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

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Question 1

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When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities.Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure.Under these circumstances, the entire $30,000 will be treated as boot.

A) True
B) False

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Question 2

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The limitation on the deduction of business interest does not apply to noncorporate taxpayers.

A) True
B) False

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Question 3

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In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation.Azul owns 25% of the Naranja Corporation stock.Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $19,500.

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

Quail Corporation is a C corporation that generates 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.

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income.However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Matt, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year.The Tax Court has held that $200,000 represents unreasonable compensation.Matt must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Sofia forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares.Shortly thereafter, she transfers half her shares to her son, Ted.The later transfer to Ted could cause the original transfer to be taxable.

Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year.Aaron, who owns 25% of Eagle, will report $2,500 of Eagle's short-term capital loss on his individual tax return.

A city contributes $500,000 to a corporation as an inducement to locate in the city.Within the next 12 months, the corporation uses the money to purchase property worth $500,000.The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Copper Corporation, a calendar year C corporation, owns stock in Bronze Corporation and has net operating income of $900,000 for the current year.Bronze Corporation pays Copper a dividend of $150,000.What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (and the two corporations are members of the same affiliated group) ? (Assume Copper's dividends received deduction is not limited by its taxable income.)

Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship.In the current year, both businesses make a profit of $80,000, and each owner withdraws $50,000 from his business.With respect to this information, which of the following statements is incorrect?

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

When consideration is transferred to a corporation in return for stock, the definition of "property" is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock.Gabriella transfers cash of $50,000, while Maria transfers a proprietary formula (basis of $0; fair market value of $50,000).Neither Gabriella nor Maria will recognize gain on the transfer.

During the current year, Jay Corporation, a calendar year personal service C corporation, had operating income of $300,000, operating expenses of $200,000, a short-term capital gain of $5,000, and a long-term capital loss of $35,000.How much is Jay's income tax liability for the year?

In working with Schedule M-2 (analysis of unappropriated retained earnings per books) of Form 1120, which of the following is an addition to beginning retained earnings?

The corporate marginal income tax rate is lower than the top individual tax rate.

Silver Corporation receives $1 million in cash from Madison County as an inducement to expand its operations there. Within one year, Silver spends $1.5 million to enlarge its existing plant.Silver Corporation's basis in the expansion is $500,000.

One month after Sally incorporates her sole proprietorship, she gives 25% of the stock to her children.Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.