433 Sample Test 1

CORPORATIONS: ORGANIZATION, INCOME, DEDUCTIONS
PROBLEMS AND QUESTIONS
True or False
1. The tax rates for corporations are the same as those for individual taxpayers.
2. If a corporation buys or sells its own stock or bonds, it will not be taxed on any gains.
3. Corporations receive an 80% dividend-received deduction for dividends received from either foreign or domestic corporations.
4. Organization expenditures made by a corporation may be amortized over a period of not less than 60 months.
5. Charitable contributions made in excess of the limitation may be carried back 3 years and carried over 5 years.
8. A corporation generally recognizes no gain or loss when it distributes property in exchange for stock in a complete liquidation.
9. The alternative minimum tax rate for corporations is 20%.
10. The depreciation recapture rules of Sections 1245 and 1250 do not apply to corporations.
11. The IRS can reallocate income, deductions and credits among related corporations if it is necessary to clearly reflect the income of each taxpayer.
12. If a corporation issues bonds payable at a discount, it can deduct the discount as an expense in the year of issue.
13. Interest on municipal bonds is not taxable income to a corporation.
14. Regular corporations are also termed C corporations.

Multiple Choice
l. Sims, Inc. received $8,000 of dividends that qualify for the 80% dividend-received deduction. Its taxable income before the dividend-received deduction and the charitable contribution deduction is $40,000. Assuming the corporation contributed $3,000 to charity, what is the taxable income?
a. $40,000
b. $31,540
c. $31,200
d. $30,600
e. none of the above

3. Rabon Corporation sold 1,000 shares of its treasury stock at $10 per share. The stock had a par value of $8 and was originally sold at $11. Rabon should report
a. $2,000 gain
b. $2,000 loss
c. $1,000 loss
d. no gain or loss
e. none of the above

4. Copp Corp. had book income of $110,000 which included a charitable contribution expense of $20,000. For tax purposes Copp can deduct a contribution of
a. $11,000
b. $13,000
c. $ 9,000
d. $20,000
e. none of the above

5. Red, Inc. is expensing organization costs of $5,000 over 10 years for book purposes and the minimum period for tax. If book income for its second year of operations is $100,000, for tax purposes it is
a. $200,000
b. $ 99,000
c. $ 99,500
d. $100,500
e. none of the above

SOLUTIONS
True or False
1. F 5. F .9. T 13. T
2. F 6. T 10. F 14. T
3. F 7. F 11. T
4. T 8. F 12. F

CORPORATIONS: GAINS AND LOSSES NONLIQUIDATING DISTRIBUTIONS, ACCUMULATED EARNINGS TAX CAPITAL GAINS AND LOSSES OF CORPORATIONS
PROBLEMS AND QUESTIONS

True or False
l. Loans to shareholders may be an indication of unreasonable accumulation of income.
2. Unlike individuals, corporations are entitled to a capital loss carryback.
3. Unlike individuals, corporations may carryover capital losses for only five years.
5. Corporations cannot deduct capital losses from ordinary income.
6. A corporation with a net operating loss in the current year cannot deduct charitable contributions.
7. Corporate net operating losses are carried back three years and carried over five years.
9. A major change in the ownership of a corporation's stock may cause a net operating loss carryover to be lost.
13. Capital loss carrybacks and carryovers are treated as short-term capital losses.
14. Corporations can elect to carry net operating losses forward only, instead of back.

Multiple Choice
1. Which of the following would most likely represent a reasonable business need for purposes of the accumulated earnings tax?
a. loan to the friend of a shareholder
b. investments in marketable securities
c. loan to a shareholder
d. loan to a supplier
e. none of the above

2. To compute the accumulated earnings tax, one must first adjust taxable income. Which of the following would not be subtracted from taxable income?
a. current net capital loss
b. federal income tax
c. net operating loss deduction
d. net capital gain reduced by the attributable taxes
e. none of the above

3. The accumulated earnings credit is $250,000 less previously accumulated earnings
a. or the reasonable business needs, whichever is larger
b. plus the reasonable business needs
c. or the reasonable business needs, whichever is smaller
d. less the reasonable business needs
e. none of the above

6. White Linen Co. has $80,000 of ordinary income and a net long-term capital loss of $10,000. The company's taxable income is:
a. $90,000
b. $80,000
c. $77,000
d. $70,000
e. none of the above

8. Allax Radio Co. has $14,000 of ordinary income, a net long-term capital gain of $8,000, a net short-term capital loss of $6,000 and a capital loss carryover of $5,000. The company's taxable income equals
a. $14,000
b. $16,000
c. $11,000
d. zero
e. none of the above

9. Which of the following would be included in an affiliated group?
a. a foreign subsidiary
b. a Domestic International Sales Corporation
c. a 75% controlled domestic subsidiary
d. brother-sister corporations
e. none of the above

10. Being classified as a controlled group
a. permits the group to file a consolidated return
b. is a tax advantage
c. increases exposure to the accumulated earnings tax
d. all of the above
e. none of the above

SOLUTIONS
True or False
1. T 5. T .9. T 13. T
2. T 6. T 10. T 14. T
3. T 7. F 11. T
4. T 8. F 12. T

CORPORATIONS: REORGANIZATIONS, PROBLEMS AND QUESTIONS
True or False
1. Income tax avoidance is an acceptable business purpose that will satisfy the requirements for a tax exempt corporate reorganization.
2. Except for Type D reorganizations, there must be a continuity of ownership.
3. Statutory mergers, but not consolidations, qualify as Type A reorganizations.
4. A Type D reorganization may precede a divisive reorganization.
5. The issuance of common stock in exchange for preferred stock will likely constitute a Type E reorganization.
6. A reorganization may not be nontaxable for both the participating corporations and shareholders.
7. For a divisive reorganization to be tax free, the parent corporation's shareholders must surrender stock in the parent.
8. Divisive reorganizations must be pursuant to a plan of reorganization.
11. Tax attributes generally carryover in a Type F reorganization.
13. A stock redemption may be taxed as a dividend or as a stock sale, depending on the facts.
14. Attribution rules do not apply to a redemption of a taxpayer's entire interest in a corporation.
17. No loss is recognized by a stockholder in a reorganization if boot is received.
19. The basis of property received by a corporation in a tax-free reorganization is the same as the basis of the property given, even if boot is received.

Multiple Choice
l. Which of the following is required for a nontaxable corporate reorganization?
a. plan of reorganization
b. continuity of ownership
c. continuity of business activity
d. business purpose
e. all of the above

2. Corporation A acquired a controlling interest in Corporation B by giving B's shareholders some of its own stock. The transaction would likely be what type of corporate reorganization?
a. Type A
b. Type B
c. Type C
d. Type D
e. none of the above

3. Corporation C acquired Corporation D's assets by giving D some of its own stock. The transaction would likely be what type of corporate reorganization?
a. Type A
b. Type B
c. Type C
d. Type D
e. none of the above

4. Corporation X issued its own common stock in exchange for its preferred stock. The exchange would likely be what type of corporate reorganization?
a. Type A
b. Type B
c. Type C
d. Type E
e. none of the above

8. If a parent liquidates a subsidiary, the parent's basis in the subsidiary's assets will
a. be equal to the subsidiary's basis
b. be equal to the parent's basis in its stock
c. depend on the type of liquidation used
d. be zero
e. none of the above

10. Corporation R moves from New Jersey to Texas where it incorporates. This is an example of what type of reorganization?
a. Type B
b. Type D
c. Type F
d. Type G
e. none of the above

11. Anderson owns 100% of the stock of a corporation. The corporation redeems 50% of the stock and pays Anderson $700. Anderson's basis for the 50% interest is $400. He will report
a. $300 dividend
b. $700 dividend
c. $300 capital gain
d. $300 dividend and $400 capital gain
e. none of the above

13. In a tax free reorganization, Bush exchanged 500 shares of Green Corp. stock for 500 shares of Blue Corp. In addition, Bush received $2,000 cash which was not in excess of Bush's share of Green's undistributed earnings and profits. In 1985 Bush purchased the Green stock for $30,000. The Blue stock had a FMV of $35,000 at the exchange date. What gain should Bush report?
a. 0
b. $2,000 dividend
c. $3,000 long-term capital gain
d. $5,000 long-term capital gain
e. none of the above

SOLUTIONS
True or False
1. F 6. T 11. T 16. F
2. T 7. F 12. F 17. T
3. F 8. T 13. T 18. T
4. T 9. T 14. T 19. F
5. T 10. T 15. F

Multiple Choice
1. E 4. D 7. A 10. C
2. B 5. C 8. C 11. B
3. C 6. C 9. A 12. A
.......................13. B

PERSONAL HOLDING COMPANIES PROBLEMS AND QUESTIONS
True or False
1. A personal holding company will not pay a personal holding company tax on income from an active business.
6. Exempt organizations are those organizations that qualify to receive deductible charitable contributions.
14. Personal holding companies are allowed a charitable contribution deduction subject to 50% of taxable income as adjusted.
15. Personal holding companies pay tax at the maximum corporate rate.
16. Personal holding companies are subject to the alternative minimum tax.
17. Consent dividends are deductible to arrive at personal holding company tax.
21. Banks and trusts companies generally have the same income and deductions as C corporations.

Multiple Choice
1. Under certain circumstances one of the following may not be personal holding company income
a. dividends
b. interest
c. rent
d. annuities
e. none of the above

2. To be a personal holding company a corporation
a. must have at least 5 shareholders
b. must have at least 50% of its income from investments
c. must have five or fewer persons who own more than 50% of the corporation's stock
d. must have only one class of stock
e. none of the above

3. The personal holding company tax does not apply if
a. a personal holding company distributes all of its adjusted taxable income
b. shareholders consent to include the adjusted taxable income in their gross incomes
c. the corporation has a sufficient dividend carryover
d. all of the above
e. none of the above

6. To compute the personal holding company tax, one must
a. subtract the federal income tax from taxable income
b. subtract "business income" from taxable income
c. add back dividends paid to taxable income
d. subtract net capital loss
e. none of the above

9. Harry Holding Co. had 30 unrelated, equal stockholders. For the year ended December 31, 1996, the company had net rental income of $10,000 and dividends from taxable domestic corporations of $100,000. Deductible expenses were $20,000. It paid no dividends. Harry's liability for personal holding company tax is based on
a. 0
b. $10,000
c. $90,000
d. $110,000
e. none of the above

SOLUTIONS
True or False
1. F .7. T 13. F 19. F
2. T .8. F 14. T 20. F
3. F .9. T 15. F
4. T 10. F 16. T
5. T 11. F 17. T
6. F 12. F 18. T

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