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Exam 13: Corporate Formations and Operations

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Question 1

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It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

A) Temporary book-tax differences will reverse in future years whereas permanent differences will not.
B) Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C) Both A and B
D) Neither A nor B

E) B) and C)
F) A) and B)

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Question 2

Multiple Choice

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Which of the following statements regarding net operating losses is true?

A) Corporations can carry net operating losses back two years and forward up to 15 years.
B) A corporation may elect to forgo carrying a net operating loss back and instead carry it over to future years.
C) When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover.
D) Marginal tax rates are irrelevant in determining the tax benefit of applying a net operating loss carryback or carryover.
E) None of these is a true statement.

F) B) and D)
G) B) and C)

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Question 3

True/False

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Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income.

Which of the following statements regarding the alternative minimum tax is false?

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

For a corporation, purchased goodwill generally leads to temporary book-tax differences.

Han transferred land he held as an investment to his corporation in a section 351 transaction. Han had held the land for two years prior to the transfer. Han's holding period in the stock he received in the exchange includes the period for which he held the land before transferring it to the corporation.

Taxable income of the most profitable corporations is subject to a flat 35% tax rate.

To meet the control test under section 351, a taxpayer transferring property to a corporation must by himself own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer even if there are other transferors of property.

Which of the following is not calculated in the corporate income tax formula?

Corporations compute their dividends received deduction by multiplying the dividend amount by 10 percent, 50 percent, or 100 percent depending on their ownership in the distributing corporation's stock.

Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

Which of the following statements best describes the concept of control as it applies to a section 351 transaction?

VitalJuice Corporation reports the following schedule of prior year taxes it owed: $\begin{array} { | l | r | } \hline \text { Tax basis of property transterred } & \$ 650,000 \\\hline \text { Plus gain recognized } & 30,000 \\\hline \text { Less boot received } & ( 100,000 ) \\\hline \text { - Adjusted tax basis of the stock received } & 580,000 \\\hline\end{array}$ What is VitalJuice's tax liability for Year 4?

Which of the following is deductible in calculating the charitable contribution limit modified taxable income?

For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

WFO Corporation has gross receipts according to the following schedule: $\begin{array} { | l | r | } \hline \text { Year } 1 & \$ 2 \text { million } \\\hline \text { Year } 2 & \$ 4 \text { million } \\\hline \text { Year } 3 & \$ 6 \text { million } \\\hline \text { Year 4 } & \$ 4.5 \text { million } \\\hline \text { Year } 5 & \$ 5 \text { million } \\\hline \text { Year } 6 & \$ 7 \text { million } \\\hline\end{array}$ If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?

Which of the following statements regarding AMT is true?

In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.