Deck 13: Corporate Formations and Operations

Question 1

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.

Answer 1

False

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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.

Question 6

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

Question 7

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 8

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

Question 9

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

Question 10

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 11

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.

Question 12

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

Question 13

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

Question 14

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

Question 15

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.

Question 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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 22

GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified nonprofit organization, in November of 2019.GenerUs made payment to FoodBank on February 2, 2020.GenerUs Inc.(a calendar-year corporation)may claim a deduction for the contribution on its 2019 tax return.

Question 23

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

Question 24

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

Question 25

Net operating losses generally create permanent book-tax differences.

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

Corporations compute their dividends received deduction by multiplying the dividend amount by 50 percent, 65 percent, or 100 percent depending on their ownership in the distributing corporation's stock.

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

Bingo Corporation incurred a net operating loss in 2017.A portion of the loss carried over to 2019.Bingo can offset up to 100 percent of the corporation's taxable income in 2019.

Question 39

Corporations can carry net operating losses occurring in 2019 back two years and forward 20 years.

Question 40

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 41

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 42

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 43

Corporate taxable income is subject to a flat 21 percent tax rate.

Question 44

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

Question 45

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 46

The corporate tax form is Form 1065.

Question 47

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 48

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

Question 49

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 50

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 51

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

Question 52

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 53

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 54

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

Question 55

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

Question 56

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 57

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

Question 58

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 59

Volos Company (a calendar-year corporation)began operations in March of 2017 and was not profitable through December of 2018.Volos has been profitable for the first quarter of 2019 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 2019 because it had no tax liability for the 2018 tax year and has been in business for at least 12 months.

Question 60

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 61

Which of the following is not included in the corporate income tax formula?

A)Gross income
B)Adjusted gross income
C)Taxable income
D)Income tax liability

Question 62

Which of the following statements regarding book-tax differences is true?

A)Corporations are not required to report book-tax differences on their income tax returns.
B)Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.
C)Income excludable for tax purposes usually creates a temporary book-tax difference.
D)None of the choices are true.

Question 63

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

A)Temporary book-tax differences will reverse in future years whereas permanent differences will not.
B)Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C)Both "Temporary book-tax differences will reverse in future years whereas permanent differences will not." and "Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns." are the reasons.
D)Neither "Temporary book-tax differences will reverse in future years whereas permanent differences will not." nor "Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns." is the reason.

Question 64

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 65

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 66

Which of the following statements regarding a corporation's overall accounting method is true?

A)If a corporation's average gross receipts for 2016-2018 are $26,500,000, the corporation is required to use the accrual method of accounting in 2019.
B)If a corporation's first year of existence is 2018 and the corporation's gross receipts in 2018 are $29 million, the corporation is required to use the accrual method of accounting in 2019.
C)Both of these are true statements.
D)Neither of these are true statements.

Question 67

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 68

Which of the following classes 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 these classes of stock can be used in a section 351 transaction.

Question 69

Which of the following does NOT create a permanent book-tax difference?

A)Organizational and start-up expenses.
B)Entertainment expenses.
C)Fines and penalties expenses.
D)Municipal bond interest income.

Question 70

iScope Inc.paid $3,000 in interest on a loan it used to purchase municipal bonds.What is the nature of the book-tax difference relating to this expense?

A)Permanent; favorable.
B)Permanent; unfavorable.
C)Temporary; favorable.
D)Temporary; unfavorable.

Question 71

Which of the following statements regarding book-tax differences associated with purchased goodwill is false?

A)It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes.
B)In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book-tax difference will be unfavorable.
C)Temporary book-tax differences associated with goodwill are always favorable.
D)If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is equal to the amount of impairment recognized.

Question 72

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 73

TrendSetter Inc.paid $50,000 in premiums for life insurance coverage for its key employees.What is the nature of the book-tax difference created by this expense?

A)Permanent; favorable.
B)Permanent; unfavorable.
C)Temporary; favorable.
D)Temporary; unfavorable.

Question 74

Which of the following describes the correct treatment of incentive stock options (ISOs)?

A)Financial accounting-no expense; tax-no deduction.
B)Financial accounting-no expense; tax-deduct bargain element at exercise.
C)Financial accounting-expense value over vesting period; tax-no deduction.
D)Financial accounting-expense value over vesting period; tax-deduct bargain element at exercise.

Question 75

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 76

Which of the following does NOT create a temporary book-tax difference?

A)Deferred compensation.
B)Bad debt expense.
C)Depreciation expense.
D)Dividends received deduction

Question 77

Which of the following statements best describes the "built-in loss" rules that apply to the basis of 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 78

Over what time period do corporations amortize purchased goodwill for tax purposes?

A)180 months.
B)150 months.
C)60 months.
D)None of the choices are correct.

Question 79

AmStore Inc.sold some of its heavy machinery at a gain.AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost recovery.If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale?

A)Permanent; favorable.
B)Permanent; unfavorable.
C)Temporary; favorable.
D)Temporary; unfavorable.

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.