1. Wade and Paul form Swan Corporation with the following investments. Wade transfers
machinery (basis of $40,000 and fair market value of $100,000), while Paul transfers land
(basis of $20,000 and fair market value of $90,000) and services rendered (worth $10,000)
in organizing the corporation. Each is issued 25 shares in Swan Corporation. With respect
to the transfers:
Wade has no recognized gain; Paul recognizes income/gain of $80,000.
Neither Wade nor Paul has recognized gain or income on the transfers.
Swan Corporation has a basis of $30,000 in the land transferred by Paul.
Paul has a basis of $30,000 in the 25 shares he acquires in Swan Corporation.
None of the above.
2. Erica transfers land worth $500,000, basis of $100,000, to a newly formed corporation,
Robin Corporation, for all of Robin’s stock, worth $300,000, and a 10-year note. The note
was executed by Robin and made payable to Erica in the amount of $200,000. As a result of
the transfer:
Erica does not recognize gain.
Erica recognizes gain of $400,000.
Robin Corporation has a basis of $100,000 in the land.
Robin Corporation has a basis of $300,000 in the land.
None of the above.
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:
George has dividend income of $13,300.
Grouse Corporation does not have a tax deduction with respect to the payment.
George has dividend income of $7,000.
Grouse Corporation has an interest expense deduction of $6,300.
None of the above.
4. George Judson is the sole shareholder and employee of Black Corporation, a C corporation
that is engaged exclusively in engineering services. During the year, Black has gross
revenues of $300,000 and operating expenses (excluding salary) of $100,000. Further,
Black Corporation pays George a salary of $150,000. The salary is reasonable in amount
and George is in the 35% marginal tax bracket irrespective of any income from Black.
Assuming that Black Corporation distributes all after-tax income as dividends, how much
total combined income tax do Black and George pay in the current year? (Ignore any
employment tax considerations.)
$64,875.
$70,000.
$74,875.
$81,375.
None of the above.
5. Blue Corporation, a cash basis taxpayer, has taxable income of $700,000 for the current
year. Blue elected $80,000 of § 179 expense. It also had a related party loss of $30,000
and a realized (not recognized) gain from an involuntary conversion of $85,000. It paid
Federal income tax of $185,000 and a nondeductible fine of $20,000. Blue’s current E & P
is:
$465,000.
$529,000.
$614,000.
$630,000.
None of the above.
6. Falcon Corporation has $200,000 of current E & P and a deficit in accumulated E & P of
$90,000. If Swan pays a $300,000 distribution to its shareholders on July 1, how much
dividend income do the shareholders report?
$0.
$10,000.
$110,000.
$200,000.
None of the above.
7. Which statement is incorrect with respect to filing for an S election?
Form 2553 must be filed.
All shareholders must consent.
The election may be filed in the previous year.
An extension of time is available for filing Form 2553.
None of the above is incorrect.
8. You are given the following facts about a one-shareholder S corporation, and you are
asked to prepare the shareholder’s ending stock basis.
Ordinary income $100,000
Payroll tax penalty 2,140
Stock purchases 32,000
Tax-exempt insurance proceeds 50,000
Insurance premiums paid (nondeductible) 2,700
Beginning stock basis 36,800
$163,960.
$181,960.
$213,960.
$216,100.
9. On January 1, 2010, Kinney, Inc., an electing S corporation, has $4,000 of AEP and a
balance of $10,000 in AAA. Kinney has two shareholders, Erin and Maine, each of whom
owns 500 shares of Kinney’s stock. Kinney’s 2010 taxable income is $5,000. Kinney
distributes $6,000 to each shareholder on February 1, 2010, and distributes another $3,000
to each shareholder on September 1. How is Erin taxed on this distribution?
$500 dividend income.
$1,000 dividend income.
$1,500 dividend income.
$3,000 dividend income.
None of the above.
10. Pepper, Inc., an S corporation in Norfolk, Virginia, has revenues of $400,000, taxable
interest of $380,000, operating expenses of $250,000, and deductions attributable to the
interest income of $140,000. What is Pepper’s § 1375 penalty tax payable?
$0.
$40,895.
$185,000.
$380,000.
Some other amount.