Question 1: Eureka, Inc., an electing S corporation, was formed in 2005 with an investment of cash by all stockholders. It immediately acquired certain capital assets for investment, many of which it decided in 2006 it did not need. The excess assets were sold in 2006 with a resulting long-term capital loss to the corporation of $40,000. Its ordinary income from operations for 2006 was $30,000. Operations for 2005 had been very successful, the corporation enjoying that year ordinary income of $50,000 and short-term capital gains of $15,000.
- Eureka, Inc. will offset its 2006 capital loss against its 2006 ordinary income, and the shareholders will report a net capital loss of $10,000 on their individual returns
- Eureka, Inc. will carry the capital loss back to 2005, offset it against the capital gain, and be entitled to a refund of a part of the tax paid on its 2005 income
- Eureka, Inc. will carry the capital loss forward for the five subsequent years until it is offset by future capital gains
- The stockholders will report both the capital loss of $40,000 and the ordinary income of $30,000 on their individual 2006 returns on a per-share, per- day basis
Question 2: On January 1, Doris and Ellen form a two-member equal partnership with a total capital of $30,000. Doris contributes $15,000 cash, and Ellen contributes depreciable property which does not qualify for MACRS write-off. It has at time of contribution a remaining life of five years, an adjusted basis to Ellen of $1,000, a fair market value of $15,000, and zero estimated salvage value. They agree that the property will be depreciated straight-line over five years and that Doris may claim the maximum depreciation deduction. For the current year Doris may claim depreciation of:
$200
$1,000
$1,500
$3,000
Question 3: Fred and George are equal partners. Because Fred devotes his entire time to the operation of the partnership and George is involved only part time, they agree that Fred shall receive a "salary" of $12,000 each year. For the current year the net profit of the partnership (prior to considering Fred's salary) was $10,000. How much will Fred report as his income from the partnership?
$1,000
$5,000
$11,000
$12,000
Question 4: Prior to 2006, Quality Corporation had accumulated earnings and profits of $12,000, and during 2006 its net current earnings amounted to $6,000. Enjoying a heavy cash flow, Quality distributed $28,000 cash to its sole stockholder, Happy, who had purchased his stock for $8,000 several years ago. The distribution is reported by Happy as a:
Taxable dividend of $18,000
Taxable dividend of $28,000
Taxable dividend of $18,000 and capital gain of $2,000
Taxable dividend of $18,000 and capital gain of $10,000