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business
federal taxation

Questions and Answers of Federal Taxation

Cathy is a 40% shareholder of City Corporation. City is a calendar year S corporation. Cathy acquired her stock on January 1 of the current year for $80,000. In the current year, City reports the
The income statement for Central Corporation, an S corporation, reports the following:Sales........................................................................$260,000Cost of goods
Which of the following events will cause termination or revocation of the S election for a calendar year corporation? When is the termination or revocation effective? (Assume all other requirements
JLK Partnership is an electing large partnership with 100 partners. The partnership reports the following operating results from the current year:Ordinary
Rita, a calendar year taxpayer, is an employee of the RST Partnership, which has a June 30 year-end. The partnership pays Rita a salary of $2,500 per month for the period January 1 through June 30,
The balance sheet of the ABC Partnership at December 31 of the current year is as follows:All partners have an equal interest in the partnership. Allen sells his partnership interest to an outsider
Lynn’s basis in her partnership interest is $9,000 when she receives a nonliquidating distribution of $5,000 cash and land having a $6,000 adjusted basis and a $12,000 FMV.a. What gain or loss does
Laura and Mark are equal partners in the LM Partnership. Laura receives a $35,000 guaranteed payment in the current year and also withdraws $15,000 of her partnership capital in cash. Partnership
Kevin has a 30% interest in the KLM Partnership. Louis (Kevin’s son) also has a 30% interest. An individual unrelated to either Kevin or Louis holds the remaining 40% interest. Kevin sells the
Keith has a one-half interest in the KL Partnership. His basis in the partnership interest at the end of the current year (before deducting his share of partnership losses) is $40,000. His share of
Anita has a one-half interest in the AB Partnership. Anita’s basis in her interest at the beginning of the current year is $75,000. During the year, the following events occur:• Partnership
Alice and Bruce are equal partners in the calendar year AB Partnership. On November 1 of the current year, Carl joined the partnership by making a $100,000 cash contribution in exchange for a
Ed contributes land (a capital asset) having a $60,000 adjusted basis and a $100,000 FMV, and Gail contributes $100,000 cash to the EG Partnership. Ed and Gail each receive 50% interests in the
Dan, who is active in the management of the partnership, contributes $10,000 in cash to the newly formed DEF Partnership for a 10% interest in the partnership. The partners transfer no liabilities to
Paula transfers two assets to a partnership in separate transactions:a. Land with a $60,000 adjusted basis and a $100,000 FMV in exchange for a 20% interest in the partnership.b. A machine with a
Penny and Rick, equal partners in a partnership, recently attended a business-planning seminar held in their town. While at the seminar they learned about limiting their personal liability by using
Vincent anticipates that his actual tax liability for the tax year 2016 will be $12,000 and that federal income taxes withheld from his salary will be $9,000. Thus, when he files his 2016 income tax
Damien and Donna are equal partners in the DD Partnership. The passive activity loss and the at-risk rules are not applicable to the partners. The partnership reports the following items on its
The ABC Partnership, a calendar year entity, is formed and begins business on July 1 of the current year. ABC incurs the following expenditures on the date the partnership is formed:Legal fees
In the current year, Dana transfers to the DE Partnership land and a building having a total $25,000 adjusted basis and an $80,000 FMV. In addition, the property is subject to a $70,000 mortgage. The
Bonnie, Carlos, and Dale form the BCD Partnership as equal partners. Bonnie contributes land and a building having a $50,000 adjusted basis and a $200,000 FMV that is subject to a $100,000 mortgage
Andrea, Robert, and Agatha form the ARA Partnership as equal general partners. Andrea contributes land with a $20,000 basis and a $40,000 FMV along with cash of $60,000. Andrea has held the land for
Coastal Corporation has been a C corporation for several years and has substantial earnings and profits. Its tangible business assets are highly appreciated, and the corporation has paid no dividends
Helen and Helga are equal partners in the HH Partnership. However, Helen devotes most of her time managing the business and believes that she should be given additional compensation in the form of a
Bert and José plan to combine their unincorporated businesses by forming a partnership. Bert has substantially appreciated business assets. Moreover, if he transfers all the business’ liabilities
Explain the circumstances in which an S corporation is subject to taxation at the corporate level.
Assume the same facts as in Problem I:17-33 except Barry and Bart instead are considering the treatment of fringe benefits. Barry and Bart want to provide group term life insurance and accident and
Barry and Bart are considering whether to start a new manufacturing business. Alternative forms of business organization being considered include operating as a partnership, a limited liability
Allied Corporation, an S corporation, is considering making a distribution of land to its sole shareholder. Allied acquired the land three years ago and used it in its business activities. The land
Anne has a $10,000 basis in her S corporation stock on January 1 of the current year. On March 1 of the current year, Anne lends the corporation $8,000. Her share of the S corporation’s ordinary
Explain why the basis of S corporation stock is increased by the stockholder’s share of ordinary income and separately stated gain and income items and reduced by the stockholder’s share of an
Indicate whether the following items are reported on the tax return of an S corporation as part of ordinary income (or loss) or as separately stated items:a. Repairsb. Long-term capital gainsc.
Under what conditions will an S corporation involuntarily lose its special tax status and revert to being a C corporation? What remedies are available if the S corporation termination is deemed to be
An S corporation’s shareholder wants the corporation to voluntarily revoke the S election. What percentage of the stock interests must agree to the revocation? When is the revocation effective?
Andrew sells his Ajax Corporation stock to Angela on March 1. On March 15, Ajax elects S corporation status for the current year. Ajax is a calendar year taxpayer. Which shareholder(s) must consent
An S corporation issues straight debt obligations to its shareholders. Is it possible for the debt to be treated as a second class of stock, which would terminate the S election? Explain.
What are the tax consequences to an S corporation and its shareholders if one of the requirements for a small business corporation is not met at some time in a tax year?
What are the primary advantages of using an S corporation instead of a C corporation?
What are the major differences between the reporting of business profits and losses earned by an electing large partnership having 200 partners and a regular partnership having two partners?
What requirements must a partnership meet to make an election to use the simplified reporting rules available to electing large partnerships?
What are the tax consequences to a partner who sells his or her partnership interest if the partnership has Sec. 751 assets (i.e., unrealized receivables or inventory items)? What is the reason for
Explain why a partner who sells his or her interest in the partnership for cash must include his or her share of the partnership liabilities in the amount realized from the sale.
Explain the circumstances that cause a partner to recognize gain or loss if the partnership distributes money or other property in a nonliquidating partnership distribution.
The SJ Partnership, in which Sandy and Jack are equal partners, reported the following income and losses in the current year:Interest from municipal bonds............................................$
Ursula is a 30% partner in the UV Partnership. The partnership agreement states that she shall receive 30% of partnership profits computed before considering guaranteed payments. However, she is not
Jose owns a 60% interest in the JKL Partnership. What are the amount and character of the recognized gain or loss in each of the following situations?a. Jose sells common stock held as an investment
Ralph sells an asset to the RST Partnership at a loss. In which of the following situations does he recognize a loss?a. Ralph owns a 20% direct interest in the partnership, and his son also owns a
Phyllis owns a 30% interest in the PQR Partnership and has a $20,000 basis in her partnership interest (before adjustments for Phyllis’s share of current year partnership income or loss). During
Indicate whether a partner’s basis in the partnershipinterest increases, decreases, or is not affected by the partner’s share of the following operating items:a. Ordinary incomeb. Ordinary lossc.
What inequities might result if partners were not required to make special allocations for precontribution gains and losses on noncash property contributed to a partnership?
What are the tax consequences to a partner who contributes liabilities that exceed the total basis of assets transferred to a new partnership in exchange for a partnership interest? How does your
Assume the same basic facts as in Problem I:17-8. How would your answer change if the entity is a new corporation with all owners making property contributions? The corporation makes a timely
Sally contributes farm machinery with a $150,000 FMV, a $125,000 basis, and a $50,000 note owed to the AB Bank to a new partnership in exchange for a 25% partnership interest. Total partnership
How is Mario’s basis in his accrual method partnership interest affected by each of the following changes in partnership assets and liabilities (assuming he has a 50% interest in the
Compare the Sec. 721 partnership formation rules for a new partnership with the Sec. 351 corporate formation rules for a new C corporation.
In the current year, Penny contributes machinery to a partnership in exchange for a minority partnership interest. She acquired the machinery five years earlier. It now has a $50,000 adjusted basis
Anya is considering whether to become a limited partner in a real estate investment partnership by making a $10,000 investment. The limited partnership will generate substantial operating losses for
Explain how the following types of business entities are treated under the check-the-box regulations. What alternative treatments are available other than the default classification?a. Corporationb.
Distinguish between the partnership, S corporation, and C corporation forms regarding the following:a. Incidence of taxation on the organization’s business incomeb. Taxation of distributions to
Erin Brinson founded BCD Corporation in 1991 with a contribution of $50,000 cash. The entity has always been a C corporation and Erin has not made any other capital contributions nor has BCD made any
In 2013, Peter purchased 150 shares of Able Manufacturing Corporation stock for $75,000. Able is a C corporation that has 40 shareholders. None of the other 39 shareholders own more than 5% of the
Beth in Case Study Problem I:16-76 also wants to know whether she can make a $50,000 capital contribution to the corporation without the corporation’s issuing additional shares. If so, should she
Ted is the sole shareholder of Zero Corporation. Before his retirement from the company, he gave 100 shares of Zero stock to his son. A few months later, Ted sold his remaining 1,900 shares to Zero
Charlie Corporation acquired 100% of Delta Corporation common stock on July 1 of the current tax year. Prior to the acquisition, Delta supplied Charlie with about 50% of the raw materials and other
The income tax laws for a particular state depend on the business entity’s organizational status. Answer the following four questions using the web site for a particular department of state (for
Beth, who is married, is the sole shareholder of Pet Store Inc., a C corporation. She also manages the store. She wishes to expand the business, but the corporation needs additional capital for her
Frank, Paul, and Sam are considering merging their respective unincorporated businesses into a new C corporation called FPS. Frank would transfer land and a building with a $50,000 adjusted basis and
Several years ago, Tampa Corporation acquired 100% of Union Corporation stock for $1,000,000. In the current year, Tampa liquidates Union and receives all of its assets and liabilities. Tampa
Alpha Corporation reports $500,000 of gross income from business operations and $625,000 of allowable business deductions. It also received from a domestic corporation $150,000 in dividends for which
For most individual investors, net long-term capital gains and dividends are taxed at the same rate. Yet, in some circumstances, an investor’s generating long-term capital gains is more
Gertrude, age 67 and widowed, owns 50 acres of land on the Chattahoochee River that she and her husband purchased for $10,000 when they were newlyweds in 1970. The land is near Atlanta and is now
Peter Martin owned an equity interest in retail hardware stores for a nationwide chain. The eleven stores operate in a single midwestern state under the name Martin Corporation. Peter has been the
Queen Corporation adopts a plan of complete liquidation on January 1 of the current year. The corporation sells the assets listed below to King Corporation during the current year. This sale is
Prime Corporation redeems some of its stock from two of its shareholders on the same date. Frank and his son Sam own 50 and 20 shares, respectively, of the 100 shares outstanding before the
Private Corporation redeems some of its stock from Jane, a major shareholder. Before the redemption Jane owns 50 of the 100 outstanding shares, and her daughter Jill owns 40 shares. The remaining ten
Galadriel Corporation reports pre-tax earnings of $500,000 during the current year. The corporation wishes to distribute $100,000 to Gabby, its sole owner and CEO, in a manner that will minimize
Without liquidating, Park Corporation distributes equipment with a $70,000 adjusted basis and a $80,000 FMV to Pam. The equipment is subject to a $25,000 mortgage assumed by Pam. Park has $300,000 of
Old Corporation has liquidity problems but wants to maintain its existing dividend policy. Old distributes investment land to its two shareholders. The land has a $30,000 adjusted basis and a
At the beginning of the current year Ohio Corporation has a $40,000 accumulated E&P balance and a $73,000 current E&P deficit. The corporation distributes $60,000 cash to its sole shareholder
North Corporation has $200,000 of accumulated E&P at the beginning of the current year. North distributed $300,000 cash during the current year to its shareholders. The company’s operating
During the current year, Nevada Corporation distributed $100,000 in cash to its sole shareholder. Because the corporation has a $300,000 accumulated E&P deficit at the beginning of the current
In a transaction that meets the requirements of Sec. 351, Matt transfers to Hill Corporation land with a $600,000 adjusted basis and a $1,000,000 FMV that was used in his business. The land is
Linda and Cynthia decide to form a corporation in a transaction that meets the requirements of Sec. 351. Linda transfers machinery she has held for several years with a basis of $45,000 and a fair
In the current year, Jack, Karen, Latoya, and Marc transfer the following property to Giant Corporation (an existing corporation), which is owned equally by the four transferors.• Jack transfers
Alfred, Barbara, and Cathy own stock in First, Second, and Third Corporations as follows:Which corporations are members of a brother-sister controlled group under the 80%-50% test? |Individuals First
Eagle and East Corporations are members of a brother-sister controlled group. Eagle’s taxable income is $75,000, and East’s taxable income is $50,000.a. What is Eagle and East’s total federal
Delta Corporation is being reorganized as an investment company because its retained earnings have been used for passive investments. The company is owned by three shareholders, and more than 60% of
The IRS is auditing Crane Corporation, a manufacturer of widgets, to determine whether the company is liable for the accumulated earnings tax in a prior tax year. Crane is owned by 20 shareholders
In an audit of Control Corporation, you were assigned to review the company’s current-year tax accrual (e.g., provision for federal income taxes and the related liability). Control was incorporated
In December of the current year, Colorado Corporation considers a sale of certain corporate assets that would result in the recognition of a $50,000 LTCG. Colorado’s controller estimates that
Calculate Ajax Corporation’s regular tax liability for the following amounts of taxable income:a. $90,000b. $300,000c. $5 milliond. $12 millione. $17 millionf. $20 milliong. Alternatively, for
On May 15 of the current year, the board of directors of Georgia Corporation authorized a $40,000 donation to a qualified charity. The corporation donated the $40,000 to the charity on December 1 of
Calculate the dividends-received deduction and taxable income for each independent scenario below. Assume there are no other income or deduction items.a. During the current year, Purple Corporation
During the current year, Florida Corporation reports the following results:Net income from operations..............................................$100,000Dividend from a 20%-ownedcorporation
For each of the four independent scenarios below, compute the additional amount of income tax (or tax savings if a loss) that would result from current gains and losses for (a) Able Corporation that
Federal Corporation realizes the following net capital losses in 2016:STCL...........................$ 80,000LTCL............................120,000NLTCGs were incurred in 2013 through 2015 as
First Corporation, in its fifth year of operations, realizes the following capital gains and losses in the current
Eastern Corporation is formed by John and Joy with an initial capitalization of $500,000. Two alternative capitalization plans are being considered: (1) John and Joy, who are unrelated, each would
Hugo and Helga each own unincorporated businesses. They plan to form a corporation to which they would transfer all of their business assets and liabilities in exchange for all of the corporation’s
Acorn Corporation is a very profitable closely held corporation that is owned solely by Helen, age 55, who plans to retire in 10 years. Management continuity is a problem because neither the existing

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