FEDERAL INCOME TAX II (ACCOUNTING 417) TERM OL2-FALL SEMESTER 2014 (SECTION 6980) MID-TERM EXAMINATION

1. Which of the following statements about a Limited Liability Company (LLC) is incorrect?

(a) A Limited Liability Company with more than one owner can elect to be classified as either a Partnership or a Corporation.

(b) A Limited Liability Company with only one owner can elect to be classified as either a Sole Proprietorship or a Corporation.

(c) If a Limited Liability Company does not make an election under the "Check The Box" regulations, multi-owner entities are classified as either Partnerships or Corporations at the sole discretion of the owners.

(d) If a Limited Liability Company does not make an election under the "Check The Box" regulations, single-person entities are classified as Sole Proprietorships.

2. On January 1 of the current year, Tanager Corporation (a calendar year taxpayer) has Accumulated Earnings And Profits (AE&P) of $190,000.For the current tax year, Tanager Corporation had a Deficit in its Current Earnings And Profits (CE&P) of ($240,000) (before any distributions). On June 30 of the current year, Tanager distributes $100,000 to Sharisa, its sole shareholder, who has a basis in her stock of $40,000. As a result of the distribution, how much of the $100,000 is a Dividend Income to Sharisa for the current year?

(a) $ 0.

(b) $70,000.

(c) $60,000.

(d) $50,000.

3. George transfers cash of $150,000 to Grouse Corporation, a newly formed corporation, for 100% of the stock in Grouse worth $80,000 and debt in the amount of $70,000, payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum. In the first year of operation, Grouse has net taxable income of $40,000. If Grouse pays George interest of $6,300 and $7,000 principal payment on the note, which of the following statements is correct?

(a) George has dividend income of $13,300.

(b) Grouse Corporation does not have a tax deduction with respect to the payment.

(c) George has dividend income of $7,000.

(d) Grouse Corporation has an interest expense deduction of $6,300.

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4. Saguaro Corporation, a cash basis and calendar year taxpayer, was formed and began operations on July 1, 2013. Saguaro incurred the following expenses during its first year of operations (July 1-December 31, 2013):

If Saguaro Corporation makes a timely election under Section 248 to amortize qualifying Organizational Expenses, how much may the corporation deduct for Organizational Expenses for the tax year 2013?

(a) $5,000.

(b) $5,100.

(c) $5,600.

(d) $5,800.

5. Tom and George form Swan Corporation with the following investments: Tom transfers machinery worth $100,000 (basis of $40,000) while George transfers land worth $90,000 (basis of $20,000) and services rendered in organizing the corporation worth $10,000. Each is issued 25 shares in Swan Corporation. Which of the following statements is correct?

(a) Tom has no recognized gain; George recognizes gain of $80,000.

(b) Neither Tom nor George recognizes gain.

(c) Swan Corporation has a basis of $90,000 in the land.

(d) George has a basis of $30,000 in the shares of Swan Corporation.

6. Kite Corporation, a calendar year taxpayer, has Taxable Income of $360,000 for 2013. Among its transactions for the year are the following:

Based on the information provide above, Kite Corporation's Earnings And Profits (E&P) for 2013 is:

(a) $358,000.

(b) $348,000.

(c) $369,000.

(d) $349,000.

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7. For purposes of the Accumulated Earnings Tax (Penalty) (Section 531), Justifiable Reasonable Business Needs does notinclude:

(a) Loans To Shareholders.

(b) Self-Insurance.

(c) Loans To Key Suppliers And Customers.

(d) Expansion Of Business.

8. Cardinal Corporation (Earnings And Profits (E&P) of $700,000) has one thousand (1,000) shares of stock outstanding. Lupita owns three hundred (300) shares of Cardinal Corporation's stock, Berta (Lupita's sister) owns five hundred (500) shares of Cardinal Corporation's stock and April (Lupita's daughter) owns two hundred (200) shares of Cardinal Corporation’s stock. Cardinal Corporation redeems two hundred (200) shares of Lupita's stock for $100,000. Lupita paid $100 a share for the stock five (5) years ago. As a result of this transaction, which of the following is correct?

(a) Lupita has a Long-Term Capital Gain of $80,000.

(b) Lupita has a Long-Term Capital Gain of $100,000.

(c) Lupita has Dividend Income of $100,000.

(d) Lupita has Dividend Income of $80,000.

9. The Gross Estate of Katheryn, decedent, includes stock in Yellow Corporation and Violet Corporation valued at $300,000 and $460,000, respectively. Katheryn's Adjusted Gross Estate is $2,000,000. She owned thirty-three percent (33%) of the Yellow Corporation's stock and twenty-one percent (21%) of the Violet Corporation’s stock. Immediate members of Katheryn's family own the remaining shares of both Yellow Corporation and Violet Corporation. Those individuals are also the sole beneficiaries of Katheryn's estate. Death Taxes And Funeral And Administration Expenses for Katheryn's estate are $300,000. Katheryn had an Adjusted Basis of $100,000 in the Yellow Corporation stock and $110,000 in the Violet Corporation stock. Yellow Corporation (Earnings And Profits (E&P) of $800,000) distributed land worth (Fair Market Value) $300,000 (Adjusted Basis of $350,000) to Katheryn's estate in redemption of all of the Yellow Corporation's stock. As a result of this transaction, which of the following is correct?

(a) The estate recognizes no Gain or Loss on the redemption.

(b) Yellow Corporation recognizes a $50,000 Loss on the distribution of the land.

(c) The estate recognizes a Gain of $200,000 on the redemption.

(d) The estate recognizes Dividend Income of $300,000 on the redemption.

10. Elk, a C corporation, has $400,000 operating income and $350,000 operating expenses during the year. In addition, Elk has a $30,000 long-term capital gain and a $52,000 short-term capital loss. Elk’s Taxable Income is:

(a) ($2,000).

(b) $28,000.

(c) $50,000.

(d) $80,000.

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11. Magenta Corporation acquired land in a Section 351 Transfer one (1) year ago. The land had an

Adjusted Basis of $450,000 and a Fair Market Value of $520,000 on the date of the transfer.

Magenta Corporation has two (2) equal shareholders, Mark and Megan, who are father and

daughter. Magenta Corporation adopts a plan of complete liquidation in the current year. On

this date the land has decreased in Fair Market Value to $390,000. Magenta Corporation sells

the land for $390,000 and distributes the proceeds pro rata to Mark and Megan. As a result of

the sale of the land what amount of Loss may Magenta Corporation recognize on the sale of the

land?

(a) $ 0.

(b) $ 60,000.

(c) $ 70,000.

(d) $130,000.

12. When Pheasant Corporation was formed under Section 351, Kristen transferred property (basis of $26,000 and fair market value of $22,500) for Section 1244 stock. Kristen’s basis in the Pheasant stock was $26,000. Three (3) years later, Pheasant Corporation declared bankruptcy and its stock becomes worthless. Kristen, who is single, owned the stock as an investment. As a result, Kristen’s loss is a:

(a) $26,000 Capital Loss (limited to $3,000 deduction per year).

(b) $22,500 Ordinary Loss and $3,500 Capital Loss (limited to $3,000 deduction per year).

(c) $3,500 Ordinary Loss and $22,500 Capital Loss (limited to $3,000 deduction per year).

(d) $26,000 Ordinary Loss.

13. On April 12, 2012, Crow Corporation acquired land in a transaction that qualified under Section 351 (ie. Section 351 Transfer). The land had an Adjusted Basis of $200,000 to the contributing shareholder and a Fair Market Value of $170,000. Crow Corporation adopted a plan of complete liquidation on October 3, 2013. On December 4, 2013, Crow Corporation distributes the land to Ali, a shareholder who owns twenty percent (20%) of the stock of Crow Corporation. The Fair Market Value of the land has declined to $130,000 on the date of the distribution to Ali. There was no business purpose for Crow Corporation acquiring the land on April 12, 2012. As a result of the distribution what amount of Loss may Crow Corporation recognize on the distribution of the land?

(a) $ 0.

(b) $ 70,000.

(c) $ 40,000.

(d) $130,000.

14. The Taxable Income for Violet Corporation for the year of 2013 is $32,000. What is the Tax Liability for Violet Corporation for the year of 2013?

(a) $ 0.

(b) $4,800.

(c) $5,200.

(d) $7,000.

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15. An Audit of a taxpayer's Income Tax Return takes place at the place of business (corporate office) of the taxpayer is known as a(n):

(a) Office Audit.

(b) Field Audit.

(c) Business Audit.

(d) Compliance Audit.

16. Tara incorporates her sole proprietorship transferring it to newly formed Black Corporation. The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000. Also transferred was $10,000 in liabilities, $1,000 of which was personal (nonbusiness) and the balance of $9,000 being business related. In return for these transfers, Tara receives all of the stock in Black Corporation. Which of the following statements is correct?

(a) Black Corporation has a basis of $241,000 in the property.

(b) Black Corporation has a basis of $240,000 in the property.

(c) Tara’s basis in the Black Corporation stock is $241,000.

(d) Tara’s basis in the Black Corporation stock is $240,000.

17. Veronica and Tracy, unrelated individuals, own all the stock in Beige Corporation. Each has a basis of $20,000 in her twenty (20) shares. Beige Corporation has Accumulated Earnings And Profits (E&P) of $2,000,000. Veronica wishes to retire in the current year and wants to sell her stock for $500,000, it's Fair Market Value. Tracy would like to purchase Veronica's shares and, thus, become the sole shareholder in Beige Corporation. However, because Tracy is short of funds, Beige Corporation redeems all of Veronica's shares for $500,000. As a result of this transaction, which of the following is correct?

(a) Tracy will have Dividend Income of $500,000 on the transaction.

(b) Veronica will have a Capital Gain of $480,000.

(c) Veronica will have taxable Dividend Income of $500,000.

(d) Beige Corporation will not reduce its Earnings And Profits (E&P) as a result of the redemption.

18. Which of the following is a not correct regarding the tax consequences of a Section 306 Preferred Stock Bailout sale transaction?

(a) The shareholder generally recognizes Capital Gain equal to the Fair Market Value of the Preferred Stock on the date of the Stock Dividend.

(b) No Loss is recognized on the sale.

(c) Any Ordinary Income recognized by the shareholder does not qualify as Dividend Income to the selling shareholder.

(d) The sale does not affect the issuing corporation's Earnings And Profits (E&P).

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19. Crimson Corporation has a Deficit in Accumulated Earnings And Profits (AE&P) of ($430,000). For the year of 2013, Crimson Corporation has Current Earnings And Profits (CE&P) of $370,000. On July 1, 2013, Crimson Corporation distributes $390,000 to its sole shareholder, Anita. Anita has a basis of $85,000 in her stock in Crimson Corporation at the time of the distribution. As a result of the distribution, which of the following is correct?

(a) Anita has Dividend Income of $390,000.

(b) Anita has Dividend Income of $85,000 and reduces her stock basis to zero ($-0-).

(c) Anita has Dividend Income of $370,000 and reduces her stock basis to $65,000.

(d) Anita has no Dividend Income, reduces her stock basis to zero ($-0-) and has a Capital Gain of $305,000.

20. Orange Corporation owns stock in White Corporation and Taxable Income Before Dividends Received Deduction of $800,000 for the year. White Corporation pays Orange a dividend of $300,000. What amount of Dividends Received Deduction may Orange claim if it owns 18% of White stock?

(a) $ 0.

(b) $210,000.

(c) $240,000.

(d) $300,000.

21. Chev Corporation, a calendar year corporation, has Alternative Minimum Taxable Income

(Line 8) (before the Alternative Minimum Tax Exemption (Line 9)) of $1,280,000 for the year of 2013. The Chev Corporation is not a small corporation. If the Regular Corporate Tax (Line 15) is $209,000, Chev Corporation's Alternative Minimum Tax (Line 16) for 2013 is:

(a) $ 47,000.

(b) $ 209,000.

(c) $ 256,000.

(d) $1,280,000.

22. Canary Corporation has one thousand (1,000) shares of stock outstanding. Canary Corporation redeems in a qualifying Stock Redemption three hundred (300) shares of its stock for $350,000 at a time when it has paid-in capital of $100,000 and Earnings And Profits (E&P) of $1,000,000. As a result of this transaction, Canary Corporation reduces its Earnings And Profits (E&P) by:

(a) $350,000.

(b) $300,000.

(c) $ 30,000.

(d) $ 0.

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23. Tim, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Wren Corporation.

Which of the following statements is correct?

(a) Wren Corporation’s basis in the building is $110,000.

(b) Tim has no recognized gain.

(c) Tim has a recognized gain of $25,000.

(d) Tim has a recognized gain of $5,000.

24. Which of the following sources has the lowest tax authority?

(a) Final Treasury Regulation.

(b) Temporary Treasury Regulation.

(c) Internal Revenue Code.

(d) Proposed Treasury Regulation.

25. As of January 1 of the current year, Cassowary Corporation has a Deficit in Accumulated Earnings And Profits (AE&P) of ($100,000). For the current tax year, Current Earnings And Profits (CE&P)for Cassowary Corporation is $240,000 (prior to any distributions). On July 1 of the current year, Cassowary Corporation distributes $275,000 to its sole shareholder. The amount of the distribution that is Dividend Income to the sole shareholder for the current year is:

(a) $ 20,000.

(b) $140,000.

(c) $240,000.

(d) $275,000.

26. Starling Corporation distributes property to its sole shareholder, Zoe. The property has a Fair Market Value of $350,000, an Adjusted Basis of $205,000 and is subject to a liability of $220,000. Current Earnings And Profits (CE&P) is $500,000. As a result of the distribution, which of the following is correct?

(a) Starling has a Gain of $15,000 and Zoe has Dividend Income of $350,000.

(b) Starling has a Gain of $145,000 and Zoe's basis in the distributed property is $130,000.

(c) Starling has a Gain of $130,000 and Zoe’s basis in the distributed property is $350,000.

(d) Starling has a Gain of $145,000 and Zoe has Dividend Income of $130,000.

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27. In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land (fair market value of $400,000) and cash of $100,000 to the corporation. Several months after the donation, Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land. Which of the following statements is correct?

(a) Yellow recognizes income of $100,000 as to the donation.

(b) Yellow has a zero basis in the land and a basis of $450,000 in the plant.

(c) Yellow recognizes income of $500,000 as to the donation.

(d) Yellow has a zero basis in the land and a basis of $350,000 in the plant.

28. Pursuant to a Complete Liquidation, Oriole Corporation distributes to its shareholders land with an Adjusted Basis of $400,000 and a Fair Market Value of $550,000. The land is subject to a liability of $620,000. As a result of this transaction, what is Oriole Corporation's Recognized Gain or Recognized Loss on the distribution?

(a) $70,000 Loss.

(b) $70,000 Gain.

(c) $150,000 Gain.

(d) $220,000 Gain.

29. Federal tax legislation generally originates in what body?

(a) Internal Revenue Service.

(b) Senate Finance Committee.

(c) House Ways and Means Committee.

(d) House Taxation Committee.

30. Rhino, Inc., a calendar year C corporation, had the following income and expenses in 2013:

How much is Rhino’s Charitable Contribution Deduction for 2013?

(a) $17,895.

(b) $18,300.

(c) $18,945.

(d) $19,350.