THE PARTNERS SHARE ECONOMIC RISK OF LOSS FROM RECOURSE LIABILITIES IN THE SAME WAY THEY SHARE PARTNERSHIP LOSSES.
UESTION 1Money Corporation has the following income and expenses for the tax year:Gross profit on sales:$200,000Expenses:700,000Dividends received from less-than-20%-owned domestic corporations:20,000What is Money’s net operating loss?$220,000$480,000$520,000$494,0002 pointsQUESTION 2On January 1, Helmut pays $2,000 for a 10% capital, profits, and loss interest in a partnership, which has recourse liabilities of $20,000. The partners share economic risk of loss from recourse liabilities in the same way they share partnership losses. In the same year, the partnership incurs losses of $6,000, and the recourse liabilities increase by $5,000. Helmut and the partnership use a calendar tax year-end. Helmut’s basis at year-end is:$1,500$3,500$3,900$2,0002 pointsQUESTION 3Identify which of the following statements is true.Payment of deficiency dividends will prevent the imposition of the accumulated earnings tax.A health service corporation can claim an accumulated earnings credit of $250,000.All corporations are exempt from the accumulated earnings tax on their first $250,000 of accumulated earnings.All of the above are false.2 pointsQUESTION 4What is an important aspect of a limited-liability partnership?It is the same as a limited partnership where the general partner has unlimited liability.All partners have unlimited liability.All partners have limited liability regarding all partnership activities.Partners have unlimited liability arising from his or her own acts of negligence or misconduct or similar acts of any person under his or her direct supervision.2 pointsQUESTION 5Identify which of the following statements is true.The NOL deduction claimed by a corporation must be taken after the dividends-received deduction.The charitable contribution deduction is computed after the deduction for an NOL.The charitable contribution deduction is computed after the dividends-received deduction.All of the above are false.2 pointsQUESTION 6A corporation cannot reasonably accumulate earnings to:Fund an employee retirement planProtect against pending litigationRedeem stock of an elderly shareholder where such accumulation occurs prior to the shareholder’s deathSelf-insure2 pointsQUESTION 7The recipient of a taxable stock dividend includes the value of the stock received in gross income, and that amount becomes the basis for the stock received.TrueFalse2 pointsQUESTION 8All of the following statements are true except:The net income of an S corporation is subject to double taxation because it is taxed at the entity level, and dividends paid from the S corporation to individual shareholders are also taxed.LLCs are generally taxed as partnerships.The net income of a C corporation is subject to double taxation because it is taxed at the entity level, and dividends paid from the C corporation to individual shareholders is also taxed.The net income earned by a sole proprietorship is reported on the owner’s individual income tax return.2 pointsQUESTION 9When computing the accumulated earnings tax, the dividends-paid deduction is not available for:Throwback dividendsDividends paid during the tax yearStock dividendsAll of the above are deductible.2 pointsQUESTION 10Which of the following is not permitted an accumulated earnings credit based on reasonable needs of the business?An incorporated engineerAn operating companyAn investment companyAll of the above are permitted a credit based on reasonable business needs.2 pointsQUESTION 11Limited-liability company members (owners) are responsible for the liabilities of their limited-liability company.TrueFalse2 pointsQUESTION 12Identify which of the following statements is true.The terms regular corporation and C corporation are synonymous.A corporation is a separate taxpaying entity that must file a tax return annually.A newly formed corporation must select its basic accounting method.All of the above are true.2 pointsQUESTION 13Identify which of the following statements is true.The accumulated earnings tax is not levied on the corporation’s total accumulated earnings balance, but only on its current-year addition to the balance.A corporation can be subject to both the accumulated earnings tax and the personal holding company tax in the same year.The accumulated earnings tax is applied to a corporation’s earnings. If the earnings are not subsequently distributed, the earnings will be taxed again under the accumulated earnings tax the next year.All of the above are false.2 pointsQUESTION 14Erin, Sarah, and Timmy are equal partners in EST Partnership. Sarah also owns 40% of Elton Corporation. The remaining 60% is owned 40% by Erin and 60% by Sarah’s uncle. What percent ownership does Sarah directly or constructively own in Elton Corporation?80%64%40%100%2 pointsQUESTION 15Identify which of the following statements is false.Members of an affiliated group can claim a 90% dividends-received deduction for dividends received from other group members that is not subject to a taxable income limitation.A corporate dividends-received deduction is not allowed for dividends received on stock held for 40 days.The 70% dividends-received deduction is limited to 70% of the taxable income of the corporation without regard to any NOL deduction, any capital loss carryback, and the dividends-received deduction itself unless the dividends-received deduction produces an NOL.All of the above are false.2 pointsQUESTION 16There are no tax consequences of a partnership converting to a C corporation.TrueFalse2 pointsQUESTION 17Which of the following is not an advantage of a limited-liability company (LLC)?Ability to choose between taxation as a partnership or corporationLimited liability for all members of an LLCDouble taxationAll of the above are advantages of an LLC.2 pointsQUESTION 18A Canadian subsidiary cannot file as part of the consolidated group with its U.S. parent.TrueFalse2 pointsQUESTION 19Jeremy, an American citizen, earned $200,000 during 2011 while employed in Saudi Arabia. Jeremy is entitled to the maximum foreign-earned income exclusion. Jeremy also incurred $40,000 of deductible expenses attributable to the foreign-earned income. Jeremy may deduct how much in expenses?$0$40,000$21,420$18,5802 pointsQUESTION 20Bart has a partnership interest with a $32,000 basis. He receives a current distribution of $6,000 cash, unrealized receivables (FMV $9,000, basis $10,000), inventory (FMV $8,000, basis $4,000), investment land (FMV $7,000, basis $4,000), and a building (FMV $20,000, basis $8,000). No depreciation recapture applies with respect to the building. The partners’ relative interests in the Sec. 751 assets do not change as a result of the current distribution. Barts basis in the building is:$4,000$3,000$8,000$6,0002 pointsQUESTION 21Identify which of the following statements is true.A corporation’s net capital gain (minus any federal income taxes paid with respect to such gain) increases the tax base for the accumulated earnings tax.A corporation accumulates earnings to fund a buy-sell agreement. Such an accumulation of earnings is a reasonable business need.A corporation accumulates earnings to fund the redemption of a shareholder’s stock following her death so as to provide her estate with liquidity to pay death taxes. Such an accumulation of earnings is a reasonable business need.All of the above are false.2 pointsQUESTION 22For 2011, the maximum foreign-earned income exclusion is$95,000$91,500$92,900None of the above2 pointsQUESTION 23Which of the following statements about a partnership is true?Partners are taxed on their allocable share of income whether it is distributed or not.Partners are considered employees of the partnership.Partners are taxed on distributions from a partnership.A partnership is a taxpaying entity.2 pointsQUESTION 24Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis. Bass distributes a nontaxable preferred stock dividend. When the preferred stock is distributed, it has an FMV of $60,000, and the FMV of the 2,000 common stock shares is $180,000. The basis of the preferred stock is:$20,000$0$80,000$60,0002 pointsQUESTION 25Which of the following actions cannot be used to eliminate a potential accumulated earnings tax liability situation involving a corporation owned by a mother and a father?Make a cash distribution within 2.5 months after the end of the tax year.Create plans to invest retained earnings in a plant expansion.Liquidate the corporation.Make a deficiency distribution within 90 days of the date on which the IRS determines that an accumulated earnings tax liability is owed.2 pointsQUESTION 26The accumulated earnings tax does not apply to corporations that:Are closely held corporationsAre personal holding companiesAre members of a controlled groupHave more than one class of stock2 pointsQUESTION 27Ashley, a calendar year taxpayer, owns 400 shares of Yale Corporation stock that she purchased 2 years ago for $4,000. In the current year, Ashley sells all 400 shares of the Yale Corporation stock for $2,400 on December 27. On January 4 of the following year, Ashley purchases 300 shares of Yale Corporation stock for $800. Ashley’s recognized loss and her basis in the newly purchased 300 shares of Yale Corporation stock are:Recognized LossBasis$0$3,200Recognized LossBasis$1,600$800Recognized LossBasis$400$2,000Recognized LossBasis$1,200$2,0002 pointsQUESTION 28A corporation can be subject to both the accumulated earnings tax and the personal holding company tax in the same year.TrueFalse2 pointsQUESTION 29Glacier Corporation, a large retail sales company, has a taxable income of $20,000,000. What is Glacier Corporation’s tax?$7,200,000$7,800,000$7,000,000$6,800,0002 pointsQUESTION 30To avoid the accumulated earnings tax, a corporation needs to have a definite plan for expending the accumulated earnings.TrueFalse2 pointsQUESTION 31Melanie, a U.S. citizen living in Paris, France, for the last 3 years, earns a salary of $110,000 in 2011. Melanie’s housing costs are $24,000 per year, which is reasonable. How much can Melanie exclude from income?$92,900$24,000$102,036$134,0002 pointsQUESTION 32Distributions from corporations to the shareholders in a nonliquidating distribution will usually be classified as a dividend up to the amount of the corporations:Retained earningsEarnings and profitsStock basisTaxable income for the year2 pointsQUESTION 33Identify which of the following statements is false.The check-the-box regulations permit an LLC to be taxed as a C corporation.Under the check-the-box regulations, an LLC that has only two members (owners) must be taxed as a partnership.Once an election is made to change its classification, an entity cannot change again for 60 months.A business need not be incorporated under state or federal law to be taxed as a corporation.2 pointsQUESTION 34Corporations recognize gains and losses on the distribution of property to shareholders if the property’s fair market value differs from its basis.TrueFalse2 pointsQUESTION 35All of the following are recognized as reasons for accumulating earnings except:Working capital needsRedemption of stock of deceased shareholderProduct liability loss reservesAll of the above are recognized reasons for accumulating earnings2 pointsQUESTION 36Identify which of the following statements is true.If a corporation receives dividends eligible for the 80% dividends-received deduction and the 70% dividends-received deduction, the 70% dividends-received deduction reduces taxable income prior to the 80% deduction.The dividends-received deduction is designed to reduce double taxation of corporate dividends.The full 80% dividends-received deduction is available without restriction.All of the above are false.2 pointsQUESTION 37Identify which of the following statements is false.The distribution of stock rights is generally tax free under Sec. 305.The distribution of stock rights will be taxable if the value of the stock rights is more than 15% of the value of the underlying stock.The holding period for stock rights includes the holding period for the underlying stock.If the value of stock rights is less than 15% of the value of the underlying stock, the basis of the rights is zero unless the shareholder elects to allocate basis to the rights.2 pointsQUESTION 38An election to forgo an NOL carryback must be made on or before the return due date (including extensions) for the year in which the NOL is incurred.TrueFalse2 pointsQUESTION 39In a taxable distribution of stock, the recipient shareholder takes a basis equal to the FMV of the stock received.TrueFalse2 pointsQUESTION 40In an S corporation, shareholdersMay allocate income among themselves in order to consider special contributionsAre taxed on their proportionate share of earningsAre only taxed on salariesAre taxed only on dividends2 pointsQUESTION 41Distributions in excess of a corporation’s current and accumulated earnings and profits are treated as a nontaxable recovery of capital unless they exceed the basis of the stock.TrueFalse2 pointsQUESTION 42Three members form an LLC in the current year. Which of the following statements is incorrect?If the LLC elects to use its default classification, it can elect to change its status to being taxed as a C corporation beginning with the third tax year after the initial classification.The LLC’s default classification under the check-the-box rules is as a partnership.The LLC can elect to be taxed as a C corporation with no special tax consequences.The LLC can elect to have its default classification ignored.2 pointsQUESTION 43Identify which of the following statements is true.An election to forgo an NOL carryback must be made on or before the return due date (including extensions) for the year in which the NOL is incurred.In computing an NOL for the current year, a deduction is allowed for NOLs from previous years.A corporate NOL can be carried back two years and forward 15 years.All of the above are false.2 pointsQUESTION 44S corporations must allocate income to shareholders based on their proportionate stock.TrueFalse2 pointsQUESTION 45In a limited-liability partnership, a partner is liable for his or her own acts of negligence or misconduct.TrueFalse2 pointsQUESTION 46In September of 2011, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale, she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize?$800,000$-0-$100,000$900,0002 pointsQUESTION 47Which of following generally does not indicate an unreasonable earnings accumulation?Expenditure of corporate funds for the personal benefit of the shareholdersInvestments in properties or securities unrelated to the activities of the corporationLoans to shareholdersPlanned expansion of business facilities2 pointsQUESTION 48When computing the accumulated earnings tax, which of the following is not a reduction to arrive at accumulated taxable income?Accrued federal income taxesDividends-paid deductionAccumulated earnings creditNOL deduction claimed2 pointsQUESTION 49An individual shareholder owns 3,000 shares of Baxter Corporation common stock with a basis of $10 per share. She receives a nontaxable 5% stock dividend. The basis per share of the common stock after the stock dividend is:$9.52$10.00$9.00$9.502 pointsQUESTION 50All of the following are classified as flow-through entities for tax purposes except:S corporationsLimited-liability companiesC corporationsPartnerships