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business
federal taxation

Questions and Answers of Federal Taxation

Jose owns a 60% interest in the JKL Partnership. What are the amount and character of the recognized gain or loss in each of the following situations?a. Jose sells common stock held as an investment
Ralph sells an asset to the RST Partnership at a loss. In which of the following situations does he recognize a loss?a. Ralph owns a 20% direct interest in the partnership, and his son also owns a
Phyllis owns a 30% interest in the PQR Partnership and has a $20,000 basis in her partnership interest (before adjustments for Phyllis’s share of current year partnership income or loss). During
Indicate whether a partner’s basis in the partnershipinterest increases, decreases, or is not affected by the partner’s share of the following operating items:a. Ordinary incomeb. Ordinary lossc.
What inequities might result if partners were not required to make special allocations for precontribution gains and losses on noncash property contributed to a partnership?
What are the tax consequences to a partner who contributes liabilities that exceed the total basis of assets transferred to a new partnership in exchange for a partnership interest? How does your
Assume the same basic facts as in Problem I:17-8. How would your answer change if the entity is a new corporation with all owners making property contributions? The corporation makes a timely
Sally contributes farm machinery with a $150,000 FMV, a $125,000 basis, and a $50,000 note owed to the AB Bank to a new partnership in exchange for a 25% partnership interest. Total partnership
How is Mario’s basis in his accrual method partnership interest affected by each of the following changes in partnership assets and liabilities (assuming he has a 50% interest in the
Compare the Sec. 721 partnership formation rules for a new partnership with the Sec. 351 corporate formation rules for a new C corporation.
In the current year, Penny contributes machinery to a partnership in exchange for a minority partnership interest. She acquired the machinery five years earlier. It now has a $50,000 adjusted basis
Anya is considering whether to become a limited partner in a real estate investment partnership by making a $10,000 investment. The limited partnership will generate substantial operating losses for
Explain how the following types of business entities are treated under the check-the-box regulations. What alternative treatments are available other than the default classification?a. Corporationb.
Distinguish between the partnership, S corporation, and C corporation forms regarding the following:a. Incidence of taxation on the organization’s business incomeb. Taxation of distributions to
Erin Brinson founded BCD Corporation in 1991 with a contribution of $50,000 cash. The entity has always been a C corporation and Erin has not made any other capital contributions nor has BCD made any
In 2013, Peter purchased 150 shares of Able Manufacturing Corporation stock for $75,000. Able is a C corporation that has 40 shareholders. None of the other 39 shareholders own more than 5% of the
Beth in Case Study Problem I:16-76 also wants to know whether she can make a $50,000 capital contribution to the corporation without the corporation’s issuing additional shares. If so, should she
Ted is the sole shareholder of Zero Corporation. Before his retirement from the company, he gave 100 shares of Zero stock to his son. A few months later, Ted sold his remaining 1,900 shares to Zero
Charlie Corporation acquired 100% of Delta Corporation common stock on July 1 of the current tax year. Prior to the acquisition, Delta supplied Charlie with about 50% of the raw materials and other
The income tax laws for a particular state depend on the business entity’s organizational status. Answer the following four questions using the web site for a particular department of state (for
Beth, who is married, is the sole shareholder of Pet Store Inc., a C corporation. She also manages the store. She wishes to expand the business, but the corporation needs additional capital for her
Frank, Paul, and Sam are considering merging their respective unincorporated businesses into a new C corporation called FPS. Frank would transfer land and a building with a $50,000 adjusted basis and
Several years ago, Tampa Corporation acquired 100% of Union Corporation stock for $1,000,000. In the current year, Tampa liquidates Union and receives all of its assets and liabilities. Tampa
Alpha Corporation reports $500,000 of gross income from business operations and $625,000 of allowable business deductions. It also received from a domestic corporation $150,000 in dividends for which
For most individual investors, net long-term capital gains and dividends are taxed at the same rate. Yet, in some circumstances, an investor’s generating long-term capital gains is more
Gertrude, age 67 and widowed, owns 50 acres of land on the Chattahoochee River that she and her husband purchased for $10,000 when they were newlyweds in 1970. The land is near Atlanta and is now
Peter Martin owned an equity interest in retail hardware stores for a nationwide chain. The eleven stores operate in a single midwestern state under the name Martin Corporation. Peter has been the
Queen Corporation adopts a plan of complete liquidation on January 1 of the current year. The corporation sells the assets listed below to King Corporation during the current year. This sale is
Prime Corporation redeems some of its stock from two of its shareholders on the same date. Frank and his son Sam own 50 and 20 shares, respectively, of the 100 shares outstanding before the
Private Corporation redeems some of its stock from Jane, a major shareholder. Before the redemption Jane owns 50 of the 100 outstanding shares, and her daughter Jill owns 40 shares. The remaining ten
Galadriel Corporation reports pre-tax earnings of $500,000 during the current year. The corporation wishes to distribute $100,000 to Gabby, its sole owner and CEO, in a manner that will minimize
Without liquidating, Park Corporation distributes equipment with a $70,000 adjusted basis and a $80,000 FMV to Pam. The equipment is subject to a $25,000 mortgage assumed by Pam. Park has $300,000 of
Old Corporation has liquidity problems but wants to maintain its existing dividend policy. Old distributes investment land to its two shareholders. The land has a $30,000 adjusted basis and a
At the beginning of the current year Ohio Corporation has a $40,000 accumulated E&P balance and a $73,000 current E&P deficit. The corporation distributes $60,000 cash to its sole shareholder
North Corporation has $200,000 of accumulated E&P at the beginning of the current year. North distributed $300,000 cash during the current year to its shareholders. The company’s operating
During the current year, Nevada Corporation distributed $100,000 in cash to its sole shareholder. Because the corporation has a $300,000 accumulated E&P deficit at the beginning of the current
In a transaction that meets the requirements of Sec. 351, Matt transfers to Hill Corporation land with a $600,000 adjusted basis and a $1,000,000 FMV that was used in his business. The land is
Linda and Cynthia decide to form a corporation in a transaction that meets the requirements of Sec. 351. Linda transfers machinery she has held for several years with a basis of $45,000 and a fair
In the current year, Jack, Karen, Latoya, and Marc transfer the following property to Giant Corporation (an existing corporation), which is owned equally by the four transferors.• Jack transfers
Alfred, Barbara, and Cathy own stock in First, Second, and Third Corporations as follows:Which corporations are members of a brother-sister controlled group under the 80%-50% test? |Individuals First
Eagle and East Corporations are members of a brother-sister controlled group. Eagle’s taxable income is $75,000, and East’s taxable income is $50,000.a. What is Eagle and East’s total federal
Delta Corporation is being reorganized as an investment company because its retained earnings have been used for passive investments. The company is owned by three shareholders, and more than 60% of
The IRS is auditing Crane Corporation, a manufacturer of widgets, to determine whether the company is liable for the accumulated earnings tax in a prior tax year. Crane is owned by 20 shareholders
In an audit of Control Corporation, you were assigned to review the company’s current-year tax accrual (e.g., provision for federal income taxes and the related liability). Control was incorporated
In December of the current year, Colorado Corporation considers a sale of certain corporate assets that would result in the recognition of a $50,000 LTCG. Colorado’s controller estimates that
Calculate Ajax Corporation’s regular tax liability for the following amounts of taxable income:a. $90,000b. $300,000c. $5 milliond. $12 millione. $17 millionf. $20 milliong. Alternatively, for
On May 15 of the current year, the board of directors of Georgia Corporation authorized a $40,000 donation to a qualified charity. The corporation donated the $40,000 to the charity on December 1 of
Calculate the dividends-received deduction and taxable income for each independent scenario below. Assume there are no other income or deduction items.a. During the current year, Purple Corporation
During the current year, Florida Corporation reports the following results:Net income from operations..............................................$100,000Dividend from a 20%-ownedcorporation
For each of the four independent scenarios below, compute the additional amount of income tax (or tax savings if a loss) that would result from current gains and losses for (a) Able Corporation that
Federal Corporation realizes the following net capital losses in 2016:STCL...........................$ 80,000LTCL............................120,000NLTCGs were incurred in 2013 through 2015 as
First Corporation, in its fifth year of operations, realizes the following capital gains and losses in the current
Eastern Corporation is formed by John and Joy with an initial capitalization of $500,000. Two alternative capitalization plans are being considered: (1) John and Joy, who are unrelated, each would
Hugo and Helga each own unincorporated businesses. They plan to form a corporation to which they would transfer all of their business assets and liabilities in exchange for all of the corporation’s
Acorn Corporation is a very profitable closely held corporation that is owned solely by Helen, age 55, who plans to retire in 10 years. Management continuity is a problem because neither the existing
Besides M-1 and M-2, what other schedules are incorporated in Form 1120, and what do they purport to report?
Explain the purpose of Schedule M-3 in corporate income tax reporting. Explain which C corporations must file this form and which C corporations need not file this form.
What advantages and disadvantages accrue to a corporation and its shareholders of (1) electing C corporation status for the business, or (2) electing S corporation status?
Why is it generally preferable to increase salaries, interest, or rental payments to employee-shareholders in a closely held corporation rather than increase dividends?
Why is Sec. 1244, which pertains to small business corporation stock, in the tax code? What advantages and disadvantages are afforded to owners of Sec. 1244 stock?
A corporate formation can take place tax-free when an individual transfers the assets of a business to a corporation and no boot property is distributed by the corporation to the shareholder. A
How does the liquidation of a controlled subsidiary differ from the liquidation of a corporation owned by a single individual? What is the reason for the difference?
If the requirements for a complete termination of a shareholder’s interest are met, should not the substantially disproportionate redemption requirements also be met? What is the major difference
Compare the three types of redemptions (i.e., substantially disproportionate, not essentially equivalent to a dividend, and complete termination of shareholder interest) in terms of the following
Sato, Jose, and Satish form a new corporation. Each individual contributes $100,000 in appreciated property and receives a one-third (equity) ownership interest. Jose and Satish also lend the
a. Brett Nelson transfers a building having a $75,000 FMV and a $30,000 adjusted basis to Gator Corporation. An advantage of the asset transfer under Sec. 351 is that Brett can defer his $45,000
The personal holding company tax imposes a penalty on corporations.a. What is the purpose of the personal holding company tax?b. Two tests are used to classify a corporation as a personal holding
C corporations are allowed a dividends received deduction (DRD) for dividends received from domestic corporations.a. What is the purpose of the DRD?b. Does the taxable income limitation on the DRD
Why is it generally preferable to structure the redemption of a shareholder’s stock to meet the substantially disproportionate test or the complete termination test rather than the
Under current tax law, a corporation may deduct interest but not dividends paid to shareholders. What potential problems are created by this disparate treatment? Should the law be changed to either
Chang and George, high income taxpayers, are starting a new business that manufactures and sells explosives. They expect the business to sustain $500,000 in losses in its first two years of
Corporate formation transactions are either taxable or tax-free events depending on whether the requirements of Sec. 351 are met. Debate the pros and cons of the following statement: All
Discuss the underlying rationale for the nonrecognition of gain or loss in a Sec. 351 transaction.
Why are controlled groups of corporations required to apportion among group members the lower rates applicable to taxable income up to $75,000?
In terms of a corporation’s incurring liability for the tax, what is the difference between the personal holding company tax and the accumulated earnings tax? Do both taxes require a tax avoidance
Acme Corporation is a highly profitable closely held corporation that has never paid a dividend. During the past five years, after-tax earnings of $200,000 per year have been retained in the
The accumulated earnings tax is effectively a penalty on corporations.a. What is the purpose of the accumulated earnings tax?b. Why does the “reasonable needs of the business” exception either
Collins Corporation pays a $30,000 alternative minimum tax in the current year. What AMT benefit (if any) is available to reduce federal income taxes paid in a prior tax year, in the current tax
Current tax law provides for a dual system, the regular tax and alternative minimum tax. In effect, a corporation pays the greater of the regular tax or the tentative minimum tax. Why did Congress
Spurrier Corporation’s taxable income is $50,000, and its tax preference items and positive adjustments for the alternative minimum tax (AMT) are $100,000.a. Is Spurrier subject to the AMT (assume
The production activities deduction is available based only on income related to U.S. production activities (or taxable income, if a smaller amount). Why did Congress restrict the calculation of the
Explain the following statement: For a C corporation earning taxable income in excess of $10,000,000, the corporate income tax is in essence a flat tax imposed at a 34% rate.
The current corporate tax structure contains phase-outs (via surtaxes) at various levels of taxable income that eliminate the benefits of lower tax brackets. Identify the two phase-outs in the
Current tax law imposes a $1 million limitation on the deductibility of executive compensation. Should such limitation be retained or repealed? Give reasons for your opinion.
Acorn Corporation is publicly traded on the American Stock Exchange. Its chief executive officer, Carl, currently receives an annual salary of $1 million. The board of directors is considering
What conditions must be met for an accrual-basis corporation to deduct a charitable contribution in a year before it is made?
Under what circumstances might a corporation elect not to carry back an NOL to its prior tax years?
Acorn Corporation has a $5,000 NSTCG and a $9,000 NLTCL in the current year. Last year, Acorn had a $3,000 NLTCG. No other capital gains or losses were reported in prior tax years.a. Do the NSTCG and
Some tax analysts contend that many corporations can shift the burden of corporate taxation to consumers in the form of higher prices. In what other ways might a corporation attempt to shift the
Under the present tax system, C corporation income is taxed twice, once when earned and again when the shareholders receive dividends or sell their stock. Nevertheless, the C corporation form is
William Bonney and Pat Garrett incorporate Sales, Inc. on January 1, of the current year, under the laws of the State of Florida.a. How should the new corporation be regarded under the check-the-box
a. What original action (acquiescence or nonacquiescence) did the IRS Commissioner take regarding the 1982 Tax Court decision in Doyle, Dane, Bernbach, Inc., 79 T.C. 101 (1982)?b. Did the IRS
a. What official action (acquiescence or nonacquiescence) did the IRS Commissioner take regarding the 1985 Tax Court decision in John McIntosh, 85 T.C. 31 (1985)?b. Did this action concern all issues
The objective is to locate a general overview of available home office deductions. You have previously researched the issue and know that Sec. 280A is the primary authority for this issue. Select the
Which IRC sections does Rev. Rul. 2001-29 interpret?
According to the Statements on Standards for Tax Services, what belief should a CPA have before taking a pro-taxpayer position on a tax return?
List three methods of searching the major tax service databases.
Name three primary sources of authority that tax professionals should check against the citator before relying on those sources for important matters.
May a taxpayer appeal a case litigated under the Small Cases Procedure of the Tax Court?
Does Title 26 contain statutory provisions dealing only with income taxation? Explain.

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