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Exam 12: Corporations: Organization,capital Structure,and Operating Rules

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Question 51

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Elk,a C corporation,has $370,000 operating income and $290,000 operating expenses during the year.In addition,Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss.Elk's taxable income is:

A) $63,000.
B) $73,000.
C) $80,000.
D) $90,000.
E) None of the above.

F) A) and B)
G) None of the above

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Question 52

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A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120)by timely filing a Form 7004 for the tax year.

A) True
B) False

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Question 53

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Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock.Gabriella transfers cash of $50,000,while Maria transfers a proprietary formula (basis of $0;fair market value of $50,000).Neither Gabriella nor Maria will recognize gain on the transfer.

Don,the sole shareholder of Pastel Corporation (a C corporation),has the corporation pay him a salary of $600,000 in the current year.The Tax Court has held that $200,000 represents unreasonable compensation.Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

The corporate marginal income tax rates range from 15% to 39%,while the individual marginal income tax rates range from 10% to 39.6%.

Rachel owns 100% of the stock of Cardinal Corporation.In the current year Rachel transfers an installment obligation,tax basis of $180,000 and fair market value of $350,000,for additional stock in Cardinal worth $350,000.

When Pheasant Corporation was formed under § 351,Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock.Kristen's basis in the Pheasant stock is $26,000.Three years later,Pheasant Corporation goes bankrupt and its stock becomes worthless.Kristen,who is single,owned the stock as an investment.Kristen's loss is:

Rachel is the sole member of an LLC,and Jordan is the sole shareholder of a C corporation.Both businesses were started in the current year,and each business has a long-term capital gain of $10,000 for the year.Neither business made any distributions during the year.With respect to this information,which of the following statements is correct?

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.

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?

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.

A taxpayer transfers assets and liabilities to a corporation in return for its stock.If the liabilities exceed the basis of the assets transferred,the taxpayer will have a negative basis in the stock.

In a § 351 transaction,if a transferor receives consideration other than stock,the transaction can be taxable.

Stock in Merlin Corporation is held equally by Jane,Eve,and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane,Eve,and Fred propose to loan Merlin $2,000,000 each,taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?

Dawn,a sole proprietor,was engaged in a service business and reported her income on a cash basis.Later,she incorporates her business and transfers the assets of the business to the corporation in return for all the stock in the corporation plus the corporation's assumption of the liabilities of her proprietorship.All the receivables and the unpaid trade payables are transferred to the newly formed corporation.The assets of the proprietorship had a basis of $105,000 and fair market value of $300,000.The trade accounts payable totaled $25,000.There was a note payable to the bank in the amount of $95,000 that the corporation assumes.The note was issued for the purchase of computers and other business equipment.

Rhonda and Marta form Blue Corporation.Rhonda transfers land (basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash.Marta transfers $160,000 cash for 50 shares in Blue Corporation.

Nick exchanges property (basis of $100,000;fair market value of $3 million),for 65% of the stock of Yellow Corporation.The other 35% of the stock is owned by Gloria who acquired it several years ago.What are the tax consequences to Nick?

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.

A shareholder transfers a capital asset to Red Corporation for its stock.If the transfer qualifies under § 351,Red's holding period for the asset begins on the day of the exchange.

When depreciable property is transferred to a controlled corporation under § 351,any recapture potential disappears and does not carry over to the corporation.