.

a. True
b. False

79. 5
Quail Corporation is a C corporation with net income of $300,000 during 2011. If Quail paid dividends of $50,000 to its shareholders, the corporation must pay tax on $300,000 of net income. Shareholders must report the $50,000 of dividends as income.

a. True
b. False

80. 6
Eagle Company, a partnership, had a short-term capital loss of $10,000 during the year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle’s short-term capital loss on his individual tax return.

a. True
b. False

81. 7
Katherine, the sole shareholder of Purple Corporation, a calendar year C corporation, has the corporation pay her a salary of $450,000 in the current year. The Tax Court has held that $150,000 represents unreasonable compensation. Purple Corporation’s taxable income is unaffected by the Tax Court’s determination.

a. True
b. False

82. 8
Double taxation of corporate income results because dividend distributions are included in a shareholder’s gross income but are not deductible by the corporation.

a. True
b. False

83. 9
Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Jake would prefer to have the payment treated as salary instead of dividend.

a. True
b. False

84. 10
Thrush Corporation files Form 1120, which reports taxable income of $110,000. The corporation’s tax is $26,150.

a. True
b. False

85. 11
The corporate marginal tax rates range from 10% to 39%, while the individual marginal tax rates range from 15% to 35%.

a. True
b. False

86. 12
There is no Federal income tax assessed on partnerships (including those formed as LLCs) or S corporations. Since all states follow the Federal approach as to entity taxation, state income taxation is a neutral factor in the selection of an entity form.

a. True
b. False

87. 13
Under the “check-the-box” Regulations, a single-member LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

a. True
b. False

88. 14
As a general rule, a personal service corporation (PSC) must use a calendar year as its accounting period.

a. True
b. False

89. 15
A calendar year C corporation with average annual gross receipts of $5 million or less must use the cash method of accounting.

a. True
b. False

90. 16
On December 31, 2011, Lavender, Inc., an accrual basis C corporation, accrues a $90,000 bonus to Barry, its vice president and a 70% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 15, 2012. Lavender can deduct the bonus in 2012, the year in which it is included in Barry’s gross income.

a. True
b. False

91. 17
Unlike individual taxpayers, corporate taxpayers do not receive a preferential tax rate with respect to long-term capital gains.

a. True
b. False

92. 18
Albatross, a C corporation, had $125,000 net income from operations and a $10,000 short-term capital loss in 2011. Albatross Corporation’s taxable income is $115,000.

a. True
b. False

93. 19
Owl Corporation, a C corporation, recognizes a gain on the sale of a § 1250 asset in the current year. Owl had used the straight-line method for depreciating the realty. Some of Owl’s gain on the sale of the realty will be treated as depreciation recapture (ordinary income).

a. True
b. False

94. 20
The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations.

a. True
b. False

95. 21
Peach Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive loss during the year. If Peach is a closely held C corporation that is not a PSC, it can deduct $230,000 of the passive loss in the year.

a. True
b. False

96. 22
On December 20, 2011, the directors of Quail Corporation (an accrual basis, calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on March 15, 2012, may be claimed as a deduction for tax year 2011.

a. True
b. False

97. 23
In the current year, Oriole Corporation donated a painting worth $75,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting 5 years ago for $25,000. Oriole’s charitable contribution deduction is $25,000 (ignoring the taxable income limitation).

a. True
b. False

98. 24
In the current year, Zircon Corporation donated scientific property worth $300,000 to City University (a qualified charitable organization) to be used in research. The basis of the property was $140,000, and Zircon had held it for ten months as inventory. Zircon Corporation may deduct $220,000 as a charitable contribution (ignoring the taxable income limitation).

a. True
b. False

99. 25
Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2010 of $5,000. In 2011, Heron made a further charitable contribution of $20,000. Heron’s 2011 deduction is limited to $15,000 (10% of taxable income). The current year’s contribution must be applied first against the $15,000 limitation.

a. True
b. False

100. 26
For a corporation in 2011, the domestic production activities deduction is equal to 9% of the higher of (1) qualified production activities income or (2) taxable income. However, the deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.

a. True
b. False

101. 27
Generally, corporate net operating loss can be carried back 3 years and forward 5 years to offset taxable income for those years.

a. True
b. False

102. 28
Azul Corporation, a calendar year C corporation, received a dividend of $50,000 from Naranja Corporation. Azul owns 10% of the Naranja Corporation stock. Assuming it is not subject to the taxable income limitation, Azul’s dividends received deduction is $35,000.

a. True
b. False

103. 29
The dividends received deduction may be subject to a limitation based on a percentage of taxable income computed without regard to the NOL deduction, the domestic production activities deduction, the dividends received deduction, and any capital loss carryback to the current tax year.

a. True
b. False

104. 30
No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days.

a. True
b. False

105. 31
Black Corporation, an accrual basis taxpayer, was formed and began operations on February 1, 2011. During its first year of operations (February 1 – December 31, 2011), Black incurred the following expenses: fee paid to state of incorporation of $2,000, accounting and legal services incident to organization of $9,000, and expenses related to the printing and sale of stock certificates of $10,000. Black has $11,000 of qualified organizational expenditures that it may elect to amortize.

a. True
b. False

106. 32
A corporation may elect to amortize startup expenditures over the 60-month period beginning with the month in which the corporation begins business.

a. True
b. False

107. 33
A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

a. True
b. False

108. 34
Ed, an individual, incorporates two separate businesses that he owns by establishing two new corporations. Each corporation generates taxable income of $50,000. Each corporation will have a tax liability of $7,500.

a. True
b. False

109. 35
Generally, corporations with no taxable income must file a Form 1120.

a. True
b. False

110. 36
The due date (not including extensions) for filing a 2010 Federal income tax return for a calendar year C corporation (Form 1120) is April 15, 2011.

a. True
b. False

111. 37
For purposes of the estimated tax payment rules, a “large corporation” is defined as a corporation that had an average taxable income of $1 million or more over the preceding three-year period.

a. True
b. False

112. 38
Income that is included in net income per books but not included in taxable income is an addition item on Schedule M-1.

a. True
b. False

113. 39
An expense that is deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1.

a. True
b. False

114. 40
On December 31, 2011, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer), who owns 75% of the corporation’s outstanding stock. The $50,000 bonus is paid to the president on February 1, 2012. For Flamingo’s 2011 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

a. True
b. False

115. 41
Canary Corporation, which sustained a $5,000 net capital loss during the year, will enter $5,000 as a addition item on Schedule M-1.

a. True
b. False

116. 42
Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

a. True
b. False

117. 43
A corporation with $10 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

a. True
b. False

118. 44

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

a. True
b. False