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<p class="text-15-black">6. Which statement appearing below does not correctly describe the IRS letter ruling process?<br />a. In certain situations, the IRS will not issue a ruling.<br />b. Some letter rulings are of such importance and general interest that they are later published (in anonymous form) as Revenue Rulings.<br />c. Letter rulings benefit both taxpayers and the IRS.<br />d. Letter rulings are private and are not open to public inspection.<br />e. None of the above is false.<br /><br />7. Bjorn owns a 35% interest in an S corporation that earned $200,000 in 2009. He also owns 10% of the stock in a C corporation that earned $200,000 during the year. The S corporation distributed $10,000 to Bjorn and the C corporation paid dividends of $10,000 to Bjorn. How much income must Bjorn report from these businesses?<br />a. $10,000 income from the S corporation and $10,000 income from the C corporation.<br />b. $70,000 income from the S corporation and $10,000 of dividend income from the C corporation.<br />c. $70,000 income from the S corporation and $0 income from the C corporation.<br />d. $0 income from the S corporation and $0 income from the C corporation. <br />e. None of the above.<br /><br />8. Luis is the sole shareholder of Stork, Inc., a C corporation, and Eduardo owns a sole proprietorship. Both businesses were started in 2009 and make a profit of $80,000 this year. Each owner withdraws $50,000 from his business during the year. Which of the following statements relating to 2009 is incorrect?<br />a. Eduardo must report $80,000 of net profit on his individual return.<br />b. Luis must report dividend income of $80,000.<br />c. Eduardo’s proprietorship is not subject to an entity (separate) level income tax.<br />d. Stork Corporation must pay tax on $80,000.<br />e. None of the above.<br /><br />9. Which of the following statements about a limited liability company is correct?<br />a. A limited liability company with more than one owner can elect to be classified as either a partnership or a proprietorship.<br />b. A limited liability company with only one owner can elect to be classified as either a proprietorship or a corporation.<br />c. If a limited liability company does not make an election under the “check-the-box” regulations, multi-owner entities are classified as corporations.<br />d. If a limited liability company does not make an election under the “check-the-box” regulations, single-person entities are classified as corporations.<br />e. None of the above.<br /><br />10. Copper Corporation owns stock in Bronze Corporation and has net operating income of $600,000 for the year. Bronze Corporation pays Copper a dividend of $200,000. What amount of dividends received deduction may Copper claim if it owns 95% of Bronze stock (assuming Copper’s dividends received deduction is not limited by its taxable income)?<br />a. $0.<br />b. $140,000.<br />c. $160,000.<br />d. $190,000.<br />e. None of the above.<br /><br />11. Which of the following statements is correct regarding the taxation of C corporations?<br />a. The alternative minimum tax does not apply.<br />b. Large corporations are subject to special rules regarding estimated tax payments.<br />c. The due date for a corporate income tax return (ignoring extensions) is the fifteenth day of the fourth month following the close of the corporation’s tax year.<br />d. In general, the required annual payment for corporate estimated taxes is 90% of the corporation’s final tax for the current year.<br />e. None of the above.<br /><br />12. Which, if any, of the following is a characteristic of the DPAD?<br />a. Not applicable in situations involving S corporations.<br />b. Applicable only to manufactured goods that are exported from the U.S.<br />c. Can never apply when the rendition of personal services is involved.<br />d. Can sometimes apply when some of the components of a product are manufactured in foreign countries.<br />e. None of the above.<br /><br />13. Maria Corporation manufactures and sells ceramic dinnerware. The company also sells dinnerware that is purchased from unrelated foreign producers. During the tax year 2009, Maria had a U.S. profit of $1.2 million (QPAI) and a profit from the imported merchandise of $100,000. What is Maria’s DPAD?<br />a. None.<br />b. $36,000.<br />c. $72,000.<br />d. $78,000.<br />e. None of the above.<br /><br /><br />14. Silver Corporation has average gross receipts of $5.7 million, $4.6 million, and $4.8 million in 2007, 2008, and 2009, respectively. Silver is:<br />a. Not subject to the corporate income tax.<br />b. A small corporation with respect to the AMT.<br />c. Not subject to the AMT.<br />d. Not a small corporation with respect to the AMT.<br />e. None of the above.<br /><br />15. Chev Corporation, a calendar year corporation, has alternative minimum taxable income (before any exemption) of $1.28 million for 2009. The company is not a small corporation. If the regular corporate tax is $209,000, Chev’s alternative minimum tax for 2009 is:<br />a. $47,000.<br />b. $209,000.<br />c. $256,000.<br />d. $1,280,000.<br />e. None of the above.<br /><br />16. Tara incorporates her sole proprietorship, transferring it to newly formed Black Corporation. The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000. Also transferred was $10,000 in liabilities, $1,000 of which was personal and the balance of $9,000 being business related. In return for these transfers, Tara receives all of the stock in Black Corporation.<br />a. Black Corporation has a basis of $241,000 in the property.<br />b. Black Corporation has a basis of $240,000 in the property.<br />c. Tara’s basis in the Black Corporation stock is $241,000.<br />d. Tara’s basis in the Black Corporation stock is $249,000.<br />e. None of the above.<br /><br />17. 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:<br />a. Indigo can deduct $25,000 as a business expense.<br />b. Nicole has a recognized gain of $55,000 on the transfer of the real estate.<br />c. Indigo has a basis of $360,000 in the inventory.<br />d. Indigo has a basis of $375,000 in the real estate.<br />e. None of the above.<br /><br /><br />18. Ronald, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Robin Corporation.<br /><br />Adjusted Fair Market<br />Basis Value <br />Cash $ 10,000 $ 10,000 <br />Building 100,000 160,000 <br />Mortgage payable (secured by the building and held for <br />5 years) 120,000 120,000 <br /><br />With respect to this transaction:<br />a. Robin Corporation’s basis in the building is $100,000.<br />b. Ronald has no recognized gain.<br />c. Ronald has a recognized gain of $20,000.<br />d. Ronald has a recognized gain of $10,000.<br />e. None of the above.<br /><br />19. Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000. The land, which has a basis to Carl of $70,000, is worth $160,000.<br />a. Carl will have a gain on the transfer of $70,000.<br />b. Carl will have a gain on the transfer of $30,000.<br />c. Cardinal Corporation will have a basis in the land transferred by Carl of $70,000.<br />d. Cardinal Corporation will have a basis in the land transferred by Carl of $160,000.<br />e. None of the above.<br /><br />20. Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel. In the first year of operation, Camel has net taxable income of $70,000. If Camel distributes $50,000 to Adam:<br />a. Adam has taxable income of $50,000.<br />b. Camel Corporation has a tax deduction of $50,000.<br />c. Adam has no taxable income from the distribution.<br />d. Camel Corporation reduces its basis in the land to $150,000.<br />e. None of the above.<br /><br /><br />21. In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land (fair market value of $400,000) and cash of $100,000 to the corporation. Several months after the donation, Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.<br />a. Yellow recognizes income of $100,000 as to the donation.<br />b. Yellow has a zero basis in the land and a basis of $450,000 in the plant.<br />c. Yellow recognizes income of $500,000 as to the donation.<br />d. Yellow has a zero basis in the land and a basis of $350,000 in the plant.<br />e. None of the above.<br /><br />22. The tax treatment of corporate distributions at the shareholder level does not depend on:<br />a. The basis of stock in the hands of the shareholder.<br />b. The earnings and profits of the corporation.<br />c. The character of the property being distributed.<br />d. Whether the distributed property is subject to a liability.<br />e. None of the above.<br /><br />23. Blue Corporation distributes property to its sole shareholder, Zeke. The property has a fair market value of $450,000, an adjusted basis of $305,000, and is subject to a liability of $250,000. Current E & P is $550,000. With respect to the distribution, Blue has a gain of:<br />a. $200,000 and Zeke has dividend income of $450,000.<br />b. $145,000 and Zeke’s basis is the distributed property is $305,000.<br />c. $200,000 and Zeke’s basis in the distributed property is $450,000.<br />d. $145,000 and Zeke has dividend income of $200,000.<br />e. None of the above.<br /><br />24. Scarlet Corporation has a deficit in accumulated E & P of $500,000. It has current E & P of $350,000. On July 1, Scarlet distributes $400,000 to its sole shareholder, Lupita. Lupita has a basis of $95,000 in her stock in Scarlet Corporation. As a result of the distribution, Lupita has:<br />a. Dividend income of $400,000.<br />b. Dividend income of $95,000 and reduces her stock basis to zero.<br />c. Dividend income of $350,000 and reduces her stock basis to $45,000.<br />d. No dividend income, reduces her stock basis to zero, and has a capital gain of $400,000.<br />e. None of the above.<br /><br /><br />25. Green Corporation has accumulated E & P of $50,000 on January 1, 2009. In 2009, Green has current E & P of $65,000 (before any distribution). On December 31, 2009, the corporation distributes $125,000 to its sole shareholder, Maxwell (an individual). Green Corporation’s E & P as of January 1, 2010 is:<br />a. $0.<br />b. ($10,000).<br />c. $50,000.<br />d. $65,000.<br />e. None of the above.<br /><br />26. Tern Corporation distributes equipment (basis of $70,000 and fair market value of $90,000) as a property dividend to its shareholders. The equipment is subject to a liability of $100,000. Tern Corporation recognizes gain of:<br />a. $0.<br />b. $20,000.<br />c. $30,000.<br />d. $100,000.<br />e. None of the above.<br /><br />27. Ten years ago, Connie purchased 4,000 shares in Platinum Corporation for $40,000. In the current year, Connie receives a nontaxable stock dividend of 40 shares of Platinum preferred. Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common. Based on this information, Connie’s basis is:<br />a. $40,000 in the common and $16,000 in the preferred.<br />b. $4,000 in the common and $136,000 in the preferred.<br />c. $36,000 in the common and $4,000 in the preferred.<br />d. $39,600 in the common and $400 in the preferred.<br />e. None of the above.<br /><br />28. Orange Corporation distributes property worth $300,000, basis of $340,000, to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $110,000, which the shareholder assumes. The basis of the property to the shareholder is:<br />a. $190,000.<br />b. $230,000.<br />c. $300,000.<br />d. $340,000.<br />e. None of the above.<br /><br />29. Currently, Brown Corporation (E & P of $800,000) has 1,000 shares of common stock outstanding. Pat owns 300 shares. His wife, Abby, owns 300 shares, his daughter, Kate, owns 200 shares, and his father, Harold, owns 200 shares. Two years ago, Pat transferred $50,000 to Brown Corporation in exchange for 100 newly issued shares of nonvoting preferred stock. In the current year, Brown Corporation redeems Pat’s preferred stock for $60,000, its fair market value. With respect to the distribution in redemption of the preferred stock:<br />a. Pat has dividend income of $10,000. <br />b. Pat has dividend income of $60,000. <br />c. Pat has a long-term capital gain of $10,000. <br />d. Pat has a long-term capital gain of $60,000. <br />e. None of the above.<br /><br />30. Brenda owns 900 shares of Eagle Corporation stock at a time when Eagle has 1,500 shares of stock outstanding. The remaining shareholders are unrelated to Brenda. What is the minimum number of shares Eagle must redeem from Brenda so that the transaction will qualify as a disproportionate redemption?<br />a. 720 shares.<br />b. 375 shares.<br />c. 347 shares.<br />d. 180 shares.<br />e. None of the above.</p><p class="text-15-black">31. Flamingo Corporation (E & P of $700,000) has 1,000 shares of stock outstanding. Jaime owns 400 shares, Lupe (Jaime’s daughter) owns 400 shares, and the remaining 200 shares are owned by unrelated individuals. In an effort to raise funds for another investment, Jaime convinces Flamingo to redeem all of his shares for $380,000. Jaime acquired the stock seven years ago for $60,000. After the redemption, Jaime continued to serve as Flamingo’s controller but Gabriella assumed his role as a member of the corporation’s board of directors. As a result of the transaction, Jaime must recognize:<br />a. $320,000 long-term capital gain. <br />b. $380,000 dividend income.<br />c. $380,000 long-term capital gain. <br />d. $320,000 dividend income. <br />e. None of the above.<br /><br /><br />32. Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $550,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 100 shares from Eleanor for $290,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:<br />a. $250,000 capital gain.<br />b. $290,000 capital gain.<br />c. $250,000 dividend. <br />d. $290,000 dividend. <br />e. None of the above.<br /><br />33. In comparing a qualifying stock redemption with a complete liquidation, which of the following statements is incorrect?<br />a. Liquidations and qualifying stock redemptions parallel each other in terms of the effect that E & P has on the nature of the gain or loss recognized by the shareholder.<br />b. A corporation will recognize gain upon the distribution of appreciated property for both a qualifying stock redemption and a complete liquidation, but a corporation will recognize loss upon a distribution of depreciated property only for a complete liquidation.<br />c. Both a qualifying stock redemption and a complete liquidation produce sale or exchange treatment to the shareholder.<br />d. The basis of property acquired in a qualifying stock redemption is equal to the distributing corporation’s basis in the property, whereas the basis of property acquired in a complete liquidation is equal to its fair market value on the date of distribution. <br />e. Section 267 disallows recognition of losses between related parties in a qualifying stock redemption but not in a complete liquidation.</p>
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