2.0 Entity Tax Compliance TCP Practice Quiz

• A. NOLs may only be carried forward indefinitely, with the deduction in any carryover year limited to 80% of the corporation's taxable income (computed before the NOL deduction) for that year
• B. NOLs may be carried back two years and forward twenty years, and there is no limitation on the amount that can be used in any carryover year
• C. NOLs may be carried back two years and forward twenty years, but the deduction in any carryover year is limited to 80% of taxable income
• D. NOLs generated by C corporations expire after five years and cannot be carried back under any circumstances

Under TCJA §13302, for NOLs arising in taxable years beginning after December 31, 2017: (1) Carryback: generally eliminated for C corporations (exceptions remain for farming losses, which retain a 2-year carryback); (2) Carryforward: indefinite, NOLs do not expire; (3) Annual deduction limitation: 80% of the corporation's taxable income (computed without regard to the NOL deduction) for each carryover year. These changes replaced the prior-law rules that allowed 2-year carryback and 20-year carryforward with no percentage limitation on the annual deduction amount.

• A. The taxpayer recognizes no gain or loss; the taxpayer's basis in the stock received equals $30,000 (substituted basis equal to the adjusted basis of the property contributed)
• B. The taxpayer recognizes a $60,000 taxable gain equal to the difference between FMV and basis, because transfers to corporations always trigger gain recognition
• C. The taxpayer recognizes no gain or loss; the taxpayer's basis in the stock received equals $90,000 (the fair market value of the stock received)
• D. The taxpayer recognizes no gain or loss only if the contributed property has been held for more than one year, short-term property always triggers gain recognition on §351 exchanges

Under §351(a), no gain or loss is recognized when property is transferred to a corporation solely in exchange for stock if the transferors are in control (≥80%) immediately after the exchange. The taxpayer's basis in the stock received equals the adjusted basis of the property contributed ($30,000) under §358, a substituted (carryover) basis. The $60,000 of built-in gain is deferred, not eliminated; it will be recognized when the stock is later sold. The corporation's basis in the received property is also a carryover basis of $30,000 under §362.

• A. Taxable income = $0; NOL carryforward = $200,000, the full NOL offsets income until exhausted
• B. Taxable income = $60,000; NOL carryforward = $260,000, the 80% limitation allows deduction of $240,000 ($300,000 × 80%), leaving $60,000 of taxable income and $260,000 of NOL remaining
• C. Taxable income = $0; NOL carryforward = $500,000, post-2017 NOLs cannot reduce taxable income below zero
• D. Taxable income = $150,000; NOL carryforward = $350,000, only 50% of the NOL may be used in any single year

Post-2017 NOL deduction calculation: (1) Taxable income before NOL = $300,000; (2) 80% limitation = $300,000 × 80% = $240,000 maximum NOL deduction; (3) Available NOL = $500,000 > $240,000 limitation, so deduction = $240,000; (4) Taxable income after NOL = $300,000 − $240,000 = $60,000; (5) NOL carryforward to future years = $500,000 − $240,000 = $260,000 (indefinite carryforward). The 80% limitation intentionally ensures that corporations with NOL carryforwards still pay some corporate tax in profitable years, at least on 20% of their current income.

• A. GreenCo recognizes no gain on the distribution; the shareholder recognizes $75,000 of ordinary dividend income
• B. GreenCo recognizes a $75,000 gain on the distribution under §311(b); E&P is increased by the $75,000 gain and then reduced by the $120,000 FMV of the distributed property; the shareholder recognizes $120,000 of dividend income (FMV of property received)
• C. GreenCo recognizes a $75,000 gain; the shareholder's basis in the land is $45,000 (GreenCo's carryover basis)
• D. Neither GreenCo nor the shareholder recognizes income because nonliquidating property distributions are tax-free to both parties

Corporation-level tax consequences under §311(b): (1) GreenCo recognizes $75,000 gain ($120,000 FMV − $45,000 basis) as if it sold the land; (2) E&P adjustment: E&P is first increased by the $75,000 recognized gain, then reduced by the FMV of the distributed property ($120,000); net E&P reduction = $120,000 − $75,000 = $45,000 (essentially the property's adjusted basis). Shareholder tax consequences: (1) Since E&P ($200,000 + $75,000 gain increase = $275,000) exceeds the distribution amount ($120,000), the full $120,000 distribution is a dividend; (2) The shareholder's basis in the land is its FMV at the distribution date ($120,000) under §301(d). Contrast with §311(a): a corporation does not recognize loss when it distributes property that has declined in value (FMV < basis), losses are disallowed on nonliquidating distributions.

• A. The full $150,000 intercompany profit ($500,000 − $350,000) is recognized in the consolidated return in the year of the original sale from ParentCo to SubCo
• B. 60% of the intercompany profit ($90,000) is recognized in the consolidated return when SubCo sells to third parties; the remaining 40% ($60,000) is deferred until SubCo sells the remaining inventory to third parties
• C. No gain or profit is recognized in the consolidated return from the intercompany sale, intercompany transactions are permanently eliminated and no gain ever appears
• D. SubCo includes the full $500,000 purchase price as cost of goods sold regardless of the intercompany relationship, and ParentCo separately reports $150,000 gain on its member return

Consolidated return intercompany transaction rules: (1) The $150,000 intercompany profit is deferred at the time of the ParentCo-to-SubCo sale, no current recognition in the consolidated return; (2) As SubCo sells inventory to third-party customers, the deferred intercompany profit is ratably recognized: 60% sold = $150,000 × 60% = $90,000 recognized; (3) 40% still in ending inventory = $150,000 × 40% = $60,000 remains deferred; (4) SubCo's cost basis in the inventory for consolidated return purposes is the arm's-length intercompany price ($500,000), with the deferred profit reducing this to the $350,000 original cost for tax purposes. This deferral mechanism prevents the group from manipulating the timing of income recognition through intercompany transactions.

• A. $600,000, the full NOL is available because §382 only limits NOLs if the ownership change was a hostile takeover
• B. $0, a §382 ownership change permanently disallows all pre-change NOLs
• C. $140,000, the annual §382 limitation is the FMV of the loss corporation's stock ($4,000,000) multiplied by the long-term tax-exempt rate (3.5%)
• D. $300,000, exactly 50% of the pre-change NOL, since a 50% ownership change triggers the §382 limitation

The §382 annual limitation = FMV of loss corporation's stock immediately before the ownership change × long-term tax-exempt rate. Calculation: $4,000,000 × 3.5% = $140,000 per year. This $140,000 annual limit restricts how much of the pre-change NOL can be used to offset income in each post-change year. Rationale: §382 approximates the return the acquiring party could have earned investing in tax-exempt bonds, preventing the purchase of loss corporations primarily for their tax benefits. Unused annual limitations accumulate (if income is less than the limitation in a year, the excess carries over to increase the next year's limitation).

• A. The shareholder recognizes $60,000 of ordinary dividend income because all corporate distributions are taxable as dividends
• B. The shareholder recognizes $60,000 of long-term capital gain because distributions from C corporations are always capital gain when E&P is zero
• C. The distribution is $40,000 tax-free return of basis (reducing the shareholder's basis in RedCo to $0), and the remaining $20,000 is treated as gain from the sale or exchange of the stock (capital gain, long-term if the stock is held more than one year)
• D. The entire $60,000 is tax-free to the shareholder because distributions from corporations without E&P are always nontaxable

Distribution ordering rules under §301(c): (1) Dividend to extent of current and accumulated E&P = $0 (no E&P); (2) Return of capital to extent of the shareholder's adjusted basis: $40,000, the shareholder's basis in the stock is reduced to $0; (3) Treated as gain from the sale or exchange of property for the excess: $60,000 − $40,000 = $20,000 of capital gain (long-term if the stock has been held more than one year). The shareholder's basis in RedCo stock after the distribution = $0 (reduced by the $40,000 return of basis). The capital gain character reflects that the shareholder has received more than their investment in the stock, similar to receiving excess proceeds from selling the stock.

• A. Year 3: deduct $150,000 capital loss against ordinary income; Year 4: $0 capital loss carryforward remains
• B. Year 3: no current deduction, $150,000 capital loss carries back to Year 1, absorbing $80,000 of capital gain and leaving $70,000 to carry forward; Year 4: the $70,000 carryforward absorbs the $60,000 of Year 4 capital gain, leaving $10,000 of capital loss to carry forward to Year 5
• C. Year 3: the $150,000 capital loss creates a $150,000 NOL for the corporation; Year 4: the NOL offsets the $60,000 capital gain, leaving $90,000 NOL carryforward
• D. Year 3: the $150,000 capital loss carries back to Year 1 ($80,000 absorbed), then forward to Years 4 and beyond for the remaining $70,000; Year 4: $70,000 carryforward absorbs $60,000 of Year 4 gain, resulting in $10,000 capital loss carryforward to Year 5

C corporation capital loss rules (IRC §1212): (1) Capital losses can only offset capital gains, never ordinary income; (2) Net capital losses carry BACK 3 years (to Years with capital gains) and FORWARD 5 years; when carried back, capital losses are treated as short-term regardless of their original character. Year 3 analysis: $150,000 net capital loss in Year 3. Carry back to Year 1 (3 years prior): $80,000 Year 1 capital gain absorbed → $80,000 refund potential; Carry back to Year 2: $0 Year 2 capital gain, nothing absorbed; Remaining carryforward: $150,000 − $80,000 = $70,000 carries forward. Year 4 analysis: $70,000 carryforward from Year 3 + $60,000 Year 4 capital gain → $70,000 − $60,000 = $10,000 net capital loss remaining; this $10,000 carries forward to Years 5-8 (within the 5-year forward window from Year 3, running through Year 8).