Ch13 Full Test Bank Corporate Formations And Operations

Essentials of Federal Taxation, 11e (Spilker)

Chapter 13 Corporate Formations and Operations

1) Maria defers $100 of gain realized in a section 351 transaction. The stock she receives in the exchange has a fair market value of $500. Maria's tax basis in the stock will be $400.

2) Control as it relates to a section 351 transaction is strictly defined to be 80 percent or more of the voting power of the stock of the corporation to which property is transferred.

3) The definition of property as it relates to a section 351 transaction includes money.

4) To meet the control test under section 351, a taxpayer transferring property to a corporation must by himself own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer even if there are other transferors of property.

5) Gain or loss realized in a section 351 transaction will be recognized if the taxpayer receives boot in the exchange.

6) A taxpayer must receive voting common stock to be eligible for deferral in a section 351 exchange.

7) A taxpayer always will have a tax basis in boot received in a section 351 transaction equal to its fair market value.

8) M Corporation assumes a $200 liability attached to property transferred to it by Jane in a section 351 transaction. The assumed liability will, as a general rule, be treated as boot received by Jane.

9) Han transferred land he held as an investment to his corporation in a section 351 transaction. Han had held the land for two years prior to the transfer. Han's holding period in the stock he received in the exchange includes the period for which he held the land before transferring it to the corporation.

10) In general, a corporation can choose to use either the accrual or cash method of accounting no matter how large the corporation.

11) Corporations calculate adjusted gross income (AGI) in the same way as individuals.

12) Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

13) Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.

14) Although a corporation may report a temporary book–tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.

15) An unfavorable temporary book–tax difference is so named because it causes taxable income to decrease relative to book income.

16) Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book–tax difference.

17) Federal income tax expense reported on a corporation's books generates a temporary book–tax difference.

18) For a corporation, purchased goodwill generally leads to temporary book–tax differences.

19) In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. It has a favorable temporary book–tax difference for that year.

20) For incentive stock options, the value of the options that is expensed as compensation in a given year creates a permanent, unfavorable book–tax difference.

21) For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

22) A nonqualified stock option will create a permanent book–tax difference in the year it is exercised if the bargain element is different from the estimated value of the option for financial accounting purposes when it was issued.

23) In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.

24) A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.

25) A corporation may carry a net capital loss back two years and forward 20 years.

26) A corporation may carry a net capital loss back three years and forward five years.

27) Corporations can carry net operating losses occurring in 2019 back two years and forward 20 years.

28) Bingo Corporation incurred a net operating loss in 2017.  A portion of the loss carried over to 2019. Bingo can offset up to 100 percent of the corporation's taxable income in 2019.

29) Net operating losses generally create permanent book–tax differences.

30) Net capital loss carryovers, but not carrybacks, are deductible against capital gains in determining a corporation's net operating loss for the year.

31) Accrual-method calendar-year corporations are not allowed to deduct charitable contributions unless they actually make payment to the charity by year-end.

32) GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified nonprofit organization, in November of 2019. GenerUs made payment to FoodBank on February 2, 2020. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2019 tax return.

33) NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while capital loss carrybacks are not.

34) Corporations may carry excess charitable contributions forward five years, but they may not carry them back.

35) A corporation generally will report a favorable, temporary book–tax difference when it deducts a charitable contribution carryover.

36) Corporations are not allowed to deduct charitable contributions in excess of 10  percent of the corporation's taxable income (before the charitable contribution and certain other deductions).

37) The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.

38) Corporations compute their dividends received deduction by multiplying the dividend amount by 50 percent, 65 percent, or 100 percent depending on their ownership in the distributing corporation's stock.

39) The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero.

40) The dividends received deduction is subject to a limitation based on income.

41) Corporate taxable income is subject to a flat 21 percent tax rate.

42) The corporate tax form is Form 1065.

43) Schedule M-1 reconciles book income to the taxable income that is applied to the tax rate to determine the corporation's gross tax liability.

44) Both Schedules M-1 and M-3 require taxpayers to identify book–tax differences as either temporary or permanent.

45) By default, an affiliated group must file a consolidated tax return.

46) The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.

47) Calendar-year corporations that request an extension for filing their tax returns will have an extended tax return due date of October 15.

48) Volos Company (a calendar-year corporation) began operations in March of 2017 and was not profitable through December of 2018. Volos has been profitable for the first quarter of 2019 and is trying to determine its first-quarter estimated tax payment (it expects a tax liability for the year of over $30,000). It will have no estimated tax payment requirement in 2019 because it had no tax liability for the 2018 tax year and has been in business for at least 12 months.

49) Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

50) Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.

51) For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.

52) Which of the following requirements do not have to be met in a section 351 transaction?

A) Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred.

B) In the aggregate, the transferors of property to the corporation must collectively control the corporation immediately after the transfers.

C) Only property transferred to a corporation is eligible for deferral.

D) All transfers of property to a corporation must be made simultaneously to qualify for deferral.

53) Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $150.

B) $200.

C) $250.

D) $300.

54) Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Antoine's tax basis in the stock received in the exchange?

A) $600.

B) $550.

C) $500.

D) $450.

55) Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $800.

B) $600.

C) $550.

D) $450.

56) Roy transfers property with a tax basis of $800 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $400 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Roy's tax basis in the stock received in the exchange?

A) $800.

B) $750.

C) $700.

D) $500.

57) Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 cash in a transaction that qualifies as a section 351 transfer. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil's tax basis in the stock received in the exchange?

A) $6,000.

B) $5,000.

C) $4,000.

D) $3,000.

58) Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

A) $5,000.

B) $4,000.

C) $3,000.

D) $2,000.

59) Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle's tax basis in the stock received in the exchange?

A) $900.

B) $850.

C) $750.

D) $700.

60) Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $900.

B) $850.

C) $800.

D) $750.

61) Which of the following statements best describes the concept of control as it applies to a section 351 transaction?

A) Control is defined as the ownership of 80 percent or more of a corporation's voting stock.

B) Control is defined as the ownership of 80 percent or more of the fair market value of a corporation's stock.

C) Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the fair market value of a corporation's stock.

D) Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the total number of shares of each class of nonvoting stock.

62) Which of the following classes of stock is not allowed to be used in a section 351 transaction?

A) Voting common stock.

B) Voting preferred stock.

C) Nonvoting preferred stock.

D) All of these classes of stock can be used in a section 351 transaction.

63) Which of the following statements best describes the impact of receiving boot in a section 351 transaction?

A) Boot received has no impact on the recognition of gain or loss realized in a section 351 transaction.

B) Boot received causes gain realized to be recognized, but not loss realized.

C) Boot received causes loss realized to be recognized, but not gain realized.

D) Boot received causes gain and loss realized to be recognized.

64) Sami transferred property with a fair market value of $600 and a tax basis of $300 to a corporation in exchange for stock with a fair market value of $600. In addition, Sami received stock with a fair market value of $50 in exchange for services she provided to the corporation in the incorporation process. Which of the following statements best describes the tax result to Sami as a result of the exchanges?

A) Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

B) Sami will recognize $50 of compensation income, but she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

C) Sami will not recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

D) Sami will not recognize $50 of compensation income, and she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

65) Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy's tax basis in the stock received in the exchange?

A) $900.

B) $750.

C) $650.

D) $450.

66) Which of the following statements best describes the tax results to a shareholder in a section 351 transaction when liabilities on property transferred to the corporation are assumed by the corporation?

A) Liabilities assumed by a corporation on a section 351 transfer are always treated as boot.

B) Liabilities assumed by a corporation on a section 351 transfer are never treated as boot.

C) Liabilities assumed by a corporation on a section 351 transfer are treated as boot if the total liabilities assumed exceed the total basis of the assets transferred.

D) Liabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.

67) Which of the following statements best describes the "built-in loss" rules that apply to the basis of property transferred to a corporation under section 351?

A) If the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property's fair market value.

B) If the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property's tax basis in the hands of the shareholder.

C) If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property.

D) If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate tax basis of the property.

68) Which of the following statements best describes the tax consequences that arise from a contribution of capital to a corporation by an existing shareholder?

A) The shareholder recognizes gain and loss on the transfer and the corporation's basis in the property transferred equals its fair market value.

B) The shareholder does not recognize gain and loss on the transfer and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.

C) The shareholder recognizes gain and loss on the transfer and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.

D) The shareholder does not recognize gain and loss on the transfer and the corporation's basis in the property transferred equals zero.

69) Which of the following is not included in the corporate income tax formula?

A) Gross income

B) Adjusted gross income

C) Taxable income

D) Income tax liability

70) Which of the following statements regarding a corporation's overall accounting method is true?

A) If a corporation's average gross receipts for 2016–2018 are $26,500,000, the corporation is required to use the accrual method of accounting in 2019.

B) If a corporation's first year of existence is 2018 and the corporation's gross receipts in 2018 are $29 million, the corporation is required to use the accrual method of accounting in 2019.

C) Both of these are true statements.

D) Neither of these are true statements.

71) Which of the following does NOT create a permanent book–tax difference?

A) Organizational and start-up expenses.

B) Entertainment expenses.

C) Fines and penalties expenses.

D) Municipal bond interest income.

72) Which of the following does NOT create a temporary book–tax difference?

A) Deferred compensation.

B) Bad debt expense.

C) Depreciation expense.

D) Dividends received deduction

73) Which of the following statements regarding book–tax differences is true?

A) Corporations are not required to report book–tax differences on their income tax returns.

B) Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book–tax differences.

C) Income excludable for tax purposes usually creates a temporary book–tax difference.

D) None of the choices are true.

74) It is important to distinguish between temporary and permanent book–tax differences for which of the following reasons?

A) Temporary book–tax differences will reverse in future years whereas permanent differences will not.

B) Certain corporations are required to disclose book–tax differences as permanent or temporary on their tax returns.

C) Both "Temporary book-tax differences will reverse in future years whereas permanent differences will not." and "Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns." are the reasons.

D) Neither "Temporary book-tax differences will reverse in future years whereas permanent differences will not." nor "Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns." is the reason.

75) TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees. What is the nature of the book–tax difference created by this expense?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

76) iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book–tax difference relating to this expense?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

77) AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book–tax difference associated with the gain on the sale?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

78) Over what time period do corporations amortize purchased goodwill for tax purposes?

A) 180 months.

B) 150 months.

C) 60 months.

D) None of the choices are correct.

79) Which of the following statements regarding book–tax differences associated with purchased goodwill is false?

A) It is possible to have no book–tax difference in a year when there is no goodwill amortization for tax purposes.

B) In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book–tax difference will be unfavorable.

C) Temporary book–tax differences associated with goodwill are always favorable.

D) If goodwill has been fully amortized for tax purposes in a previous year, the book–tax difference is equal to the amount of impairment recognized.

80) Which of the following describes the correct treatment of incentive stock options (ISOs)?

A) Financial accounting—no expense; tax—no deduction.

B) Financial accounting—no expense; tax—deduct bargain element at exercise.

C) Financial accounting—expense value over vesting period; tax—no deduction.

D) Financial accounting—expense value over vesting period; tax—deduct bargain element at exercise.

81) Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)?

A) Financial—no expense; tax—no deduction.

B) Financial—no expense; tax—deduct bargain element at exercise.

C) Financial—expense value over vesting period; tax—no deduction.

D) Financial—expense value over vesting period; tax—deduct bargain element at exercise.

82) Which of the following statements regarding nonqualified stock options (NQOs) is false?

A) Book–tax differences associated with NQOs may be either permanent or temporary.

B) If the initial estimated value of the options that are exercised during the year is greater than the bargain element of those options, the book–tax difference for that year is unfavorable.

C) If the initial estimated value of the options that are exercised during the year is greater than the bargain element of those options, the book–tax difference for that year is entirely temporary.

D) None of these choices are false (all of these choices are true).

83) Which of the following statements regarding incentive stock options (ISOs) is false?

A) ISOs that vest solely create permanent book–tax differences.

B) For ISOs, book–tax differences are always unfavorable.

C) For books, the initial estimated value of the ISOs is expensed pro rata over the vesting period.

D) Book–tax differences associated with ISOs may be either permanent or temporary.

84) Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total) on December 31, 2018. The options vest entirely on December 31, 2019. The options were all exercised in 2019 with a bargain element on each option of $3. What is the 2019 book–tax difference associated with the stock options?

A) $40,000 unfavorable.

B) $40,000 favorable.

C) $20,000 unfavorable.

D) $20,000 favorable.

E) None of the choices are correct.

85) On December 31, 2018, Khors Company issued nonqualified stock options to its CEO. The options fully vest on December 31, 2019, and the options were valued at $50,000 on the grant date. Ms. Svaro exercised the options on December 31, 2019. The total bargain element at the time of exercise was $40,000. For 2019, what is the nature of the book–tax difference due to the options exercised?

A) Favorable and temporary.

B) Favorable and permanent.

C) Unfavorable and temporary.

D) Unfavorable and permanent.

E) Not enough information to determine.

86) Which of the following statements regarding capital gains and losses is false?

A) In terms of tax treatment, corporations generally prefer capital gains to ordinary income.

B) Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.

C) Corporations can carry back net capital losses three years and they can carry them forward for five years.

D) Corporations must apply capital loss carrybacks and carryovers in a particular order.

87) For corporations, which of the following regarding net capital losses is true?

A) A corporation that experiences a net capital loss has a favorable book–tax difference in the year of the loss.

B) A corporation that experiences a net capital loss in year 4 first carries the loss back to year 3, then year 2, and then year 1 before carrying it forward.

C) Net capital loss carrybacks are deductible in determining a corporation's net operating loss.

D) Net capital loss carrybacks and carryovers create temporary book–tax differences if they are used before they expire.

88) Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book–tax difference in year 6 related to the net capital carryover?

A) $11,000 unfavorable.

B) $11,000 favorable.

C) $16,000 unfavorable.

D) $16,000 favorable.

89) BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book–tax difference created by the net operating loss carryover deduction in the current year?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

90) Which of the following is allowable as a deduction in calculating a corporation's net operating loss?

A) Charitable contribution deduction.

B) Net operating loss carryover from previous year.

C) Net capital loss carryback.

D) None of these choices are correct.

91) Which of the following statements regarding net operating losses is true?

A) A corporation can carry a net operating loss incurred in 2017 forward indefinitely.

B) A corporation can carry forward a net operating loss incurred in 2019 to 2020 but it may offset only 80 percent of taxable income (before the NOL deduction) in 2020.

C) When a corporation applies a net operating loss carryover, it reports a favorable, permanent book–tax difference in the amount of the applied carryover.

D) None of these is a true statement.

92) Which of the following statements regarding charitable contributions is false?

A) Only contributions made to qualified charitable organizations are deductible.

B) Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions).

C) Corporations can qualify to deduct a contribution before actually paying the contribution to the charity.

D) The amount deductible for noncash contributions is always the adjusted basis of the property donated.

93) Which of the following is unnecessary to allow an accrual-method calendar-year corporation to deduct charitable contributions before actually paying the contribution to charity?

A) Approval of the payment from the board of directors.

B) Approval from the IRS prior to making the contribution.

C) Payment made within three and a half months of the tax year-end.

D) All of these choices are necessary.

94) Which of the following is deductible in calculating the charitable contribution limit modified taxable income?

A) Net capital loss carrybacks.

B) Charitable contributions.

C) NOL carryovers.

D) None of these choices are correct.

95) Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of $72,000. Its charitable contributions for the year were $7,500. What is Remsco's current-year charitable contribution deduction and contribution carryover?

A) $6,000 current-year deduction; $1,500 carryover.

B) $7,500 current-year deduction; $0 carryover.

C) $1,200 current-year deduction; $6,300 carryover.

D) $7,200 current-year deduction; $300 carryover.

96) If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what kind of book–tax difference is created for that year?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

97) Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true?

A) Corporations may not carry over or carry back excess charitable contributions.

B) Corporations can carry excess charitable contributions over to a future year or back to a prior year.

C) Corporations can carry excess charitable contributions over to a future year but not back to a prior year.

D) Corporations can carry excess charitable contributions back to a prior year but not over to a future year.

98) Which of the following statements regarding dividends and/or the dividends received deduction (DRD) is true?

A) Dividends are taxed at preferential rates for corporations and individuals.

B) The DRD can increase the net operating loss of a corporation.

C) Corporations are allowed to deduct from a dividend received the product of the dividend and the percentage of the receiving corporation's ownership in the distributing corporation's stock.

D) The DRD allows corporations to deduct the amount of dividends that they distribute.

99) Which of the following is deductible in calculating DRD modified taxable income?

A) Charitable contribution deduction.

B) Dividends received deduction.

C) NOL carryovers.

D) None of these choices are correct.

100) Jazz Corporation owns 50 percent of Williams Corp.'s stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income before the dividend was $100,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.?

A) $0.

B) $5,000.

C) $6,500.

D) $10,000.

101) Jazz Corporation owns 10 percent of Williams Corp.'s stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.?

A) $0.

B) $4,000.

C) $5,000.

D) $6,500.

E) None of the choices are correct.

102) Jazz Corporation owns 10 percent of Favors Corp.'s stock. Favors distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($6,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Favors Corp.?

A) $0.

B) $4,000.

C) $5,000.

D) $6,500.

E) None of the choices are correct.

103) Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?

A) In general, smaller corporations are required to complete Schedule M-1 while larger corporations are required to complete Schedule M-3.

B) Schedule M-3 lists more specific book–tax differences than M-1.

C) Both Schedule M-1 and M-3 reconcile to a corporation's bottom line taxable income.

D) Schedule M-1 does not distinguish between temporary and permanent book–tax differences while Schedule M-3 does.

104) Which of the following statements is false regarding consolidated tax returns?

A) An affiliated group can file a consolidated tax return only if it elects to do so.

B) To file a consolidated tax return, one corporation must own at least 50 percent of the stock of another corporation.

C) For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member.

D) For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.

105) What is the unextended due date of the tax return of a calendar-year corporation?

A) February 15.

B) March 15.

C) April 15.

D) October 15.

106) Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations?

A) 100 percent of the prior year's tax liability (with a few exceptions).

B) 100 percent of the current year's tax liability.

C) 100 percent of the estimated current-year tax liability using the annualized income method.

D) All of these choices are acceptable methods of determining the required annual payment of federal income tax for corporations.

107) Which of the following statements is false regarding corporate estimated tax payments?

A) The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.

B) Corporations must pay estimated taxes only if they have a federal income tax liability greater than $1,000.

C) Even though a corporation extends its tax return it still must pay its tax liability for the year by three and a half months after year-end.

D) Corporations using the annualized income method for determining estimated tax payments project their tax liability for the year based on income from the first, second, and third quarters.

108) Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters). What is Omnidata's annual estimated taxable income for the tax year as of the end of the third quarter?  

A) $300,000.

B) $320,000.

C) $400,000.

D) $480,000.

109) Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current year. It would like to use its prior-year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true?

A) Rapidpro may use the prior-year tax liability to determine its first- and second-quarter estimated tax payments only since it is a large corporation.

B) To avoid penalty, the second-quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its first-quarter estimated taxable income (assume it does not rely on its current-year actual tax liability to determine its estimated tax payment).

C) To avoid penalty, the third-quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its third-quarter estimated taxable income (assume it does not rely on its current-year actual tax liability to determine its estimated tax payment).

D) None of these choices are true.

110) Keegan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax bases.

The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Keegan.

What amount of gain or loss does Keegan realize on the transfer of the property to his corporation?

111) Keegan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax bases.

The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Keegan.

Assuming the gain or loss realized in the previous problem is deferred under section 351, what is Keegan's basis in the stock he receives in his corporation? 

112) Francine incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax bases.

The corporation also assumed a mortgage of $60,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $150,000.

a. What amount of gain or loss does Francine realize on the transfer of the property to her corporation?

b. What amount of gain or loss does Francine recognize on the transfer of the property to her corporation?

c. What is Francine's basis in the stock she receives in her corporation?

113) Zhao incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax bases.

The corporation also assumed a mortgage of $50,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $330,000. The transaction met the requirements to be tax-deferred under section 351.

a. What amount of gain or loss does Zhao realize on the transfer of the property to her corporation?

b. What amount of gain or loss does Zhao recognize on the transfer of the property to her corporation?

c. What is the corporation's tax basis in each of the assets received in the exchange? 

114) Phillip incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax bases.

The fair market value of the corporation's stock received in the exchange was $400,000. The transaction met the requirements to be tax-deferred under section 351.

a. What amount of net gain or loss does Phillip realize on the transfer of the property to his corporation?

b. What amount of gain or loss does Phillip recognize on the transfer of the property to his corporation? 

115) Ken and Jim agree to go into business together selling old comic books and records. According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation. Ken's tax basis in the inventory is $120,000. Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $50,000.

Please answer the following questions about the tax consequences of the transaction to Ken.

a. What amount of gain or loss does Ken realize on the formation of the corporation?

b. What amount of gain or loss, if any, does he recognize?

c. What is Ken's tax basis in the stock he receives in return for his contribution of property to the corporation?

116) Ken and Jim agree to go into business together selling old comic books and records. According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation. Ken's tax basis in the inventory is $120,000. Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $50,000.

Please answer the following questions about the tax consequences of the transaction to Jim.

a. What amount of income, gain or loss, does Jim realize on the formation of the corporation?

b. What amount of gain or loss, if any, does he recognize?

c. What is Jim's tax basis in the stock he receives in return for his contribution of services to the corporation?

117) Don and Marie formed Paper Lilies Corporation on January 2. Don contributed cash of $400,000 in return for 50 percent of the corporation's stock. Marie contributed a building and land with the following fair market values and tax bases in return for 50 percent of the corporation's stock.

To equalize the exchange, Paper Lilies Corporation paid Marie $50,000 in addition to her stock.

a. What amount of gain or loss does Marie realize on the formation of the corporation?

b. What amount of gain or loss, if any, does she recognize?

c. What is Marie's tax basis in the stock she receives in return for her contribution of property to the corporation?

d. What tax basis does Paper Lilies Corporation take in the land and building received from Marie?

118) Harry and Sally formed Empire Corporation on January 2. Harry contributed cash of $500,000 in return for 50 percent of the corporation's stock. Sally contributed a building and land with the following fair market values and tax bases in return for 50 percent of the corporation's stock.

To equalize the exchange, Empire Corporation paid Sally $100,000 in addition to her stock.

a. What amount of gain or loss does Sally realize on the formation of the corporation?

b. What amount of gain or loss, if any, does she recognize?

c. What is Sally's tax basis in the stock she receives in return for her contribution of property to the corporation?

d. What tax basis does Empire Corporation take in the land and building received from Sally? 

119) Boston, Inc., made a capital contribution of investment property to its 100 percent owned subsidiary, Hartford Company. The investment property had a fair market value of $1,000,000 and a tax basis to Boston of $250,000. What are the tax consequences to Boston, Inc., on the contribution of the investment property to Hartford Company and what is the tax basis of the investment property to Hartford Company after the contribution to capital?

120) The City of Boston made a capital contribution of land to Fenway Company as an inducement to the company to build a manufacturing plant in the city. The land was valued at $500,000 at the time of the contribution. What gain, if any, does Fenway recognize on the contribution and what is Fenway's basis in the land?

121) During the year, AutoUSA Inc. received $4,600,000 of book income, including $20,000 of interest income from tax-exempt municipal bonds. AutoUSA reported $3,600,000 of regular business expenses. If it made $200,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return?

122) For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds. It also expensed $12,000 of radio station filing fines paid to the FCC (a governmental agency) the same year. What is the total book–tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?

123) US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of meal expense. What is the total book–tax difference associated with these items? Is it favorable or unfavorable? What amount of the book–tax difference is temporary and what amount is permanent?

124) Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold equipment for $500,000. The book-adjusted basis of the equipment sold was $350,000, while the adjusted basis for tax purposes was $210,000. What is the total book–tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book–tax difference is permanent and what amount is temporary?

125) On January 1, 2016, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2017, the auditors of Credit Inc. determined that the goodwill had been impaired by $50,000 and Credit Inc. wrote down the book value of the goodwill by $50,000. During 2018, the goodwill was not impaired. In 2019, goodwill was impaired and was written down another $18,000 for financial reporting purposes. What is the temporary book–tax difference associated with the purchased goodwill in 2017, 2018, and 2019? Are the differences favorable or unfavorable? Are the differences permanent or temporary?

126) Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on December 31, 2018, with an estimated value of $5.50 per option. The options vest at 25 percent per year for four years (beginning on December 31, 2019). Each option allows the holder to purchase one share of stock at $8. On December 31, 2019, employees exercised 12,500 options when IC's stock was valued at $14.72 per share. What is the amount of the book–tax difference in 2019 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

127) Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2019 of $64,000. It had net capital gains of $21,500 in 2018, $45,000 in 2017, $0 in 2016, and $8,000 of net capital gain in 2015. What is the net capital gain in 2018 after the carryback is applied?

128) In 2019, Smith Traders Inc. reported a net operating loss of $100,000. In 2020, before the NOL deduction, it reported taxable income of $50,000. What is Smith Traders' 2020 taxable income after the NOL deduction and what is its NOL carryover to 2021?

129) During 2019, Hughes Corporation sold a portfolio of stock it had held for five years at a loss of $200,000. It also sold some investment land and recognized a capital gain of $180,000. In 2017, Hughes reported a net capital gain of $12,000 and in 2016 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2020?

130) Webtel Corporation donated $50,000 to a qualifying charity. For the year, it reported taxable income of $310,000, which included the following: the $50,000 charitable contribution (before limitation), a $100,000 dividends received deduction, and a $20,000 net operating loss carryover. What is Webtel Corp's charitable contribution deduction?

131) Datasoft Inc. received $350,000 in dividends from CSLabs Inc. Datasoft's taxable income before the dividends received deduction and $20,000 charitable contribution deduction is $300,000. What is Datasoft's DRD assuming it owns 15 percent of the CSLabs Inc. stock?

132) AB Inc. received a dividend from CD Corporation and is able to claim the dividends received deduction without limitation. AB owns 30 percent of CD. What is AB's marginal tax rate (to the nearest tenth of a percent) on the dividends received (after taking the DRD into account)?

133) Netgate Corporation's gross regular tax liability for the year was $95,375. What was its taxable income? Note: New Corporate income tax rate has been mentioned as "21% on all taxable income" as per the recent change.

134) AR Systems Inc. (AR) had $120,000 of tax liability last year. It anticipates a current-year tax liability of $500,000. Assuming AR is considered a large corporation for purposes of estimating tax liability, what are the minimum estimated tax payments it should make to avoid underpayment penalties? Ignore the annualized income method.

135) In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters:

What amount of estimated tax payments would Auto Rent pay each quarter in order to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?