[jeff]

Welcome to the Q2 2015 CPA Exam Study Group for REG.

“Death and Taxes” – Individual Tax for the CPA Exam

Posted by Another71 on Monday, November 24, 2014

Free NINJA: https://www.another71.com/cpa-exam-study-plan/

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Anonymous]

I'm struggling with the following question:

In 2014, RR Trust had a long-term capital gain of $3,000 (allocated to corpus), taxable interest of $2,000 and nontaxable interest of $2,000. The trustee's fee was $400. The trust distributed $1,600 to beneficiaries. RR Trust is a simple trust. The trust's taxable income is:

A. $0.

B. $3,000.

C. $4,000.

D. $3,700.

Answer: D, Since the beneficiaries received $1,600, it is assumed that half ($2,000 / $4,000) of the distribution or $800 is from nontaxable income.

Explanation: Capital gain $ 3,000

Taxable interest + 2,000

Trustee fee (1/2) – 200

Distribution (1/2) – 800

Exemption – 300

---

Taxable income $ 3,700

My question: Why is the allocation ($2,000/$4,000) limited to just taxable interest and nontaxable interest? Why doesn't it include capital gains, so $2,000/$7,000? I thought gross income on the Income Tax Returns for trusts and estates included capital gains? Obviously I'm missing something, but I would like to figure it out. Thanks!

[Anonymous]

because cap gain wasn't distributed?

[hunter32]

Can someone walk me through this one and maybe dumb it down?

Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation. The S corporation had the following balances at the beginning of its tax year:

Accumulated adjustments account $ 8,000

Accumulated earnings and profits 10,000

Paul's stock basis was $20,000 at the beginning of the tax year. The S corporation made a distribution of $19,000 to Paul during the year. What amount of the distribution is taxable to Paul?

Select an answer:

A.

$0

B.

$8,000

C.

$10,000

D.

$18,000

BEC - 80 (Becker)
AUD - 92 (Becker+NINJA MCQ)
FAR - 87 (Becker+NINJA MCQ)
REG - 90 (Becker+NINJA MCQ and Audio)

[Anonymous]

Is it 10?

[Troblin]

@ hunter,

I'm not sure the technical explanation to that question. The short answer is that the 19k distribution hits the 8k AAA and

10k -AEP.Only the 10k AEP is taxable, and the 8k AAA is non-taxable.

I believe the remaining 1k is charged against the stock basis as a return of capital. Since basis still exists, there is no additional capital gain which would be taxable.

FAR: 85(11/22/2014) - Becker(full)/Ninja MCQ (5 day cram)
AUD: 79 (2/1/2015) -Becker/Ninja MCQ/Ninja Notes
REG: 84(4/19/2015) -Becker/Ninja MCQ/Ninja Notes
BEC: 83 (7/13/2015) -Becker/Ninja MCQ/Ninja Notes

Date I Got My Life Back!: 8/4/2015 🙂

[Anonymous]

AEP were earned while this corporation was operating as C corp, so that is just undistributed dividends (taxable). AAA accumulated during the S corp period, it's a flow through entity so these earning were already taxed on 1040 before the distribution

[willpassby2014]

How did he get the %? There are no base stock to calculate the %. Any one can help?

Quigley, Roberk, and Storm form a corporation. Quigley exchanges $25,000 of legal fees for 30 shares of stock. Roberk exchanges land with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Storm exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?

Incorrect A.

Quigley $0, Roberk $0, and Storm $0

B.

Quigley $25,000, Roberk $90,000, and Storm $0

C.

Quigley $25,000, Roberk $90,000, and Storm $10,000

D.

Quigley $0, Roberk $90,000, and Storm $0

BEC Passed
FAR Passed
AUD Passed
REG Passed

[jstay]

is it B? I know Quigley has to recognize the services at FMV so that narrowed it down to B or C, I went with B because I don't think the 10,000 is taxable

[willpassby2014]

The answer is B. But how did he come up with the 80% controlling interest is the question.

The general rule is that transfers of property to a corporation in exchange for stock will be tax-free as long as the transferors are in control of the corporation immediately after the exchange. Control is defined as 80% of both the voting power and number of shares of the stock.

Quigley contributed services, and services are not considered part of the 80% control group; therefore, he would have to include in income $25,000. Roberk and Storm are the only ones left to be included in the 80% control group; they do not add up to 80% either, so Roberk would include $90,000 in income ($100,000 – $10,000). Storm would include nothing in income as he contributed cash for the stock.

BEC Passed
FAR Passed
AUD Passed
REG Passed

[Anonymous]

They don't have controlling interest, that's why R recognized 90 gain

[Gabe]

@willpass the 80% control in the answer is a referenced because they do NOT have 80% control. They have 60, 30, and 10

CPA, CFE
CISA- Experience will be completed by August 2016

[jstay]

the oercentages came from the 60, 30, and 10 shares each owned (100 in total). whoever owned 60 shares owns 60% of company. 30 shares = 30% and 10 shares = 10%.

your saying Roberk recognizes the 90,000 because he didn't own 80%, had he owned 80% he wouldn't recognize anything? This is a C corp right? it says formed a “corporation”

[jstay]

Wait, is Gabe right or am I regarding the percentages?

[Gabe]

@jstay correct. If he owned 85 shares of stock he would recognize nothing.

jstay- I changed my answer because I didn't see the percentages lol. you are correct, in that regard.

CPA, CFE
CISA- Experience will be completed by August 2016

[Anonymous]

They all should own at least 80%, not one of them

[Author]

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