Deck 13: Corporate Formations and Operations

Question 1

In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. It has a favorable temporary book-tax difference for that year.

Answer 1

False
Explanation: Goodwill impairment in excess of tax goodwill creates either a permanent difference or an unfavorable temporary book-tax difference.

Question 2

Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.

Answer 2

True

Question 3

For incentive stock options, the value of the options that is expensed as compensation in a given year creates a permanent, unfavorable book-tax difference.

Answer 3

True

Question 4

Maria defers $100 of gain realized in a section 351 transaction. The stock she receives in the exchange has a fair market value of $500. Maria's tax basis in the stock will be $400.

Question 5

The definition of property as it relates to a section 351 transaction includes money.

Question 6

Federal income tax expense reported on a corporation's books generates a temporary book-tax difference.

Question 7

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

Question 8

Corporations calculate adjusted gross income (AGI) in the same way as individuals.

Question 9

A taxpayer always will have a tax basis in boot received in a section 351 transaction equal to its fair market value.

Question 10

For a corporation, purchased goodwill generally leads to temporary book-tax differences.

Question 11

To meet the control test under section 351, a taxpayer transferring property to a corporation must by himself own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer even if there are other transferors of property.

Question 12

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

Question 13

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

Question 14

Control as it relates to a section 351 transaction is strictly defined to be 80 percent or more of the voting power of the stock of the corporation to which property is transferred.

Question 15

Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

Question 16

Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.

Question 17

M Corporation assumes a $200 liability attached to property transferred to it by Jane in a section 351 transaction. The assumed liability will, as a general rule, be treated as boot received by Jane.

Question 18

Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

Question 19

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

Question 20

Han transferred land he held as an investment to his corporation in a section 351 transaction. Han had held the land for two years prior to the transfer. Han's holding period in the stock he received in the exchange includes the period for which he held the land before transferring it to the corporation.

Question 21

Net operating losses generally create permanent book-tax differences.

Question 22

A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.

Question 23

Bingo Corporation incurred a net operating loss in 2016. If it carries the loss back, it must first carry the loss back to offset its 2015 taxable income and then it carries any remaining loss back to offset its 2014 taxable income.

Question 24

Corporations may carry excess charitable contributions forward five years, but they may not carry them back.

Question 25

Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation's net operating loss for the year.

Question 26

GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2016. GenerUs made payment to FoodBank on February 2, 2017. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2016 tax return.

Question 27

A corporation may carry a net capital loss back two years and forward 20 years.

Question 28

A corporation may carry a net capital loss back three years and forward five years.

Question 29

NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while NOL and capital loss carrybacks are not.

Question 30

Accrual-method corporations are not allowed to deduct charitable contributions unless they actually make payment to the charity by year end.

Question 31

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

Question 32

A nonqualified stock option will create a permanent book-tax difference in the year it is exercised if the bargain element is different from the estimated value of the option for financial accounting purposes when it was issued.

Question 33

The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero.

Question 34

The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.

Question 35

Corporations can carry net operating losses back two years and forward 20 years.

Question 36

A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.

Question 37

Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).

Question 38

For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

Question 39

In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.

Question 40

Corporations compute their dividends received deduction by multiplying the dividend amount by 10 percent, 50 percent, or 100 percent depending on their ownership in the distributing corporation's stock.

Question 41

Small corporations (in terms of average annual gross receipts) are exempt from the alternative minimum tax.

Question 42

Urban Corporation receives tax-exempt income from Denver municipal bonds. All the proceeds from the bonds were used to fund public projects. In computing its AMT base, Urban must add back the interest income from its municipal bonds to taxable income.

Question 43

Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

Question 44

A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out.

Question 45

Volos Company (a calendar-year corporation) began operations in March of 2014 and was not profitable through December of 2015. Volos has been profitable for the first quarter of 2016 and is trying to determine its first quarter estimated tax payment (it expects a tax liability for the year of over $30,000). It will have no estimated tax payment requirement in 2016 because it had no tax liability for the 2015 tax year and has been in business for at least 12 months.

Question 46

Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income.

Question 47

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.

Question 48

The tax rate for the corporate alternative minimum tax is a flat 26%.

Question 49

Schedule M-1 reconciles from book income to the taxable income that is applied to the tax rates to determine the corporation's gross tax liability.

Question 50

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

Question 51

Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.

Question 52

The adjusted current earnings (ACE) adjustment is 75% of the difference between a corporation's alternative minimum taxable income before the ACE adjustment and the corporation's ACE.

Question 53

By default, an affiliated group must file a consolidated tax return.

Question 54

Calendar-year corporations that request an extension for filing their tax returns will have a tax return due date of September 15.

Question 55

Three brothers each own 20 percent of the stock in three corporations. Because no single brother owns more than 50 percent of a corporation, the tax law would not treat the corporations as a controlled group.

Question 56

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

Question 57

The corporate tax form is Form 1065.

Question 58

Corporations are allowed to deduct at least some AMT exemption regardless of profitability.

Question 59

Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.

Question 60

Taxable income of the most profitable corporations is subject to a flat 35% tax rate.

Question 61

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $900
B) $850
C) $800
D) $750

Question 62

A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its tentative minimum tax when its regular tax exceeds its tentative minimum tax.

Question 63

Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $800
B) $600
C) $550
D) $450

Question 64

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?

A) $800
B) $750
C) $700
D) $500

Question 65

Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy's tax basis in the stock received in the exchange?

A) $900
B) $750
C) $650
D) $450

Question 66

Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 cash in a transaction that qualifies as a section 351 transfer. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil's tax basis in the stock received in the exchange?

A) $6,000
B) $5,000
C) $4,000
D) $3,000

Question 67

Which of the following class of stock is not allowed to be used in a section 351 transaction?

A) Voting common stock
B) Voting preferred stock
C) Nonvoting preferred stock
D) All of the above classes of stock can be used in a section 351 transaction.

Question 68

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle's tax basis in the stock received in the exchange?

A) $900
B) $850
C) $750
D) $700

Question 69

Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

A) $5,000
B) $4,000
C) $3,000
D) $2,000

Question 70

Which of the following statements best describes the "built-in loss" rules that apply to property transferred to a corporation under section 351?

A) If the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property's fair market value.
B) If the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property's tax basis in the hands of the shareholder.
C) If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property.
D) If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate tax basis of the property.

Question 71

Which of the following statements best describes the tax consequences that arise from a contribution of capital to a corporation by an existing shareholder?

A) The shareholder recognizes gain and loss on the transfer and the corporation's basis in the property transferred equals its fair market value.
B) The shareholder does not recognize gain and loss on the transfer and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.
C) The shareholder recognizes gain and loss on the transfer and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.
D) The shareholder does not recognize gain and loss on the transfer and the corporation's basis in the property transferred equals zero.

Question 72

Minimum tax credits generated by the AMT can be carried forward indefinitely.

Question 73

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?

A) Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.
B) Sami will recognize $50 of compensation income, but she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.
C) Sami will not recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.
D) Sami will not recognize $50 of compensation income, and she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

Question 74

Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Antoine's tax basis in the stock received in the exchange?

A) $600
B) $550
C) $500
D) $450

Question 75

Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $150
B) $200
C) $250
D) $300

Question 76

The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular tax.

Question 77

Which of the following statements best describes the impact of receiving boot in a section 351 transaction?

A) Boot received has no impact on the recognition of gain or loss realized in a section 351 transaction.
B) Boot received causes gain realized to be recognized, but not loss realized.
C) Boot received causes loss realized to be recognized, but not gain realized.
D) Boot received causes gain and loss realized to be recognized.

Question 78

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

A) Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred.
B) In the aggregate, the transferors of property to the corporation must collectively control the corporation immediately after the transfers.
C) Only property transferred to a corporation is eligible for deferral.
D) All transfers of property to a corporation must be made simultaneously to qualify for deferral.

Question 79

Which of the following statements best describes the tax results to a shareholder in a section 351 transaction when liabilities on property transferred to the corporation are assumed by the corporation?

A) Liabilities assumed by a corporation on a section 351 transfer are always treated as boot.
B) Liabilities assumed by a corporation on a section 351 transfer are never treated as boot.
C) Liabilities assumed by a corporation on a section 351 transfer are treated as boot if the total liabilities assumed exceed the total basis of the assets transferred.
D) Liabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.

Question 80

Which of the following statements best describes the concept of control as it applies to a section 351 transaction?

A) Control is defined as the ownership of 80 percent or more of a corporation's voting stock.
B) Control is defined as the ownership of 80 percent or more of the fair market value of a corporation's stock.
C) Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the fair market value of a corporation's stock.
D) Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the total number of shares of each class of nonvoting stock.