Eagle corporation owns stock in hawk corporation

1. (TCOs 1 and 8) Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation's stock is distributed equally to Kevin and Nicole. As a result of these transfers, (Points : 5)

Indigo can deduct $25,000 as a business expense. Nicole has a recognized gain of $55,000 on the transfer of the real estate. Indigo has a basis of $360,000 in the inventory. Indigo has a basis of $375,000 in the real estate. None of the above

2. (TCOs 1 and 8) Joe and Kay form Gull Corporation. Joe transfers cash of $250,000 for 200 shares in Gull Corporation. Kay transfers property with a basis of $50,000 and fair market value of $240,000. She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation. The value of Kay's services is $10,000. What occurs with respect to the transfer? (Points : 5)

Gull Corporation has a basis of $240,000 in the property transferred by Kay. Neither Joe nor Kay recognizes gain or income on the exchanges. Gull Corporation has a business deduction under § 162 of $10,000. Gull capitalizes $10,000 as organizational costs. None of the above

3. (TCOs 1, 8, and 9) Eagle Corporation owns stock in Hawk Corporation and has taxable income of $160,000 for the year before considering the dividends received deduction. Hawk Corporation pays Eagle a dividend of $200,000, which was considered in calculating the $160,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock? (Points : 5)

$0 $112,000 $140,000 $160,000 None of the above

4. (TCOs 1 and 8) George Judson is the sole shareholder and employee of Black Corporation, a C corporation that is engaged exclusively in engineering services. During the year, Black has gross revenues of $300,000 and operating expenses (excluding salary) of $100,000. Further, Black Corporation pays George a salary of $150,000. The salary is reasonable in amount and George is in the 35% marginal tax bracket irrespective of any income from Black. Assuming that Black Corporation distributes all after-tax income as dividends, how much total combined income tax do Black and George pay in the current year? (Ignore any employment tax considerations.) (Points : 5)

$64,875 $70,000 $74,875 $81,375 None of the above

5. (TCOs 1 and 9) Red Corporation, a calendar year taxpayer, has taxable income of $600,000. Among its transactions for the year are the following:

Collection of proceeds from insurance policy on life of corporate officer (in excess of cash surrender value)

$10,000

Realized gain (not recognized) on an involuntary conversion

$5,000

Nondeductible fines and penalties

$35,000

Disregarding any provision for federal income taxes, what is Red Corporation's current E & P? (Points : 5)

$565,000 $575,000 $580,000 $650,000 None of the above

6. (TCOs 1 and 9) Mulberry Corporation has an August 31 year-end. Mulberry had $50,000 in accumulated E & P at the beginning of its 2011 fiscal year (September 1, 2010) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Charles, on November 30, 2010. If Charles is a calendar year taxpayer, how should he treat the distribution when he files his 2010 income tax return (assuming the return is filed by April 15, 2011)? (Points : 5)

The distribution has no effect on Charles in the current year. $50,000 of dividend income and $15,000 recovery of capital. $60,000 of dividend income and $5,000 recovery of capital. $65,000 of dividend income. None of the above

7. (TCOs 1 and 10) Identify a disadvantage of an S corporation. (Points : 5)

Generally, trusts cannot be shareholders. Losses flow through to the shareholders. The AMT on corporations is avoided. Tax-exempt income flows through to the shareholders. None of the above

8. (TCOs 1 and 10) You are given the following facts about a one-shareholder S corporation:

Ordinary income

$100,000

Payroll tax penalty

$2,140

Stock purchases

$32,000

Tax-exempt insurance proceeds

$50,000

Insurance premiums paid (nondeductible)

$2,700

Beginning stock basis

$36,800

Prepare the shareholder's ending stock basis. (Points : 5)

$163,960 $181,960 $213,960 $216,100

9. (TCOs 1 and 10) On January 1, 2010, Kinney, Inc. an electing S corporation, has $4,000 of AEP and a balance of $10,000 in AAA. Kinney has two shareholders, Erin and Maine, each of whom owns 500 shares of Kinney's stock. Kinney's 2010 taxable income is $5,000. Kinney distributes $6,000 to each shareholder on February 1, 2010, and distributes another $3,000 to each shareholder on September 1. How is Erin taxed on this distribution? (Points : 5)

$500 dividend income $1,000 dividend income $1,500 dividend income $3,000 dividend income None of the above

10. (TCOs 1 and 10) Apple, Inc. a cash basis S corporation in Orange, Texas, formerly was a C corporation. Apple has the following assets and liabilities on January 1, 2010, the date the S election is made:

Adjusted Basis

Fair Market Value

Cash

$200,000

$200,000

Accounts receivable

-0-

$105,000

Equipment

$110,000

$100,000

Land

$1,800,000

$2,500,000

Accounts payable

-0-

$110,000

During 2010, Apple collects the accounts receivable and pays the accounts payable. The land is sold for $3 million, and taxable income for the year is $590,000. What is Apple's built-in gains tax?

(Points : 5)

$0 $206,500 $590,000 $695,000 None of the above