Question 1

Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the current 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.

Accepted Answer

To calculate Elk's taxable income, we need to start with the operating income of $370,000 and subtract the operating expenses of $290,000, which gives us $80,000.

Next, we need to add the long-term capital gain of $10,000, which brings us to $90,000.

Finally, we need to subtract the short-term capital loss of $17,000, giving us a taxable income of $73,000.

Therefore, the correct answer is C).

Question 2

Paige is the sole shareholder of Citron Corporation.During the year, Paige leases a building to Citron for a monthly rental of $80,000.If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved?

Accepted Answer

The answer of Paige is the sole shareholder of Citron...

Question 3

Due to the population change, the Goose Creek School District has decided to close one of its high schools.Since it has no further need of the property, the school is listed for sale.The two bids it receives are as follows: $$\begin{array} { l r } 
\text { United Methodist Church } & \$ 1,700,000 \
\text { Planet Motors } & 1,600,000
\end{array}$$ The United Methodist Church would use the property to establish a sectarian middle school.Planet, a well-known car dealership, would revamp the property and operate it as a branch location.
If you were a member of the School District board, what factors would you consider in evaluating the two bids?

Accepted Answer

The answer of Due to the population change, the Goose...

Question 4

Morgan inherits her father's personal residence including all of the furnishings.She plans to add a swimming pool and sauna to the property and rent it as a furnished house.What are some of the ad valorem property tax problems Morgan can anticipate?

Accepted Answer

The answer of Morgan inherits her father's personal residence including...

Question 5

In 2015, Deborah became 65 years old.In 2016 she added a swimming pool, and in 2017 she converted the residence to rental property and moved into an assisted living facility.Since 2014, Deborah's ad valorem property taxes have decreased once and increased twice.Explain.

Accepted Answer

The answer of In 2015, Deborah became 65 years old.In...

Question 6

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.

Accepted Answer

Juanita must report the dividend income she receives from the corporation, not the proportionate share of the corporation's income, as corporations are taxed at the entity level and then dividends are taxed at the shareholder level.

Question 7

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?
A)The C corporation receives a preferential tax rate on the LTCG of $10,000.
B)The LLC must pay corporate tax on taxable income of $10,000.
C)Jordan must report $10,000 of LTCG on his tax return.
D)Rachel must report $10,000 of LTCG on her tax return.
E)None of the above.

Accepted Answer

In an LLC, the income and losses pass through to the owner(s) and are reported on their personal tax returns. Therefore, Rachel must report the $10,000 LTCG on her personal tax return. In a C corporation, the tax rate on long-term capital gains is the same as the tax rate on ordinary income, so there is no preferential tax rate. Since the corporation did not make any distributions, the LTCG will be retained in the corporation and not reported on Jordan's personal tax return. Option B is incorrect because the LLC is not subject to corporate tax; it is a pass-through entity. Option C is incorrect because Jordan is not required to report the LTCG on his tax return.

Question 8

Taylor, a widow, makes cash gifts to her five married children (including their spouses) and to her seven grandchildren.What is the maximum amount Taylor can give for calendar year 2017 without using her unified transfer tax credit?

Accepted Answer

The answer of Taylor, a widow, makes cash gifts to...

Question 9

Pablo, a sole proprietor, sold stock held as an investment for a $40,000 long-term capital gain.Pablo's marginal tax rate is 33%.Loon Corporation, a C corporation, sold stock held as an investment for a $40,000 long-term capital gain.Loon's marginal tax rate is 35%.What tax rates are applicable to these capital gains?
A)15% rate applies to Pablo and 35% rate applies to Loon.
B)15% rate applies to Loon and 33% rate applies to Pablo.
C)35% rate applies to Loon and 33% rate applies to Pablo.
D)15% rate applies to both Pablo and Loon.
E)None of the above.

Accepted Answer

For individuals, long-term capital gains are taxed at preferential rates (0%, 15%, or 20%) depending on their taxable income. Since Pablo's marginal tax rate is 33%, his long-term capital gains would be taxed at 15%. C corporations, like Loon Corporation, do not benefit from these preferential rates; their gains are taxed at their corporate tax rate, which in this case is 35%.

Question 10

In 1986, Roy leased real estate to Drab Corporation for 20 years.Drab Corporation made significant capital improvements to the property.In 2006, Drab decides not to renew the lease and vacates the property.At that time, the value of the improvements is $800,000.Roy sells the real estate in 2017 for $1,200,000 of which $900,000 is attributable to the improvements.When is Roy taxed on the improvements made by Drab Corporation?

Accepted Answer

The answer of In 1986, Roy leased real estate to...

Question 11

A landlord leases property upon which the tenant makes improvements.The improvements are significant and are not made in lieu of rent.At the end of the lease, the value of the improvements are not income to the landlord.This rule is an example of:
A)A clear reflection of income result.
B)The tax benefit rule.
C)The arm's length concept.
D)The wherewithal to pay concept.
E)None of these.

Accepted Answer

The answer of A landlord leases property upon which the...

Question 12

Lucinda is a 60% shareholder in Rhea Corporation, a calendar year S corporation.During the current year, Rhea Corporation had gross income of $550,000 and operating expenses of $380,000.In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000.During the year, Rhea Corporation distributed $50,000 to Lucinda.With respect to this information, which of the following statements is correct?
A)Rhea Corporation will pay tax on taxable income of $200,000.
B)Lucinda reports ordinary income of $50,000.
C)Lucinda reports ordinary income of $120,000.
D)Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.
E)None of the above.

Accepted Answer

The answer of Lucinda is a 60% shareholder in Rhea...

Question 13

Flycatcher Corporation, a C corporation, has two equal individual shareholders, Nancy and Pasqual.In the current year, Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher, Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket.With respect to the current year, which of the following statements is incorrect?
A)Flycatcher cannot avoid the corporate tax altogether by distributing all $100,000 of net profit as dividends to the shareholders.
B)Nancy incurs income tax of $1,500 on her dividend income.
C)Pasqual incurs income tax of $1,500 on his dividend income.
D)Flycatcher pays corporate tax of $22,250.
E)None of the above.

Accepted Answer

The answer of Flycatcher Corporation, a C corporation, has two...

Question 14

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?
A)$0 income from the S corporation and $30,000 income from the C corporation.
B)$30,000 income from the S corporation and $30,000 of dividend income from the C corporation.
C)$90,000 income from the S corporation and $0 income from the C corporation.
D)$90,000 income from the S corporation and $30,000 income from the C corporation.
E)None of the above.

Accepted Answer

For the S corporation, Bjorn's share of the income is $150,000 x 60% = $90,000. Since the S corporation distributed $30,000 to him, this is considered a return of capital and is not taxable income. 
For the C corporation, Bjorn's share of the income is also $150,000 x 60% = $90,000. The $30,000 in dividends is taxable income. 
Therefore, Bjorn must report $90,000 income from the S corporation and $30,000 income from the C corporation, for a total of $120,000 taxable income.

Quiz 1: Introduction to Taxation

Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the current 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:

Paige is the sole shareholder of Citron Corporation.During the year, Paige leases a building to Citron for a monthly rental of $80,000.If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved?

Morgan inherits her father's personal residence including all of the furnishings.She plans to add a swimming pool and sauna to the property and rent it as a furnished house.What are some of the ad valorem property tax problems Morgan can anticipate?

In 2015, Deborah became 65 years old.In 2016 she added a swimming pool, and in 2017 she converted the residence to rental property and moved into an assisted living facility.Since 2014, Deborah's ad valorem property taxes have decreased once and increased twice.Explain.

Taylor, a widow, makes cash gifts to her five married children (including their spouses) and to her seven grandchildren.What is the maximum amount Taylor can give for calendar year 2017 without using her unified transfer tax credit?

A landlord leases property upon which the tenant makes improvements.The improvements are significant and are not made in lieu of rent.At the end of the lease, the value of the improvements are not income to the landlord.This rule is an example of: