Question 1

Chance Corporation has a $20,000 deficit in earnings and profits as of January 1,2013.During 2013,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

Accepted Answer

The distribution is taxable as dividend income to the extent of the current earnings and profits, which is $40,000.

Question 2

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
C)$26,000
D)$44,000
E)$60,000

Accepted Answer

As Peter owns 30% of the Bear Company, he can deduct his share of operating loss on his income tax return. 
Peter's share of operating loss = 30% of $200,000 = $60,000
However, as the company is an S corporation, Peter's share of the operating loss will be limited to his adjusted basis in the stock. 
Peter's adjusted basis in the stock = $44,000
Thus, Peter can deduct up to $44,000 of his share of operating loss on his income tax return.
As Peter is a material participant in Bear Company, he can also deduct his share of the dividend distribution. 
Peter's share of the dividend = 30% of $60,000 = $18,000
Therefore, Peter can deduct $44,000 of the operating loss and $18,000 of the dividend distribution on his income tax return, for a total deduction of $62,000. However, as the maximum deduction allowed is $60,000 (the total distribution), the answer is C, $26,000.

Question 3

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

Accepted Answer

Since Lavery is an S corporation, its taxable income flows through to its shareholders and their adjusted basis in the stock is affected. Shareholders' basis in the stock increases when the S corporation generates taxable income, but it does not increase when the S corporation generates tax-exempt income. In this case, Lavery's taxable income of $60,000 includes $50,000 from operations and $10,000 from investment interest income. Both of these types of income are taxable, so each shareholder's adjusted basis in the stock will increase by $30,000 (i.e., $60,000/2). The correct choice is D, $30,000.

Question 4

The Serenity Corporation distributes $200,000 in cash to its shareholder during 2013.Accumulated earnings and profits are $80,000 as of January 1,2013.Current earnings and profits for 2013 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.

Accepted Answer

The tax effect of the distribution for Jonas is that he will recognize ordinary income of $164,000, which is the total distribution of $200,000 minus the current earnings and profits of $84,000. Additionally, he will receive a tax-free return of capital of $36,000, which is the amount that exceeds the accumulated earnings and profits of $80,000. Because Jonas's basis in his stock is $48,000, he will not recognize any capital gains or losses. Therefore, option C is the correct choice.

Question 5

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.

Accepted Answer

As Anna's adjusted basis in the stock is $32,000 and Cross Co. reports a $200,000 operating loss for the current year, Anna's maximum loss deduction can only be up to $32,000 (20% of the operating loss). The fact that Cross Co. paid a $50,000 cash dividend to its shareholders is irrelevant to Anna's loss deduction. Therefore, statement II is correct while statement I is incorrect as it is not relevant to Anna's loss deduction.

Question 6

Rona owns 3% of Theta Corporation and has a basis of $500 in her stock.During the year,Theta distributes a $40,000 taxable dividend and a $30,000 nontaxable dividend.As a result of the dividend,Rona has
A)$1,200 of dividend income and a $400 capital gain.
B)$ 300 of dividend income.
C)$1,200 of dividend income and a $900 tax free return of capital.
D)$1,200 of dividend income and no capital gain.
E)$ 500 capital gain.

Accepted Answer

The answer of Rona owns 3% of Theta Corporation and...

Question 7

Pluto Corporation contributes $30,000 to qualified charitable organizations during 2013.Pluto's 2013 taxable income before any charitable contribution deduction is $280,000.Included in that amount is a $10,000 dividend-received deduction amount.Pluto also has a carryover charitable contribution of $2,000 from 2012.What is the maximum amount Pluto Corporation can deduct as a charitable contribution for 2013?
A)$ - 0 -
B)$28,000
C)$29,000
D)$30,000
E)$35,000

Accepted Answer

The maximum amount of charitable contribution that can be deducted in a given year is limited to 10% of the corporation's taxable income before the charitable contribution deduction is taken. In this case, 10% of $280,000 (Pluto's taxable income before charitable contribution deduction) is $28,000. However, since Pluto contributed $30,000 to qualified charitable organizations during 2013, the maximum amount it can deduct as a charitable contribution is $29,000 ($28,000 + $1,000, which is the carryover amount from 2012 since the maximum carryover is limited to 5 years). Therefore, the correct answer is C.

Question 8

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

Accepted Answer

BPablo can deduct $18,000 of the loss. The $60,000 dividend distribution does not affect his stock basis for loss deduction purposes because S corporation distributions are generally tax-free to the extent of the shareholder's stock basis. Pablo's share of the $200,000 operating loss is 30%, which equals $60,000. However, his stock basis at the beginning of the year is $44,000, limiting his deductible loss to $44,000. After considering the distribution, his basis would be reduced first by the distribution (to the extent of the basis), but since distributions do not affect the calculation of deductible loss, his deductible loss is limited to his beginning basis of $44,000. However, since the question specifies that he is not a material participant, passive activity loss rules could apply, limiting his immediate deduction. Given the information provided and typical tax treatment, the best answer with the provided options, considering the basis and not accounting for potential passive activity limitations explicitly, would be $18,000, which is incorrect based on the standard approach to S corporation basis adjustments for losses and distributions. The correct approach without considering passive activity limitations would be to limit the loss deduction to his adjusted basis before the distribution, which is $44,000, but since the question seems to aim at how much of the $60,000 loss attributable to him he can deduct, and given the misunderstanding in the explanation, the initial premise should be that he can deduct losses up to his stock basis, which is $44,000, before any distributions. However, given the options and typical understanding, the confusion arises from how the distribution affects the basis for loss deduction, which it does not. Therefore, the correct deduction amount considering the basis and the loss would be up to his basis, but since none of the options correctly reflects a standard understanding and the explanation provided was aiming at clarifying the misconception, the initial response aimed at the deduction based on the basis and the loss, which would be $44,000, not considering the distribution's impact on the basis for the loss deduction, which was an error in the explanation provided. The correct understanding should be that his deductible loss is limited by his stock basis, which is $44,000, before any distributions are considered for the loss deduction limit.

Question 9

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.

Accepted Answer

Neither statement is correct because cash distributions and distributions of property to a partner generally do not result in taxable income to the partner, as long as the distributions do not exceed the partner's basis in the partnership.

Question 10

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

Accepted Answer

Byron's basis in the partnership after the distribution is calculated by subtracting the cash distribution ($8,000) and the basis of the property distributed ($9,000) from his original basis in the partnership ($34,000). Thus, $34,000 - $8,000 - $9,000 = $17,000.

Question 11

Howard is a partner in the Smithton Partnership with a basis of $20,000.During the current year,the partnership is 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

Accepted Answer

In a partnership liquidation, partners are generally taxed on the difference between the cash and property received and their basis in the partnership. Howard received cash of $22,000 and property with a fair market value of $15,000, for a total of $37,000. His basis in the partnership was $20,000.

Therefore, his gain is ($37,000 - $20,000) = $17,000. However, $15,000 of this gain is due to the increase in value of the property received, which is unrealized gain that was not subject to tax until the property was sold. The realized gain from the liquidation is therefore only ($17,000 - $15,000) = $2,000, which Howard must report as a gain on his tax return.

Question 12

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.

Accepted Answer

Statement I is correct because if the distribution exceeds the partner's basis, then the excess is treated as a capital gain. Statement II is not correct because the partner's share of net income does not affect the taxation of nonliquidating distributions.

Question 13

Virginia is the sole shareholder in Barnes Inc.,an electing S corporation.During the current year,Barnes has operating income of $64,000,interest income of $10,000 from investments,and passive losses from investments in limited partnerships of $20,000.Barnes Corporation pays $12,000 in dividends.What is Virginia's taxable income from Barnes for the current year?
A)$12,000
B)$46,000
C)$54,000
D)$74,000
E)$76,000

Accepted Answer

The answer of Virginia is the sole shareholder in Barnes...

Question 14

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

Accepted Answer

Hank can deduct $30,000 of the loss, which is limited to his adjusted basis in the stock at the beginning of the year. The recourse loan increases the company's basis, but not Hank's individual basis in the S corporation for deducting the loss.

Question 15

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.

Accepted Answer

The answer of The Polaris S Corporation has operating income...

Question 16

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.

Accepted Answer

Statement II is correct, as gain is only recognized if the distribution exceeds the partner's basis in the partnership. Statement I is incorrect, as partners can recognize a loss if the distribution is less than their basis. However, if the distribution is solely in cash and the cash received is less than the partner's basis, they cannot recognize a loss.

Question 17

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

Accepted Answer

Operating income = Sales - Operating expenses = $150,000 - $155,000 = $(5,000).
The dividends received from a 3% owned corporation are not included in operating income as they are a non-operating item. Therefore, Lane's operating income is negative $(5,000).

Question 18

Carlota owns 4% of Express Corporation and has a basis of $5,000 in her stock.During the year,Express distributes a $300,000 dividend.As a result of the dividend,Carlota has
A)$12,000 of dividend income.
B)$ 5,000 of dividend income and $7,000 of capital gain.
C)$ 7,000 of dividend income and a $5,000 tax-free return of capital.
D)$ 5,000 of dividend income, $5,000 tax-free return of capital, and a $2,000 capital gain.
E)$ 7,000 capital gain.

Accepted Answer

Carlota's share of the $300,000 dividend, based on her 4% ownership, is $12,000 (4% of $300,000). This amount is considered dividend income to her.

Question 19

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

Accepted Answer

In a partnership, distributions are generally not considered taxable income to the partner unless the amount of cash received exceeds the partner's basis in the partnership. In this case, Mariana's basis is $23,000, and the distribution consists of $6,000 in cash and property with a basis of $4,000 (regardless of its fair market value). The total distribution is $10,000, which is less than Mariana's basis in the partnership. Therefore, Mariana does not have to report any of the distribution as income.

Question 20

Salem Inc.is an electing S corporation with current year operating income of $300,000.The $300,000 does not 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.

Accepted Answer

Salem Inc. should report operating income of $300,000 and Section 1231 gain of $30,000 on the sale of the building ($330,000 - $250,000 - $20,000). Therefore, the total income will be $300,000 + $30,000 = $330,000. However, since Salem Inc. is an electing S corporation, it can only distribute its taxable income to its shareholders. Therefore, it should distribute $304,000 ($330,000 - $26,000 of federal income tax) to its shareholders as operating income and $96,000 ($30,000 x 80%) as Section 1231 gain.

Quiz 14: Choice of Business Entity - Operations and Distributions

Rona owns 3% of Theta Corporation and has a basis of $500 in her stock.During the year,Theta distributes a $40,000 taxable dividend and a $30,000 nontaxable dividend.As a result of the dividend,Rona has

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.

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

Carlota owns 4% of Express Corporation and has a basis of $5,000 in her stock.During the year,Express distributes a $300,000 dividend.As a result of the dividend,Carlota has