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At the beginning of year 1, Bill and Cindy form an S-corp andare equal shareholders, each gave $5,000 in exchange for stock.Cindy loaned the corp another $5,000 on June 30th of year. Thecorporation had an ordinary loss in its first year of $12,000 andordinary income in its second year of $15,000. Assume that allparties use a calendar based taxable year and that neither thepassive nor at-risk limitations are applicable. If theS-corporation also made a $12,000 distribution on Oct 30th of year1 (split equally between the shareholders as generally required bythe one-class of stock rule), then what are the tax impacts of thedistribution?

A. Both will recognize a short-term capital gain of $1,000 on thedistribution and each of their bases in the S-corporation’s stockis reduced to $0. Bill may not deduct any of the first year losswhile Cindy may deduct $5,000 of it.

B. Bill recognizes a short-term capital gain of $1,000 on thedistribution, his basis in stock is reduced to $0, and he cannotrecognize any of the first year loss. Cindy recognizes no gain onthe distribution, which reduces her basis in stock to $0 and herbasis in debt to $4,000. She may then deduct $4,000 of the firstyear loss, which reduces her debt basis to $0.

C. Bill recognizes $5,000 of the first year loss, which reduces hisbasis to $0. He then recognizes a $6,000 short-term capital gain onthe distribution. Cindy recognizes $6,000 of the first year loss,which reduces her stock basis to $0 and her debt basis to $4,000.She then recognizes a $2,000 capital gain on the distribution inexcess of her debt basis.

D. Bill recognizes $5,000 of the first year loss, which reduces hisbasis to $0. He then recognizes a $6,000 short-term capital gain onthe distribution. Cindyl recognizes $6,000 of the first year loss,which reduces her stock basis to $0 and her debt basis to $4,000.She then recognizes a $6,000 capital gain on the distribution,because debt basis cannot be reduced for distributions with respectto the stock of the S-corporation.

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Nestor Rutherford
Nestor RutherfordLv2
28 Sep 2019

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22) Boxer Corporation buysequipment in January of the current year with a 7-year class lifefor $15,000. The corporation expensed the $15,000 under Sec. 179.The deduction in the year of purchase for E&P purposes due tothe acquisition and expensing of the equipment is
A. $14,000
B. $15,000
C. $1,500
D. $3,000
23) Maxwell Corporation reportsthe following results:
Year CurrentE&P Distributions
2005 $6,000 $4,000
2006 5,000 1,000
2007 1,000 -0-

Maxwell's dividends-received deduction is
A. $5,000
B. $12,000
C. $0
D. $7,000
24) Identify which of thefollowing statements is false.
A. At formation, acorporation's E&P depends on the amount of capital contributedby the shareholders.
B. Adjustments totaxable income when computing E&P do not include tax exemptinterest.
C. For E&Pdividend distribution purposes, property as defined in Sec. 317(a)includes money.
D. The function ofE&P is to provide a measure of a corporation's economic abilityto pay dividends.
25) Exit Corporation hasaccumulated E&P of $24,000 at the beginning of the current taxyear. Current E&P is $20,000. During the year the corporationmakes the following distributions to its sole shareholder who has a$22,000 basis for her stock.
Date AmountDistributed
April 1 $20,000
June 1 20,000
August 1 15,000
November 1 5,000

The treatment of the $15,000 August 1 distribution would be
A. $4,000 is taxableas a dividend from accumulated E&P, and $11,000 is tax-free asa return of capital
B. $5,000 is taxableas a dividend from current E&P and $10,000 is tax-free as areturn of capital
C. $15,000 is taxableas a dividend; $5,000 from current E&P and the balance fromaccumulated E&P
D. $15,000 is taxableas a dividend from accumulated E&P
26) Current E&P does notinclude
A. tax-exemptinterest income
B. life insuranceproceeds where the corporation is the beneficiary
C. federal income taxrefunds from prior years
D. All of the theseare included
27) Identify which of thefollowing statements is true.
A. Section 179property must be expensed ratably over a 5-year period whencomputing E&P.
B. Losses on propertysales to related parties are not deductible when computingE&P.
C. Distributions madeout of accumulated E&P are allocated ratably between multipledistributions made during the tax year.
D. All arefalse.
28) Crossroads Corporationdistributes $60,000 to its sole shareholder Harley. Crossroads hasearnings and profits of $55,000 and Harley's basis in her stock is$20,000. After the distribution, Harley's basis is
A. $20,000
B. $60,000
C. $5,000
D. $15,000
29) Hogg Corporation distributes$30,000 to its sole shareholder, Ima. At the time of thedistribution, Hoggs' E&P is $14,000 and Ima's basis in herstock is $10,000. Ima's gain from this transaction is
A. $20,000 capitalgain
B. $30,000 capitalgain
C. $6,000 capitalgain
D. $14,000 capitalgain
30) One consequence of aproperty distribution by a corporation to a shareholder is
A. the amount of thedistribution is increased by any liability assumed by theshareholder
B. any liabilitiesassumed by the shareholder do not reduce the shareholder'sbasis
C. the shareholder'sbasis in the distributed property is the same as the distributingcorporation's basis
D. the holding periodof the distributed property includes the holding period of thedistributing corporation
31) Identify which of thefollowing statements is true.
A. The distributingcorporation's E&P must be reduced by the FMV of nontaxablestock rights distributed to shareholders.
B. A stock redemptioncan be used to withdraw some assets from a corporation prior to asale of the business.
C. A shareholder canredeem part of his stock and recognize a capital gain if thecorporation has only one shareholder.
D. All arefalse.
32) Which of the following isnot a reason for a stock redemption?
A. desire byremaining shareholders to retain control
B. No outside marketexists for the stock.
C. Redemption ofshares is a good corporate investment.
D. desire byshareholders to reduce the corporate tax liability
33) Elijah owns 20% of ParkCorporation's single class of stock. Elijah's basis in the stock is$8,000. Park's E&P is $28,000. If Park redeems all of Elijah'sstock for $48,000, Elijah must report dividend income of
A. $0
B. $48,000
C. $40,000
D. $28,000

During the current year, Marlene, Nancy and Olive formed a new SCorporation. Solely in exchange for stock, Marlene and Nancycontributed appreciated property, while Olive contributed services.The exchanges of Marlene and Nancy will be nontaxable if:

Olive receives 30% of the stock

Olive receives 80% of the stock

Olive receives 15% of the stock

Marlene and Nancy together receive 50% of the stock

In June of 2018, Alice acquired heronly machine for $30,000 to use in her business. The machine isclassified as 5-year property. Alice’s maximum depreciation(including bonus) on the machine this year is:

$30,000

$12,000

$6,000

$18,000

Cactus Corporation, an S Corporation, had accumulated earningsand profits of $200,000 at the beginning of the tax year. Tex andShirley each own 50% of the stock. During the current year Cactushad $100,000 of ordinary income and distributed $10,000 to Tex and$10,000 to Shirley. What is Tex's taxable income for the currentyear?

$10,000

$0

$100,000

$50,000

Bristol Corporation was formed as an S Corporation on January 1,2014 and elected S corporation status at that date. Bristol has hadthe same 25 shareholders throughout its existence and has one classof stock. Bristol's S election will terminate if it:

10% of the shareholders vote to revoke the election

to purchase 10 shares

Allows a variation in the voting rights of the stock

Increases the number of shareholders to 125

On February 10, 2018, Ace Corporation, a new calendar yearcorporation, elected S corporation status and all shareholdersconsented to the election. There was no change in its shareholdersduring the current year. Ace met all eligibility requirements foran S corporation during the preelection portion of the year. Whatis the earliest date on which Ace can be recognized as an Scorporation?

February 10, 2018

January 1, 2019

February 10, 2019

January 1, 2018

In March of 2017 Frederick acquired an passenger automobile for$45,000 and used the automobile 85% for business. Themaximum depreciation deduction for 2017 is:

$3,160

$11,160

$8,928

$9,486

In August of 2017, Joseph acquires andplaces into services business equipment costing $300,000. Theequipment is classified as 5-year recovery property. No otheracquisitions are made during the year. Joseph elects to expense themaximum amount under Sec. 179. Joseph’s total deductions for theyear are

$60,000

$500,000

$100,000

$300,000

For the current tax year, VBN, an S Corporation distributes$100,000 to its sole shareholder, Raymond. His basis in the stockwas $140,000 before the distribution. VBN had once been a regular CCorporation and had remaining accumulated earnings and profits(E&P) from those years of $70,000. However, VBN has no balancein its accumulated adjustment account. How should the distributionof $100,000 be handled?

$100,000 as a taxable distribution

$70,000 as a taxable dividend, and $30,000 has a non taxablereturn of capital

$50,000 as a taxable dividend, and $100,000 as a non taxablereturn of capital

$70,000 as a taxable dividend; and $30,000 as a capital gain

Stahl, an individual who owns 100% of Talon, an S corporation,had a basis of $50,000 at the first of the year. During the yearTalon reported the following: Ordinary Loss of $10,000; Municipalinterest income of $8,000, Long term capital gain of $4,000; andLong term capital loss of $9,000. What was Stahl's basis in Talonat year end?

$56,000

$65,000

$53,000

$43,000

Gross Receipts of $70,000; Tax Exempt Interest Income of $4,000;Dividends of $10,000; Supplies Expense of $3,000; and UtilitiesExpense of $1,500. What amount is the S Corporation's ordinarytaxable income?

$75,500

$79,500

$70,000

$65,500

Bob and Sam each owned 50% of Lostalot, an S Corporation. Bob'sbasis is $30,000 and Sam's basis is $15,000. The corporation hasoperating loss for the current year of $50,000. Howmuch loss can each shareholder deduct in the current year assumingthey materially participate in the business:

Bob: $25,000; Sam: $15,000

Bob: $0; Sam: $0

Bob: $25,000; Sam: $25,000

Bob: $30,000; Sam: $15,000

Terra Corporation, a calendar-yeartaxpayer, purchases and places into service in 2017 machinery witha 7-year life that cost $650,000. The mid-quarter convention doesnot apply. Terra’s taxable income for the year before the Sec. 179deduction is $700,000. What is Terra’s total maximum depreciationdeduction related to this property?

$585,718

$521,345

$92,885

$500,000

Identify which of the following statements is false.

The PTI (previously taxed income) represents the balance ofundistributed net income which were already taxed.

The AAA balance can be negative, but the shareholder's basis inthe S corporation stock cannot be less than zero.

Tax exempt income increase the AAA and the basis of the Scorporation stock.

An S Corporation may or may not have accumulated Earnings andProfits

Elaine owns an unincorporated manufacturing business. In 2017,she purchases and places in service $600,000 of qualifying fiveyear equipment for use in her business. Her taxable income from thebusiness before any section 179 deduction is $100,000. Which of thefollowing statements is true?

Elaine cannot deduct any Section 179 deduction for 2017

Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $400,000 carryover to next year.

Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $500,000 carryover to the next year

Elaine can deduct $500,000 as a section 179 deduction in2017

Charles, an individual, owned 100% of the Alpha, an Scorporation. At the first of the year, Charles' basis in Alpha was$25,000. In the current year, Alpha realized ordinary income of$1,000; and a long term capital gain of $3,000. Alpha distributed$25,000 to Charles at the end of the year. What amount of the$25,000 is taxable to Charles?

$0

$7,000

$1,000

$25,000

What is the net Form W-2 wages?

What is miscellaneous income?

What is Schedule B income (Interest anddividends)?

What is Schedule C net income (Businessincome)?

What is Schedule D net income (Capital gains andlosses)?

What is Schedule E depreciation (Rentalproperty)?

What is Schedule E net income (Rental income & Sub-Sincome)?

What is the total “For AGI” deductions?

What is Adjusted Gross Income?

What is the Schedule A deduction for taxes?

What is the Schedule A deduction for interestexpense?

What is the Schedule A deduction for charitablecontributions?

What is the Schedule A total itemizeddeductions?

What is the total personal and dependentexemptions?

What is taxable income?

What is the tax on ordinary income?

What is the tax on long-term capital gain (loss) andqualified dividends?

What is the self-employment tax?

What is the kiddie tax?

What is the balance due or (refund)?

Answer above questions with the factsbelow:

Paul Turner is single and has two children, Allen and Lee Ann,from his previous marriage. Allen lives with Paul and Paul providesmore than half of his support. In the current year, Allen earned$300 of interest income and $5,000 working at a fast-foodrestaurant. Allen graduated from high-school in December 2015 andwas not a registered student during 2016. Lee Ann lives with hermother, Wilma (Lee Ann lived with Wilma for all of the currentyear). Wilma provides more than half of Lee Ann's support. Paulpays “alimony” of $400 per month to Wilma. The payments are tocontinue until Lee Ann reaches age 18, when they will be reduced to$250. Paul uses the cash method of accounting and a calendar yearfor reporting. Paul's birthday is May 31, 1975. Allen's birthday isOctober 5, 1998. Lee Ann's birthday is December 1, 2002. Paulprefers to report any “kiddie tax” on his tax return.

Paul is employed as a nuclear engineer with Atom SystemsConsultants, Inc. (ASCI). Paul's pay stubs indicate that he had$7,320 withheld in federal taxes, $4,987 in state taxes. He earned$80,000 of wages subject to employee Social Security taxes andMedicare taxes. ASCI has an extensive fringe benefits program forits employees.

Paul earned salary of $82,500 (before subtracting his 401(k) andflexible spending plan contributions). He contributed $6,500 to his401(k) account, and he contributed $2,600 to his flexible spendingaccount.

ASCI paid $497 of whole life insurance premiums to cover Paul'spersonal whole life insurance policy. ASCI also paid health clubdues of $825 to a nearby health club on Paul's behalf.

Taking advantage of ASCI's educational assistance program,during the fall Paul enrolled in two graduate engineering classesat a local college. ASCI paid his tuition, fees, and othercourse-related costs of $5,300.

Paul received free parking in the company's security garage thatwould normally cost $200 per month.

Paul manages the safety program for ASCI. In recognition of hissuperior handling of three potential crises during the year, Paulwas awarded the Employee Safety Award on December 15. The cashaward was $400.

On January 15, of the current year, Paul's father died. From hisfather's estate, he received stock valued at $30,000 (father’sbasis was $12,000) and his father's house valued at $95,000(father’s basis in the house was $55,000).

Paul owns several other investments and received the followinginformation reports for the current tax year:

Form 1009-Div:

General Dynamics – Gross qualified dividends - $400

Form 1099-Int

New Jersey Economic Development bonds – Gross interest -$300

IBM bonds – Gross interest - $600

State of Nebraska bonds – Gross Interest - $200

Form 1098-Mortgage InterestStatement

Sunbelt Credit Union – Mortgage interest - $7,100

Northeast Bank – Home-equity loan interest - $435

Form K-1 Grubstake Mining andDevelopment:

Distribution to shareholder - $1,000

Ordinary income (1% of $200,000) - $2,000

In addition to the investments discussed above, Paul owns 1,000shares of Grubstake Mining & Development common stock.Grubstake is organized as an S corporation and has 100,000 sharesoutstanding. Grubstake reported taxable income of $200,000 and paida distribution of $1.00 per share during the current year. Pauldoes not materially participate in Grubstake's activities.

Paul slipped on a wet spot in front of a computer store lastJuly. He broke his ankle and was unable to work for two weeks. Heincurred $1,300 in medical costs, all of which were paid by theowner of the store. The store also gave him $1,000 for pain andsuffering resulting from the injury. ASCI did not pay his salaryduring the two weeks he missed because of the accident. However,ASCI's disability insurance plan paid him $1,500 in disability payfor the time he was unable to work. Under this plan, ASCI pays thepremiums of $500 for the disability insurance as a taxable fringebenefit. The disability plan premiums and the disability benefitpayments were not included in Paul’s W-2 wages reported inparagraph 3.

Paul received a Form 1099-B from his broker for the sale of thefollowing securities during the current year. The adjusted basisamounts were reported to the IRS.

Security

Sale Date

Purchase Date

Sales Price

CommissionPaid Sale

His Basis

Nebraska bonds

03/14/16

10/22/07

$2,300

$200

$1,890

Cassill Corp

(500 shares)

10/20/16

02/19/12

$8,500

$425

$9,760

In addition to the taxes withheld from his salary, he also madetimely estimated federal tax payments of $175 per quarter andtimely estimated state income tax payments of $150 for the firstthree quarters. The $150 fourth-quarter state payment was made onDecember 28 of the current year. Paul would like to receive arefund for any overpayment.

In August of the current year, he received a federal refund of$60 and a state tax refund of $200 related to the tax returns hefiled for the prior year. His itemized deductions for the prioryear were $18,430.

Paul found a renter for his father's house on August 1. Themonthly rent is $400, and the lease agreement is for one year. Thelease requires the tenant to pay the first and last months' rentand a $400 security deposit. The security deposit is to be returnedat the end of the lease if the property is in good condition. OnAugust 1, Paul received $1,200 from the tenant per the terms of thelease agreement. In November, the plumbing froze and several pipesburst. The tenant had the repairs made and paid the $300 bill. InDecember, he reduced his rental payment to $100 to compensate forthe plumbing repairs. Paul provides you with the followingadditional information for the rental in the current year.

Propertytaxes $720

Other maintenanceexpenses 285

Insuranceexpense 495

Managementfee 350

Depreciation (to becomputed) ?

Local practice is to allocate 10percent of the fair market value of the property to the land. (See¶8 for basis information.) Paul makes all decisions with respect tothe property.

Paul paid $2,050 in real estate taxes on his principalresidence. The real estate tax is used to pay for town schools andother municipal services.

Paul drives a 2013 Acura TL. His car registration fee (based onthe car year) is $50 and covers the period 1/1/16 through 12/31/16.In addition, he paid $280 in property tax to the state based on thebook value of the car.

In addition to the medical costs presented in ¶11, Paul incurredthe following unreimbursed medical costs:

Dentist $ 310

Doctor 390

Prescriptiondrugs 215

Over-the-counterdrugs 140

Optometrist 125

Emergency room charges 440

LASIK eyesurgery 2,000

Chiropractor 265

On April 1, Paul took advantage of low interest rates andrefinanced his $75,000 home mortgage with her original lender. Thenew home loan is for 15 years. He paid $215 in closing costs and$1,600 in discount points (prepaid interest) to obtain the loan.The house is worth $155,000, and Paul's basis in the house is$90,000. As part of the refinancing arrangement, he also obtained a$10,000 home-equity loan. He used the proceeds from the home-equityloan to reduce the balance due on her credit cards. Paul receivedseveral Form 1098 statements from her bank for interest paid by himin the current year. Details appear below. (See also ¶9)

Primary homemortgage $7,100

Home-equityloan 435

Creditcards 498

Carloan 390

On May 14 of the current year, Paul contributed clothing to theSalvation Army. The original cost of the clothing was $740. He hassubstantiation valuing the donation at $360. In addition, he madethe following cash contributions and received a statement from eachof the following organizations acknowledging his contribution:

LarkinCollege $800

UnitedWay 152

First MethodistChurch 790

Amos House (homelessshelter) 200

Local Chamber ofCommerce 100

On April 1 of the current year, Paul's house was robbed. Heapparently interrupted the burglar because all that's missing is anantique brooch he inherited from his grandmother (June 12, 2005)and $300 in cash. Unfortunately, he didn't have a separate rider onher insurance policy covering the jewelry. Therefore, the insurancecompany reimbursed him only $500 for the brooch. His basis in thebrooch was $6,000, and its fair market value was $7,500. Hisinsurance policy also limits to $100 the amount of cash that can beclaimed in a theft.

Paul sells real estate in the evening and on weekends(considered an active trade or business). He runs his business froma rental office he shares with several other realtors. Paul hasbeen operating in a business-like way since 2003 and has alwaysshown a profit. He had the following income and expenses from hisbusiness:

Commissionsearned $21,250

Expenses:

Advertising 2,200

Telephone 95

Real estate license 130

Rent 6,000

Utilities 600

He has used his Acura TL in his business during the currentyear. During the year, he properly documented 5,000 business miles.The total mileage on his car (i.e., business-use and personal-usemiles) during the year was 15,000 miles. Paul elects to use thestandard mileage method to calculate his car expenses. He spent $45on tolls and $135 on parking related to the real estatebusiness.

Paul's company has an accountable expense reimbursement plan foremployees from which Paul receives $12,000 for the followingexpenses:

Airfare $4,700

Hotel 3,400

Meals 2,000

Car rentals 600

Entertainment 900

Incidentals 400

Total 12,000

During the current year, Paul also paid $295 for businesspublications other than those paid for by his employer and $325 fora local CPA to prepare his tax return for the prior year.

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