Corporate Taxation

Question 1

Initial amount of organizational expense deduction

Answer 1

5,000 in YR 1. Phased out if expenses exceed 50,000. Rest is Capitalized and Amortized over 180 months (15 years). Amortization includes current year and applies proportionately to months since incorporation. It must be elected or else it can’t be deducted until a corporation is liquidated.

Question 2

Life Insurance Premiums for employees by corporations are (blank) for tax purposes and (blank) for reporting purposes

Answer 2

deductible, deductible

Question 3

Organizational expenses include:

Answer 3

Legal Services, Meetings, Incorporation Fees (Attorney Fees)

Question 4

Start-Up expenses tax treatment is:

Answer 4

$5,000 is the deduction but it is reduced by the extent of the expenses that exceed $50,000. The rest is amortized over 180 months beginning the first month that business begins. Apply proportion. Amortization includes the current year.

Question 5

Dividends Received Deduction vs Charitable Contributions, who’s first?

Answer 5

Charitable Contribution 10% limit is considered before applying the DR Deduction, add dividend income back in to calculate CC deduction and then apply the deduction.

Question 6

CC carryback and carryfoward in years.

Answer 6

Can’t be carried back, 5 year carry forward.

Question 7

Expenses paid off will change amortization method. Additional expenses in later year will add o the amortization. (T/F x 2)

Answer 7

FALSE, FALSE

Question 8

Dividends Received is limited to:

Answer 8

70/80% (or applicable percent of deductible expense) of taxable income before the deduction. Add dividends back to get taxable income first to determine if there is a limit and then apply the deduction rules.

Question 9

Corporate Tax formula is:

Answer 9

Gross Income minus deductions. Deductions does not include CC, DR, DPD, NOL and capital loss carryback.Then CC then DR Deduction then DPD, NOL carryback and STCL carryback.

Question 10

Capital gains are (blank) Capital losses are deductible (blank)

Answer 10

fully taxable, to the extent of capital gains. The excess is carried forward as STCL for 5 years.

Question 11

Life insurance premiums are not deductible for a corporation IF:

Answer 11

They are the beneficiary.

Question 12

What can prevent DIV received deduction:

Answer 12

• Held under 46 days.
• Dividend from passthrough entity
• Derived from interest paying securities
• Capital Gains dividend
• Exceeding the applicable limit

Question 13

Domestic Production Deduction

Answer 13

Limited to 9% the lower of:

• Qualified Production Activity Income
• Taxable Income

QPAI calculated with the gross income from domestic production (Gross Receipts minus COGS, Direct expenses such wages and pro-rated indirect expenses)

Cannot exceed 50% of wages allocable to domestic production

Question 14

Corporate tentative tax in excess of regular tax is:

Answer 14

Payable in addition to regular tax as AMT. Credit can be taken in subsequent years but cannot be carried back.

Question 15

Determining exemption from AMT rules:

Answer 15

First year is always exempt. The subsequent tax is to determine if year one gross receipts exceeds the $7,500,000 threshold for a three year window prior to the current tax year. It is $5,000,000 for year two, comparing to year one. If it does, there is no more exemption for subsequent years.

Question 16

AMT exempt portion formula:

Answer 16

40,000 - (.25)(AMT - 150,000)

Question 17

ACE adjustment rules:

Answer 17

75% increase of ACE - AMTI or 75% decrease of AMTI - ACE limited to aggregate of the + adjustments from prior years minus previously claimed negative adjustments.

Question 18

Personal holding company rules:

Answer 18

5 or fewer individuals directly or indirectly own 50% or more of a domestic company. Indirect ownership can occur is direct family members (brother, sister, spouse, linear ancestors) own the stock or if they are the beneficiary of an estate or a partner in a partnership. PHC are subject to a 15% penalty tax on undistributed personal holding company income.

Question 19

Personal Holding Company Income Test:

Answer 19

Income test is satisfied is 60% of the corporation’s adjusted ordinary gross income is PHC income.

PHC income consists of: dividends, interest, annuities, rent, mineral oil and gas royalties, copyright and patent royalties, produced film rent, compensation for more than 25% use of corporate property by shareholders, personal contracts and amounts for estates and trusts.

Question 20

Accumulated earnings credit is the greater of:

Answer 20

• $250K - BOY E&P
• Earnings needed for reasonable business needs

The excess of the taxable income minus dividends paid and this credit is taxed at the current top tax rate of on dividend income (20%)

Question 21

Adjustments from taxable income include:

Answer 21

Adding DRD and NOL and subtracting Fed Taxes, Excess CC and Net Capital Losses

Question 22

Advantages of filing a consolidated return:

Answer 22

1. Intercompany dividends are 100% excludable.
2. Losses of one affiliated member offset gains from another.
3. Intercompany profits are deferred until realized

Question 23

Corporations qualify as members of an affiliated group by:

Answer 23

Having a common parent who owns at least 80% of the total voting stock AND at least 80% of the total value of the stock in at least one other includible corporation.

A minimum of one of the other includible corporations must own at least 80% in each of the remaining corporations. A corporation can file a consolidated return without issuing an audited financial statement on a consolidated basis. Test has to be met every day of the tax year.

Insurance, Foreign and S-Corps are not eligible to be in an affiliated group.

Question 24

Parent-Subsidiary Rule

Answer 24

80% of voting stock power OR value of corporation. Can consolidate the percentage if both are in the same group. Common Parent has to own at least 80% of one of the other companies. Tested on last day of tax year.

Question 25

Brother-Sister Rule

Answer 25

5 or fewer persons who have a common ownership of two or more corporations of greater than 50% of total voting powers or value of shares (take smallest amount of ownership for each individual and sum it up) AND

If an owner doesn’t have common ownership, his total does not count. 80% requirement of stock needs to be owned. This test does not apply to:

• Corporate Tax Brackets
• Accumulated Earnings Credit
• Minimum Tax Exemption

Question 26

When accumulated E&P is negative and current E&P is positive, how are distributions treated by the corporation?

Answer 26

They are treated as dividends limited to the extent of current E&P and the excess is treated as ROC if there is no more available accumulated E&P. ROC decreases shareholders basis in the property.

Question 27

How are property distributions treated by the corporation and shareholders?

Answer 27

Shareholder: Property is treated as being received at FMV as the dividend income. Cash is the amount of dividend income. This is to extent of current and then accumulated E&P. Gains are added to Current E&P for all shareholders proportionately regardless of who it was distributed to.

Corporation: Greater of FMV or basis minus any liabilities. Appreciate the property and recognize appreciation as gain and add to E&P.

Treated as a sale at FMV to the SH, can recognize gains but not losses (if nonliquidating)

Question 28

To the shareholder:

Basis in Property received as a taxable dividend:

Amount of Distribution:

Answer 28

• FMV of the property.

- FMV - Liabilities Assumed

Question 29

If a stock of a subsidiary is liquidated by its parent company, what is the recognized and realized gain?

Answer 29

Realized Gain is FMV of the property minus the basis of the stock they own and the gain is not recognized. Basis in the asset will remain the same.

Question 30

A dissolved corporation’s filing fees, professional fees and other expenditures are treated in what way:

Answer 30

They are deducted fully by the corporation itself, not its shareholders.

Question 31

A distribution in liquidation is treated in what way by the shareholders:

Answer 31

The gain or loss is calculated by taking the total distribution less their basis. It will be recognized as a capital gain or loss. The basis in the property is the FMV of the property at the time of distribution.

Question 32

Non-corporate shareholders treat gain on a partial liquidation as:

What about a corporate shareholder?

Answer 32

• A capital gain

- Dividend Treatment

Question 33

A corporation that is a party to a qualified reorganization in which stock is exchanged solely for stock requires what for a gain to be recognized:

Answer 33

This is a Type B reorganization, Stock for Stock. A controlling interest must be acquired, this is defined as possessing ownership of at least 80% of both the total combined voting stock and the total number of shares of each class of nonvoting stock. Asset transfer is not required. If it is, it is a Type C reorganization and substantially all assets must be transferred.

Question 34

Ordering Rule for Shareholders:

Answer 34

1. Taxed as Dividend to E&P
2. Reduces Basis of stock (tax free)
3. Capital Gain (LT or ST depends on holding period)

Question 35

How to treat differences in E&P amount:

Answer 35

(+ C/- A) = Dividend in extent of current

(- C/+ A) = net first

Question 36

Redemption requirements to get capital gain treatment:

Answer 36

1. Less than 80% of original interest
2. Less than 50% of total combing voting power

If not met, it is treated as a dividend.

“Not essentially equivalent to a dividend”
Complete termination of interest (family attribution rules not apply)
Partial Liquidation = 2 active businesses for last 5 years and one is liquidated

Question 37

When can a loss not be recognized in a liquidation:

Answer 37

1. The property was contribute the last 5 years

2. Property is distributed to a related party

Question 38

A Reorganization:

Answer 38

• Stock for Asset
• Target must dissolve
• Voting or Non-voting
• 50% of consideration given to Target must be stock

Question 39

B Reorganization:

Answer 39

• Stock for Stock
• Acquiring must own at least 80% of Target (cumulative, does not require all to be acquired at once)
• Only voting stock can be used by Acquiring
• No boot

Question 40

C Reorganization:

Answer 40

• Stock for Asset
• Only voting stock
• Boot is allowed, can’t exceed 20% of consideration given to Target
• Acquiring must own substantially all (90% net asset value or 70% gross)