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Exam 13: Corporate Formations and Operations

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Question 51

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

A) True
B) False

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Question 52

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

A) True
B) False

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Question 53

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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. $\begin{array}{c}\begin{array}{lll}\\\text {Inventory}\\\text {Building}\\\text {Land}\\\text {Total}\end{array}\begin{array}{rr}\text {FMV }\\\$ \quad 80,000 \\100,000 \\\underline{200,000}\\\underline{\$\quad 380,000} \end{array}\begin{array}{cc} \text { Tax Basis } \\\$ \quad 40,000 \\120,000 \\ \underline{150,00 }\\\underline{\$ \quad 310,000} \end{array}\end{array}$ 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?

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?

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. $\begin{array} { l r r r r } & \text { FMV } & \text { Tax Basis } \\\text { Irventory } & \$ 100,000 & \$ 50,000 \\\text { Buildirg } & 100,000 & 250,000 \\\text { Land } & \underline{200,000} & \underline{150,000} \\\text { Total } &\underline{ \$ 400,000} & \underline{\$ 450,000}\end{array}$ 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?

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?

The corporate tax form is Form 1065.

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.

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?

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

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

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

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?

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

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

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. $\begin{array}{l}\begin{array} { c c } &\text { FMV } & \text { Tax Basis } \\\text { Building }&180,000 & 150,000 \\\text { Land}&\underline{420,000} & \underline{500,000 }\\\text { Total}&\underline{\$ 600,000} & \underline{\$ 650,000 }\\\end{array}\end{array}$ 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?

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?

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?

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

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?