Corporation

Question 1

For a corporation, what is the SH basis of property received from a corp as a dividend?

Answer 1

SH basis is always the property’s FMV

Question 2

When a total distribution is made from a Corporation, how is that Cash/Property distribution handled?

Answer 2

The total distribution made to each SH first reduces Current E&P (to $0) then reduces the remainder of Accumulated E&P

Question 3

What happens when, at formation, a corporation assumes a SH liability and the amount of the liability is greater than the Adj. Basis of the property?

Answer 3

SH must recognize a gain for the amount the liability is greater than the Adj. Basis

Liability > Basis = Gain of excess

Question 4

Determine if the amount is fully, partially, or non-deductible for regular tax purposes:

1) Business entertainment expense

2) Indirect costs (i.e. advertising expense to promote new product line)

3) Interest expense incurred on a loan to purchase municipal bonds

4) Penalty on underpayment of taxes

5) On 12/9/2022, the BoD voted to pay a bonus to each non-stockholder employee. Bonuses were paid on 2/3/2023

Answer 4

1) Nondeductible - business entertainment expense is not deductible

2) Fully deductible

3) Nondeductible b/c proceeds of loan were used to purchase muni-bonds which generate tax-exempt income

4) Nondeductible

5) Accrual method can deduct when there is an obligation to make payment, performance has occurred, amt is reasonable, pmt is made not later than 2.5 months after end of Tax Year

Question 5

Which items (gain/loss) on non-liquidating CORPORATE distributions would be recognized by the Corp.?

Answer 5

Gain’s = recognized
Losses = Cannot be recognized on non-liquidating corporate distributions to shareholders

Question 6

What event is recognized when a Corporation issues preferred stock in exchange for its bonds, and no cash/boot is received?

Answer 6

no gain would be recognized since no boot was received. This event is a non taxable ‘Type E’ reorganization.

Question 7

What is the Corporation’s basis in property contributed by a shareholder who does not meet the 80% (property) test?

Answer 7

Corp’s basis will be the FMV of property contributed if the 80% test is not met.

Question 8

The accumulated earnings tax can be imposed:

Answer 8

Regardless of the # of stockholders of a corporation. It will be imposed only on corporation’s (not pships)

It cannot be imposed on personal holding companies nor on companies that make distributions in excess of accumulated earnings (there would be no retention of Accum. Earnings)

Question 9

For tax years FY21 and FY22, what percent of business meals are deductible?

Answer 9

100% are deductible. no need to adjust/add-back for meals in this timeframe

Question 10

The personal holding company (PHC) tax:

Answer 10

1) Should be self-assessed by filing a separate schedule with the regular tax return.

2) Depends on stock ownership test (can only be imposed if 5 or less people own 50%+ of a corp’s stock)

3) PHC - only on corporations

4) Tax can only me mitigated by sufficient dividend distributions

Question 11

Are net capital losses added/subtracted to book income when computing TI?

Answer 11

net cap. losses = added back to book income to calc. TI b/c a net capital loss is not deductible in computing TI

Question 12

What is the calc for charitable contribution base for a corporation?

For example, a corp has operating income of $160k, after deducting $10k for charitable contribution, but not including $2k of dividends received. What base amount should the Charitable contribution be based on?

Answer 12

It is TI computed before the charitable contributions deduction, the DRD, and Capital Loss Carryback

Limited to 10%.

Answer is $160k income + $10k contribution + $2k dividends = $172k

Question 13

What is the calc for when a corporation makes a non-liquidating distribution

Answer 13

Corp must recognize a gain as if property were sold at its FMV - Adj Basis.

Liability increases the gain only when the amt of Liab exceeds FMV

Question 13

Are life insurance premiums added/subtracted when calculating taxable income?

Answer 13

Added back as life insurance premiums are not deductible in computing taxable income because life insurance proceeds are excluded from gross income

Question 14

When a corporation exchanges its own stock for money/other property, how is the gain/loss computed?

For example, a Corp exchanged 5k shares of $10 par value C/S for land with FMV of $75k. What gain should be reported on the Corp’s CY TR?

Answer 14

no gain or loss is EVER recognized by a corporation on the receipt of money/other prop. in exchange for its own stock (including treasury stock)

Answer = $0 as no Gain is recognized

Question 15

A non-corporate SH will treat a distribution as a capital gain under what 5 tests?

Answer 15

1) Redemption = not equivalent to dividend

2) Redemption = substantially disproportionate

3) Redemption terminates SH interest

4) Redemption = completely terminates SH interest

5) Redemption to pay death tax

If none of the above are met –> treat redemption proceeds as dividend

Question 16

Which of the following are reported on schedule M-1, reconciling book income to taxable income?

1) Deduction for net capital loss

2) Business meals for executive out of town travel

Answer 16

1) yes

2) no

Question 17

When is it acceptable for a corp to make a deduction for an amount incurred in connection with the redemption of its stock?

Answer 17

Generally no deduction is allowed EXCEPT for interest expense on loans to repurchase stock

Question 18

In 2022 and beyond, hhow are research and experimental expenses incurred treated?

Answer 18

Must be AMORTIZED over 60 months.

For the year these expenses are incurred, they can be amortized for 6 months regardless of when incurred during the year

Question 19

The minimum accumulated earnings credit is:

Answer 19

non-service corporations: $250,000

service corporations: $150,000

Question 20

The accumulated earnings tax (AET)

Answer 20

Cannot bee imposed on a corporation that has undistributed earnings and profits of less than $150,000

Question 21

For purposes of determining the accumulated earnings tax, what item is allowed as a deduction in determining accumulated taxable income?

Answer 21

net capital loss for current year

Question 22

How does a non-corporate shareholder treat the gain on a redemption of stock that qualifies as a partial liquidation of the distributing corporation?

Answer 22

Entirely as a capital gain

Question 23

Would the following expense items be reported on Schedule M-1 showing the reconciliation of income per books with income per return?

1) Deduction for Net Capital Loss

2) Business meals for executive out of town travel

Answer 23

1) Yes

2) No

Only 50% of business meals is deductible for tax purposes (for 2021 and 2022 100% of business meals purchased at a restaurant are deductible)

Question 24

Which one of the following is a corporate reorganization as defined in the IRC?

A) Stock redemption
B) Change in place of organization of one corporation
C) Change in depreciation method
D) Change in inventory costing method

Answer 24

Change in place of organization = Corporate reorg.

Stock redemption - Results in dividend or exchange treatment

Change in depreciation & inventory costing method - change in acctg method

Question 25

The personal holding company tax be avoided by making dividend payments sufficient to reduce undistributed PHC income to $0.

Which dividends reduce undistributed PHC income?

Answer 25

1) Dividends paid during the taxable year
2) dividends paid within 3.5 months after YE
3) Dividend carryover
4) Consent dividends (hypothetical dividend treated as if paid on the last day of the Corp’s taxable year)

Question 27

In what scenarios does a constructive dividend occur?

For example, Ral Corp. had retained earnings of $100k. On that date, Ral sold a plot of land to a noncorporate stockholder for $50k. Ral Corp had paid $40k for the land in Y3, and it had a FMV of $80k when the stockholder bought it. What is the amount of dividend income taxable to the stockholder?

Answer 27

Constructive dividends happen when corp’s sell property to a SH for LESS THAN FMV.

SH Dividend income = FMV ($80k) - SH Purchase price ($50k) = $30k

Question 28

When calculating a NOL for the current year, which items are excluded for determining the amount of that year’s NOL?

Answer 28

Deductions for NOL Carryover’s and charitable contributions are excluded

Question 29

Does the calculation of ending accumulated earnings and profits include cash distributions when there is an existing deficit in accumulated E&P?

For example, Chicago Corp. had Accum E&P of $100k at 1/1/Y5 and had a deficit in current E&P of $140k. Chicago Corp distributed $30k cash to its SH on 12/31/Y5. What is the balance of Chicago Corps accumulated E&P at 1/1/6?

Answer 29

No cash distributions are not included in this scenario.

Ending balance would just be the ($40k) as the deficit is not affected by the $30k distributed to SH.

Question 30

Formula to calculate the allowable accumulated earnings credit at year end is:

Answer 30

Credit is the greater of:
1) The E&P retained for reasonable business needs
2) $150k less the accumulated E&P at end of preceding year

Question 31

In determining accumulated taxable income for the purposes of the accumulated earnings tax, which one of the following is allowed as a deduction?

a) Capital loss carryover from PY
b) Dividends received deduction
c) Net operating loss deduction
d) Net capital loss for current year

Answer 31

d) is correct

A Net capital loss for the current year is allowed as a deduction in determining accumulated taxable income for purposes of the accumulated earnings tax.

Cap loss carryover, DRD, and NOL Deduction –> all 3 would be added back to taxable income in arriving at accumulated taxable income

Question 32

Which of the following is not a corporate reorganization as defined in the IRC?

a) Stock redemption
b) Recapitalization
c) Mere change in identity
d) Statutory merger

Answer 32

Stock redemption = correct

Statutory merger - Type A
Recapitalization - Type E
Mere change in identity - Type F

Question 33

What is the formula to calculate Accumulated Earnings & Profits?

Answer 33

Beginning Accumulated E&P
+Taxable income
-Federal income taxes paid
-CY Charitable contributions
-CY Net Capital Loss
=Ending Accumulated E&P

Question 34

An incorporated exempt organization subject to tax on its unrelated business income:

Answer 34

Must comply with the Code provisions regarding installment payments of estimated income tax by corporations. This means that Exempt Org’s must make quarterly estimated tax payments if it expects its estimated tax on unrelated business income to be $500 or more

Question 35

What is the shareholder’s basis for property received in a corporate distribution?

Answer 35

Basis will be the FMV of the property. Note that the shareholder’s basis is unaffected by the mortgage assumed

Question 36

Aztec, a C-Corp, distributed an asset to Burn, a shareholder. The asset had a FMV of $30k and was subject to a $40k liability, assumed by Burn. The asset had an adjusted basis of $25k. What amount of gain must Aztec recognize?

Answer 36

$15k gain must be recognized b/c generally a corporation must recognize gain on the distribution of appreciated property to a shareholder