Chapter 14
include the amount it realized on the sale of a building for $330,000. The building was purchased in 2004 for $250,000
and $20,000 in straight-line depreciation had been taken on the building up to the date of its sale. How should Salem Inc.
report these results to its shareholders?
a.
Operating income of $320,000 and Section 1231 gain of $80,000.
b.
Operating income of $400,000.
c.
Operating income of $304,000 and Section 1231 gain of $96,000.
d.
Operating income of $380,000 and unrecaptured Section 1250 gain of $20,000.
e.
Operating income of $300,000 and Section 1231 gain of $80,000 and unrecaptured Section 1250 gain of
$20,000.
c
60. Lane Inc., an electing S corporation, realizes $150,000 from sales during the current year. Lane also receives $20,000
of dividends from a 3% owned corporation. Operating expenses total $155,000. Lane’s operating income is
a.
$(19,000)
b.
$( 5,000)
c.
$1,000
d.
$4,500
e.
$15,000
61. Lavery Corporation has two equal shareholders, and has been an electing S corporation since its inception. In the
current year, Lavery has taxable income of $60,000. This amount includes $50,000 from operations and $10,000 from
investment interest income. Because of these events, each shareholder’s adjusted basis in the stock will increase by
a.
$- 0 –
b.
$10,000
c.
$25,000
d.
$30,000
e.
$50,000
62. Boston Company, an electing S corporation, has an operating loss of $400,000 for the current year. Hank owns a 40%
interest in the company and is a material participant. At the beginning of the year, Hank’s adjusted basis in the stock is
$30,000. During the year the company borrows $100,000 with a recourse note. How much of the loss can Hank deduct on
his current-year income tax return?
a.
$- 0 –
b.
$ 30,000
c.
$ 70,000
d.
$160,000
e.
$200,000
63. Peter owns 30% of Bear Company, an electing S corporation. Peter’s adjusted basis in the stock is $44,000 at the
beginning of the current year. During the current year, Bear distributes a $60,000 dividend. Bear Company reports a
$200,000 operating loss for the current year. If Peter is a material participant in Bear Company, how much of the loss can
he deduct on his income tax return?
a.
$-0-
b.
$18,000
Chapter 14
c.
$26,000
d.
$44,000
e.
$60,000
c
64. Pablo owns 30% of Cancun Company, an electing S corporation. Pablo’s adjusted basis in the stock is $44,000 at the
beginning of the current year. During the current year, Cancun distributes a $60,000 dividend. Cancun Company reports a
$200,000 operating loss for the current year. If Pablo is not a material participant in Cancun Company, how much of the
loss can he deduct on his income tax return?
a.
$-0-
b.
$18,000
c.
$26,000
d.
$44,000
e.
$60,000
a
65. Anna owns 20% of Cross Co., an electing S corporation. Anna’s adjusted basis in the stock is $32,000 at the beginning
of the current year. During the current year, Cross pays a $50,000 cash dividend to its shareholders. Cross Co. reports a
$200,000 operating loss for the current year. Which of the following statements is/are correct?
I.
If Anna is a material participant in Chris Co., she can deduct a $40,000 loss.
II.
Anna’s maximum loss deduction is limited to $22,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
66. The Polaris S Corporation has operating income of $50,000. Andrew is the sole shareholder of the corporation that has
had the S election in effect since its inception. At the beginning of the current year, Andrew’s basis in his S corporation
stock is $2,000. During the year Andrew receives cash distributions totaling $55,000. How much income must Andrew
recognize for the current tax year?
a.
$50,000 ordinary income; $55,000 dividend income.
b.
$50,000 ordinary income.
c.
$50,000 ordinary income; $3,000 capital gain.
d.
$55,000 dividend income; $3,000 capital gain.
e.
$55,000 dividend income.
c
67. On a nonliquidating distribution of cash from a partnership, the partner will recognize gain if
I.
the cash distributed exceeds his/her basis in the partnership.
II.
the cash distributed exceeds his/her share of the net income of the partnership for the
year.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
Chapter 14
a
68. Mariana is a partner in the Benson Partnership. At the close of the current year, Mariana’s basis in the partnership is
$23,000. At that time, the partnership distributes cash of $6,000 and property with a basis of $4,000 and a fair market
value of $7,000 to each partner. What amount must Mariana report as income from the distribution in the current year?
a.
$- 0 –
b.
$4,000
c.
$6,000
d.
$10,000
e.
$13,000
a
69. Meritt is a partner in the McPherson Partnership. At the close of the current year, Meritt’s basis in the partnership is
$25,000.
I.
If the partnership distributes cash of $7,500 to Meritt, she must report the cash as
income.
II.
If the partnership distributes property with a basis of $12,000 and a fair market value of
$15,000, Meritt must report $3,000 as income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
70. Byron is a partner in the Dowdy Group. At the close of the current year, Byron’s basis in the partnership is $34,000. At
that time, the partnership distributes cash of $8,000 and property with a basis of $9,000 and a fair market value of $13,000
to each partner. What is Byron’s basis in the partnership after the distribution?
a.
$13,000
b.
$17,000
c.
$26,000
d.
$34,000
71. During the current year the Newport Partnership is liquidated. Which of the following statements is correct concerning
the liquidation of the partnership?
I.
If only cash is distributed by the partnership, the partners must recognize a gain but
cannot recognize a loss.
II.
Gain is recognized only if the amount of cash and property distributed exceeds the
partner’s basis in the partnership.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
72. Howard is a partner in the Smithton Partnership with a basis of $20,000. During the current year, the partnership is
Chapter 14
liquidated and the partnership distributes cash of $22,000 and property with a basis of $8,000 and a fair market value of
$15,000 to each partner. What amount must Howard report as a gain from the liquidation?
a.
$- 0 –
b.
$2,000
c.
$10,000
d.
$15,000
e.
$17,000
73. Chance Corporation has a $20,000 deficit in earnings and profits as of January 1, 2015. During 2015, the corporation
has current earnings and profits of $40,000 and makes a $70,000 cash distribution to its shareholders. What part of the
distribution is taxable as dividend income to Chance’s shareholders?
a.
$- 0 –
b.
$20,000
c.
$30,000
d.
$40,000
e.
$70,000
74. The Serenity Corporation distributes $200,000 in cash to its shareholder during 2015. Accumulated earnings and
profits are $80,000 as of January 1, 2015. Current earnings and profits for 2015 are $84,000. Jonas, the sole shareholder of
Serenity Corporation, has a basis of $48,000 in his stock. What is the tax effect of the distribution for Jonas?
a.
Jonas will recognize ordinary income of $164,000 and a capital gain of $36,000.
b.
Jonas will recognize ordinary income of $84,000, capital gain of $80,000 and a tax-free recovery of capital of
$36,000.
c.
Jonas will recognize ordinary income of $164,000 and a tax-free return of capital of $36,000.
d.
Jonas will recognize ordinary income of $164,000 and a capital loss of $12,000.
e.
Jonas will recognize ordinary income of $200,000 and a capital loss of $12,000.
c
75. Roy receives a nonliquidating distribution from Ageless Corporation. Which of the following statements concerning
nonliquidating distributions from a corporation are correct?
I.
A nonliquidating cash distribution is taxable if the distribution comes from the
corporation’s current or accumulated earnings and profits.
II.
The amount of the dividend on a nonliquidating distribution of property is the basis of
the property distributed.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
76. Posey Corporation distributes land with a fair market value of $20,000 and a basis of $12,000 to Brock, a shareholder.
Posey’s earnings and profits are $125,000. What must Brock report as income from the property distribution?
a.
$- 0 –
b.
$8,000
Chapter 14
c.
$12,000
d.
$20,000
77. Fender Corporation makes a cash distribution of $40,000 to Gibson in complete liquidation of the corporation.
Gibson’s basis in Fender stock is $18,000. What must Gibson report as income from the cash distribution?
a.
$- 0 –
b.
$18,000
c.
$22,000
d.
$40,000
c
78. Global Corporation distributes property with a basis of $22,000 and a fair market value of $30,000 to Arturo in
complete liquidation of the corporation. Arturo’s basis in the stock is $14,000. What must Arturo and Global report as
income upon the liquidation of Global?
Arturo Global
a.
$16,000 $8,000
b.
$16,000 $-0-
c.
$30,000 $-0-
d.
$30,000 $30,000
a
79. Brooks Corporation distributes property with a basis of $20,000 and a fair market value of $25,000 to Caroline in
complete liquidation of the corporation. Caroline’s basis in the stock is $32,000. What must Caroline and Brooks report as
income (loss) upon the liquidation of Brooks?
Caroline Brooks
a.
$(12,000) $(7,000)
b.
$(12,000) $5,000
c.
$(12,000) $-0-
d.
$(7,000) $5,000
80. Serenity receives a nonliquidating distribution from the Hickock Corporation, an S corporation. Which of the
following statements concerning nonliquidating distributions from an S corporation are correct?
I.
A nonliquidating cash distribution is taxable if the amount distributed exceeds
Serenity’s basis in Hickock.
II.
The amount of the dividend on a nonliquidating distribution of property is the fair
market value of the property distributed.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
81. Micaela owns all the shares of the Madison Corporation that operates as an S corporation. Micaela’s basis in the stock
Chapter 14
is $40,000. During the year she receives a cash distribution of $10,000 from Madison. What must Micaela and Madison
report as income from the cash distribution?
Micaela Madison
a.
$-0- $-0-
b.
$10,000 $-0-
c.
$-0- $10,000
d.
$10,000 $10,000
82. Rayburn owns all the shares of Newcastle Corporation that operates as an S corporation. Rayburn’s basis in the stock
is $15,000. During the year he receives a cash distribution of $22,000 from Newcastle. What must Rayburn and
Newcastle report as income from the cash distribution?
Rayburn Newcastle
a.
$-0- $-0-
b.
$7,000 $-0-
c.
$-0- $7,000
d.
$7,000 $7,000
83. Jane receives a nonliquidating distribution of land with a fair market value of $30,000 and a basis of $18,000 from
Strickland Corporation, an S corporation. Jane’s basis in the stock is $46,000. What must Jane and Strickland report as
income from the property distribution?
Jane Strickland
a.
$-0- $-0-
b.
$12,000 $-0-
c.
$-0- $12,000
d.
$12,000 $12,000
84. Malcolm receives a liquidating distribution of land with a fair market value of $14,000 and a basis of $19,000 from
Blithe Corporation, an S corporation. Malcolm’s basis in the stock is $21,000. What must Malcolm and Blithe report as
income (loss) from the property distribution?
Malcolm Blithe
a.
$-0- $-0-
b.
$(2,000) $(5,000)
c.
$(7,000) $-0-
d.
$(7,000) $(5,000)
85. Mario receives a liquidating distribution of land with a fair market value of $19,000 and a basis of $15,000 from
Blithe Corporation, an S corporation. Mario’s basis in the stock is $21,000. What must Mario and Blithe report as income
(loss) from the property distribution?
Mario Blithe
a.
$-0- $-0-
Chapter 14
b.
$(2,000) $4,000
c.
$(6,000) $-0-
d.
$(6,000) $4,000
86. Advantages of hiring one’s own children to work in her/his business enterprise include which of the following?
I.
The corporation can deduct wages paid to the children for work performed.
II.
The corporation is required to pay Social Security taxes on the children’s earnings.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
87. Louise is the marketing manager and a 30% owner of Walker Company. At the beginning of the current year, Louise’s
basis in Walker Company is $22,000. During the year, Walker borrows $50,000 to finance the construction of a new
building. For the year, Walker suffers a $100,000 net operating loss and distributes $60,000 in cash to its owners.
Determine Louise’s deductible loss if Walker is organized as
a.
A partnership
b.
A corporation
c.
An S corporation
88. Sandi and Jodie are partners who operate Household Humanities. Sandi owns 60% and Jodie owns 40% of Household.
During the current year, Household has the following results:
Chapter 14
Revenues
$165,000
Operating expenses
45,000
Sandi’s salary
50,000
Jodie’s salary
45,000
Municipal bond interest income
3,000
Long-term capital loss
30,000
Charitable contributions
10,000
a.
How must Household report these results to Sandi and Jodie? Show calculations.
b.
Sandi is a head of household with two dependent children (ages 17 and 18). She has $19,000 of
other income, which includes a $6,000 short-term capital gain. Sandi has $16,750 of other
allowable itemized deductions. Calculate Sandi’s taxable income and income tax liability.
Household has operating income of $120,000 ($165,000 – $45,000). Salaries
the partners. The remaining items must be separately reported to each partner.
Operating income
Municipal bond interest income
Long-term capital loss
Charitable contributions
Other income ($19,000 – $6,000)
Partnership operating income
Capital loss deduction
Adjusted gross income
Itemized deductions ($16,750 +
exemptions ($4,000 × 3)
Taxable income
89. Marvin and Marshall own and operate MM Company, an electing S corporation. Marvin owns 75% and Marshall
owns 25% of MM’s stock. During the current year, MM has the following results:
Revenues
$350,000
Operating expenses
185,000
Marvin’s salary
40,000
Marshall’s salary
85,000
Municipal bond interest income
12,000
Chapter 14
Long-term capital loss
30,000
Charitable contributions
20,000
a. How must MM report these results to Marvin and Marshall? Show calculations.
b. Marvin is a single taxpayer with no dependents. He has total income from other
sources of $68,000, which includes a $26,000 long-term capital gain. He has
$11,400 of other allowable itemized deductions. Calculate Marvin’s taxable income
and his income tax liability.
– $40,000 – $85,000). The remaining items must be separately reported to each
Operating income
Municipal bond interest income
Long-term capital loss
Charitable contributions
Other income ($68,000 – $26,000)
Salary from MM
S corporation operating income
Adjusted gross income
Less: Deductions from adjusted gross
Itemized deductions ($11,400 +
Less: Personal exemption
Taxable income
– $5,156.25 + [25% × ($81,600 –
Tax on $3,500 capital gain
– $3,500 × 15%
Income tax liability
90. Calvin Corporation, has the following items of income and expense for the current year. Calculate (a) Calvin’s taxable
income and (b) income tax liability.
Sales revenue
$500,000
Cost of goods sold
360,000
Gross profit
$140,000
Other revenue:
Dividends (less than 2% ownership)
$5,000
Interest received from municipal bonds
30,000
Expenses:
Utilities
$25,000
Insurance
15,000
Meals and entertainment
60,000
Charitable contributions
10,000
Net operating loss (from the previous year)
$ 60,000
15%).
Sales revenue
Cost of goods sold
Gross profit
Other revenue: Dividends
Expenses:
Utilities
Insurance
Income before special deductions
Taxable income
91. Dorothy operates a pet store as a sole proprietorship. During the year she sells the business to Florian for $200,000.
Chapter 14
The assets sold and the allocation of the purchase price are as follows:
Adjusted Basis
Purchase Price
Inventory
$20,000
$20,000
Building
60,000
105,000
Land
20,000
35,000
Equipment
-0-
30,000
Goodwill
-0-
10,000
Total Assets
$100,000
$200,000
Dorothy acquired the building in 1997 for $100,000 of which $20,000 was allocated to the land. She paid $40,000 for the
equipment in the same year. What are the tax consequences of the liquidation for Dorothy?
the purchase price allocated to inventory is equal to its cost, Dorothy has no gain or loss to recognize.
92. Discuss two tax-planning techniques that can be used by a 100% owner-employee to reduce his/her tax liability.
Match the term with the entity to which it applies.
a.
Sole Proprietorship.
b.
Partnership.
c.
Corporation.
d.
S Corporation.
93. Dividends-received deduction
c
94. Double taxation
c
95. Losses flow-through limited to basis plus the amount of any direct loans
96. Separate entity that never pays income taxes
97. Not a separate entity
98. Owner basis adjusted for liabilities