annual Federal income tax return

1449. MC #1
Which of the following is correct regarding the form for filing the annual Federal income tax return?

Business entity form Tax form

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a. Sole proprietorship Form 1040-Schedule C
b. Partnership Form 1065P
c. C corporation Form 1120C
d. LLC Form 1120S
e. S corporation Form 1120

1450. MC #2
A limited liability company:

a. Could be subject to double taxation.
b. Is normally taxed as a partnership.
c. Is normally taxed as an S corporation.
d. Only a. and b.
e. a., b., and c.

1451. MC #3
For a limited liability company with 100 owners,

a. An election can be made to be taxed as a C corporation.
b. An election can be made to be taxed as an S corporation.
c. An election can be made to be taxed as a partnership.
d. Only a. and c. are correct.
e. a., b., and c. are correct.

1452. MC #4
Which of the following statements is correct?

a. The number of owners of an LLC is not limited.
b. If the LLC has three or more corporate characteristics, it will be taxed as a C corporation.
c. An LLC can elect to be taxed as a C corporation or as a partnership.
d. Only a. and c.
e. a., b., and c. are correct.

1453. MC #5
Which of the following statements is not correct?

a. An S corporation has a greater opportunity to raise capital than does an C corporation.
b. A general partnership has a greater opportunity to raise capital than does a limited partnership.
c. A partnership has a greater opportunity to raise capital than does a sole proprietorship.
d. Only a. and b. are not correct.
e. a., b., and c. are not correct.

1454. MC #6
Nontax factors that affect the choice of business entity include:

a. Ease of capital formation.
b. Limited liability.
c. Single versus double taxation.
d. Only a. and b.
e. a., b., and c.

1455. MC #7
Amber, Inc., has taxable income of $212,000. In addition, Amber accumulates the following information which may affect its AMT.

What is Amber’s AMTI?

a. $212,000.
b. $233,000.
c. $238,000.
d. $249,000.
e. None of the above

1456. MC #8
Which of the following statements is correct?

a. The AMT applies to both the individual taxpayer and the C corporation.
b. The individual AMT rates are 26% and 28%.
c. The C corporation AMT rate is 20%.
d. Only a. and b. are correct.
e. a., b., and c. are correct.

1457. MC #9
Techniques that can be used to minimize the current period tax liability include:

a. Recognizing the interaction between the regular income tax liability and the alternative minimum tax liability.
b. Utilization of special allocations.
c. Favorable treatment of certain fringe benefits.
d. Minimizing double taxation.
e. All of the above.

1458. MC #10
Maria has a 70% ownership interest in a business entity. She is in the 28% tax bracket. The entity incurs $18,000 of meals and lodging expense for Maria, which she believes qualify for exclusion under § 119. Which of the following statements is correct?

a. If the entity is a partnership, the effect of the $18,000 expenditure by the partnership on Maria’s tax liability is an increase of $5,040.
b. If the entity is a sole proprietorship, the effect of the $18,000 expenditure by the sole proprietorship on Maria’s tax liability is $0.
c. If the entity is a C corporation, the effect of the $18,000 expenditure by the corporation on Maria’s tax liability is $0.
d. Only a. and c. are correct.
e. a., b., and c. are correct.

1459. MC #11
Brown, Inc., has accumulated earnings and profits at the end of the year of $600,000. Brown pays a salary and bonus of $175,000 to Alice, its CEO. Brown’s taxable income before the salary and bonus is $200,000. The IRS classifies $75,000 of the salary and bonus as unreasonable. Calculate Brown’s taxable income after the reclassification.

a. $21,250.
b. $25,000.
c. $77,750.
d. $100,000.
e. None of the above.

1460. MC #12
Robin Company has $100,000 of income before payment of $100,000 of reasonable salaries to its owners/employees (who are in the 33% bracket). Which form of business results in the least amount of combined tax being paid by the company and its owners?

a. Partnership.
b. C corporation.
c. S corporation.
d. a., b., and c. all result in the same amount of tax.
e. a. and c. result in the least amount of tax.

1461. MC #13
Aaron purchases a building for $500,000 which is going to be used by his wholly-owned corporation. Which of the following statements are correct?

a. If Aaron contributes the building to the corporation, there will be no recognition under § 351 and a carryover basis of $500,000.
b. If Aaron leases the building to the corporation, lease-rental payments of $30,000 per year to Aaron will result in a $30,000 deduction for the corporation.
c. If Aaron leases the building to the corporation, lease-rental payments of $30,000 per year to Aaron will result in $30,000 of gross income for Aaron.
d. Leasing the building to the corporation will contribute to the tax avoidance objective of minimizing double taxation.
e. All of the above are correct.

1462. MC #14
Tonya contributes $150,000 to Swan, Inc., for 80% of the stock. In addition, she loans Swan $600,000. The maturity date on the loan is 5 years and the interest rate is 6%, the same as the Federal rate. Which of the following statements are correct?

a. If the loan is reclassified as equity under § 385, Swan qualifies for a deduction of $600,000 when the loan is repaid, and Tonya receives dividend income of $600,000 (assuming that Swan’s earnings and profits are at least $600,000).
b. If the loan is not reclassified as equity under § 385, Swan can deduct interest expense annually of $36,000, and Tonya includes in gross income annually interest income of $36,000.
c. If the loan is reclassified as equity under § 385, Swan claims no interest deduction, and Tonya recognizes no income.
d. Only a. and b.
e. a., b., and c.

1463. MC #15
Rocky and Sandra (shareholders) each loan Eagle Corporation $10,000 at the market rate of 10% interest. Which of the following statements are false?

a. Eagle may deduct the interest expense, and the interest income is taxable to Rocky and Sandra.
b. When the note principal is repaid, neither Rocky nor Sandra recognizes gross income from the repayment.
c. If the IRS were successful in reclassifying the notes as equity, the interest payments would not be deductible by Eagle, and Rocky and Sandra would still recognize income.
d. If the IRS were successful in reclassifying the notes as equity, repayment of the note principal to Rocky and Sandra would not qualify for return of capital treatment and would most likely result in dividend income treatment for Rocky and Sandra.
e. All of the above are true.

1464. MC #16
Austin is the sole shareholder of Purple, Inc. Purple’s accumulated E & P at the beginning of the year is $700,000. Purple’s taxable income after paying a salary and bonus to Austin of $100,000 is $500,000. Assume the salary and bonus payment are reasonable. Purple’s maximum exposure in calculating accumulated taxable income for purposes of the accumulated earnings tax for the current tax year is:

a. $330,000.
b. $500,000.
c. $600,000.
d. $1,300,000.
e. None of the above.

1465. MC #17
Which of the following statements regarding the accumulated earnings tax is correct in 2011?

a. If Blue, Inc.’s accumulated taxable income for 2011 is $180,000, the calculated accumulated earnings tax liability would be $53,450 [($50,000 ´ 15%) + ($25,000 ´ 25%) + ($25,000 ´ 34%) + ($80,000 ´ 39%)].
b. Blue, Inc., calculates accumulated taxable income for 2011 of $100,000. Therefore, it should increase the amount paid to the IRS for 2011 by $15,000 ($100,000 ´ 15%).
c. The accumulated earnings tax applies to C corporations, but applies to S corporations at only the shareholder level.
d. The tax rate for the accumulated earnings tax of 35% is the same as the highest tax bracket for the corporate taxpayer.
e. None of the above.

1466. MC #18
Factors that should be considered in making the S corporation election for the current tax year include the following:

a. Are greater than 50% of the shareholders willing to consent to the election?
b. Can the requirements for qualification be satisfied by the 15th day of the third month of the tax year and also for the period of the tax year that precedes this date?
c. Will the corporation have total capital not in excess of $1 million?
d. Only b. and c.
e. a., b., and c.

1467. MC #19
Steve and Karen are going to establish a business entity. They expect the business to be very successful in the long-run, but project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is a requisite for the owners. Which form of business entity should they select?

a. General partnership.
b. Limited partnership.
c. C corporation.
d. S corporation.
e. Any of the above should satisfy Steve and Karen.

1468. MC #20
Beige, Inc., has 3,000 shares of stock authorized and 1,000 shares outstanding. The shares are owned by Sam (700 shares) and Lois (300 shares). Sam’s adjusted basis for his stock is $100,000 and Lois’ adjusted basis for her stock is $90,000. Beige’s earnings and profits are $500,000. Beige redeems 200 of Lois’ shares for $150,000. Determine the amount of Lois’ recognized gain (1) if she is Sam’s mother and (2) if they are unrelated.

a. $0 and $0.
b. $150,000 and $60,000.
c. $150,000 and $90,000.
d. $50,000 and $150,000.
e. None of the above.

1469. MC #21
Shania, Taylor, and Kelly form a corporation with the following contributions.

a. If the corporation is a C corporation, Taylor has a recognized gain of $40,000, a stock basis of $100,000, and the corporation has a basis for the land of $100,000.
b. If the corporation is an S corporation, Kelly has a recognized gain or loss of $0, a stock basis of $110,000, and the corporation has a basis for the building of $110,000.
c. If the corporation is a C corporation, Shania has a recognized gain or loss of $0, a stock basis of $100,000, and the corporation has a basis for the cash of $100,000.
d. Only a. and c. are correct.
e. Only b. and c. are correct.

1470. MC #22
Barb and Chuck each own one-half of the stock of Wren, Inc., a C corporation. Each shareholder has a stock basis of $125,000. Wren has accumulated E & P of $200,000. Wren’s taxable income for the current year is $90,000, and it distributes $60,000 to each shareholder. Barb’s stock basis at the end of the year is:

a. $0.
b. $65,000.
c. $110,000.
d. $125,000.
e. None of the above.

1471. MC #23
Barb and Chuck each own one-half the stock of Wren, Inc., an S corporation. Each shareholder has a stock basis of $125,000. Wren has no accumulated E & P. Wren’s taxable income for the current year is $90,000, and it distributes $60,000 to each shareholder. Barb’s stock basis at the end of the year is:

a. $0.
b. $65,000.
c. $110,000.
d. $125,000.
e. None of the above.

1472. MC #24
Barb and Chuck each have a 50% ownership in Wren Partnership. Each partner has a partnership interest basis of $125,000. Wren’s taxable income for the current year is $90,000, and it distributes $60,000 to each partner. Barb’s basis in the partnership interest at the end of the year is:

a. $0.
b. $65,000.
c. $110,000.
d. $125,000.
e. None of the above.

1473. MC #25
Trolette contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity. If the entity is a C corporation and the transaction qualifies under § 351, the corporation’s basis for the property and the shareholder’s basis for the stock are:

Asset Basis Stock Basis

a. $ 80,000 $100,000
b. $100,000 $ 80,000
c. $ 80,000 $ 80,000
d. $100,000 $100,000
e. None of the above.

1474. MC #26
Alanna contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity. If the entity is a partnership and the transaction qualifies under § 721, the partnership’s basis for the property and the partner’s basis for the partnership interest are:

Asset Basis Stock Basis

a. $ 80,000 $100,000
b. $100,000 $ 80,000
c. $ 80,000 $ 80,000
d. $100,000 $100,000
e. None of the above.

1475. MC #27
Marcus contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity. If the entity is an S corporation and the transaction qualifies under § 351, the S corporation’s basis for the property and the shareholder’s basis for the stock are:

Asset Basis Stock Basis

a. $ 80,000 $100,000
b. $100,000 $ 80,000
c. $ 80,000 $ 80,000
d. $100,000 $100,000
e. None of the above.

1476. MC #28
Brenda contributes appreciated property (i.e., adjusted basis of $65,000 and a fair market value of $100,000) to her business entity in a transaction which qualifies for nonrecognition of gain. Brenda’s ownership interest is 60%. The business entity later sells the appreciated property for $110,000. The property is not depreciable. Which of the following statement(s) is correct?

a. If the entity is a partnership, Brenda’s gross income is increased by $41,000 [($35,000 ´ 100%) + ($10,000 ´ 60%)] in the year of the sale of the property by the partnership.
b. If the entity is a C corporation, the corporation’s gross income is increased by $10,000 in the year of the sale of the property by the corporation.
c. If the entity is an S corporation, the S corporation’s gross income is increased by $10,000 in the year of the sale of the property by the S corporation and Brenda’s gross income is increased by $6,000 ($10,000 ´ 60%).
d. All of the above.
e. None of the above.

1477. MC #29
Alice contributes equipment (fair market value of $50,000; adjusted basis of $15,000), subject to a $10,000 liability, to form Orange Partnership, a general partnership. Mary contributes $40,000 cash. Alice and Mary share equally in partnership profits and losses. What is Alice’s and Mary’s basis for their partnership interests?

a. $10,000 to Alice, $45,000 to Mary.
b. $25,000 to Alice, $25,000 to Mary.
c. $15,000 to Alice, $40,000 to Mary.
d. $5,000 to Alice, $40,000 to Mary.
e. $20,000 to Alice, $45,000 to Mary.

1478. MC #30
Melba contributes land (basis of $190,000; fair market value of $250,000) to a business entity in exchange for 100% of the stock. During the first year of operations, the entity earns a profit of $75,000. At the end of the first year, the entity has outstanding liabilities of $30,000 ($20,000 recourse and $10,000 nonrecourse).

a. If the entity is a C corporation, Melba’s basis for her stock at the end of the first year is $265,000 ($190,000 + $75,000) and her at-risk basis is $265,000.
b. If the entity is a partnership, Melba’s basis for her partnership interest (outside basis) at the end of the first year is $355,000 ($250,000 + $75,000 + $30,000) and her at-risk basis is $345,000 ($250,000 + $75,000 + $20,000).
c. If the entity is an S corporation, Melba’s basis for her stock at the end of the first year is $345,000 ($250,000 + $75,000 + $20,000) and her at-risk basis is $345,000.
d. Only a. and c. are correct.
e. a., b., and c. are incorrect.

1479. MC #31
Catfish, Inc., a closely held corporation which is not a PSC, owns a 45% interest in Trout Partnership, which is classified as a passive activity. Trout’s taxable loss for the current year is $250,000. During the year, Catfish receives a $60,000 cash distribution from Trout. Other relevant data for Catfish are as follows:

How much of Catfish’s share of Trout’s loss may it deduct in calculating its taxable income?

a. $0.
b. $20,000.
c. $45,000.
d. $112,500.
e. None of the above.

1480. MC #32
Bart contributes $160,000 to the Tuna Partnership for a 30% interest. During the first year of operations, Tuna has a profit of $30,000. At the end of the first year, Tuna has outstanding loans from the following banks.

What is Bart’s at-risk basis in Tuna at the end of the first year?

a. $160,000.
b. $169,000.
c. $175,000.
d. $187,000.
e. None of the above.

1481. MC #33
Which of the following special allocations are mandatory for the partners in a partnership?

a. Section 704(a) special allocation requiring limited partners to share losses in accordance with their capital interests in the partnership.
b. Section 704(c) special allocation for the difference between the adjusted basis and fair market value of contributed property.
c. Section 734 (optional adjustment to basis) special allocation for distributions to partners when the partnership does have a § 754 election in effect or does make a § 754 election.
d. Only b. and c. are mandatory.
e. a., b., and c. are mandatory.

1482. MC #34
Albert’s sole proprietorship owns the following assets:

Potential § 1245 recapture of $45,000.
Straight-line depreciation was used.

Albert sells his sole proprietorship for $500,000. Calculate Albert’s recognized gain or loss and classify it as capital or ordinary.

a. $230,000 ordinary income.
b. $230,000 capital gain.
c. $115,000 ordinary income and $115,000 capital gain.
d. $110,000 ordinary income and $120,000 capital gain.
e. None of the above.

1483. MC #35
Mr. and Ms. Smith’s partnership owns the following assets:

Potential § 1245 recapture of $45,000.
Straight-line depreciation was used.

Mr. and Ms. Smith each have a basis for their partnership interest of $135,000. Calculate their combined recognized gain or loss and classify it as capital or ordinary if they sell their partnership interests for $500,000.

a. $230,000 ordinary income.
b. $230,000 capital gain.
c. $115,000 ordinary income and $115,000 capital gain.
d. $110,000 ordinary income and $120,000 capital gain.
e. None of the above.