EA Exam Lite
Part 2
Businesses - II
Previous Exam Questions
1. Donna exchanges property having an $18,000 adjusted basis and a $35,000 fair market value for 70
shares of the newly created Table Corporation stock. Evelyn exchanges legal services worth $15,000
for the remaining 30 shares of Table Corporation stock. Which of the following is correct?
a.
b.
c.
d.
2.
Evelyn recognizes no income, and the exchange is nontaxable.
Evelyn must recognize $15,000 of income, but Donna’s transfer of property qualifies under IRC
Section 351 as nontaxable.
Evelyn must recognize $15,000 of income, and Donna must recognize $17,000 gain on the
exchange.
The exchange qualifies as a nontaxable exchange under IRC Section 351.
Mario and Jim are considering incorporating their pizza shop. If Mario and Jim incorporate, they
would transfer the following assets to the corporation in exchange for 100% of the stock.
Basis
Mario Jim
FMV
Mario Jim
Cash
$ 5,000 $ 4,000 $ 5,000 $ 4,000
Equipment
$10,000 $31,000 $ 30,000 $ 30,000
Furniture &Fixtures $ 1,000 $
0 $ 12,000 $ 1,000
Building
$40,000 $
0 $100,000 $
0
TOTALS
$56,000 $35,000 $147,000 $ 35,000
If they went forward with the incorporation, how much gain/loss would Mario have to report on his
individual tax return for the year of transfer?
a.
b.
c.
d.
$91,000
$-0$91,000 loss
None of the above
3. Paul, Randy, and Steve form North Corporation by transferring the following properties:
Transferor’s
Transferor
Asset Adjusted Basis FMV
Paul
Machinery $10,000
$12,500
Randy
Land
$18,000
25,000
Steve
Cash
$17,500
$17,500
Consideration
Received
25 shares North Stock
40 shares North Stock & $5,000 North Note
35 shares North Stock
(The 100 shares represent all of the outstanding stock of North Corporation)
Using the rules for IRC Section 351, which of the following is correct?
a.
b.
c.
d.
4.
The exchange does not qualify for IRC Section 351 nontaxable treatment.
The exchange qualifies for IRC Section 351 and is nontaxable except that Randy must recognize
$7,000 of capital gain.
The exchange qualifies for IRC Section 351 and is nontaxable except that Randy must recognize
$5,000 of capital gain.
The exchange qualifies for IRC Section 351 and is nontaxable except that Randy must recognize
$5,000 or ordinary income.
Mr. Jacobs transferred an office building to Booda Corporation in exchange for 100% of Booda’s only
class of outstanding stock and $30,000 in cash. The building had an adjusted basis of $150,000, and a
fair market value of $250,000. The building was subject to a mortgage of $120,000 which Booda
assumed for a valid business reason. The fair market value of Booda Corporation’s stock on the date
of the transfer was $100,000. What is the amount of Mr. Jacobs’ recognized gain?
a.
b.
c.
d.
$100,000
$70,000
$30,000
$0
5. The basis of stock received in exchange for property transferred to a corporation is the same as the
basis of the property transferred with certain adjustments. Which one of the following would NOT
decrease the basis of the stock?
a.
b.
c.
d.
The fair market value of other property received.
Any amount treated as a dividend.
Any money received.
Any loss recognized on the exchange.
6. Mr. Kahrs transferred property with an adjusted basis of $17,500 and a fair market value of $21,500 to
Corporation G. In exchange, Mr. Kahrs received $2,000 cash and 85% of Corporation G’s only class
of stock. The stock received by Kahrs had a fair market value of $19,500. What is Corporation G’s
basis in the property received in this exchange?
a.
b.
c.
d.
$-0$17,500
$19,500
$21,500
7. Cooper Corporation had the following income and expenses during its calendar year:
Income from operations…………………………………………………………$250,000
Expenses of operations…………. ………………………………………………$175,000
Qualifying dividends from Domestic corporations (10% Ownership)……… $ 15,000
What is Copper Corporation’s dividend received deduction?
a.
b.
c.
d.
$15,000
$10,500
$12,000
None of the above
8. During the year, Pine Corporation had losses of $20,000 from operations. It received $180,000 in
dividends from a 25% owned Domestic Corporation. Pine’s taxable income is $160,000 before the
dividends-received deduction. What is the amount of Pine’s dividend-received deduction?
a.
b.
c.
d.
$-0$144,000
$128,000
$180,000
9. During the year, Tilden, Inc. had gross income from business operations of $500,000 and $625,000 of
allowable business expenses. Tilden also received $150,000 in dividends from Jefferson Corporation.
Tilden owns 23% of the voting power and value of Jefferson. What is the amount of Tilden Inc.’s net
operating loss?
a.
($125,000)
b.
c.
d.
($14,500)
($95,000)
None of the above
10. During the year, Sweetheart had the following income and expenses:







Gross receipts…………………………………………………….. $1,200,000
Salaries and wages……………………………………………….. $ 600,000
Contribution to qualified charities…………………….………. .. $ 90,000
Capital gains………………………………………………………..$ 30,000
Depreciation expense………………………………………………. $ 70,000
Dividend income from a 20% owned domestic corporation……
$ 120,000
Dividends-received deduction…………………………………… $ 96,000
What is the amount of Sweetheart’s charitable contribution deduction for the year?
a.
b.
c.
d.
$90,000
$68,000
$52,000
$43,000
11. Spice, a calendar year accrual basis corporation, distributed shares of Sugar Corporation stock to
Spice’s employee in lieu of salaries. The salary expense would have been deductible as compensation
if paid in cash. On the date of the payment, Spice’s adjusted basis in the Sugar Corporation stock
distributed was $25,000 and the stock’s fair market value was $85,000. What is the tax effect to Spice
Corporation?
a.
b.
c.
d.
$25,000 deduction
$25,000 deduction; $60,000 recognized gain
$85,000 deduction
$85,000 deduction; $60,000 recognized gain
12. For the tax year ended December 31, Muncie Corporation had gross income of $300,000 and
operating expenses of $450,000. Contributions of $2,500 were included in the expenses. In addition
to the expenses, Muncie had a net operating loss carryover of $8,000. What is the amount of Muncie
Corporation’s net operating loss for the year?
a.
b.
c.
d.
$156,500
$152,500
$150,000
$147,500
13. For tax year 2007, Windy Corporation had taxable income of $80,000 before using any of its net
operating loss from 2006. Windy never elected to forgo the carryback of its losses since its
incorporation in 2002. Windy’s books and records reflect the following income (losses) since
incorporation:
2002
2003
2004
2005
2006
$20,000
($55,000)
$30,000
$35,000
($50,000)
What is the amount of taxable income Windy Corporation should report on its 2007 tax return?
a.
b.
c.
d.
$50,000
$60,000
$70,000
$80,000
14. Ace Corporation, a calendar year corporation, started business on May 1, 2007. The corporation
incurred the following expenses relating to the organization of the business:





Fee paid to state for incorporation…………………..
Legal fees for drafting……………………….………
Cost of printing stock certificates…………………..
Commission expense on sale of stock………………
Expenses of temporary directors…………………….
$22,400
$24,200
$21,200
$32,300
$ 7,400
If Ace Corporation elects to amortize its organizational expenses, what is its maximum allowable
deduction for 2007?
a.
b.
c.
d.
$880
$1,040
$3,356
$9,333
15. During the year, Dowdy, a C Corporation, realized a long-term capital gain of $5,000 from the sale of a
tract of land, a long-term capital gain of $10,000 from the sale of stock of Ornery Corporation, and a
long-term capital loss of $23,000 from the sale of U.S. Government securities. What amount of the
long-term capital loss may Dowdy deduct on its income tax return?
a.
b.
c.
d.
$8,000
$15,000
$18,000
$23,000
16. Dooly Corp. incurred net short-term capital gains of $40,000 and net long-term capital losses of
$90,000 during 2007. Taxable income from other sources was $500,000. How are the capital gains
and losses treated on the 2007 tax return, Form 1120?
a.
b.
c.
d.
$3,000 of the excess net long-term capital losses are deducted currently and the $47,000 remainder
is carried forward indefinitely.
None of the excess net long-term capital losses are currently deductible, but may be carried back to
the three preceding years and then forward five years as short-term capital losses.
Excess net long-term capital losses are fully deductible in 2006.
Excess net long-term capital losses of $50,000 are carried back two years and then carried forward
20 years as short-term capital losses.
17. Mitchell sold his Saratoga Bombers Corporation stock to his brother Sheldon for $7,600. Mitchell’s
cost basis in the stock was $10,000. Sheldon later sold this stock to Morey, an unrelated party for
$10,500. What is Sheldon’s recognized gain?
a.
b.
c.
d.
$2,100
$2,900
$500
$2,400
18. Porter Corporation, a calendar year taxpayer, reporting on the accrual basis, had accumulated earnings
and profits of $110,000 as of January 1. The following occurred during the year:





Taxable income………………………………………………………………………...$46,000
Unused charitable contributions …………………………………………………….. $ 1,800
Depreciation on return – MACRS (straight-line would have been $4,500)………… $ 5,600
Federal income tax accrual……. …………………………………………………….. $ 5,400
Net capital losses……………………………………………………………………... ($3,200)
What is Porter Corporation’s accumulated earnings and profits as of December 31?
a.
b.
c.
d.
$152,100
$149,900
$150,300
$146,700
19. Vernon Corporation, a calendar year C Corporation, had accumulated earnings and profits of $100,000
as of January 1. Vernon had a deficit in earnings and profits at the beginning of the year in the amount
of ($140,000). Vernon distributed $35,000 cash to its shareholders on July 1. Vernon Corporation’s
accumulated earnings and profits as of December 31 is:
a.
b.
c.
d.
$0
($40,000)
($70,000)
($75,000)
20. During the year, Ambassador Matinee Company distributes a dividend in the form of land to its sole
shareholder. The land has a fair market value of $50,000 and an adjusted basis of $10,000. Assuming
that the corporation has sufficient earnings and profits and ignoring the potential tax effect of any taxes
on the distribution, the net effect of the transaction on earnings and profits is:
a.
b.
c.
d.
An increase of $40,000
An increase of $10,000
A decrease of $10,000
None of the above
21. Rose Corporation, a calendar year corporation, had accumulated earnings and profits of $40,000 as of
January 1. However, for the first six months of the year Rose Corporation had an operating loss of
$36,000 and finished the year with a total net operating loss of $55,000. Rose Corporation distributed
$15,000 to its shareholders on July 1. Which of the following is CORRECT?
a.
b.
c.
d.
The entire distribution of $15,000 is taxable.
The entire distribution is not taxable.
The part of the distribution which is taxable is $12,500.
The part of the distribution which is taxable is $14,000.
22. Corporation M, a calendar year corporation that began doing business on January 1, 1998, had
accumulated earnings and profits of $30,000 as of January 1, 2007. On July 2, 2007, M distributed
$22,000 cash to Mrs. C, M’s shareholder, M had a $20,000 deficit in earnings and profits for 2007.
Mrs. C had an adjusted basis of $14,000 in her stock before the distribution. What is the amount of
Mrs. C’s basis in the stock after the distribution?
a.
b.
c.
d.
$-0$2,000
$12,000
$14,000
23. Mr. Oleaner owns 600 shares of the voting stock of Clarkson Corporation. The remaining 350 shares
of the voting stock outstanding are held by persons unrelated to Mr. Oleaner. Mr. Oleaner wants a
proposed redemption of part of the stock to qualify under IRC 302 (b)(2). What is the maximum
number of shares that Mr. Oleaner can own after the redemption to qualify as a sale or exchange?
a.
b.
c.
d.
300
349
479
None of the above
24. Ranger Corporation’s only class of stock is owned as follows:




Matthew………………………….… 40%
Darlene, Matthew’s sister………….. 25%
Matthew’s & Darlene’s father………25%
Matthew’s & Darlene’s grandfather. 10%
What is Matthew’s percentage of stock ownership under the attribution rules for stock redemptions?
a.
b.
c.
d.
65%
75%
90%
100%
25. Philly Corp. distributed an office building to its 60% shareholder. The fair market value of the
building on the date of the distribution was $300,000. Philly’s basis in the building was $200,000.
The shareholder assumed the mortgage on the building that had a principal balance of $100,000 on the
date of the distribution. Current year earnings and profits of Philly Corp. were $400,000. No other
distributions were made during the year. What should the shareholder report on his tax return for the
year of the distribution?
a.
b.
c.
d.
$0; distributions to shareholders result in no gain or loss to the shareholder
$300,000 dividend
$200,000 dividend
$100,000 dividend
26. Rally Corporation distributed a sailboat to its sole shareholder, Ms. H. At the time of the distribution,
the sailboat had a fair market value of $175,000 and an adjusted basis to Rally of $150,000. The
sailboat was subject to a loan of $190,000, which Ms. H assumed. What is the amount of Rally’s gain
or (loss) on the distribution?
a.
b.
c.
d.
($15,000)
$0
$25,000
$40,000
27. A corporation may elect to be an S corporation if it meets the following tests:
a.
b.
c.
d.
It is a domestic corporation.
It has no more than 100 shareholders. Certain family members are treated as one shareholder for
this requirement. All other persons are treated as separate shareholders.
It has only one class of stock.
All of the above.
28. Bob and Dianne are merchants. They decided to combine their businesses and start a mail-order
business. They also decided that the corporate structure would be in their best interest. On January 1,
2007, they formed the B & D Corporation, but they did not file Form 2553 (Election by a Small
Business Corporation) when they formed the corporation. Bob and Dianne filed an 1120S return at the
end of the 2007 calendar tax year, and reported their respective shares of earnings on their individual
tax returns. All of the following statements are TRUE except:
a.
b.
c.
d.
Bob and Dianne have until March 15, 2008, to make a valid election for 2007.
Bob and Dianne were not permitted to file an 1120S return because they did not make a valid
election for 2007.
Bob and Dianne should have filed Form 1120, U.S. Corporation Income Tax Return, and should
not report earnings and losses on their individual tax returns.
Both Bob and Dianne are required to consent to the election.
29. All of the following events would cause an S corporation to cease qualifying as an S corporation
except:
a.
b.
c.
d.
Having more than 100 shareholders.
The transfer of its stock to a corporation.
The transfer of its stock to a nonresident alien.
The election is revoked with the consent of shareholders that, at the time the revocation is made,
had 40% of the stock.
30. Which of the following corporations may be subject to the built-in capital gains tax?
a.
b.
c.
d.
K-corp. originally established as an S corp. on May 13, 2007.
G-corp. established in 1994 as a C corp., elected to be an S corp. on April 15, 2007.
J-corp. established in 1986 as an S corp. terminated S corp. election on Jan. 1, 2007.
All of the above.
31. An S corporation may owe tax if, at the end of the tax year, the corporation had accumulated earnings
and profits, taxable income, and:
a.
b.
c.
d.
Its tax preference items exceed 25% of its gross receipts.
Its foreign source income exceeds 25% of its gross receipts.
Its passive investment income exceeds 25% of its gross receipts.
All of the above.
32. Foster’s RV Sales, Inc. is an S corporation with the following activity during the year:





$500,000 gross sales of RV’s and campers
$300,000 operating expenses
$1,000 interest income
$3,000 charitable contributions
$10,000 Section 179 expense
How much ordinary income from trade or business activities will be reported on Schedule K,
Shareholder’s Shares of Income, Credits, Deductions, etc.?
a.
b.
c.
d.
$188,000
$190,000
$198,000
$200,000
33. R, a calendar year S corporation, reported an $83,000 ordinary loss for 2007. Ms. K owns 25% of R’s
stock at all times during 2007, and materially participates in R’s business. K’s basis in her Corporation
R stock at the beginning of 2007 was $10,000. At the end of 2007 R is liable for the following
amounts:



Third party creditors…………… . $15,000
Loan from Ms. K…………………$ 3,000
Loans from other shareholders… . $ 9,000
What is the amount of R’s losses that may be deducted by K in 2007 on her individual return and what
amount can she carry over to 2008?
a.
b.
c.
d.
2007 Deduction
$20,750
$13,000
$13,000
$20,000
Carryover
$-0$-0$7,750
$750
34. Pages, Inc. (S Corporation) is owned by Martin and Steve. They share in the income and loss of the
corporation on a 50/50 basis. In 2007 the corporation reported $90,000 in ordinary income and taxexempt income of $12,000. Martin and Steve’s basis in their stock is $25,000 each. The corporation
was previously a C corporation and there remained $30,000 in E & P on the books at the beginning of
the year. Martin and Steve each received a $80,000 distribution from the corporation on December 15,
2007. What is the character of the distribution to Martin. (Assume AAA and other adjustment account
are zero on 1/1/07).
a.
b.
c.
d.
$45,000 AAA, $31,000 return of capital, $4,000 dividend, zero capital gains.
$45,000 AAA, $15,000 dividend, $20,000 return of capital, zero capital gains.
$45,000 AAA, $25,000 return of capital, $10,000 dividend, zero capital gains.
$45,000 AAA, $25,000 return of capital, $10,000 capital gains, zero dividends.
35. Mr. Jones died on November 30, 2007. After his death, but prior to December 31, 2007, his estate
received the following cash receipts:




Life insurance proceeds………………………………………………………$50,000
Social Security death benefits………………………………………………...$ 250
Redeemed Certificate of Deposit of which $100 was accrued interest…….. $10,000
Mutual fund dividend distribution…………………………………………. $ 200
Assuming that none of the beneficiaries are nonresident alien individuals and the executor of the estate
adopted a calendar year for the estate, Form 1041 will need to be filed on or before:
a.
b.
c.
d.
March 15, 2008.
April 15, 2008.
August 30, 2008.
Form 1041 does not need to be filed for the 2007 tax year.
36. A complex trust is a trust that:
a.
b.
c.
d.
Must distribute income currently, but is prohibited from distributing principal during the taxable
year.
Invests only in corporate securities and is prohibited from engaging in short-term transactions.
Permits accumulation of current income, provides for charitable contributions, or distributes
principal during the taxable year.
Is exempt from payment of income tax since the tax is paid by the beneficiaries.
37. Mr. Justin, a cash basis taxpayer, died on January 21, 2007. His estate received the following income
and incurred the following expenses during 2007:




Gain on sale of asset……………$ 10,400
Dividend income……………….. $14,000
Interest income………………….$ 6,000
Administration expenses………..$ 2,800
The personal representative filed a statement waiving the right to claim the administration expenses as
a deduction for federal estate tax purposes. What is the estate’s taxable income for 2007?
a.
b.
c.
d.
$27,600
$27,000
$17,600
$13,000
38. Maxine Hartfield is an employee with Boiler Corporation. Her annual salary is $56,000. The
maximum amount that Boiler may contribute to a pension plan on her behalf is
a.
b.
c.
d.
$9,000
$27,000
$45,000
$56,000
39. A Keogh plan must meet certain requirements. Which of the following is not a requirement of a
Keogh plan?
a.
b.
c.
d.
The plan must make it impossible for its assets to be used for, or diverted to, purposes other than
for the benefit of employees and their beneficiaries.
Contributions or benefits must not discriminate in favor of highly compensated employees.
Minimum coverage requirements must be met.
The plan cannot provide for payment of retirement benefits before the normal retirement age.
40. Your employee, Jane Wood (age 41), earned $110,000 and elected to defer 10% of her salary. You
make a 2% nonelective contribution. The total contribution that may be made for Jane under a
SIMPLE IRA plan is:
a.
b.
c.
d.
$10,200
$10,500
$1,700
$12,700
Part 2-I
Answers and Explanations to Questions
Question
Answer
1
2
3
4
5
6
7
8
c
b
c
c
b
c
b
c
Explanation
Both amounts are taxable, as the 80% is not met (30% was for services)
All Sec. 351 requirements are satisfied, no gain or loss is reported
Gain is taxable to the extent of the $5,000 boot received
Gain limited to cash boot received; liabilities do not exceed basis
Other three items definitely reduce basis; item b makes no sense
Corp. basis = shareholder basis ($17,500) + shareholder gain ($2,000)
DRD = $15,000 x .70 = $10,500 (less than 20% interest; no limitations)
Limit ($160,000 taxable income x .80) – Full DRD doesn’t create loss
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
c
b
d
d
b
c
b
b
c
d
c
c
c
c
b
a
c
d
d
a
d
b
c
d
c
b
d
c
b
d
d
d
DRD allowed in full (500,000 – 625,000 + 150,000 – 120,000)
Limited to 10% of (1,200,000-600,000+30,000-70,000+120,000)
Comp. paid in other stock creates gain as if sold; then deduct FMV
Net loss not reduced by the charitable contribution or NOL c/o
$20,000 of 2006 NOL left after using up $55,000 ’03 loss & $30,000 ‘05
Amortization is $1,000 expense + [$54,000 - $1,000) x 8/180]
Capital loss deduction limited to capital gains recognized that year
Excess losses are eligible for 3-year carryback and 5-year carryforward
$2,900 gain on resale less disallow. loss (2,400)
E&P = 46,000 taxable-1,800+1,100-5,400-3,200+110,000 beg. bal.
E&P reduced to zero after ½ of loss & 1st dist; neg. after other ½ loss
E&P effect = $40,000 gain increase - $50,000 FMV of property
Taxable = $40,000 beg E&P – (6/12 x 55,000 current loss) = $12,500
Basis = $14,000 basis - $2,000 return; dividend =30,000 – (1/2 x 20,000)
Taxpayer must own less than 50% of outstanding after redemption
Include only Matthew’s holdings (40%) and his father’s (25%)
Dividend is FMV of property less liability assumed
The FMV is presumed at a minimum to be the amount of the liability
All three items are tests for S corporation status
Since election was not made in first 2 ½ months, it is too late for 2007
A majority of shareholders must vote to revoke election
G Corporation, a former C, made the S election after 1986, still in effect
Passive income must exceed 25% of gross receipts
$500,000 sales - $300,000 expenses (only items that cannot vary on ind.)
Loss share = $83,000 x .25 = $20,750; deduct ($10,000 + $3,000)
$90,000 income adds to AAA (1/2 for Martin), ½ of E&P dividend
No return is required, as the gross income is only $550 (250+100+200)
All items listed are characteristic of a complex trust
Taxable = 10,400 + 14,000 + 6,000 – 2,800 – 600 exemption
The maximum is lesser of $45,000 or 100% of salary ($56,000)
There is no restriction on when payments may be made
Maximum contribution by employee is $10,500, plus 2% nonelec. match