(TCO 2) Charles and David are equal partners in Cozy Enterprises, a calendar-year partnership. During the year, Cozy Enterprises

ACCT 424  Federal Tax Accounting II Week 4 Midterm Answers


1. (TCO 2) Charles and David are equal partners in Cozy Enterprises, a calendar-year partnership. During the year, Cozy Enterprises had gross income of $400,000 and operating expenses of $220,000. In addition, the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000. During the year, Charles withdrew $60,000 from the partnership, and David withdrew $60,000. Discuss the impact of this information on the taxable income of Cozy Enterprises’ Charles and David.

2. (TCO 2) A C corporation has gross receipts of $150,000, $35,000 of other income, and deductible expenses of $95,000. In addition, the corporation incurred a net long-term capital loss of $25,000 in the current year. What is the corporation's taxable income?

3. (TCO 1) Sarah transfers property (basis of $120,000 and fair market value of $400,000) to Designer Corporation for 80% of its stock (worth $350,000) and a long-term note (worth $50,000), executed by Designer Corporation and made payable to Sarah. As a result of the transfer

4. (TCO 1) Mike Corporation, which owns stock in Red Corporation, had net operating income of $125,000 for the year. Red pays Mike a dividend of $100,000. Mike takes a dividends received deduction of $80,000. Which of the following statements is correct?

5. (TCO 1) Cheryl transfers property worth $275,000, basis of $100,000, to Frank Corporation for 80% of the stock in Frank, worth $150,000, and a long-term note, executed by Frank Corporation and made payable to Cheryl, worth $125,000.

6. (TCO 11) Candace, a calendar-year taxpayer subject to a 35% marginal tax rate, claimed a charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $200,000. Which is the applicable overvaluation penalty?

7. (TCO 11) In which of the following circumstances does the 3-year statute of limitations on additional tax assessments apply?

8. (TCO 2) Dodge Inc., has taxable income of $10 million this year. Which is the maximum DPAD tax savings for this C corporation?

9. TCO 2) The following information pertains to Dahl Corporation.
Accumulated earnings and profits at January 1, Year 1: $120,000. Earnings and profits for the year ended December 31, Year 1 $160,000. Cash distributions to individual stockholders during Year 1 $360,000. What is the total amount of distributions taxable as dividend income to Dahl's stockholders in Year 1?

10. TCO 3) Wood Corporation distributes land (fair market value of $75,000 and an adjusted basis of $25,000). The land is subject to a liability of $30,000. Which is the total effect of the distribution on the E&P of Wood?

1. (TCO 3) Oak Corporation, a calendar-year taxpayer, has taxable income of $110,000 for the year. In reviewing Oak's financial records, you discover the following occurred this year. 

Federal income taxes paid: $25,000
Net operating loss carryforward deducted currently: $25,000
Gain recognized this year on an installment sale from a prior year: $12,000
Depreciation deducted on tax return (ADS depreciation would have been $8,000): $15,000
Interest income from Illinois state bonds: $37,000 

Oak Corporation's current E&P is _____.

2. (TCO 3) Which statement is false?

3. (TCO 4) Five years ago, Reba transferred property she had used in her sole proprietorship to Green Corporation for 1,000 shares of Green Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $100,000, and a fair market value of $270,000 on the date of the transfer. In the current year, Green Corporation (E&P $800,000) redeems 250 shares from Reba for $220,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Reba will have a _____.

4. (TCO 4) Cook Corporation has 1,000 shares of stock outstanding. Harold owns 250 shares, Harold's father owns 150 shares, Harold's brother owns 250 shares, and Harold's son owns 50 shares. Blue Corporation owns the other 300 shares in Cook Corporation. Harold owns 60% of the stock in Blue Corporation. Applying the § 318 stock attribution rules, how many shares does Harold own in Cook Corporation?

5. (TCO 5) Catch Corporation gives its voting stock worth $500,000 and a building worth $250,000 with a basis of $150,000 for the assets of Neptune Corporation worth $750,000 and basis of $525,000. Neptune distributes the stock in Catch Corporation to its sole shareholder. Which, if any, of the following statements regarding this transaction is correct?

6. (TCO 5) Fruit Corporation transfers assets (fair market value of $3,000,000 and a basis of $750,000) to Nut Corporation. Fruit receives Nut voting stock worth $2,600,000 and $400,000 cash. Nut Corporation assumes none of Fruit's $600,000 liabilities. Fruit distributes the Nut stock and its liabilities to its shareholders. Fruit Corporation recognizes gain on the transfer of _____.

7. TCO 5) Which type of reorganization can be used to divide a corporation?

8. (TCO 6) X, Y, and Z Corporations file Federal tax returns on a consolidated basis. The group’s tax return has been under audit. Under a valid tax-sharing agreement, each corporation is liable for one-third of the group’s consolidated tax liability. The parties have agreed that the group’s unpaid liability for the year is $220,000. Because of an incorrect tax return position, $120,000 interest and a $90,000 penalty is attributable to X. At present, only Y is solvent and has the cash with which to make such a substantial tax payment. What is the maximum amount for which the IRS could be successful in forcing Y to satisfy the outstanding liabilities of the consolidated group?

9. (TCO 6) ParentCo's separate taxable income was $350,000, and SubCo's was $225,000. Consolidated taxable income before contributions was $400,000. Charitable contributions made by the affiliated group included $15,000 by ParentCo, and $20,000 by SubCo. Compute the group's charitable contribution deduction.

10. (TCO 6) Which tax item is not likely to be considered when a group of related corporations is evaluating the election to file on a consolidated basis?

1. (TCO 2) During the current year, Tourist Company had operating income of $510,000 and operating expenses of $400,000. In addition, Tourist Company had a long-term capital gain of $30,000. How does 

2. (TCO 11) The client has decided to dispute the revenue agent's report. What is the tax advisor's next step?

3. (TCO 4) DLA Corporation has 1,000 shares of common stock outstanding. Mark owns 200 shares, Mark's mother owns 200 shares, Mark's daughter owns 100 shares, and Mark's sister owns 150 shares. The remaining shares outstanding are owned by HNK Corporation (150 shares) and TMS Partnership (200 shares). Mark owns 60% of the stock in HNK Corporation.
(I) Applying the stock attribution rules applicable in the case of a stock redemption, how many shares does Mark own in DLA Corporation?
(II) Assume Mark owns only 35% of HNK Corporation. How many shares does Mark own, directly or indirectly, in DLA Corporation?
(III) Assume Mark owns 50% of TMS Partnership. How many shares does Mark own in DLA Corporation, assuming the same facts as in (1), above, augmented by TMS's ownership of DLA shares?

4. (TCO 5) Prince Corporation is acquiring Jam Corporation in a Type A reorganization by exchanging 40% of its voting stock and $50,000 for all of Jam's assets (value of $850,000 and basis of $600,000) and liabilities ($200,000). The shareholders of Jam are Susan (650 shares) and Richard (350 shares). They bought their stock for $500 per share. What is the amount of gains or losses that Susan and Richard will recognize due to the reorganization? What is the value of the stock they received from Prince and what is their basis in the Prince stock?

5. (TCO 6) In the context of a federal consolidated income tax return, describe the matching rule and the acceleration rule. The regulations apply these rules to some of the intercompany transactions of an affiliated group.