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Exam 12: Corporations: Organization,capital Structure,and Operating Rules

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Question 31

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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

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Question 32

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Lucinda is a 60% shareholder in Rhea Corporation,a calendar year S corporation.During the year,Rhea Corporation had gross income of $550,000 and operating expenses of $380,000.In addition,the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000.During the year,Rhea Corporation distributed $50,000 to Lucinda.With respect to this information,which of the following statements is correct?

A) Rhea Corporation will pay tax on taxable income of $200,000.
B) Lucinda reports ordinary income of $50,000.
C) Lucinda reports ordinary income of $120,000.
D) Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.
E) None of the above.

F) D) and E)
G) None of the above

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Question 33

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Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is a subtraction on Schedule M-1?

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

In order to encourage the development of an industrial park,a county donates land to Ecru Corporation.The donation does not result in gross income to Ecru.

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:

Kim,a real estate dealer,and others form Eagle Corporation under § 351.Kim contributes inventory (land held for resale)in return for Eagle stock.The holding period for the stock includes the holding period of the inventory.

Under the "check-the-box" Regulations,a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

Mitchell and Powell form Green Corporation.Mitchell transfers property (basis of $105,000 and fair market value of $90,000) while Powell transfers land (basis of $8,000 and fair market value of $75,000) and $15,000 of cash.Each receives 50% of Green Corporation's stock (total value of $180,000) .As a result of these transfers:

Albert transfers land (basis of $140,000 and fair market value of $320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000.Gold assumes Albert's mortgage on the land of $200,000.

Flycatcher Corporation,a C corporation,has two equal individual shareholders,Nancy and Pasqual.In the current year,Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher,Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket.With respect to the current year,which of the following statements is incorrect?

Joe and Kay form Gull Corporation.Joe transfers cash of $250,000 for 200 shares in Gull Corporation.Kay transfers property with a basis of $50,000 and fair market value of $240,000.She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation.The value of Kay's services is $10,000.With respect to the transfer:

Similar to the like-kind exchange provision,§ 351 can be partly justified under the wherewithal to pay concept.

Quail Corporation is a C corporation with net income of $125,000 during the current year.If Quail paid dividends of $25,000 to its shareholders,the corporation must pay tax on $100,000 of net income.Shareholders must report the $25,000 of dividends as income.

Earl and Mary form Crow Corporation.Earl transfers property,basis of $200,000 and value of $1,600,000,for 50 shares in Crow Corporation.Mary transfers property,basis of $80,000 and value of $1,480,000,and agrees to serve as manager of Crow for one year;in return Mary receives 50 shares of Crow.The value of Mary's services is $120,000.With respect to the transfers:

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

Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000) ,executed by Green Corporation and made payable to Jane.As a result of the transfer:

No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2014.He also owns 60% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn.How much income must Bjorn report from these businesses?

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is an addition on Schedule M-1?