ch13

ch13 Student:

1. Maria defers $100 of gain realized in a section 351 transaction. The stock she receives in the exchange has a fair market value of $500. Maria's tax basis in the stock will be $400. True False

Control as it relates to a section 351 transaction is strictly defined to be 80 percent or more of the voting power of the stock of the corporation to which property is transferred. True False

The definition of property as it relates to a §351 transaction includes money.

True False

To meet the control test under section 351, a taxpayer transferring property to a corporation must

by himself own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer even if there are other transferors of property. True False

Gain and loss realized in a section 351 transaction will be recognized if the taxpayer receives boot in the exchange. True False

A taxpayer must receive voting common stock to be eligible for deferral in a section 351 exchange.

True False

A taxpayer always will have a tax basis in boot received in a section 351 transaction equal to its fair market value. True False

M Corporation assumes a $200 liability attached to property transferred to it by Jane in a section 351 transaction. The assumed liability will, as a general rule, be treated as boot received by Jane. True False

Han transferred land he held as an investment to his corporation in a section 351 transaction. Han had held the land for two years prior to the transfer. Han's holding period in the stock he received in the exchange includes the period for which he held the land before transferring it to the corporation. True False

In general, a corporation can choose to use either the accrual or cash method of accounting no matter how large the corporation. True False

Corporations calculate adjusted gross income (AGI) in the same way as individuals.

True False

Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues. True False

Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence. True False

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14. Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes. True False

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income. True False

Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference. True False

Federal income tax expense reported on a corporation's books generates a temporary book-tax difference. True False

For a corporation, purchased goodwill generally leads to temporary book-tax differences.

True False

In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. It has a favorable temporary book-tax difference for that year. True False

For incentive stock options, the value of the options that is expensed as compensation in a given year always creates a permanent, unfavorable book-tax difference. True False

For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised. True False

A nonqualified stock option will create a permanent book-tax difference in the year it is exercised if the bargain element is different from the estimated value of the option for financial accounting purposes when it was issued. True False

In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.

True False

A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years. True False

A corporation may carry a net capital loss back two years and forward 20 years.

True False

A corporation may carry a net capital loss back three years and forward five years.

True False

Corporations can carry net operating losses back two years and forward 20 years.

True False

Bingo Corporation incurred a net operating loss in 2012. If it carries the loss back, it must first carry the loss back to offset its 2011 taxable income and then it carries any remaining loss back to offset its 2010 taxable income. True False

Net operating losses generally create permanent book-tax differences.

True False

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30. Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation's net operating loss for the year. True False

Accrual-method corporations are not allowed to deduct charitable contributions unless they actually make payment to the charity by year end. True False

GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non- profit organization, in November of 2012. GenerUs made payment to FoodBank on February 2, 2013. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2012 tax return. True False

NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while NOL and capital loss carrybacks are not. True False

Corporations may carry excess charitable contributions forward five years, but they may not carry them back. True False

A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover. True False

Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions). True False

The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation. True False

Corporations compute their dividends received deduction by multiplying the dividend amount by 10 percent, 50 percent, or 100 percent depending on their ownership in the distributing corporation's stock. True False

The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero. True False

The dividends received deduction is subject to a limitation based on income.

True False

Taxable income of the most profitable corporations is subject to a flat 35% tax rate.

True False

Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income. True False

Three brothers each own 20 percent of the stock in three corporations. Because no single brother owns more than 50 percent of a corporation, the tax law would not treat the corporations as a controlled group. True False

The corporate tax form is Form 1065.

True False

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45. Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability). True False

Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent. True False

By default, an affiliated group must file a consolidated tax return.

True False

The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes. True False

Calendar-year corporations that request an extension for filing their tax returns will have a tax return due date of September 15. True False

Volos Company (a calendar-year corporation) began operations in March of 2010 and was not profitable through December of 2011. Volos has been profitable for the first quarter of 2012 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2012 because it had no tax liability for the 2011 tax year and has been in business for at least 12 months. True False

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments. True False

Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year. True False

For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of

$5,000,000 in the three years prior to the current year. True False

Small corporations (in terms of average annual gross receipts) are exempt from the alternative minimum tax. True False

Urban Corporation receives tax-exempt income from Denver municipal bonds. All the proceeds from the bonds were used to fund public projects. In computing its AMT base, Urban must add back the interest income from its municipal bonds to taxable income. True False

Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

True False

The tax rate for the corporate alternative minimum tax is a flat 26%.

True False

The adjusted current earnings (ACE) adjustment is 75% of the difference between a corporation's alternative minimum taxable income before the ACE adjustment and its ACE. True False

Corporations are allowed to deduct at least some AMT exemption regardless of profitability.

True False

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60. A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out. True False

Minimum tax credits generated by the AMT can be carried forward indefinitely.

True False

A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its tentative minimum tax when its regular tax exceeds its tentative minimum tax. True False

The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular tax. True False

Which of the following requirements do not have to be met in a section 351 transaction?

A.Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred.

B In the aggregate, the transferors of property to the corporation must collectively control the corporation . immediately after the transfers. C. Only property transferred to a corporation is eligible for deferral. D. All transfers of property to a corporation must be made simultaneously to qualify for deferral.

Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is the corporation's tax basis in the property received in the exchange? A. $150 B. $200 C. $250 D. $300

Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Antoine's tax basis in the stock received in the exchange? A. $600 B. $550 C. $500 D. $450

Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange? A. $800 B. $600 C. $550 D. $450

Roy transfers property with a tax basis of $800 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $400 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Roy's tax basis in the stock received in the exchange? A. $800 B. $750 C. $700 D. $500

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69. Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil's tax basis in the stock received in the exchange? A. $6,000 B. $5,000 C. $4,000 D. $3,000

Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation

in exchange for stock with a fair market value of $2,000 and $500 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange? A. $5,000 B. $4,000 C. $3,000 D. $2,000

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle's tax basis in the stock received in the exchange? A. $900 B. $850 C. $750 D. $700

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange? A. $900 B. $850 C. $800 D. $750

Which of the following statements best describes the concept of control as it applies to a section 351 transaction? A. Control is defined as the ownership of 80 percent or more of a corporation's voting stock. B. Control is defined as the ownership of 80 percent or more of the fair market value of a corporation's

stock. C Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent . or more of the fair market value of a corporation's stock. DControl is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent . or more of the total number of shares of each class of nonvoting stock.

Which of the following class of stock is not allowed to be used in a section 351 transaction?

A. Voting common stock. B. Voting preferred stock. C. Nonvoting preferred stock. D. All of the above classes of stock can be used in a section 351 transaction.

Which of the following statements best describes the impact of receiving boot in a section 351 transaction? A. Boot received has no impact on the recognition of gain or loss realized in a section 351 transaction. B. Boot received causes gain realized to be recognized, but not loss realized. C. Boot received causes loss realized to be recognized, but not gain realized. D. Boot received causes gain and loss realized to be recognized.

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76. Sami transferred property with a fair market value of $600 and a tax basis of $300 to a corporation in exchange for stock with a fair market value of $600. In addition, Sami received stock with a fair market value of $50 in exchange for services she provided to the corporation in the incorporation process. Which of the following statements best describes the tax result to Sami as a result of the exchanges? ASami will recognize $50 of compensation income, but she can count the shares of stock she receives in . exchange for services in determining if the control test is met under section 351. BSami will recognize $50 of compensation income, but she cannot count the shares of stock she receives . in exchange for services in determining if the control test is met under section 351. CSami will not recognize $50 of compensation income, but she can count the shares of stock she receives . in exchange for services in determining if the control test is met under section 351. DSami will not recognize $50 of compensation income, and she cannot count the shares of stock she . receives in exchange for services in determining if the control test is met under section 351.

Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy's tax basis in the stock received in the exchange? A. $900 B. $750 C. $650 D. $450

Which of the following statements best describes the tax results to a shareholder in a section 351 transaction when liabilities on property transferred to the corporation are assumed by the corporation? A. Liabilities assumed by a corporation on a section 351 transfer are always treated as boot. B. Liabilities assumed by a corporation on a section 351 transfer are never treated as boot. C Liabilities assumed by a corporation on a section 351 transfer are treated as boot if the total liabilities . assumed exceed the total basis of the assets transferred. DLiabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business . purpose for the assumption of the liabilities by the corporation.

Which of the following statements best describes the "built-in loss" rules that apply to property transferred to a corporation under section 351? AIf the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the . corporation will always take a tax basis in the property equal to the property's fair market value. BIf the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the . corporation will always take a tax basis in the property equal to the property's tax basis in the hands of

the shareholder. CIf the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate . fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property.

DIf the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate . fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed

the aggregate tax basis of the property.

Which of the following statements best describes the tax consequences that arise from a contribution of capital to a corporation by an existing shareholder? A The shareholder recognizes gain and loss on the transfer and the corporation's basis in the property . transferred equals its fair market value. BThe shareholder does not recognize gain and loss on the transfer and the corporation's basis in the . property transferred equals the shareholder's basis in the property transferred. CThe shareholder recognizes gain and loss on the transfer and the corporation's basis in the property . transferred equals the shareholder's basis in the property transferred. D The shareholder does not recognize gain and loss on the transfer and the corporation's basis in the . property transferred equals zero.

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81. Which of the following is not calculated in the corporate income tax formula? A. Gross income B. Adjusted gross income C. Taxable income D. Regular tax liability

WFO Corporation has gross receipts according to the following schedule: 82.

If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method? A. Year 3. B. Year 4. C. Year 5. D. Year 6. E. None of these.

Which of the following does NOT create a permanent book-tax difference?

A. Organizational and start-up expenses B. Key employee death benefit income C. Fines and penalties expenses D. Municipal bond interest income

Which of the following does NOT create a temporary book-tax difference?

A. Deferred compensation B. Bad-debt expense C. Depreciation expense D. Domestic production activities deduction

Which of the following statements regarding book-tax differences is true?

A. Corporations are not required to report book-tax differences on their income tax returns. B Corporations will eventually recognize the same amount of income for book and tax purposes for . income-related temporary book-tax differences. C. Income excludable for tax purposes usually creates a temporary book-tax difference. D. None of these is true.

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons? A. Temporary book-tax differences will reverse in future years whereas permanent differences will not. B. Certain corporations are required to disclose book-tax differences as permanent or temporary on their

tax returns. C. Both A and B. D. Neither A nor B.

TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees. What is the nature of the book-tax difference created by this expense? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable

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88. iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable

AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost-recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable

Over what time period do corporations amortize purchased goodwill for tax purposes?

A. 180 months B. 150 months C. 60 months D. None of these

Which of the following statements regarding book-tax differences associated with purchased goodwill is

false?

A. It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes.

BIn a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of . the goodwill for that year), the book-tax difference will be unfavorable. C. Temporary book-tax differences associated with goodwill are always favorable. D If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is . equal to the amount of impairment recognized.

Which of the following describes the correct treatment of incentive stock options (ISOs)?

A. Financial accounting—no expense; tax—no deduction B. Financial accounting—no expense; tax—deduct bargain element at exercise C. Financial—expense value over vesting period; tax—no deduction D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)? A. Financial—no expense; tax—no deduction B. Financial—no expense; tax—deduct bargain element at exercise C. Financial—expense value over vesting period; tax—no deduction D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

Which of the following statements regarding nonqualified stock options (NQOs) is false?

A. Book-tax differences associated with NQOs may be either permanent or temporary. BIf the initial estimated value of the options that vest is greater than the bargain element of options . exercised that year, the book-tax difference for that year is unfavorable. CIf the initial estimated value of the options that vest is greater than the bargain element of options . exercised that year, the book-tax difference for that year is entirely temporary. D. None of the above (all of the above are true).

Which of the following statements regarding incentive stock options (ISOs) is false?

A. ISOs that vest create solely permanent book-tax differences. B. For ISOs, book-tax differences are always unfavorable. C. The value expensed for book purposes in a given year is the value of the options that vest. D. Book-tax differences associated with ISOs may be either permanent or temporary.

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96. Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest entirely in 2013, the year after issue. The options were all exercised in 2013 with a bargain element on each option of $3. What is the 2013 book-tax difference associated with the stock options? A. $40,000 unfavorable B. $40,000 favorable C. $20,000 unfavorable D. $20,000 favorable E. None of these

In January 2013, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In the same year, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2013, what is the nature of the book-tax difference due to the options exercised? A. Favorable and temporary. B. Favorable and permanent. C. Unfavorable and temporary. D. Unfavorable and permanent. E. Not enough information to determine.

Which of the following statements regarding capital gains and losses is false?

A. In terms of tax treatment, corporations generally prefer capital gains to ordinary income. B. Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a

given year. C. C corporations can carry back net capital losses three years and they can carry them forward for five

years. D. Corporations must apply capital loss carrybacks and carryovers in a particular order.

For corporations, which of the following regarding net capital losses is true?

A. A corporation that experiences a net capital loss has a favorable book-tax difference in the year of the loss.

B A corporation that experiences a net capital loss in year 4 first carries the loss back to year 3, then year . 2, and then year 1 before carrying it forward. C. Net capital loss carrybacks are deductible in determining a corporation's net operating loss. D. Net capital loss carrybacks and carryovers create temporary book-tax differences if they are used

before they expire.

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100.Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover? A. $11,000 unfavorable B. $11,000 favorable C. $16,000 unfavorable D. $16,000 favorable

101.BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable

102.Which of the following is allowable as a deduction in calculating a corporation's net operating loss?

A. Charitable contribution deduction B. Domestic production activities deduction C. Net capital loss carryback D. Net operating losses from other years

103.Which of the following statements regarding net operating losses is true? A. Corporations can carry net operating losses back two years and forward up to 15 years. B. A corporation may elect to forgo carrying a net operating loss back and instead carry it over to future

years. C When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax . difference in the amount of the applied carryover. D. Marginal tax rates are irrelevant in determining the tax benefit of applying a net operating loss

carryback or carryover. E. None of these is a true statement.

104.Which of the following statements regarding charitable contributions is false?

A. Only contributions made to qualified charitable organizations are deductible. B.Charitable contribution deductions are subject to a limitation based on the corporation's taxable income

(before certain deductions). C. Corporations can qualify to deduct a contribution before actually paying the contribution to the charity. D. The amount deductible for non-cash contributions is always the adjusted basis of the property donated.

105.Which of the following is unnecessary to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity? A. Approval of the payment from the board of directors. B. Approval from the IRS prior to making the contribution. C. Payment made within two and one-half months of the tax year end. D. All of these are necessary.

106.Which of the following is deductible in calculating the charitable contribution limit modified taxable income? A. Net capital loss carrybacks B. NOL carrybacks C. NOL carryovers D. Charitable contributions

107.Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of

$72,000. Its charitable contributions for the year were $7,500. What is Remsco's current-year charitable contribution deduction and contribution carryover? A. $6,000 current-year deduction; $1,500 carryover B. $7,500 current-year deduction; $0 carryover C. $1,200 current-year deduction; $6,300 carryover D. $7,200 current-year deduction; $300 carryover

108.If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what kind of book-tax difference is created for that year? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable

109.Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true? A. Corporations may not carry over or carry back excess charitable contributions. B. Corporations can carry excess charitable contributions over to a future year or back to a prior year. C. Corporations can carry excess charitable contributions over to a future year but not back to a prior

year. D. Corporations can carry excess charitable contributions back to a prior year but not over to a future

year.

110.Which of the following statements regarding dividends and/or the dividends received deduction (DRD) is true? A. Dividends are taxed at preferential rates for corporations as well as for individuals. B. The DRD can increase the net operating loss of a corporation. CCorporations are allowed to deduct from a dividend received the product of the dividend and the . percentage of the receiving corporation's ownership in the distributing corporation's stock. D. The DRD allows corporations to deduct the amount of dividends that they distribute.

111.Which of the following is deductible in calculating DRD modified taxable income?

A. Charitable contribution deduction B. NOL carrybacks C. NOL carryovers D. Dividends received deduction

112.Jazz Corporation owns 50% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income before the dividend was $100,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A. $0 B. $7,000 C. $8,000 D. $10,000

113.Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A. $0. B. $5,600. C. $7,000. D. $8,000. E. None of these.

114.Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($6,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A. $0. B. $2,800. C. $4,200. D. $7,000. E. None of these.

115.Which of the following is not a type of controlled group as defined in the Internal Revenue Code?

A. Parent-subsidiary. B. Brother-sister. C. Combined. D. All of these are types of controlled groups.

116.TireShop, Inc. owns 85 percent of Rubber Supply Co.'s voting stock throughout the tax year. TireShop and Rubber Supply would be considered as what kind of controlled group? A. Parent-subsidiary B. Brother-sister C. Combined D. None of these

117.Together, Kurt and Esmeralda own 60 percent of three corporations: RAZ, DVA, and TRE. The three corporations would be considered as what kind of controlled group for tax purposes? A. Parent-subsidiary. B. Brother-sister. C. Combined. D. The three corporations would not be considered to be a controlled group for tax purposes.

118.Which of the following statements regarding controlled groups is false? A The purpose of the controlled group rules is to essentially treat the group as though it were one entity . for purposes of determining certain tax benefits. BHaving several entities treated as a controlled group is advantageous for tax purposes because each . corporation in the group is allowed to use the 15% tax bracket in the corporate tax rate schedule in

computing its regular income tax liability. C Lauren owns 100% of Corporation A stock and 100% of Corporation B stock. Corporation A and . Corporation B form a controlled group. D. Corporation A owns 100% of Corporation B. Corporation A and Corporation B form a controlled

group.

119.Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?

A In general, smaller corporations are required to complete Schedule M-1 while larger corporations are . required to complete Schedule M-3. B. Schedule M-3 lists more specific book-tax differences than M-1. C. Both Schedule M-1 and M-3 reconcile to a corporation's bottom line taxable income. D. Schedule M-1 does not distinguish between temporary and permanent book-tax differences while

Schedule M-3 does.

120.Which of the following statements is false regarding consolidated tax returns?

A. An affiliated group can file a consolidated tax return only if it elects to do so. B. To file a consolidated tax return, one corporation must own at least 50% of the stock of another

corporation. C For a group of corporations filing a consolidated tax return, an advantage is that losses of one group . member may offset gains of another group member. DFor a group of corporations filing a consolidated tax return, losses from certain intercompany . transactions are deferred until realized through a transaction outside of the group.

121.What is the unextended due date of the tax return of a calendar-year corporation?

A. February 15. B. March 15. C. April 15. D. September 15.

122.Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations? A. 100 percent of the prior year's tax liability (with a few exceptions) B. 100 percent of the current year's tax liability C. 100 percent of the estimated current year tax liability using the annualized income method D. All of these are acceptable methods of determining the required annual payment of federal income tax

for corporations

123.Which of the following statements is false regarding corporate estimated tax payments?

A.The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the

corporation's tax year. B Corporations must pay estimated taxes only if they have a federal income tax liability greater than . $10,000 (including the alternative minimum tax). C Even though a corporation extends its tax return it still must pay its tax liability for the year by two and . one half months after year end. DCorporations using the annualized income method for determining estimated tax payments project their . tax liability for the year based on income from the first, second, and third quarters.

124.Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters). What is Omnidata's annual estimated taxable income as of the end of the third quarter? A. $300,000 B. $320,000 C. $400,000 D. $480,000

125.Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current year. It would like to use its prior year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true? A Rapidpro may use the prior year tax liability to determine its first and second quarter estimated tax . payments only since it is a large corporation. BTo avoid penalty, the second quarter estimated payment must be large enough to cover 50 percent of its . estimated annual tax liability annualized from its first quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment).

CTo avoid penalty, the third quarter estimated payment must be large enough to cover 50 percent of its . estimated annual tax liability annualized from its third quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment).

D. None of these is true.

126.Which of the following statements regarding the alternative minimum tax is false?

A.Corporations compute the AMT by multiplying their AMT base by 35 percent and subtracting their regular tax liability.

B. Small corporations are exempt from the AMT. C. All first-year corporations are exempt from the AMT. D. None of these is false (choose if you believe all of these are true).

127.Which of the following is not an AMT adjustment?

A. Adjustment for depreciation B. Adjustment of gain or loss on sale of depreciable assets C. Adjustment for adjusted current earnings (ACE) D. Adjustment for domestic production activities deduction

128.In the current year, FurnitureKing Corporation recognized $32,000 of income from an installment sale it made in a previous tax year. If installment sales are the only difference between ACE and alternative minimum taxable income (before the ACE adjustment), what is the amount and nature of the ACE adjustment for the current tax year? A. $24,000 favorable B. $24,000 unfavorable C. $32,000 favorable D. $32,000 unfavorable

129.XPO Corporation has a minimum tax credit of $51,000 from 2011. If its 2012 tentative minimum tax is

$211,000 and its regular tax liability is $250,000, what is its minimum tax credit carryover to 2013? A. $51,000 B. $39,000 C. $12,000 D. $0

130.Flywest Airlines, Inc. has regular taxable income of $190 million. It also has $10 million of AMT preference items, a $5 million unfavorable depreciation adjustment, and a $2 million favorable ACE adjustment. What is Flywest's alternative minimum tax income (AMTI)? A. $177 million B. $183 million C. $197 million D. $203 million

131.Z poration has AMTI of $250,000, which exceeds the AMT exemption phase-out threshold by $100,000. What is Z's tentative minimum tax? A. $47,000 B. $45,000 C. $40,000 D. $30,000

132.Which of the following statements regarding AMT is true?

A. Only very profitable companies (AMTI greater than $1 million) have their AMT exemption phased out.

B. The AMT exemption is phased out dollar for dollar as AMTI increases. C. Minimum tax credits are generated whenever regular tax liability exceeds tentative minimum tax. D. Minimum tax credits can be carried forward indefinitely.

133.Assume a corporation is not required to pay AMT in the current year but will pay AMT next year. Also assume the corporation's regular marginal tax rate is 35 percent. Which tax planning strategy would minimize its after-tax cost of a charitable contribution it is considering paying to a qualified charity? A. Pay the contribution this year. B. Wait until next year to pay the contribution. C. The after-tax cost of the contribution will be the same no matter which year it makes the contribution. D. None of these.

Keegan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Keegan.

134.What amount of gain or loss does Keegan realize on the transfer of the property to his corporation?

135.Assuming the gain or loss realized in the previous problem is deferred under §351, what is Keegan's basis in the stock he receives in his corporation?

Francine incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

The corporation also assumed a mortgage of $60,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $150,000.

136.What amount of gain or loss does Francine realize on the transfer of the property to her corporation

137.What amount of gain or loss does Francine recognize on the transfer of the property to her corporation?

138.What is Francine's basis in the stock she receives in her corporation?

Zhao incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

The corporation also assumed a mortgage of $50,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $330,000. The transaction met the requirements to be tax-deferred under §351.

139.What amount of gain or loss does Zhao realize on the transfer of the property to her corporation?

140.What amount of gain or loss does Zhao recognize on the transfer of the property to her corporation?

141.What is the corporation's tax basis in each of the assets received in the exchange?

Phillip incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

The fair market value of the corporation's stock received in the exchange was $400,000. The transaction met the requirements to be tax-deferred under §351.

142.What amount of net gain or loss does Phillip realize on the transfer of the property to his corporation?

143.What amount of gain or loss does Phillip recognize on the transfer of the property to his corporation?

Ken and Jim agree to go into business together selling old comic books and records. According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation. Ken's tax basis in the inventory is $120,000. Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $50,000.

Please answer the following question about the tax consequences of the transaction to Ken.

144.What amount of gain or loss does Ken realize on the formation of the corporation?

145.What amount of gain or loss, if any, does he recognize?

146.What is Ken's tax basis in the stock he receives in return for his contribution of property to the corporation?

Please answer the following question about the tax consequences of the transaction to Jim.

147.What amount of income, gain or loss does Jim realize on the formation of the corporation?

148.What amount of gain or loss, if any, does he recognize?

149.What is Jim's tax basis in the stock he receives in return for his contribution of services to the corporation

Don and Marie formed Paper Lilies Corporation on January 2. Don contributed cash of $400,000 in return for 50 percent of the corporation's stock. Marie contributed a building and land with the following fair market values and tax bases in return for 50 percent of the corporation's stock.

To equalize the exchange, Paper Lilies Corporation paid Marie $50,000 in addition to her stock.

150.What amount of gain or loss does Marie realize on the formation of the corporation?

151.What amount of gain or loss, if any, does she recognize?

152.What is Marie's tax basis in the stock she receives in return for her contribution of property to the corporation?

153.What tax basis does Paper Lilies Corporation take in the land and building received from Marie?

Harry and Sally formed Empire Corporation on January 2. Harry contributed cash of $500,000 in return for 50 percent of the corporation's stock. Sally contributed a building and land with the following fair market values and tax bases in return for 50 percent of the corporation's stock.

To equalize the exchange, Empire Corporation paid Sally $100,000 in addition to her stock.

154.What amount of gain or loss does Sally realize on the formation of the corporation?

155.What amount of gain or loss, if any, does she recognize?

156.What is Sally's tax basis in the stock she receives in return for her contribution of property to the corporation?

157.What tax basis does Empire Corporation take in the land and building received from Sally?

158.Boston, Inc. made a capital contribution of investment property to its 100 percent-owned subsidiary, Hartford Company. The investment property had a fair market value of $1,000,000 and a tax basis to Boston of $250,000. What are the tax consequences to Boston, Inc. on the contribution of the investment property to Hartford Company and what is the tax basis of the investment property to Hartford Company after the contribution to capital?

159.The City of Boston made a capital contribution of land to Fenway Company as an inducement to the company to build a manufacturing plant in the city. What is the tax basis of the land to Fenway Company?

160.In 2012, AutoUSA Inc. received $4,600,000 of book income, including $20,000 of interest income from tax-exempt municipal bonds. AutoUSA reported $3,600,000 of regular business expenses. If it made $350,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return? Assume AutoUSA pays taxes at a flat 34 percent rate and disregard the alternative minimum tax.

161.For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in 2012. It also expensed $12,000 of radio station filing fines paid to the FCC the same year. What is the total book- tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?

162.In 2012, US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of meals and entertainment expenditures. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the book-tax difference is temporary and what amount is permanent?

163.In 2012, Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold equipment for $500,000. The book adjusted basis of the equipment sold was $350,000, while the adjusted basis for tax purposes was $210,000. What is the total book-tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book-tax difference is permanent and what amount is temporary?

164.On January 1, 2010, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2011, the auditors of Credit Inc. determined that the goodwill had been impaired by $50,000 and Credit Inc. wrote down the book value of the goodwill by $50,000. During 2012, the goodwill was not impaired. In 2013, goodwill was impaired and was written down another $18,000 for financial reporting purposes. What is the temporary book-tax difference associated with the purchased goodwill in 2011, 2012, and 2013? Are the differences favorable or unfavorable? Are the differences permanent or temporary?

165.Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2012 with an estimated value of $5.50 per option. The options vest at 25 percent per year for four years (beginning in 2012). Each option allows the holder to purchase one share of stock at $8. On January 1, 2013, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book-tax difference in 2013 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

166.Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2012 of $64,000. It had net capital gains of $21,500 in 2011, $45,000 in 2010, $0 in 2009(but suffered a net operating loss in 2009),

and $8,000 of net capital gain in 2008. What is the net capital gain in 2011 after the carryback is applied?

167.In 2009, Smith Traders Inc. reported taxable income of $100,000. In 2010, it reported taxable income of $15,000. In 2011, it reported taxable income of $95,000. In 2012, Smith Traders experienced a net operating loss of $25,000. What amount of refund can Smith Traders receive if it does not elect to forgo the carry back (see the corporate income tax schedule)?

168.During 2012, Hughes Corporation sold a portfolio of stock it had held for five years at a loss of $200,000. It also sold some investment land and recognized a capital gain of $180,000. In 2010, Hughes reported a net capital gain of $12,000 and in 2011 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2013?

169.In 2012, Webtel Corporation donated $50,000 to a qualifying charity. For the year, it reported taxable income of $310,000, which included the following: the $50,000 charitable contribution (before limitation), a $100,000 dividends received deduction, and a $20,000 net operating loss carryover. What is Webtel Corp's charitable contribution deduction?

170.In 2012, Datasoft Inc. received $350,000 in dividends from CSLabs Inc. Datasoft's taxable income before the dividends received deduction and $20,000 charitable contribution deduction is $300,000. What is Datasoft's DRD assuming it owns 15 percent of the CSLabs Inc. stock?

171.AB Inc. received a dividend from CD Corporation and is able to claim the dividends received deduction without limitation. AB owns 10 percent of CD. What is AB's marginal tax rate (to the nearest tenth of a percent) on the dividends received (after taking the DRD into account) assuming its ordinary marginal tax rate is 34%?

172.Netgate Corporation's gross regular tax liability for 2012 was $95,375. What was its taxable income?

173.For 2012, SRH's taxable income is $35,000 and JHH's taxable income is $45,000. Together, Scott and Jackson Howard own 100 percent of both corporations. What is the combined tax liability of the two corporations?

174.AR Systems Inc. (AR) had $120,000 of tax liability last year. It anticipates a current-year tax liability of $500,000. Assuming AR is considered a large corporation for purposes of estimating tax liability, what are the minimum estimated tax payments it should make to avoid underpayment penalties? Ignore the annualized income method.

175.In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters:

What amount of estimated tax payments would Auto Rent pay each quarter in order to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

176.IndusTree Inc. received $1,800,000 from the sale of a property in 2012. The property's adjusted basis for regular tax purposes was $200,000 at the time of the sale. The property's adjusted basis for AMT purposes was $290,000. What is the amount of the AMT adjustment due to the sale of the asset? Does it increase or decrease AMTI?

177.ValuCo gives you the following information:

What is its ACE adjustment for the year? Is it favorable or unfavorable?

178.TerraWise Inc. reported the following information for 2012:

What is TerraWise Inc.'s AMTI?

179.QDP Corporation's AMTI is $569,000 for 2012. Its regular tax liability is $110,000. What is its AMT?

180.VitalJuice Corporation reports the following schedule of prior year taxes it owed:

What is VitalJuice's tax liability for Year 4?

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133. A

Feedback:

134. Gain realized of $76,000

Feedback: The stock takes a substituted basis of the assets transferred to the corporation.

135. $164,000

Feedback:

136. $20,000

137. Francine does not recognize any gain or loss on the transfer because the requirements of §351 are met and no boot is received in the exchange.

Feedback: Francine's tax basis in the stock received is a substituted basis of the assets transferred less the mortgage assumed by the corporation. 138. $130,000

Feedback:

139. $70,000 gain

140. Zhao does not recognize any gain or loss on the transfer because the requirements of §351 are met and no boot is received in the exchange.

Feedback:

141. The corporation receives a carryover basis in the assets received from Zhao. The built-in loss rules do not apply because the total fair market value of the assets transferred exceeds the aggregate basis of the assets transferred.

Feedback:

142. Net $50,000 loss

143. Phillip does not recognize any gain or loss on the transfer because the requirements of §351 are met.

Feedback:

144. $80,000 gain

145. Ken does not recognize any gain or loss on the transfer because the requirements of §351 are met.

Feedback: Ken's tax basis in the stock received is a substituted basis of the inventory transferred.

146. $120,000

147. $50,000 compensation

Feedback: Jim is not entitled to tax deferral under §351 because services are not considered property.

148. $50,000 compensation is recognized

Feedback: The tax basis of the stock equals the income recognized on the receipt of the stock in exchange for services.

149. $50,000

Feedback:

150. $250,000 gain

Feedback: The gain recognized is the lesser of the gain realized or the boot received.

151. $50,000 gain

Feedback:

152. $200,000

Feedback: Paper Lilies Corporation increases the tax basis of the building and land to reflect the gain recognized by Marie. The gain is allocated to the assets based on their relative fair market values (this is the way the boot was allocated to each asset): 153. Building: $140,000; Land: $110,000

Feedback:

154. $50,000 loss

Feedback: The gain (but not loss) recognized is the lesser of the gain realized or the boot received.

155. $30,000 gain is recognized. Sally allocates the $100,000 boot between the building and land based on relative FMV. The boot allocated to the building is $30,000 ($100,000 × $180/$600). Gain recognized is the lesser of the gain realized or boot received. No loss is recognized on the transfer of the land.

Feedback:

156. $580,000

Feedback: The corporation receives a carryover basis in the land received from Sally, reduced by the aggregate net $50,000 built-in loss on the assets transferred, which is allocated to the land. The corporation increases the carryover basis in the building transferred by the gain recognized by Sally on the transfer. 157. Building: $180,000 ($150,000 + $30,000 gain); Land: $450,000

Feedback: Contributions to capital by a shareholder are nontaxable events. The corporation receiving the contribution to capital takes a carryover basis in the property. 158. No gain is recognized by Boston, Inc. The tax basis of the property to Hartford is $250,000, a carryover basis from Boston, Inc.

Feedback: Contributions to capital by a non-shareholder to a corporation take a zero basis.

159. Zero.

Feedback:

160. $16,800 refund

Feedback:

161. $3,000, favorable book-tax difference. Entire difference is permanent book-tax difference.

Feedback:

162. $225,000 favorable, permanent book-tax difference

Feedback:

163. $86,000, unfavorable, temporary book-tax difference.

Feedback:

164. 2011: $32,000 unfavorable, temporary book tax difference; 2012: $18,000 favorable, temporary book-tax difference; 2013: $0 book-tax difference.

Feedback:

165. $137,500 unfavorable, permanent book-tax difference.

Feedback:

166. $2,500 capital gain, computed as follows:

Feedback:

167. $5,650, computed as follows:

Feedback:

168. $2,000, computed as follows:

Feedback:

169. $46,000, computed as follows:

Feedback:

170. $196,000, computed as follows:

171. 10.2 percent [34% × (100% - 70%)]

Feedback:

172. $287,500

Feedback: SRC and JHH are a brother-sister control group. Both are more than 50-percent owned by five or fewer persons. Consequently, their incomes must be combined when applying the tax rate schedule. $15,450 = $13,750 + [34% × ($80,000 - $75,000)]. 173. $15,450

Feedback:

174. Q1: $30,000, Q2: $220,000, Q3: $125,000, Q4: $125,000; AR should use last year's tax liability to determine its quarterly payments. However, because it is a large corporation, it is allowed to use the prior year's tax liability to determine the first quarter payment only. The second quarter payment must catch up the cumulative payments to 50 percent of the current year tax liability.

175. First quarter $510,000; ($1,500,000 × 4 = $6,000,000 × 34% × 25%); Second quarter $510,000 ($6,000,000 × 34% × 50% - $510,000); Third quarter $408,000 ($2,800,000 × 2 × 34% × 75% - $1,020,000); Fourth quarter $204,000 ($3,600,000 × 1.33333 × 34% - $1,428,000).

Feedback: The gain recognized for regular tax purposes is $1,600,000 ($1,800,000 amount realized - $200,000 adjusted basis). The gain recognized for AMT purposes is $1,510,000 ($1,800,000 amount realized - $290,000 adjusted basis). The difference of $90,000 is favorable and decreases AMTI because less gain is recognized under AMT rules than regular tax rules. 176. $90,000

Feedback: Two of the three items given are included in the ACE adjustment: interest from tax-exempt bonds funding a public activity and the 70 percent dividends received deduction. The eighty percent dividends received deduction is not included in the ACE adjustment. The sum of the $14,000 interest and the $60,000 seventy-percent DRD is multiplied by 75 percent to get the ACE adjustment. 177. $55,500, unfavorable

Feedback:

178. $5,900,000, computed as follows:

Feedback: QDP's AMT exemption is completely phased-out, so its tentative minimum tax is $113,800 ($569,000 × 20 percent). The difference between tentative minimum tax and regular tax liability is AMT: $3,800 = $113,800 - $110,000. 179. $3,800.

Feedback: VitalJuice generates a minimum tax credit in Year 2 of $100,000 ($900,000 - $800,000). It generates a $50,000 minimum tax credit in Year 3. In Year 4, the $150,000 minimum tax credit carryover can be applied to reduce regular tax liability to $750,000 ($900,000 - $150,000). 180. $750,000.

ch13 Summary Category # of Questions

AACSB: Analytic

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

Blooms: Analyze

Blooms: Apply

Blooms: Remember

Blooms: Understand

Learning Objective: 13-

1 Compute the tax consequences to parties to transactions in which transferor shareholders transfer property or services to corpora tions in exchange for stock of the transferee corporation.

Learning Objective: 13-

2 Describe the corporate income tax formula; compare and contrast the corporate tax formula to the individual tax formula; and di scuss tax considerations relating to corporations accounting periods and accounting methods.

Learning Objective: 13-03 Identify common book-

tax differences; distinguish between permanent and temporary differences; and compute a corporations taxable income and regular tax liability.

Learning Objective: 13-04 Describe a corporations tax return reporting and estimated tax payment obligations.

Learning Objective: 13-05 Explain how to calculate a corporations alternative minimum tax liability.

Level of Difficulty: 1 Easy

Level of Difficulty: 2 Medium

Level of Difficulty: 3 Hard

Spilker - Chapter 13

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