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Exam 1: Introduction to Taxation

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Question 41

True/False

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Donald owns a 45% interest in a partnership that earned $130,000 in the current year.He also owns 45% of the stock in a C corporation that earned $130,000 during the year.Donald received $20,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $78,500 of income on his individual income tax return for the year.

A) True
B) False

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Question 42

Multiple Choice

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Which of the following statements is incorrect about LLCs and the check-the-box Regulations?

A) If a limited liability company with more than one owner does not make an election,the entity is taxed as a corporation.
B) All 50 states have passed laws that allow LLCs.
C) An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.
D) If a limited liability company with one owner does not make an election,the entity is taxed as a sole proprietorship.
E) A limited liability company with one owner can elect to be taxed as a corporation.

F) A) and E)
G) B) and E)

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Question 43

Multiple Choice

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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?

The Federal estate and gift taxes are examples of progressive taxes.

Lucinda is a 60% shareholder in Rhea Corporation,a calendar year S corporation.During the 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?

In 2011,Deborah became 65 years old.In 2012 she added a swimming pool,and in 2013 she converted the residence to rental property and moved into an assisted living facility.Since 2010,Deborah's ad valorem property taxes have decreased once and increased twice.Explain.

A tax cut enacted by Congress that contains a sunset provision will make the tax cut temporary.

In 2012,José,a widower,sells land (fair market value of $100,000)to his daughter,Linda,for $50,000.José has made a taxable gift of $50,000.

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?

Property can be transferred within the family group by gift or at death.One motivation for preferring the gift approach is:

Dawn is the sole shareholder of Thrush Corporation,a C corporation.In the current year,Thrush earned $350,000 and distributed $75,000 to Dawn.Kirk is the sole shareholder of Swallow Corporation,an S corporation.In the current year,Swallow earned $350,000 and distributed $75,000 to Kirk.Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk.

Norma formed Hyacinth Enterprises,a proprietorship,in 2013.In its first year,Hyacinth had operating income of $400,000 and operating expenses of $240,000.In addition,Hyacinth had a long-term capital loss of $10,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $75,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2013?

A parent employs his twin daughters,age 17,in his sole proprietorship.The daughters are not subject to FICA coverage.

Taxes levied by all states include:

There is a Federal excise tax on hotel occupancy.

Burt and Lisa are married and live in a common law state.Burt wants to make gifts to their four children in 2013.What is the maximum amount of the annual exclusion they will be allowed for these gifts?

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.

Nancy is a 40% shareholder and president of Robin Corporation,a regular corporation.The board of directors of Robin has decided to pay Nancy a $75,000 bonus for the year based on her outstanding performance.The directors want to pay the $75,000 as salary,but Nancy would prefer to have it paid as a dividend.If Robin Corporation is in the 34% marginal tax bracket and Nancy is in the 33% marginal tax bracket irrespective of the treatment of the bonus,discuss which form of payment would be most beneficial for each party.(Ignore any employment tax considerations.)

On transfers by death,the Federal government relies on an estate tax,while states impose an estate tax,an inheritance tax,both taxes,or neither tax.

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?