41. Hemingway Corporation had net book income of $1,000,000 for the current year. In preparing its Schedule M-1 reconciliation for the year, the corporation's tax account noted that Hemingway had the following: Federal tax expense=$250,000; Net capital losses=$50,000; Excess of tax depreciation [MACRS] over book depreciation = $150,000; interest income on U.S. Treasury securities = $90,000. What is Hemingway's taxable income for the year?
42. An S corporation that used to be a C corporation is subject to the "built-in gains tax" for what length of time after conversion to S corporation status?
A. 20 years
B. 10 years
C. Six months
D. 5 years
43. Which of the following is a true statement concerning an affiliated group?
A. The parent must directly own at least 80 percent of the stock in one subsidiary
B. The stock ownership test for affiliated groups is based on both the total voting power and the total value of a corporation's stock.
C. A life insurance company is NOT an includible corporation.
D. Only domestic subsidiaries can be included in the parent's consolidated tax return.
E. All of these are true statements.
44. Jimbo Corporation acquires all of the net assets of Sabo Corporation in a tax-deferred merger. Heather was one of the shareholders of Sabo. As part of the merger, she exchanged all of her Sabo shares for shares in Jimbo Corporation. At the time of the exchange, her shares in Sabo had a tax basis of $10,000 and a FMV of $90,000, which was also the FMV of the Jimbo stock. What is Heather's tax basis in her Jimbo stock?
45. Little Rock, Inc. distributed $1,750,000 in a year in which its current E&P was $800,000 and it accumulated E&P was $450,000. How much of this distribution was a dividend to Little Rock's shareholders?
A. $ 800,000
B. $ 650,000
46. Oliver and Wendell formed the Holmes Partnership. Each contributed $50,000 in cash for an equal partnership interest. During the year the partnership had a $44,000 loss from operations. On December 21, each partner received $20,000 in cash. Which of the following is a true statement?
A. Basis is reduced by the loss before distributions are considered.
B. Each partner will recognize ordinary income on the receipt of cash from the partnership
C. Each partner will have a $8,000 basis in the partnership after these items are considered.
D. More than one of these is a true statement.
47. End-Run, Inc. had the following results for its first two years of operation
Which of the following is a true statement?
A. If the AMT tax liability in 2004 is caused by preferences there is an AMT credit carryback to 2003.
B. If the AMT tax liability in 2004 is caused by adjustments there is an AMT credit carryback to 2003.
C. If the AMT tax liability in 2004 is caused by basic exemption there is an AMT credit carryback to 2003.
D. There is never an AMT credit carryback
48. Which of the following items must be computed on a consolidated basis?
A. Capital gain net income.
B. Charitable contributions deduction.
C. Net operating loss (NOL) deduction.
D. Dividend-received deduction
E. All of these must be computed on a consolidated basis.
49. Melodious Corporation is having cash flow problems, although it is not insolvent nor in bankruptcy proceedings. One of its suppliers decides to accept a $100,000 cash payment from Melodius in full settlement of a $140,000 debt. What is Melodious Corporation's gross income, if any, from the debt settlement?
50. Shirley received $40,000 cash and investment land (FMV $75,000, tax basis $60,000) in a liquidating distribution from her partnership when her outside basis was $120,000. Based on this information, what is Shirley's tax basis in the land?
51. London Inc. is the common parent of a calendar year consolidated group. Fox-Hound, its wholly owned subsidiary, generated $800,000 taxable income that was included in the group's CTI. Fox-Hound had no tax-exempt income or nondeductible expenses and paid a $200,000 dividend to London. Before these items were considered, London's basis in Fox-Hound was $1,000,000. After these items are considered, its basis is
D. $ 800,000
52. Chowder Corporation operates in three states - Vermont, Maine and New Hampshire. It has state taxable income to be apportioned totaling $1,000,000. For the purposes of this question, assume that each state has adopted the 3-factor UDITPA formula, without modification. Using the information in the following chart, determine the amount of income apportioned to Vermont.
Vermont New Hampshire
Gross Receipts/Sales $270,000 $190,000 $ 40,000 $ 500,000
Payroll Expense 120,000 40,000 20,000 180,000
Property Costs 500,000 70,000 130,000 700,000
Total $890,000 $300,000 $190,000 $1,380,000
53. Which of the following is a true statement concerning tax treaties?
A. Many countries enter into tax treaties.
B. U. S person and an Italian doing business in France will be bound by different tax treaties.
C. Tax treaties mitigate double taxation by decreasing the withholding rate on some types of income.
D. Tax treaties mitigate double taxation through reciprocal tax exemptions.
E. All of these are true statements.
54. All of Sundown Inc.'s taxable income of is from foreign sources. It paid foreign taxes of $250,000 on $750,000 of income. Sundown Inc. had no AMT adjustments or preferences. Which of these is a true statement?
A. Sundown Inc. will be able to use the full tax paid as a foreign tax credit.
B. Sundown Inc.'s foreign tax credit is $250,000.
C. Sundown Inc.'s final U.S. tax will be $5,000.
D. All of these statements are true.
55. This year, Bonnie sold 1,000 shares of Armor stock for $30 per share. She purchased her shares of stock in the following transactions:
January 13, 1999: 1,800 shares at $18 per share
October 8, 2001: 4,000 shares at $25 per share
If Bonnie does not specifically identify any of the shares sold, what is her realized gain?
56. Jim and his best friend Michael each own 50 of the 100 shares of The Buddy Corporation. Jim decides to retire and has the corporation redeem all of his stock for $500,000. Jim's basis in his stock was $50,000 and the corporation had E&P of $2,000,000 at the time of the redemption. How much of the redemption proceeds are treated as dividend income.
57. On January 1, 2004, Bender Inc. paid $25,000,000 cash to the shareholders of Groeing Corporation to acquire control. Bender also paid $300,000 of investment banking fees directly relating to this acquisition. How much of the $300,000 can be deducted by Bender in its 2004 tax return?
B. $ 20,000
D. $ 7,500
58. On January 1, 2004, Van Winkle Inc. paid $30 million to purchase the assets of a retail business. The FMV of the target's assets was $24 million with a tax basis of $18 million . What is the amount of the goodwill deduction in Van Winkle's 2004 tax return?
A. $ 6 million
59. Schwartz Inc. acquired the business operated by Music Inc. in a qualifying Type A reorganization. At the acquisition date, Music had $418,000 accumulated E&P and a $68,000 foreign tax credit (FTC) carryforward. Based on this information, which of the following is a true statement?
A. Schwartz must increase its E&P by $418,000.
B. Schwartz can use the FTC in the first tax return filed after the merger.
C. Both of these are true statements.
D. Neither of these is a true statement.
60. Baskerville Inc. distributed all of its stock in River Inc. to its shareholders in a tax-free Type D split-off. Judy owns 15,000 shares of Baskerville stock ($180,000 basis; FMV $500,000 at the date of this split-off). Pursuant to the split-off, Judy received River stock with a $500,000 FMV and redeemed all of her Baskerville stock in the exchange. Based on this information, Judy's basis in the River stock is
B. $ 90,000
C. $ 30,000