Reg 3 Flashcards
A C corporation’s net capital losses are:
a.
Carried forward indefinitely until fully utilized.
b.
Deductible in full from the corporation’s ordinary income.
c.
Deductible from the corporation’s ordinary income only to the extent of $3,000.
d.
Carried back 3 years and forward 5 years.
Choice “d” is correct. A C corporation’s net capital losses are carried back 3 years and forward 5 years; they expire after 5 years. In addition, a C corporation cannot deduct net capital losses from ordinary income.
Baker Corp., a calendar year C corporation, realized taxable income of $36,000 from its regular business operations for the calendar year. In addition, Baker had the following capital gains and losses during the year. Short-term capital gain $ 8,500 Short-term capital loss (4,000) Long-term capital gain 1,500 Long-term capital loss (3,500) Baker did not realize any other capital gains or losses since it began operations. What is Baker's total taxable income for the year? a. $42,000 b. $40,500 c. $38,500 d. $46,000
Choice "c" is correct. Capital losses offset capital gains. If a corporation has net capital gains, they are taxed at ordinary (corporate) income tax rates. Taxable income from business operations $ 36,000 Short-term capital gain $ 8,500 Short-term capital loss (4,000) Net short-term capital gain $ 4,500 Long-term capital gain 1,500 Long-term capital loss (3,500) Net capital gain 2,500 Taxable income $ 38,500
At the beginning of the year, Westwind, a C corporation, had a deficit of $45,000 in accumulated earnings and profits. For the current year, Westwind reported earnings and profits of $15,000. Westwind distributed $12,000 during the year. What was the amount of Westwind's accumulated earnings and profits at year-end? a. $45,000 b. $57,000 c. $30,000 d. $42,000
Choice "d" is correct. Accumulated earnings and profits include all prior and current year earnings and profits at year-end. The key here is recognizing that the beginning accumulated earnings and profits is a deficit. Thus the calculation would be as follows: Beginning deficit in Accumulated E&P $ (45,000) Plus: Current year E&P 15,000 Less: Amounts distributed (12,000) End of year Accumulated E&P $ 42,000 Note: The examiners did not ask whether or not the accumulated earnings and profits at year-end was a deficit, rather they asked solely for the dollar amount.
A corporation’s capital loss carryback or carryover is:
a.
Limited to $3,000.
b.
Always treated as a long-term capital loss.
c.
Not allowable under current law.
d.
Always treated as a short-term capital loss.
Choice “d” is correct. A corporation’s capital loss carryback or carryover is always treated as a short-term capital loss.
Rule: Corporations may not deduct any capital loss from ordinary income, but instead only carry it back 3 years and forward 5 years as a “short-term” capital loss to deduct from net capital or Section 1231 gains.
Jackson, a single individual, inherited Bean Corp. common stock from Jackson’s parents. Bean is a qualified small business corporation under Code Section 1244. The stock cost Jackson’s parents $20,000 and had a fair market value of $25,000 at the parents’ date of death. During the year, Bean declared bankruptcy and Jackson was informed that the stock was worthless. What amount may Jackson deduct as an ordinary loss in the current year? a. $0 b. $20,000 c. $25,000 d. $3,000
Choice “a” is correct. Losses resulting from the sale, exchange or worthlessness of Section 1244 qualifying stock (also called small business stock) are treated as ordinary losses up to $50,000 in any tax year. However, this loss is available only to original owners of the stock. Because Jackson inherited the stock, he is not the original owner. Therefore, in this case, no ordinary loss may be deducted. (Note that Jackson would be allowed a capital loss in the year the stock was deemed entirely worthless. The capital loss would be deducted under the personal capital loss rules and calculated using the likely transfer basis of $25,000.)
Which of the following is not true with regard to personal holding companies (PHCs)?
a.
There is no penalty if net earnings are distributed, as the penalty only applies to income that has not been distributed.
b.
The additional tax (penalty) is self-assessed by the PHC.
c.
Personal holding companies are not subject to the accumulated earnings tax.
d.
Personal holding companies, as specifically defined by the Code, are corporations that meet certain “closely-held” ownership criteria and have over 50% of their adjusted gross income consisting of net rent (less than 50% of ordinary gross income), taxable interest, most royalties, and dividends from an unrelated domestic corporation.
Choice “d” is correct. While most of the information in the item is correct, it is when over 60% of the adjusted gross income of a closely-held (more than 50% owned by 5 or fewer individuals either directly or indirectly at any time during the last half of the tax year) corporation consists of “NIRD” that it is defined as a personal holding company, not over 50% (as in the selection).
Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income? I. Cost of merchandise. II. Business expenses other than the cost of merchandise. a. Both I and II. b. I only. c. Neither I nor II. d. II only.
Choice “b” is correct. A gain from an illegal activity is includible in income. To determine the gain, a deduction is permitted for cost of merchandise. Business expenses for operating an illegal business, other than the cost of merchandise, are not permitted as deduction.
Which of the following taxpayers may use the cash method of accounting?
a.
A tax shelter.
b.
A manufacturer.
c.
A C corporation with annual gross receipts of $50,000,000.
d.
A qualified personal service corporation.
Choice “d” is correct.
Rule: The general rule is that the accrual method of accounting will be required by tax shelters, large C corporations and manufacturers. The IRS has the authority to require that a taxpayer use a method of accounting to accurately reflect the proper income and expenses. Personal Service Corporations are permitted the use of the cash method.
On January 1, Year 1, Locke Corp., an accrual-basis, calendar-year C corporation, had $30,000 in accumulated earnings and profits. For Year 1, Locke had current earnings and profits of $20,000, and made two $40,000 cash distributions to its shareholders, one in April and one in September of Year 1. What amount of the Year 1 distributions is classified as dividend income to Locke's shareholders? a. $50,000 b. $80,000 c. $0 d. $20,000
Choice “a” is correct. Dividends are distributions of a corporation’s earnings & profits, including accumulated (prior year) and current year E&P. Because the corporation had both accumulated E&P of $30,000 and current E&P of $20,000, the total amount of distributions classified as dividends is $50,000.
On January 2 of the current year, Shaw Corp., an accrual-basis, calendar-year C corporation, purchased all the assets of a sole proprietorship, including $300,000 in goodwill. Current-year federal income tax expense of $110,100 and $7,500 for goodwill impairment were deducted to arrive at Shaw's reported book income of $239,200. What should be the amount of Shaw's current-year taxable income, as reconciled on Shaw's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return? a. $329,300 b. $349,300 c. $336,800 d. $239,200
Choice "c" is correct. $336,800 should be reported as Shaw's current-year taxable income, reconciled as follows on Shaw's Schedule M-1 on the Form 1120: Book income $ 239,200 Add: Federal income tax expense 110,100 [1] Less: Excess of tax amortization over book impairment of goodwill (12,500) [2] Taxable income $ 336,800 [1] Federal income taxes paid are not deductible for tax purposes. [2] The excess amortization is determined as follows: Total purchased goodwill $ 300,000 Divided by 15 years ÷ 15 [tax amortization period] Tax amortization $ 20,000 Less: Book impairment (given) (7,500) Excess tax amortization for the current year $ 12,500
How are a C corporation’s net capital losses used?
a.
Carried back three years and forward five years.
b.
Deducted from the corporation’s ordinary income only to the extent of $3,000.
c.
Deductible in full from the corporation’s ordinary income.
d.
Carried forward 20 years.
Choice “a” is correct. A C corporation’s net capital losses are carried back three years and forward five years.
If a corporation’s charitable contributions exceed the limitation for deductibility in a particular year, the excess:
a.
May be carried back or forward for one year at the corporation’s election.
b.
Is not deductible in any future or prior year.
c.
May be carried back to the third preceding year.
d.
May be carried forward to a maximum of five succeeding years.
Choice “d” is correct.
Rule: A corporate charitable deduction that exceeds the limit for deduction in one year can be carried over to the succeeding five tax years. It cannot be carried back.
A corporation may reduce its regular income tax by taking a tax credit for: a. Accelerated depreciation. b. State income taxes. c. Foreign income taxes. d. Dividends-received exclusion.
Choice “c” is correct. Under certain conditions a taxpayer may take a credit against its U.S. income tax for foreign income taxes paid.
The accumulated earnings tax can be imposed:
a.
On both partnerships and corporations.
b.
Regardless of the number of stockholders in a corporation.
c.
On personal holding companies.
d.
On companies that make distributions in excess of accumulated earnings.
Choice “b” is correct. The imposition of the accumulated earnings tax does not depend on the number of shareholders a corporation has.
The following information pertains to Dahl Corp.:
Accumulated earnings and profits at January 1, Year 1 $ 120,000
Earnings and profits for the year ended December 31, Year 1 160,000
Cash distributions to individual stockholders during Year 1 360,000
What is the total amount of distributions taxable as dividend income to Dahl’s stockholders in Year 1?
a.
$160,000
b.
$280,000
c.
$360,000
d.
$0
Choice “b” is correct. Distributions out of the sum of current and accumulated earnings and profits are taxable as dividends to the recipients.
Accumulated E&P at 1/1/Year 1 $ 120,000
Earnings in Year 1 160,000
Taxable dividends to recipients 280,000
Excess distributed 80,000
Total distributed $ 360,000
Any excess reduces the shareholder’s basis in Dahl stock, and any amount beyond that required to reduce the shareholder’s basis to zero is treated as received on the sale or exchange of the stock and is capital gain.
A corporation's tax year can be reopened after all statutes of limitations have expired if: I. The tax return has a 50% nonfraudulent omission from gross income. II. The corporation prevails in a determination allowing a deduction in an open tax year that was taken erroneously in a closed tax year. a. I only. b. Neither I nor II. c. Both I and II. d. II only.
Choice “d” is correct. If the prior omission was nonfraudulent, the statute of limitations cannot be reopened after it has expired.
To mitigate the unfair effects of the statute of limitations in some rare cases, a tax year can be reopened to avoid hardship for the taxpayer or the IRS. In the case in which an item is ruled deductible in a subsequent year after having been taken in a year now closed by the statute of limitations, the IRS will reopen the statute of limitations to disallow the deduction in the previous year.
Edge Corp. met the stock ownership requirements of a personal holding company. What sources of income must Edge consider to determine if the income requirements for a personal holding company have been met? I. Interest earned on tax-exempt obligations. II. Dividends received from an unrelated domestic corporation. a. I only. b. II only. c. Both I and II. d. Neither I nor II.
Choice “b” is correct.
I.
Interest is normally included in personal holding company income, but only if it is included in the receiving corporation’s gross income. Since interest income from tax-exempt obligations is not included in gross income, it is not personal holding company income.
II.
Dividend income from unrelated domestic corporations is personal holding company income.
Banks Corp., a calendar year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings. What percentage of the meal expense may Banks deduct? a. 100% b. 0% c. 80% d. 50%
Choice “d” is correct. Only 50% of business meal and entertainment expense is deductible.
In Year 1, Best Corp., an accrual-basis calendar-year C corporation, received $100,000 in dividend income from the common stock that it held in an unrelated domestic corporation. The stock was not debt-financed and was held for over a year. Best recorded the following information for Year 1: Loss from Best's operations $ (10,000) Dividends received 100,000 Taxable income (before dividends-received deduction) 90,000 Best's dividends-received deduction on its Year 1 tax return was: a. $100,000 b. $80,000 c. $63,000 d. $70,000
Choice “c” is correct. The dividends-received deduction (“DRD”) is generally calculated as 70% of dividends received which would be $70,000 (70% × $100,000). However, the deduction is limited to 70% × dividends received deduction (DRD) modified taxable income. DRD modified taxable income is calculated as taxable income before the dividends received deduction, any NOL carryover or carryback deduction, capital loss carryback deduction, and the domestic production activities deduction. Because the loss of $10,000 is a current year loss and not a carryover or carryback, it is not an adjustment to taxable income when calculating modified taxable income. DRD modified taxable income is $90,000. Best’s DRD deduction on its Year 1 tax return is limited to $63,000 (70% × $90,000).
In Year 2, Cable Corp., a calendar year C corporation, contributed $80,000 to a qualified charitable organization. Cable's Year 2 taxable income before the deduction for charitable contributions was $820,000 after a $40,000 dividends-received deduction. Cable also had carryover contributions of $10,000 from Year 1. In Year 2, what amount can Cable deduct as charitable contributions? a. $82,000 b. $90,000 c. $86,000 d. $80,000
Choice “c” is correct. A C corporation can deduct charitable contributions up to 10% of its taxable income after adding back the dividends-received deduction; $820,000 taxable income + $40,000 dividends-received deduction = $860,000. 10% × $860,000 = $86,000, the maximum allowable charitable contribution deduction. $4,000 is carried forward to Year 3. A corporate charitable deduction that exceeds the limit for deduction in one year can be carried over to the succeeding five tax years. It cannot be carried back.
If a corporation’s charitable contributions exceed the limitation for deductibility in a particular year, the excess:
a.
May be carried back to the third preceding year.
b.
May be carried forward to a maximum of five succeeding years.
c.
May be carried back or forward for one year at the corporation’s election.
d.
Is not deductible in any future or prior year.
Choice “b” is correct.
Rule: A corporate charitable deduction that exceeds the limit for deduction in one year can be carried over to the succeeding five tax years. It cannot be carried back.
In Year 1, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In Year 2, after filing its Year 1 federal income tax return, Stewart determined that the exact amount was $6,000. Which of the following statements is correct?
a.
No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith.
b.
Stewart is required to file an amended return to report the additional $1,000 of income.
c.
Stewart is required to notify the IRS within 30 days of the determination of the exact amount of the item.
d.
The $1,000 difference is includible in Stewart’s Year 2 income tax return.
Choice “d” is correct. Under these facts the estimate was accurate based on information available when the return was filed. When the exact amount is known, the difference is included in income in the year the amount is received or the exact amount is determined.
A personal holding company deducts federal income taxes in computing undistributed personal holding company income.
A personal holding company deducts net long-term capital gain less related federal income taxes in computing undistributed personal holding company income.
From question:
In filing a consolidated federal income tax return, a corporate group eliminates the dividends from group members. Shore would have to be included in Bank’s group consolidated income tax return because Bank owns 80% of Shore.
No dividend income reported when own 80%
Dart Corp., a calendar year domestic C corporation, is not a personal holding company. For purposes of the accumulated earnings tax, Dart has accumulated taxable income for Year 1. Which step(s) can Dart take to eliminate or reduce any Year 1 accumulated earnings tax? I. Demonstrate that the "reasonable needs" of its business require the retention of all or part of the Year 1 accumulated taxable income. II. Pay dividends by March 15, Year 2. a. II only. b. I only. c. Both I and II. d. Neither I nor II.
Choice “c” is correct. Dart can take both actions to eliminate or reduce any Year 1 accumulated earnings tax. A corporation that can demonstrate that its reasonable business needs require it to accumulate earnings can escape the accumulated earnings tax on the portion reasonably accumulated. Dividends paid by the 15th day of the third month after the close of the corporation’s tax year reduce the accumulated earnings subject to the accumulated earnings tax.
Eastern Corp., a calendar year corporation, was formed January 3, Year 1, and on that date placed five-year property in service. The property was depreciated under the general MACRS system. Eastern did not elect to use the straight-line method. The following information pertains to Eastern:
Eastern’s Year 1 taxable income $ 300,000
Adjustment for the accelerated depreciation taken on Year 1 five-year property 1,000
Year 1 tax-exempt interest from specified private activity bonds issued 5,000
What was Eastern’s Year 1 alternative minimum taxable income before the adjusted current earnings (ACE) adjustment?
a.
$304,000
b.
$301,000
c.
$305,000
d.
$306,000
Choice “d” is correct. Eastern’s alternative minimum taxable income before the ACE adjustment (and ignoring the exemption allowable) is $306,000:
Taxable income $ 300,000
Adjustment for regular tax accelerated depreciation 1,000
Tax preference for private activity bond interest 5,000
AMTI $ 306,000
The accumulated earnings tax can be imposed:
a.
On personal holding companies.
b.
On companies that make distributions in excess of accumulated earnings.
c.
On both partnerships and corporations.
d.
Regardless of the number of stockholders in a corporation.
Choice “d” is correct. The imposition of the accumulated earnings tax does not depend on the number of shareholders a corporation has.
The following information pertains to Dahl Corp.:
Accumulated earnings and profits at January 1, Year 1 $ 120,000
Earnings and profits for the year ended December 31, Year 1 160,000
Cash distributions to individual stockholders during Year 1 360,000
What is the total amount of distributions taxable as dividend income to Dahl’s stockholders in Year 1?
a.
$360,000
b.
$0
c.
$160,000
d.
$280,000
Choice “d” is correct. Distributions out of the sum of current and accumulated earnings and profits are taxable as dividends to the recipients.
Accumulated E&P at 1/1/Year 1 $ 120,000
Earnings in Year 1 160,000
Taxable dividends to recipients 280,000
Excess distributed 80,000
Total distributed $ 360,000
Any excess reduces the shareholder’s basis in Dahl stock, and any amount beyond that required to reduce the shareholder’s basis to zero is treated as received on the sale or exchange of the stock and is capital gain.
Bass Corp., a calendar year C corporation, made qualifying Year 2 estimated tax deposits based on its actual Year 1 tax liability. On March 15, Year 3, Bass filed a timely automatic extension request for its Year 2 corporate income tax return. Estimated tax deposits and the extension payment totaled $7,600. This amount was 95% of the total tax shown on Bass' final Year 2 corporate income tax return. Bass paid $400 additional tax on the final Year 2 corporate income tax return filed before the extended due date. For the Year 2 calendar year, Bass was subject to pay: I. Interest on the $400 tax payment made in Year 3. II. A tax delinquency penalty. a. I only. b. II only. c. Neither I nor II. d. Both I and II.
Choice “a” is correct. A taxpayer does not extend the time for payment of tax by extending the filing deadline for the return. If there is tax owed when the return is filed, interest must be paid at the rate prescribed by IRC §6621; therefore, Bass was subject to pay interest on the $400 tax payment made in Year 3. There is no delinquency penalty if the taxpayer files its return, pays at least 90% of the tax due by the due date, and pays the balance due on or before the extended due date (all of which Bass Corp. complied with).
A corporation's tax year can be reopened after all statutes of limitations have expired if: I. The tax return has a 50% nonfraudulent omission from gross income. II. The corporation prevails in a determination allowing a deduction in an open tax year that was taken erroneously in a closed tax year. a. Both I and II. b. II only. c. I only. d. Neither I nor II.
Choice “b” is correct. If the prior omission was nonfraudulent, the statute of limitations cannot be reopened after it has expired.
To mitigate the unfair effects of the statute of limitations in some rare cases, a tax year can be reopened to avoid hardship for the taxpayer or the IRS. In the case in which an item is ruled deductible in a subsequent year after having been taken in a year now closed by the statute of limitations, the IRS will reopen the statute of limitations to disallow the deduction in the previous year.
Edge Corp. met the stock ownership requirements of a personal holding company. What sources of income must Edge consider to determine if the income requirements for a personal holding company have been met? I. Interest earned on tax-exempt obligations. II. Dividends received from an unrelated domestic corporation. a. Both I and II. b. Neither I nor II. c. I only. d. II only.
Just 2
Jaxson Corp. has 200,000 shares of voting common stock issued and outstanding. King Corp. has decided to acquire 90 percent of Jaxson’s voting common stock solely in exchange for 50 percent of its voting common stock and retain Jaxson as a subsidiary after the transaction. Which of the following statements is true?
a.
Jaxson must surrender assets for the transaction to qualify as a tax-free reorganization.
b.
King must issue at least 60 percent of its voting common stock for the transaction to qualify as a tax-free reorganization.
c.
King must acquire 100 percent of Jaxson stock for the transaction to be a tax-free reorganization.
d.
The transaction will qualify as a tax-free reorganization.
Choice “d” is correct. The acquisition of a controlling (usually 80%) interest by one corporation in the stock of another corporation solely for stock is a tax-free (Type B) reorganization.
For the current year, Kelly Corp. had net income per books of $300,000 before the provision for Federal income taxes. Included in the net income were the following items:
Dividend income from an unaffiliated domestic taxable corporation (taxableincome limitation does not apply and there is no portfolio indebtedness) $ 50,000
Bad debt expense (represents the increase in the allowance for doubtful accounts) 80,000
Assuming no bad debt was written off, what is Kelly’s taxable income for the current year?
a.
$330,000
b.
$345,000
c.
$250,000
d.
$380,000
Choice "b" is correct. Book net income $ 300,000 Nondeductible bad debt expense 80,000 Dividends received deduction (35,000) $ 345,000
For the year ended December 31, Year 6, Taylor Corp. had a net operating loss of $200,000. Taxable income for the earlier years of corporate existence, computed without reference to the net operating loss, was as follows: Taxable income Year 1 $ 5,000 Year 2 10,000 Year 3 20,000 Year 4 30,000 Year 5 40,000 What amount of net operating loss will be available to Taylor for the year ended December 31, Year 7? a. $110,000 b. $200,000 c. $130,000 d. $95,000
Choice “c” is correct. Year 4 to Year 5, Taylor will carry its NOL back two years and forward until it is used (but not more than 20 years). Carrying the NOL back to Year 4 to Year 5 absorbs $70,000 of the $200,000 NOL generated in Year 6 leaving $130,000 to be absorbed in Year 7 and later years.
Axis Corp. is an accrual basis calendar year corporation. On December 13, Year 1, the Board of Directors declared a two percent of profits bonus to all employees for services rendered during Year 1 and notified them in writing. None of the employees own stock in Axis. The amount represents reasonable compensation for services rendered and was paid on March 13, Year 2. Axis’ bonus expense may:
a.
Not be deducted on Axis’ Year 1 tax return because the per share employee amount cannot be determined with reasonable accuracy at the time of the declaration of the bonus.
b.
Not be deducted on Axis’ tax return because payment is a disguised dividend.
c.
Be deducted on Axis’ Year 2 tax return.
d.
Be deducted on Axis’ Year 1 tax return.
Choice “d” is correct. The deduction is an ordinary and necessary business expense treated just as any other compensation expense is treated. Axis is an accrual basis taxpayer, and the deduction is taken on the return for the year in which the expense accrued because it was paid within 2-1/2 months of year-end.
Tapper Corp., an accrual basis calendar year corporation, was organized on January 2, Year 1. During Year 1, revenue was exclusively from sales proceeds and interest income. The following information pertains to Tapper:
Taxable income before charitable contributions for the year ended December 31, Year 1 $ 500,000
Tapper’s matching contribution to employee-designated qualified universities made during Year 1 10,000
Board of Directors’ authorized contribution to a qualified charity (authorized December 1, Year 1, made February 1, Year 2) 30,000
What is the maximum allowable deduction that Tapper may take as a charitable contribution on its tax return for the year ended December 31, Year 1?
a.
$0
b.
$10,000
c.
$30,000
d.
$40,000
Choice “d” is correct. Tapper’s college matching contributions are deductible; Tapper made the contributions; the employees merely directed the proceeds. The Board’s authorized contribution is also deductible since it satisfies the two rules under which an accrual-basis corporation can deduct an accrued contribution: 1) it was authorized to a qualified charity by Board resolution before the end of the taxable year and 2) it was paid by the 15th day of the 3rd month after the end of the taxable year of accrual.
Which of the following costs are expensable/amortizable organizational expenditures?
a.
Printing costs to issue the corporate stock.
b.
Commissions paid by the corporation to an underwriter.
c.
Legal fees for drafting the corporate charter.
d.
Professional fees to issue the corporate stock.
Choice “c” is correct. The costs of organizing the corporation are expensable (subject to the $5,000 limitation) and amortizable, but the costs of selling stock are not. The only expense listed that qualifies for expense/amortization is the legal fees for drafting the corporate charter; the others relate to the sale of stock.
With regard to consolidated tax returns, which of the following statements is correct?
a.
The common parent must directly own 51% or more of the total voting power of all corporations included in the consolidated return.
b.
Of all intercompany dividends paid by the subsidiaries to the parent, 70% are excludible from taxable income on the consolidated return.
c.
Operating losses of one group member may be used to offset operating profits of the other members included in the consolidated return.
d.
Only corporations that issue their audited financial statements on a consolidated basis may file consolidated returns.
Choice “c” is correct. A significant advantage of consolidated tax returns is the ability to offset gains and losses among group members as if they were a single taxpayer.
In the filing of a consolidated tax return for a corporation and its wholly owned subsidiaries, intercompany dividends between the parent and subsidiary corporations are:
a.
Not taxable.
b.
Fully taxable.
c.
Included in taxable income to the extent of 20%.
d.
Included in taxable income to the extent of 80%
Choice “a” is correct. Dividends received from other group members are eliminated from the parent’s taxable income in consolidation; no dividends received deduction is allowed. Since the parent eliminates the subsidiary dividends in consolidation, they are effectively not taxable.
A corporation's penalty for underpaying federal estimated taxes is: a. Fully deductible if reasonable cause can be established for the underpayment. b. Partially deductible. c. Fully deductible in the year paid. d. Not deductible.
Choice “d” is correct.
Rule: The penalty for underpayment of federal estimated taxes is not deductible.
Which of the following credits is a combination of several tax credits to provide uniform rules for the current and carryback-carryover years? a. Enhanced oil recovery credit. b. Foreign tax credit. c. Minimum tax credit. d. General business credit.
Choice “d” is correct. The general business credit combines several nonrefundable tax credits and provides rules for their absorption against the taxpayer’s liability.
Blink Corp., an accrual basis calendar year corporation, carried back a net operating loss for the tax year ended December 31, Year 1. Blink's gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending December 31, Year 2. Which method(s) of estimated tax payment can Blink use for its quarterly payments during the Year 2 tax year to avoid underpayment of federal estimated taxes? I. 100% of the preceding tax year method. II. Annualized income method. a. I only. b. II only. c. Neither I nor II. d. Both I and II.
Choice “b” is correct. Blink cannot use the 100% of preceding tax year method in Year 2 because it did not pay income tax in Year 1. Blink can use the annualized income method.
Tank Corp., which had earnings and profits of $500,000, made a nonliquidating distribution of property to its shareholders in Year 1 as a dividend in kind. This property, which had an adjusted basis of $20,000 and a fair market value of $30,000 at the date of distribution, did not constitute assets used in the active conduct of Tank's business. How much gain did Tank recognize on this distribution? a. $10,000 b. $20,000 c. $30,000 d. $0
Choice “a” is correct. The property distributed by Tank is treated as if it were sold to the shareholder at its fair market value on the date of distribution. Tank recognizes gain to the extent of the fair market value ($30,000) over the adjusted basis ($20,000) or $10,000.
In a Type B reorganization, as defined by the Internal Revenue Code, the: I. Stock of the target corporation is acquired solely for the voting stock of either the acquiring corporation or its parent. II. Acquiring corporation must have control of the target corporation immediately after the acquisition. a. Neither I nor II. b. I only. c. II only. d. Both I and II.
Choice “d” is correct. Both requirements listed are necessary in a Type B reorganization. In a Type B reorganization, the target is acquired using the stock of the acquiring corporation or the acquiring corporation’s parent (triangular acquisition). In a Type B reorganization, the acquiring corporation must be in control of the target immediately after the acquisition.
Jackson Corp., a calendar year corporation, mailed its Year 1 tax return to the Internal Revenue Service by certified mail on Friday, March 11, Year 2. The return, postmarked March 11, Year 2, was delivered to the Internal Revenue Service on March 18, Year 2. The statute of limitations (for assessments) on Jackson's corporate tax return begins on: a. December 31, Year 1. b. March 11, Year 2. c. March 16, Year 2. d. March 18, Year 2.
Choice “c” is correct. The Year 1 return of a calendar year corporation is due on March 15, Year 2, so the statute of limitations begins on the next day, March 16, Year 2.
Tech Corp. files a consolidated return with its wholly-owned subsidiary, Dow Corp. During the year, Dow paid a cash dividend of $20,000 to Tech. What amount of this dividend is taxable on the current year's consolidated return? a. $14,000 b. $0 c. $6,000 d. $20,000
Choice “b” is correct. Intercompany dividends are eliminated when preparing a consolidated return. The $20,000 came from income of Dow and is reported as part of consolidated income. The receipt of the dividend by Tech is not included again.
On January 1, Year 1, Kee Corp., a C corporation, had a $50,000 deficit in earnings and profits. For Year 1, Kee had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable as dividend income to Kee's stockholders? a. $10,000 b. $0 c. $20,000 d. $30,000
Choice “a” is correct. Taxable dividend income is paid out of the corporation’s current or accumulated earnings and profits. Since Kee had a deficit, only current earnings and profits of $10,000 are available for dividends.
In Year 1, Brun Corp. properly accrued $10,000 for an income item on the basis of a reasonable estimate. In Year 2, Brun determined that the exact amount was $12,000. Which of the following statements is correct?
a.
No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith.
b.
The $2,000 difference is includible in Brun’s Year 2 income tax return.
c.
Brun is required to notify the IRS within 30 days of the determination of the exact amount of the item.
d.
Brun is required to file an amended return to report the additional $2,000 of income.
Choice “b” is correct. Under the accrual basis of accounting, when you include an amount in gross income on the basis of a reasonable estimate, and you later determine the exact amount, the difference (if any) is taken into account in the tax year in which the determination is made. Therefore, in this case, the additional $2,000 is included in Brun’s Year 2 income.
Cape Co. reported book income of $140,000. Included in that amount was $50,000 for meals and entertainment expense and $40,000 for federal income tax expense. In Cape's Schedule M-1 of Form 1120, which reconciles book income and taxable income, what amount should be reported as taxable income? a. $140,000 b. $205,000 c. $190,000 d. $150,000
Choice “b” is correct. The M-1 reconciliation of book income to taxable income would be as follows:
Book income
$ 140,000
Federal income tax expense deductible from book income, but not deductible for tax purposes
40,000
180,000
50% × $50,000 meals and entertainment expenses not deductible for tax purposes, but deductible from book income
25,000
Taxable income
$ 205,000
When computing a corporation’s income tax expense for estimated income tax purposes, which of the following should be taken into account?
When computing a corporation’s income tax expense for estimated income tax purposes, both corporate tax credits and the alternative minimum tax should be taken into account.
Jones incorporated a sole proprietorship by exchanging all the proprietorship’s assets for the stock of Nu Co., a new corporation. To qualify for tax-free incorporation, Jones must be in control of Nu immediately after the exchange. What percentage of Nu’s stock must Jones own to qualify as “control” for this purpose?
a. 66. 67% b. 50. 00% c. 80. 00% d. 51. 00%
Choice “c” is correct.
Rule: In a tax-free incorporation, the percentage for “control” is 80%, (i.e., control exists if the transferor/shareholder owns at least 80% of the total voting power and at least 80% of the total number of shares of all other classes of stock).
A corporation was completely liquidated and dissolved during the year. The filing fees, professional fees, and other expenditures incurred in connection with the liquidation and dissolution are:
a.
Not deductible either by the corporation or shareholders.
b.
Treated as capital losses by the corporation.
c.
Deductible in full by the dissolved corporation.
d.
Deductible by the shareholders and not by the corporation.
Choice “c” is correct. The corporation generally deducts its liquidation expenses (i.e., filing fees, professional fees) on its final tax return.
Brown Corp., a calendar-year taxpayer, was organized and actively began operations on July 1, Year 1, and incurred the following costs: Legal fees to obtain corporate charter $ 41,000 Commission paid to underwriter 25,000 Other stock issue costs 10,000 Brown wishes to amortize its organizational costs over the shortest period allowed for tax purposes. In Year 1, what amount should Brown deduct for the organizational expenses? a. $5,000 b. $6,200 c. $1,200 d. $8,600
Choice “b” is correct. Organizational costs are amortizable over a minimum period of 15 years (180 months). In addition, subject to a $50,000 total expenditure limitation, a $5,000 deduction is allowed in Year 1. Allowable costs in connection with the corporate organization are legal fees to obtain the corporate charter, necessary accounting services, expenses of temporary directors, and incorporation fees paid to the state. Organizational costs exclude stock issue costs and commissions paid to underwriters to help sell the shares. Only the legal fees of $41,000 qualify as organizational costs. $41,000 − $5,000 = $36,000/180 months = $200 × 6 months = $1,200 + $5,000 (expense in Year 1) = $6,200.
Acorn Inc. had the following items of income and expense: Sales $ 500,000 Cost of sales 250,000 Dividends received 25,000 The dividends were received from a corporation of which Acorn owns 30%. In Acorn's corporate income tax return, what amount should be reported as income before special deductions? a. $525,000 b. $250,000 c. $505,000 d. $275,000
Choice “d” is correct. Income before special deductions includes sales, dividends received and cost of sales. It excludes the dividends received deduction, which is a “special” deduction.
Sales $ 500,000
Cost of sales (250,000)
Gross profit 250,000
Dividends received 25,000
Income before special deductions $ 275,000
Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its Year 2 and Year 1 balance sheets, respectively. During Year 2, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace's Year 2 corporate income tax return, what amount should Ace include as rent revenue? a. $55,000 b. $60,000 c. $50,000 d. $65,000
Choice “d” is correct. Rent revenue under the accrual basis would include the cash received ($50,000) plus the increase in the rent receivable ($10,000 = $35,000 - 25,000), or $60,000. In addition, the $5,000 nonrefundable rent deposit is additional rent revenue, for a total of $65,000.
During the year, Portal Corp. received $100,000 in dividends from Sal Corp., its 80%-owned subsidiary. What net amount of dividend income should Portal include in its current year consolidated tax return? a. $0 b. $80,000 c. $70,000 d. $100,000
Choice “a” is correct. If a corporation owns 80% or more of another corporation, the dividends received deduction is 100% as the dividend income is eliminated in consolidation. Therefore, the net amount of dividend income is $0.
In Year 2, Garland Corp. contributed $40,000 to a qualified charitable organization. Garland's Year 2 taxable income before the deduction for charitable contributions was $410,000. Included in that amount is a $20,000 dividends received deduction. Garland also had carryover contributions of $5,000 from the prior year. In Year 2, what amount can Garland deduct as charitable contributions? a. $40,000 b. $43,000 c. $45,000 d. $41,000
Choice “b” is correct. The charitable contribution deduction is limited to 10% of taxable income before the dividends received deduction and the charitable contribution deduction. 10% ($410,000 + $20,000) = $43,000. The deduction consists of $40,000 from the current year and $3,000 from the prior year contribution carryover. That leaves a $2,000 carryover from Year 1 to Year 3.
When a corporation has an unused net capital loss that is carried back or carried forward to another tax year:
a.
It is treated as a long-term capital loss whether or not it was long-term when sustained.
b.
It is treated as a short-term capital loss whether or not it was short-term when sustained.
c.
It retains its original identity as short-term or long-term.
d.
It can be used to offset ordinary income up to the amount of the carryback or carryover.
Choice “b” is correct.
Rule: Unused capital losses of a corporation that are carried back or forward are treated as short-term capital losses whether or not they were short-term or long-term when sustained. Capital losses can only be used to offset capital gains up to the amount of the carryback or carryover, not ordinary income.
Soma Corp. had $600,000 in compensation expense for book purposes in Year 1. Included in this amount was a $50,000 accrual for Year 1 nonshareholder bonuses. Soma paid the actual Year 1 bonus of $60,000 on March 1, Year 2. In its Year 1 tax return, what amount should Soma deduct as compensation expense? a. $540,000 b. $600,000 c. $610,000 d. $550,000
Choice “c” is correct. An accrual basis employer may deduct bonuses paid to nonshareholder employees in the year of accrual if the bonuses are subsequently paid within 2 ½ months after the close of the tax year. Since the $50,000 accrued at year-end Year 1 was paid by March 15, Year 2 (2 ½ months), the $50,000 accrual is deductible as compensation expense. The additional $10,000 bonus paid on March 1, Year 2 is also deductible in Year 1, even though it was not accrued at year-end Year 1. Therefore, the total compensation is $600,000 + $10,000, or $610,000.
Which of the following tax credits cannot be claimed by a corporation? a. Alternative fuel production credit. b. Foreign tax credit. c. General business credit. d. Earned income credit.
Choice “d” is correct. The earned income credit can only be claimed by individuals, not corporations.
Acme Corp. has two common stockholders. Acme derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its stockholders. Acme is a:
a.
Corporation subject to tax only on income not distributed to stockholders.
b.
Regulated investment company.
c.
Corporation subject to the accumulated earnings tax.
d.
Personal holding company.
Choice “d” is correct. A corporation is a personal holding company (PHC) if (1) at any time during the last half of the taxable year more than 50% of the value of the outstanding stock is owned by 5 or fewer individuals, and (2) at least 60% of its adjusted ordinary gross income for the year is investment-type income.
n the current year, Stone, a cash basis taxpayer, incorporated her CPA practice. No liabilities were transferred. The following assets were transferred to the corporation: Cash (checking account) $ 500 Computer equipment: Adjusted basis 30,000 Fair market value 34,000 Cost 40,000 Immediately after the transfer, Stone owned 100% of the corporation's stock. The corporation's total basis for the transferred assets is: a. $34,500 b. $30,500 c. $40,500 d. $30,000
Choice “b” is correct. In a corporate formation, the corporation’s basis in the transferred assets is the carryover adjusted basis from the shareholder, $500 + $30,000 = $30,500.
What is the usual result to the shareholders of a distribution in complete liquidation of a corporation? a. No taxable effect. b. Capital gain or loss. c. Ordinary gain to the extent of cash received. d. Ordinary gain or loss.
Choice “b” is correct.
Rule: Shareholders treat property received in a complete liquidation of a corporation as full payment for their stock. Therefore, the shareholder must recognize capital gain or loss equal to the difference between the fair market value of the property received and the basis of the stock surrendered.
Kari Corp., a manufacturing company, was organized on January 2, Year 1. Its Year 1 federal taxable income was $400,000 and its federal income tax was $100,000. What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for Year 1 if Kari takes only the minimum accumulated earnings credit? a. $50,000 b. $0 c. $150,000 d. $300,000
Choice “a” is correct. For the accumulated earnings tax, in this case, accumulated taxable income would equal taxable income ($400,000) minus federal income taxes ($100,000) minus the minimum accumulated earnings credit ($250,000) for manufacturing companies or $50,000.
Corporations A and B combine in a qualifying reorganization and form Corporation C, the only surviving corporation. This reorganization is tax-free to the:
Choice “a” is correct. This is a Type A reorganization in the form of a consolidation (e.g., A + B = C). Generally, no gain or loss is recognized by the shareholders of the various corporations except when they receive cash or other consideration in addition to the stock or securities. In addition, no gain or loss is recognized by the acquired corporations or the acquiring corporation pursuant to a tax-free reorganization.
If a corporation’s tentative minimum tax exceeds the regular tax, the excess amount is:
a.
Payable in addition to the regular tax.
b.
Carried back to the first preceding taxable year.
c.
Carried back to the third preceding taxable year.
d.
Subtracted from the regular tax.
Choice “a” is correct. If a corporation’s tentative minimum tax exceeds the regular tax, the excess amount is the alternative minimum tax which is payable in addition to the regular tax.
