Question 1

Laurie is a 70% shareholder in Martin Ltd. ,a calendar year S corporation.As of January 1,2014,Laurie's basis in her stock investment was $400,000.During 2014,she made an additional capital contribution to Martin of $90,000 and also loaned the corporation $80,000.During 2014,Martin Ltd.had an operating loss of $900,000.One of the results of these transactions as to 2014 is that:

Accepted Answer

Laurie's share of the recognized loss,$630,000 (70% × $900,000),is limited to her basis in the stock and any loans she has made to the corporation.Thus,her available basis for a loss pass-through is $570,000 [$400,000 (stock basis)+ $90,000 (capital contribution)+ $80,000 (loan to corporation)].The remaining unused loss of $60,000 ($630,000 - $570,000)can be carried over to future years.

Question 2

Camilla and Dean form Grouse Corporation with the following investment: From Camilla From Dean
Cash $300,000
Property (basis of $320,000;fair market value of $330,000
$330,000)
Camilla and Dean each receive 300 shares of stock in Grouse Corporation and,in addition,Dean receives $30,000 in cash.As a result of the transfer,Dean's basis in the stock and Grouse's basis in the property will be:

Accepted Answer

Dean's basis in the stock is $320,000 (basis of property given up)- $30,000 (boot received)+ $10,000 (gain recognized)= $300,000.Of the $30,000 boot received,only $10,000 is recognized,as recognized gain cannot exceed realized gain.Grouse's basis in the property is $320,000 (Dean's basis)+ $10,000 (Dean's recognized gain)= $330,000.

Question 3

Which,if any,of the following transactions incurred by an S corporation is not a separately stated item?

Accepted Answer

Organizational expenditures are not passed through to the shareholders but are deducted by the S corporation in determining its taxable income.

Question 4

On January 1,2014,Copper Corporation (a calendar year S corporation for many years)became a C corporation.A possible reason for this change in status is:

Accepted Answer

A majority of the shareholders can revoke the S election on a prospective basis.This is apparently what occurred on March 14,2014 (choice c. ).The April 11,2014,meeting of the shareholders (choice d. )was too late to be effective for 2014.The March 4 event (choice b. )would cause the loss of the election as of the date of the disqualifying event .

Question 5

As of January 1,2014,Donald,the sole shareholder of Sandpiper (a calendar year C corporation),had a basis in his stock of $50,000.During 2014,Sandpiper had an operating loss of $100,000 and distributed a $70,000 dividend to Donald.As of January 1,2014,Sandpiper had accumulated E & P of $200,000.What is Donald's basis in his Sandpiper stock as of January 1,2015?

Accepted Answer

A shareholder's basis in the stock of a C corporation is not affected by profits (or losses)of the corporation.Likewise,as long as covered by E & P,dividend distributions have no effect on the shareholder's basis.

Question 6

As of January 1,2014,Owl Corporation (a calendar year C corporation)has a deficit in accumulated earnings and profits (E & P)of $150,000.In 2014,it has current E & P of $200,000 and distributes a $220,000 dividend to its shareholders.A result of these transactions is:

Accepted Answer

The shareholders must recognize dividend income of $200,000 which is the amount of current E & P (choices c.and d. ).The additional $20,000 the shareholders receive [$220,000 (amount of distributions)- $200,000 (dividend income)] is a return of capital.As a corporation's deficit cannot be increased by a dividend distribution,Owl Corporation's E & P does not change and remains at a deficit of $150,000 (choice a. ).

Question 7

Jacob and Ashley form Junco Corporation with the following investments: From Jacob From Ashley
Cash $200,000
Equipment (basis of $400,000;fair market value of $300,000)300,000
Land (basis of $300,000;fair market value of $600,000
$600,000)
Jacob and Ashley each receive one-half of the Junco stock.In addition,Ashley receives cash of $100,000.One of the results of these transfers is:

Accepted Answer

Because § 351 applies,Jacob has no recognized loss (choice a. ).Ashley's recognized gain is limited to the lesser of her realized gain of $300,000 or the boot received of $100,000 (choice b. ).Junco's basis in the land is Ashley's basis of $300,000 plus her recognized gain of $100,000,or $400,000 (choice c. ).Ashley's basis in the Junco stock is $300,000 [$300,000 (basis in the land)- $100,000 (boot received)+ $100,000 (gain recognized)]-choice d.

Question 8

In determining a partner's basis in the partnership interest,which of the following reflects a correct adjustment?

Accepted Answer

Capital losses (choice a. ),operating losses (choice d. ),and decrease in partnership liabilities (choice c. )decrease basis.Tax-exempt income (choice b. )increases the basis in a partnership interest.

Question 9

Which of the following statements,if any,is characteristic of constructive dividends?

Accepted Answer

The answer of Which of the following statements,if any,is characteristic...

Question 10

Aiden and Addison form Dove Corporation with the following investments: From Aiden From Addison
Cash $800,000
Building (basis of $400,000,fair market value of $300,000
$300,000)
Land (basis of $200,000;fair market value of 500,000
$500,000)
Dove issues stock equally to Aiden and Addison.One of the tax consequences of these transfers is:

Accepted Answer

Dove's basis in the building is $400,000 (choice a. ).Addison has neither recognized loss (choice b. )nor recognized gain (choice d. ).

Question 11

Nick,Kristin,Spencer,Giselle,and Herbert are equal shareholders in Cuckoo Corporation.Which of the following,if any,could not be a constructive dividend?

Accepted Answer

Nick could be charging more than a fair rental for the building (choice a. ).Kristen could be overcharging for the land (choice b. ).Unless it is assumed that the services are not worth anything,it is the corporation (not the shareholder)that received a benefit.In constructive dividend situations,the shareholder receives the benefit,not the corporation (choice c. ).The advance to Giselle might not be a bona fide loan.Even if the loan is legitimate,the interest element could result in a constructive dividend (choice d. ).

Question 12

Jim,Betty,and Bill form Crow Corporation.Jim and Betty each contribute cash of $500,000,while Bill contributes land (basis of $550,000;fair market value of $600,000).Each shareholder receives one­third of Crow's stock,and Bill also receives $100,000 in cash.Which,if any,of the following choices is a correct result of the incorporation?

Accepted Answer

Bill's basis in the Crow Corporation stock is $500,000 [$550,000 (basis in the land)- $100,000 (boot received)+ $50,000 (gain recognized)].Crow's basis in the land is $600,000 [$550,000 (Bill's basis in the land)+ $50,000 (gain recognized by Bill)].[Recall that recognized gain cannot exceed the lesser of realized gain ($50,000)or boot received ($100,000).]

Question 13

Mel,Fred,and Mary form Canary Corporation.Mel and Fred each contribute cash of $250,000,while Mary contributes land (basis of $100,000;fair market value of $300,000).Each transferor receives one­third of Canary's shares,and Mary also receives $50,000 in cash.Which,if any,of the following choices is a correct result of the incorporation?

Accepted Answer

Canary's basis in the land is $150,000 [$100,000 (Mary's basis)+ $50,000 (gain recognized by Mary)].Mary's basis in the Canary stock is $100,000 [$100,000 (basis in the land)- $50,000 (boot received)+ $50,000 (gain recognized)].

Question 14

Snipe Corporation,a calendar year taxpayer,has total E & P of $800,000.During the current year,Snipe makes property distributions to Tracy (the sole shareholder)as follows: $\begin{array}{c}
\begin{array}{lll}
\
\text { Stock investment }\
\text { Land}
\end{array}
\begin{array}{lll}
\underline{\text {Adjusted Basis}}\
\$ 100,000 \
270,000
\end{array}
\begin{array}{lll}
\underline{\text {Fair Market Value}}\
\$ 90,000 \
300.000
\end{array}
\end{array}$
 As a result of these distributions:

Accepted Answer

Snipe Corporation must recognize a gain of $30,000 on the land distribution because the fair market value exceeds the adjusted basis. No loss is recognized on the stock investment because losses are not recognized on property distributions.

Question 15

Jean is a shareholder in Parrot Corporation,a calendar year S corporation.During the year,Jean's share of the pass-through from Parrot is: $\begin{array}{llcc}
  \text { Dividend distribution by Parrot } &\$30,000  \
 \text {Long-term capital gain  } &5,000\
 \text {  Operating loss} &20,000\
 \text {Tax-exempt interest income  } &10,000\
\end{array}$
 If Jean's basis in the Parrot stock was $100,000 at the beginning of the year,her basis at the end of the year is:

Accepted Answer

The answer of Jean is a shareholder in Parrot Corporation,a...

Question 16

Jerry is the sole shareholder of Bluejay Corporation,a calendar year C corporation.As of January 1,2014,Bluejay has a deficit of $50,000 in accumulated E & P.During 2014,it has current E & P of $300,000 and distributes a cash dividend of $400,000 to its shareholder.As of January 1,2014,Jerry's basis in the Bluejay stock is $75,000.One result of these transactions is:

Accepted Answer

Jerry has dividend income of $300,000 (the amount of Bluejay's current E & P).The remaining $100,000 of the $400,000 distribution is a return of capital.As his basis in the stock is only $75,000,the extra $25,000 is a capital gain.Consequently,Jerry's basis in the Bluejay stock as of January 1,2015,is $0.Since a dividend cannot increase a deficit,Bluejay's accumulated E & P on January 1,2015,is still a deficit of $50,000.

Question 17

Silver Corporation has held an S election since its formation five years ago.Which,if any,of the following will cause Silver to lose its election?

Accepted Answer

An S corporation can own stock in another corporation (choice a. )but cannot have as a shareholder another corporation or partnership (choice b. ).It can have as a shareholder an estate (choice d. )or a resident alien (choice c. ).

Question 18

Elijah contributes land (basis of $80,000;fair market value of $400,000)for a 20% interest in a partnership.The land is subject to a mortgage of $50,000 which the partnership assumes.As a result of the transfer,Elijah:

Accepted Answer

Elijah's basis is $40,000 [$80,000 (basis in the land)- $40,000 (80% × $50,000-the portion of the mortgage assumed by the other partners).Elijah recognizes no gain on the transfer (choice a. ).

Question 19

In determining the taxable income (or loss)of a partnership,which,if any,of the following items must be considered?

Accepted Answer

Choices a. ,b. ,and c.are passthrough items that each partner picks up on his (or her)individual return.

Question 20

As of January 1,2014,Amanda,the sole shareholder of Tern (a calendar year S corporation),had a basis in her stock of $50,000.During 2014,Tern had a net operating loss of $100,000 and distributed a $70,000 dividend to Amanda.What is Amanda's basis in her Tern stock as of January 1,2015?

Accepted Answer

Amanda's basis is reduced to zero by the NOL pass­through.A negative basis is not allowed.

Quiz 20: Corporations and Partnerships

Which,if any,of the following transactions incurred by an S corporation is not a separately stated item?

On January 1,2014,Copper Corporation (a calendar year S corporation for many years) became a C corporation.A possible reason for this change in status is:

As of January 1,2014,Owl Corporation (a calendar year C corporation) has a deficit in accumulated earnings and profits (E & P) of $150,000.In 2014,it has current E & P of $200,000 and distributes a $220,000 dividend to its shareholders.A result of these transactions is:

In determining a partner's basis in the partnership interest,which of the following reflects a correct adjustment?

Which of the following statements,if any,is characteristic of constructive dividends?

Nick,Kristin,Spencer,Giselle,and Herbert are equal shareholders in Cuckoo Corporation.Which of the following,if any,could not be a constructive dividend?

Silver Corporation has held an S election since its formation five years ago.Which,if any,of the following will cause Silver to lose its election?

Elijah contributes land (basis of $80,000;fair market value of $400,000) for a 20% interest in a partnership.The land is subject to a mortgage of $50,000 which the partnership assumes.As a result of the transfer,Elijah:

In determining the taxable income (or loss) of a partnership,which,if any,of the following items must be considered?

As of January 1,2014,Amanda,the sole shareholder of Tern (a calendar year S corporation) ,had a basis in her stock of $50,000.During 2014,Tern had a net operating loss of $100,000 and distributed a $70,000 dividend to Amanda.What is Amanda's basis in her Tern stock as of January 1,2015?