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Exam 12: Organization, Capital Structure, and Operating Rules

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Question 1

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Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in the current year.Carlos owns a 60% interest in a partnership that had a profit of $200,000 during the year.The corporation distributed $45,000 to Juanita, and the partnership distributed $45,000 to Carlos.With respect to this information, which of the following statements is incorrect?

A) Juanita must report $120,000 of income from the corporation.
B) The corporation must pay corporate tax on $200,000 of income.
C) Carlos must report $120,000 of income from the partnership.
D) The partnership is not subject to a Federal entity-level income tax.
E) None of the above.

F) A) and B)
G) B) and C)

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Question 2

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Robin Corporation, a calendar year C corporation, had taxable income of $1.9 million, $1.2 million, and $900,000 for 2014, 2015, and 2016, respectively.Robin has taxable income of $1.5 million for 2017.The minimum 2017 estimated tax installment payments for Robin are:

A) April 17, 2017, $76,500; June 15, 2017, $76,500; September 15, 2017, $76,500; December 15, 2017, $76,500.
B) April 17, 2017, $110,500; June 15, 2017, $127,500; September 15, 2017, $127,500; December 15, 2017, $127,500.
C) April 17, 2017, $127,500; June 15, 2017, $127,500; September 15, 2017, $127,500; December 15, 2017, $127,500.
D) April 17, 2017, $76,500; June 15, 2017, $178,500; September 15, 2017, $127,500; December 15, 2017, $127,500.
E) None of the above.

F) A) and B)
G) C) and E)

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Question 3

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In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney.Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.

Because boot is generated under § 357(b) (i.e., the liability is not supported by a bona fide business purpose), the transferor shareholder will always have to recognize gain.

In order to encourage the development of an industrial park, a county donates land to Ecru Corporation.The donation does not result in gross income to Ecru.

A city contributes $500,000 to a corporation as an inducement to locate in the city.Within the next 12 months, the corporation uses the money to purchase property.The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Quail Corporation is a C corporation with net income of $125,000 during the current year.If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income.Shareholders must report the $25,000 of dividends as income.

For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.

Which of the following statements is incorrect regarding the dividends received deduction?

When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities.Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure.Under these circumstances, the entire $30,000 will be treated as boot.

In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land (fair market value of $400,000) and cash of $100,000 to the corporation.Several months after the donation, Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.

Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation.In the current year both businesses make a net profit of $60,000.Neither business distributes any funds to the owners in the year.For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return.

On December 31, 2017, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer), who owns 75% of the corporation's outstanding stock.The $50,000 bonus is paid to the president on February 2, 2018.For Flamingo's 2017 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

When forming a corporation, a transferor-shareholder may choose to receive some corporate debt along with stock.Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.

Bjorn owns a 60% interest in an S corporation that earned $150,000 in the current year.He also owns 60% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn.How much income must Bjorn report from these businesses?

Hazel transferred the following assets to Starling Corporation. $\begin{array}{lrr}&&\text { Fair Market }\\&\text { Adjusted Basis }&\text { Value }\\\text { Cash } & \$ 120,000 & \$ 120,000 \\\text { Machinery } & 48,000 & 36,000 \\\text { Land } & 108,000 & 144,000\end{array}$ ? In exchange, Hazel received 50% of Starling Corporation's only class of stock outstanding.The stock has no established value.However, all parties believe that the value of the stock Hazel received is the equivalent of the value of the assets she transferred.The only other shareholder, Rick, formed Starling Corporation five years ago.

A shareholder's holding period for stock received under § 351 can include the holding period of the property transferred to the corporation.

Rita forms Finch Corporation by transferring land (basis of $125,000; fair market value of $750,000) which is subject to a mortgage of $375,000.Two weeks prior to incorporating Finch, Rita borrows $125,000 for personal purposes and gives the lender a second mortgage on the land.Finch Corporation issues stock worth $250,000 to Rita and assumes the two mortgages on the land.What are the tax consequences to Rita and to Finch Corporation?

To ease a liquidity problem, all of the shareholders of Osprey Corporation contribute additional cash to its capital.Osprey has no tax consequences from the contribution.

A shareholder contributes land to his wholly owned corporation but receives no stock in return.The corporation has a zero basis in the land.