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

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Question 41

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Mary transfers a building (adjusted basis of $15,000 and fair market value of $90,000) to White Corporation.In return, Mary receives 80% of White Corporation's stock (worth $65,000) and an automobile (fair market value of $5,000) .In addition, there is an outstanding mortgage of $20,000 (taken out 15 years ago) on the building, which White Corporation assumes.With respect to this transaction:

A) Mary's recognized gain is $10,000.
B) Mary's recognized gain is $5,000.
C) Mary has no recognized gain.
D) White Corporation's basis in the building is $15,000.
E) None of these.

F) All of the above
G) B) and E)

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Question 42

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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) Book depreciation in excess of tax depreciation.
B) Excess of capital losses over capital gains.
C) Proceeds on key employee life insurance.
D) Income subject to tax but not recorded on the books.
E) None of these.

F) B) and E)
G) B) and D)

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Question 43

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Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year.The Tax Court has held that $90,000 represents unreasonable compensation.Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

A shareholder transfers a capital asset to Red Corporation for its stock.If the transfer qualifies under § 351, Red's holding period for the asset begins on the day of the exchange.

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000.How much is Sparrow's income tax liability for the year?

To encourage the development of an industrial park, a county donates land to Ecru Corporation.The donation results in gross income to Ecru.

Orange Corporation, a calendar year C corporation, owns stock in White Corporation and has net operating income of $400,000 for the current year.White Corporation pays Orange a dividend of $60,000.What amount of dividends received deduction may Orange claim if it owns 45% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income) ?

Jake, the sole shareholder of Peach Corporation (a C corporation) has the corporation pay him $100,000.For income tax purposes, Jake would prefer to have the payment treated as a dividend instead of salary.

Because services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

When a taxpayer incorporates her business, she transfers several liabilities to the corporation.If one of the liabilities is personal in origin, the release of only that liability is treated as boot.

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.

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.

Kirby and Helen form Red Corporation.Kirby transfers property, basis of $20,000 and value of $300,000, for 100 shares in Red Corporation.Helen transfers property, basis of $40,000 and value of $280,000, and provides legal services in organizing the corporation.The value of her services is $20,000.In return Helen receives 100 shares in Red Corporation.Regarding these transfers:

Allen transfers marketable securities with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation.In addition, he receives cash of $40,000.Allen recognizes a capital gain of $40,000 on the transfer.

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.

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:

On December 31, 2019, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer) who owns 75% of the corporation's outstanding stock.The $50,000 bonus is paid to the president on February 4, 2020.For Flamingo's 2019 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

In the current year, Red Corporation (a calendar year C corporation) , which owns stock in Blue Corporation, had net operating income of $200,000 for the year.Blue pays Red a dividend of $40,000.Red takes a dividends received deduction of $20,000.Which of the following statements is correct?

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.