Flashcards in Chapter 3 Deck (92):
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.
A corporation's capital loss carryback or carryover is:
Always treated as a short term capital loss
osses 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.
Personal holding companies?
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,
Which of the following taxpayers may use the cash method of accounting?
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?
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.
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 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.
Kane Corp. is a calendar year domestic personal holding company. Which deduction(s) must Kane make from Year 1 taxable income to determine undistributed personal holding company income prior to the dividend-paid deduction?
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.
A corporation may reduce its regular income tax by taking a tax credit for:
foreign income taxes
The accumulated earnings tax can be imposed:
Regardless of the number of stockholders in a corporation.
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:
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, the amount owed on the return is not $500 or more, and the taxpayer pays the balance due on or before the extended due date (all of which Bass Corp. complied with).
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?
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.
Which of the following costs are expensable/amortizable organizational expenditures?
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 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:
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:
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?
The general business credit combines several nonrefundable tax credits and provides rules for their absorption against the taxpayer's liability.
In a Type B reorganization, as defined by the Internal Revenue Code, the:
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, April 11, Year 2. The return, postmarked April 11, Year 2, was delivered to the Internal Revenue Service on April 18, Year 2. The statute of limitations (for assessments) on Jackson's corporate tax return begins on:
The Year 1 return of a calendar year corporation is due on April 15, Year 2, so the statute of limitations begins on the next day, April 16, Year 2.
Rule: The statute of limitations for assessments runs from the date of the filing of the return, or, if later, the due date of the return.
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?
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?
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.
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?
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:
The corporation generally deducts its liquidation expenses (i.e., filing fees, professional fees) on its final tax return.
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
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?
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.
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?
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:
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.
Potter Corp. and Sly Corp. file consolidated tax returns. In January Year 1, Potter sold land, with a basis of $60,000 and a fair value of $75,000, to Sly for $100,000. Sly sold the land in December Year 2 for $125,000. In its Year 2 and Year 1 tax returns, what amount of gain should be reported for these transactions in the consolidated return?
The $40,000 gain realized by Potter ($100,000 − $60,000) on the sale to Sly is an intercompany gain that is eliminated in consolidation. Therefore, the Year 1 consolidated return gain is $0. In Year 2 when Sly sells the land to an outside party, the full gain of $65,000 is recognized ($125,000 − $60,000 original basis) on the consolidated return.
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 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.
What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
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?
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.
Which of the following types of entities is entitled to the net operating loss deduction?
trusts and estates are entitled to a net operating loss deduction. Trusts and estates can be taxable entities, even though, at times, they may also have pass-through effects.
Examples of those that are denied the privilege TO FILE A CONSOLIDATED RETURN include:
Most real estate investment trusts (REITs),
Some insurance companies, and
Most exempt organizations.
Rule: Filing a consolidated return is a privilege afforded to affiliated groups of corporations (Code Sections 1501 and 1504(b)), and it can only be filed if all of the affiliated corporations consent to such a filing. An affiliated group has ownership through a common parent. The common parent must directly own at least 80% of the voting power of at least one of the affiliated (includible) corporations and at least 80% of the value of the stock of that corporation, and the other corporations not controlled by the parent must be controlled under the 80% ownership test by an includible corporation. Not all corporations are allowed the privilege of filing a consolidated return.
Which of the following items should be included on the Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return to reconcile book income to taxable income?
The Schedule M-1 reports the reconciliation of income (loss) per books to income (loss) per the tax return [Note: It reports both permanent and temporary differences that are discussed in the Financial textbook for deferred taxes.]. Items that are included on this schedule are those that are (1) reported as income for book purposes but not for tax purposes; (2) reported as an expense for book purposes but not for tax purposes; (3) reported as taxable income for tax purposes but not as income for book purposes; and (4) reported as deductible for tax purposes but not as an expense for book purposes.
The only option above that falls into one of these four categories is option b. Premiums paid on a key-person life insurance policy are proper GAAP expenses for book purposes, but they are not allowable deductions for tax purposes.
A C corporation must use the accrual method of accounting in which of the following circumstances?
The business has more than $10 million in average sales.
One of the elections a new corporation must make is its choice of an accounting period. Which of the following entities has the most flexibility in choosing an accounting period?
A C corporation has considerable flexibility in choosing an accounting period. A C corporation generally has the same choice of accounting periods as do individual taxpayers. All of the other forms have some limitations
Forrest Corp. owned 100% of both the voting stock and total value of Diamond Corp. Both corporations were C corporations. Forrest's basis in the Diamond stock was $200,000 when it received a lump sum liquidating distribution of property as a result of the redemption of all of Diamond stock. The property had an adjusted basis of $270,000 and a fair market value of $500,000. What amount of gain did Forrest recognize on the distribution?
No gain or loss is recognized by either the parent corporation (Forrest) or the subsidiary corporation (Diamond) when the parent, who owns at least 80% of the stock (Forrest owns 100% of the stock), liquidates its subsidiary. The parent assumes the basis of the subsidiary's assets as well as any unused NOL carryover, capital loss carryover, or charitable contribution carryover.
Brisk Corp. is an accrual-basis, calendar-year C corporation with one individual shareholder. At year end, Brisk had $600,000 accumulated and current earnings and profits as it prepared to make its only dividend distribution for the year to its shareholder. Brisk could distribute either cash of $200,000 or land with an adjusted tax basis of $75,000 and a fair market value of $200,000. How would the taxable incomes of both Brisk and the shareholder change if land were distributed instead of cash?
Rule: The taxable amount of a dividend to a shareholder from a corporation's earnings and profits is the amount received in cash or the fair market value of the property received.
Rule: The general rule is the payment of a dividend does not create a taxable event, unless the distribution is appreciated property. When the distribution is of appreciated property, the corporation recognizes gain as if the property were sold at fair market value.
Therefore, it would INCREASE Brisk's income (they'd realize a gain) and no change would be made to the shareholders (they'd still get 200,000)
Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox's tax basis in the land?
Absent information to the contrary, we should assume this distribution is in the form of a dividend (especially because Fox is the sole shareholder). If the shareholder is an individual, the taxable amount of a property dividend from a corporation's earnings and profits is the fair market value of the property received (and the property's basis then becomes that fair market value). In this case, the shareholder is also taking on the responsibility for the mortgage on the property, but this affects only the amount of taxable income, as the debt is reported as a separate line item and does not affect the basis of the land.
While the cash basis of accounting is used by most taxpayers for tax purposes, the accrual basis method of accounting for tax purposes is required for the following:
The accounting for purchases and sales of inventory,
Certain farming corporations, and
C corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner provided the business has greater than $5 million average annual gross receipts for the three-year period ending with the tax year.
In April, X and Y formed Z Corp. X contributed $50,000 cash, and Y contributed land worth $70,000 (with an adjusted basis of $40,000). Y also received $20,000 cash from the corporation. X and Y each receives 50% of the corporation's stock. What is the tax basis of the land to Z Corp.?
Rule: There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation.
Therefore, it would be basis of 40,000 + 20,00 cash received = 60,000
Which of the following groups may elect to file a consolidated corporate return?
Rule: An affiliated group of corporations may elect to be taxed as a single unit, thereby eliminating intercompany gains and losses. To be entitled to file a consolidated return, all the corporations in the group (1) must have been members of an affiliated group at some time during the tax year and (2) must have filed a consent (the act of filing a consolidated return qualifies as consent). An affiliated group means that a common parent owns (1) 80% or more of the voting power of all outstanding stock and (2) 80% or more of the value of all outstanding stock of each corporation.
Rule: Not all corporations are allowed the privilege of filing a consolidated return. Examples of those denied the privilege include S corporations, foreign corporations, most real estate investment trusts (REITs), some insurance companies, brother-sister corporations where an individual (not a corporation) owns 80% or more of the stock of two or more corporations, and most exempt organizations.
Webster, a C corporation, has $70,000 in accumulated and no current earnings and profits. Webster distributed $20,000 cash and property with an adjusted basis and fair market value of $60,000 to its shareholders. What amount should the shareholders report as dividend income?
Rules: Distributions from corporations to shareholders are taxable to such shareholders if the distributions are classified as dividends. A dividend is defined by the IRC as a distribution of property by a corporation out if its earnings and profits. An individual shareholder will be taxed on dividends in cash for the amount received and on dividends of property for the fair market value of the property received. Distributions are deemed to come from earnings and profits first. Any distribution in excess of earnings and profits ("E&P," accumulated and current) is treated as a nontaxable return of capital that reduces the shareholder's basis in the stock. Distributions in excess of basis are capital gain distributions taxable as capital gains instead of dividends.
Therefore, the shareholders would report $70,000 as taxable dividend income (60,000 + 20,000) and the remaining 10,000 may be a capital gain or nontaxable return on capital.
Ames and Roth form Homerun, a C corporation. Ames contributes several autographed baseballs to Homerun. Ames purchased the baseballs for $500, and they have a total fair market value of $1,000. Roth contributes several autographed baseball bats to Homerun. Roth purchased the bats for $5,000, and they have a fair market value of $7,000. What is Homerun's basis in the contributed bats and balls?
The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. Applying the information in the fact pattern and the above rules, there is no "shareholder gain" on this transaction. Further, there is no indication of any debt being assumed by the corporation. Thus, Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.
The accumulated earnings tax can be imposed:
The accumulated earnings tax can be imposed on regular corporations (C corporations) or on personal service corporations.
Dale Corporation's book income before federal income taxes was $435,000 for the year ended December 31, Year 1. Dale was organized on January 1, Year 1. Organization costs of $50,000 are being written off over a ten-year period for financial statement purposes. For tax purposes, the corporation has elected to take advantage of the maximum benefit for expensing organizational costs. No additional book/tax differences exist. For the year ended December 31, Year 1, Dale Corporation's taxable income was:
For tax purposes, if elected, a maximum expense deduction of $5,000 is allowed for organizational costs in the year of organization. The remainder must be amortized over 180 months. The book income of $435,000 must be adjusted for the difference between the book amortization and tax amortization allowed. Book amortization would be $5,000 per year ($50,000 divided by 10 years). Tax amortization/expense is calculated as follows:
50,000 - 5,000 = 45,000 / 180 mo = 250 per mo
Tax expense/amortization would be $8,000 in this year ($50,000 − 5,000 ÷ 45,000/180 = 250 x 12 = 3,000 + 5,000 initial expense). The difference would be a $3,000 higher tax deduction than book. Thus, $435,000 less 3,000 = $432,000.
Roger Corp. had operating income of $300,000 after deducting $12,000 for charitable contributions made during the fiscal year, but not including dividends of $10,000 received from 10%-owned domestic taxable corporation. How much is the base amount to which the percentage limitation should be applied in computing the maximum deduction for the charitable contribution?
The percentage threshold limit for charitable contributions for a corporation is 10% of adjusted taxable income. Total taxable income is calculated before the deduction of any charitable contributions, the dividends received deduction, any net operating loss carryback, or any capital loss carryback. Thus, the $300,000 must be adjusted to add back the charitable contribution deduction of $12,000 plus the $10,000 of dividend income not included in the $300,000. The base equals $322,000.
Dreamscape, Inc., a widget retailer, had taxable income of $150,000 from operations during its taxable year. In addition, Dreamscape incurred a $35,000 loss from the sale of investment land, a capital asset. No other gains or losses were generated during the taxable year, nor had been in past years. In Dreamscape's tax return for that year, what is the proper treatment of the $35,000 loss?
Capital gains are taxed at the same rate as ordinary income for a corporation. However, capital losses can only be used to offset capital gains. Any amount not utilized in the year of generation can either be carried back 3 years to offset prior capital gains or carried forward for 5 years.
*Arin remember, the 3,000 rule is ONLY for individuals.
Quigley, Roberk, and Storm form a corporation. Quigley exchanges $25,000 of legal fees for 30 shares of stock. Roberk exchanges land with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Storm exchanges $10,000 cash for 10 shares of stock. What amount of income should each
Quigley - 25,000
Roberk - 90,000
Storm - 0
Rule: IRC Section 351 controls the taxation of transfers to controlled corporations. No gain or loss is recognized to the transferors/shareholders on the property transferred if certain conditions are satisfied.
Choice "a" is correct. The transaction in this question does not satisfy the conditions of Section 351, and gain or loss can be recognized for each of the shareholders. For Section 351 to apply, the shareholders contributing property, including cash, must own, immediately after the transaction, at least 80% of the voting stock and at least 80% of the nonvoting stock of the corporation. A shareholder who contributes only services (Quigley in this question) is not counted as part of the control group. Thus, only Roberk and Storm are counted, and they together own only 70 shares out of the 100 shares (70%). The $25,000 of legal fees to Quigley is compensation for services rendered and is recognized as income by Quigley. A gain of $90,000 (the fair market value of the land of $100,000 - its adjusted basis of $10,000) is recognized to Roberk. Storm bought shares for cash and has no gain.
Which of the following entities must pay taxes for federal income tax purposes?
A C corporation (a regular corporation) must pay federal income tax. A C corporation is not a pass-through entity like the other entities listed.
Quail, Inc. manufactures consumer products and sells them to distributors. Quail advertises its products to increase sales and enhance the value of its trade name. What is the appropriate tax treatment for the advertising costs?
Rule: IRC Section 162 controls the deductibility of trade or business expenses. There is nothing special about advertising costs, except for certain foreign advertising costs. Any business expenses have to be reasonable and related to the taxpayer's business activities.
Advertising costs which are in the nature of selling expenses (which these expenses appear to be) are deductible if they are reasonable and are related to the taxpayer's business activities.
On June 30, Gold and Silver are calendar-year C corporations. The corporations have merged, with Gold as a subsidiary of Silver. Silver owns 85% of Gold's voting stock and fair market value (FMV). Which of the following tax return filings would be appropriate for the two companies?
Rule: IRC Sections 1501 and 1504 allow certain combinations of corporations (an affiliated group) to file a consolidated income tax return. An affiliated group is one or more chains of corporations connected through stock ownership with a common parent if that parent directly owns stock possessing at least 80% of the total voting power of at least one of the other corporations and having a value equal to at least 80% of the total value of the stock of the corporation.
Ace Corp. and Bate Corp. combine in a qualifying reorganization and form Carr Corp., the only surviving corporation. This reorganization is tax-free to the:
Rule: A qualifying corporate reorganization is tax-free to all corporations involved and to all their shareholders
On January 1, Fast, Inc. entered into a covenant not to compete with Swift, Inc. for a period of five years, with an option by Swift to extend it to seven years. What is the amortization period of the covenant for tax purposes?
Intangibles such as goodwill, licenses, franchises, trademarks and covenants not to compete may be amortized using the straight line basis over a period of 15 years, starting with the month of acquisition. Note, the difference for GAAP purposes: Intangible assets with indefinite lives are subject only to an impairment test, and intangible assets with finite lives are amortized over those lives and also subject to an impairment test.
In calculating the tax of a corporation for a short period, which of the following processes is correct?
Corporations are required to pay estimated taxes on the fifteenth day of the fourth, sixth, ninth, and twelfth months of their tax year. One-fourth of the estimated tax is due with each payment. Unequal quarterly payments may be made using the annualized income method.
Simon, a C corporation, had a deficit in accumulated earnings and profits of $50,000 at the beginning of the year and had current earnings and profits of $10,000. At year end, Simon paid a dividend of $15,000 to its sole shareholder. What amount of the dividend is reported as income?
Dividends are a distribution of property by a corporation out of its earnings and profits (E&P). Dividends come from current E&P and then from accumulated E&P. If current E&P is positive and accumulated E&P is negative, distributions are dividends only to the extent of current E&P. Any excess distribution above E&P reduces the shareholders basis in the stock, if any. If the shareholder has no basis, then the excess distribution is reported as a capital gain.
Therefore, it would be 10,000
For year 2, Quest Corp., an accrual-basis calendar-year C corporation, had an $8,000 unexpired charitable contribution carryover from year 1. Quest's year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, year 2, Quest's board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its year 2 income tax return?
C corporations are allowed a maximum charitable contribution deduction of 10% of taxable income computed before the following deductions:
Any charitable contribution,
The dividend received deduction,
Any net operating loss carryback,
Any net capital loss carryback, and
The U.S. production activities deduction.
In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Code Sec. 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Code Sec. 1244 stock in MMM Corp., another qualifying small business corporation. What is the maximum amount of loss that Fitz can deduct for the current year?
The stock in each corporation is a capital asset. The general rule is that a loss on the sale or exchange of a capital asset will be a capital loss (either a short-term capital loss or a long-term capital loss, depending upon the holding period). However, a special rule applies to "section 1244 small business stock." When a corporation's stock is sold or becomes worthless, an original stockholder can be treated as having an ordinary loss (fully deductible), instead of a capital loss, up to $50,000 ($100,000 if married filing jointly) for the year. Any loss(es) in excess of this amount is (are) a capital loss.
In this question, the taxpayer, who is not married, during the year has $68,000 of losses from the sale of section 1244 small business stock. As such, the taxpayer will treat as an ordinary loss $50,000 of the total loss; the taxpayer will treat as a capital loss the remaining $18,000 of the total loss.
A corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory. Which of the following statements is accurate regarding the use of the LIFO method?
The LIFO method can be used for tax purposes only if the LIFO method is used for financial statement purposes.
Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Section 1244 stock loss made up three-fourths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Code Section 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Code Section 1244 loss that Summer can deduct for the current year?
The maximum Section 1244 loss that can be deducted by a single taxpayer in any year is $50,000. All losses designated as Section 1244 losses are ordinary by definition. Note that most of the information in this question is not required to solve for the correct answer.
The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?
Generally, this is a nontaxable transaction. However, the liabilities assumed by the corporation of $12,000 are in excess of the basis of the property contributed of $6,000. The amount of the excess, which is $6,000 ($12,000 − $6,000) is a gain that must be recognized. Note that the fact that this is an S Corporation does not affect the answer. The rules for the formation of an S Corporation are the same as for a C Corporation.
The selection of an accounting method for tax purposes by a newly incorporated C corporation:
The selection of an accounting method for tax purposes is made on the initial tax return by using the chosen method.
In which of the following circumstances does the three-year statute of limitations on additional tax assessments apply?
With respect to a timely filed return, the general rule is that the IRS can assess additional tax within three years from the later of the return's due date (plus extensions, if any) or the date the return was filed. A taxpayer's inadvertently overstating deductions in an amount equal to 15% of gross income will not trigger any of the exceptions to the general rule.
Which of the following corporations would be taxed as a personal service corporation?
A personal service corporation (PSC) is primarily involved in the performance of one of the following fields: accounting, law, consulting, engineering, architecture, health, and actuarial science.
A personal services corporation may deduct payments made to owner-employees only in the year in which the:
A personal services corporation may only deduct payments to an employee-owner in the year it is included in income by the recipient.
Parent company X and subsidiary company Y file a calendar year consolidated federal income tax return. Company X reported a $120,000 tax loss, which included a $10,000 dividend from Y. Company Y reported $140,000 of taxable income, which included $30,000 of dividends received from less than 20% owned stock investments. Neither company took into account any applicable dividends received deduction. What is the group's consolidated tax loss for the year?
The facts are given before the consideration of any dividend-received deduction (DRD). Y can exclude $21,000 (70%) of the $30,000 dividend. This reduces Y’s income to $119,000 ($140,000 – $21,000 = $119,000). Because X and Y are a consolidated entity, X should not include the $10,000 dividend from Y in its income. This brings X’s loss to $130,000 [($120,000) – $10,000 = ($130,000)]. The consolidated loss for the year is then X’s $130,000 loss netted with Y’s $119,000 income, for a net loss of $11,000.
Which of the following statements is correct regarding the taxes payable under the Federal Unemployment Tax Act (FUTA)?
Credits for this tax are allowed to employers for certain state unemployment taxes paid by the employer.
Borasco Corp. owns land with a fair market value of $200,000. Borasco purchased the land 10 years ago for $65,000 and owes a liability of $50,000 as of August 2 of the current year. Alvo Corp. owns 100 percent of Borasco. Borasco is completely liquidated on August 2 of the current year, according to a plan adopted on June 18 of the current year. As a result, the land is transferred to Alvo in complete cancellation of Borasco's stock. What basis does Alvo have in the land it receives?
This is the liquidation of a subsidiary by a parent. No gain or loss is recognized in this type of liquidation, and the parent assumes the carryover bass of all assets and liabilities of the subsidiary. Therefore, the basis of the land is the carryover basis of $65,000.
In which of the following situations will a controlled foreign corporation located in Ireland be deemed to have subpart F income?
Subpart F income is taxable income includable by a U.S. taxpayer from a controlled foreign corporation. It generally includes income that has no economic connection to the country of origin. This choice describes subpart F income, because the contract is entered into by the U.S. parent and has no economic connection to Ireland.
Which of the following statements correctly represents the tax effect of the liquidation of an 80% or more owned subsidiary?
In a tax-free liquidation of an 80% or more owned subsidiary, the parent corporation takes a carryover basis in the assets it receives from the subsidiary.
Which expense listed below would be subject to the Uniform Capitalization Rules of Code Sec. 263A?
Quality control expenditures are subject to the Uniform Capitalization Rules of Code Sec. 263A.
Which of the following items reported on a C corporation's tax return would not require an adjustment to taxable income in computing current earnings and profits?
Earnings and profits are computed using straight-line depreciation. Thus, if a corporation is using straight-line depreciation in computing taxable income, no adjustment would have to be made in reconciling taxable income to earnings and profits.
Filler-Up is an accrual-basis calendar-year C corporation. Filler-Up uses an allowance method for accounting for bad debts. The allowance for bad debts was $20,000 at the beginning of the year and $30,000 at the end of the year. During the year, Filler-Up wrote off $5,000 of uncollectible receivables and accrued an additional $15,000 of expenses for accounts estimated to be uncollectible. What is the Schedule M-1 adjustment on Filler-Up's federal income tax return?
For tax purposes, Filler-Up may only deduct the amount of uncollectible receivables actually written off during the year, which in this case was $5,000. For financial accounting purposes, Filler-Up recorded $15,000 of expenses for accounts estimated to be uncollectible. So, the amount recorded as an expense for financial accounting purposes was $10,000 more than that allowed to be deducted for tax purposes. On the Schedule M-1 reconciliation, that $10,000 difference must be added back in reconciling financial accounting income to taxable income.
The personal holding company income test requires the company's income for a given taxable year to be at least:
There are two criteria in determining whether a company is a personal holding company: a) more than 50% of the stock must be owned by 5 or fewer individuals, and b) at least 60% of the adjusted ordinary gross income must consist of certain investment income (e.g., interest, dividends, etc.). So, the stock ownership test is 50% while the income test is 60%.
A married individual invested in Section 1244 small business stock in year 1. In year 7, the individual sold the stock at a loss of $157,000. There were no other stock transactions during year 7. If the taxpayer files a joint return, how much loss can the taxpayer deduct in year 7 against ordinary income?
Married taxpayers may deduct $100,000 of loss on Section 1244 stock as an ordinary loss. Any remaining loss is treated as a capital loss subject to the capital loss limitation rules, under which married filing joint taxpayers may deduct up to $3,000 of capital losses against ordinary income. Therefore, of the $157,000 loss, 100,000 is deductible as an ordinary loss and another $3,000, although considered a capital loss, may be deducted against ordinary income. Total loss deductible in year 7 is therefore $103,000.
*note that it is 50,000 for single
In a dividend situation, assets are transferred from the corporation using the?
fair market value of the assets at the date of distribution.
If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder:
If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder decreases the shareholder's basis for the stock. The distribution is nontaxable to the extent of the shareholder's basis.
Which of the following conditions will prevent a corporation from qualifying as an S Corporation?
The corporation has both common and preferred stock.
An S corporation can only have one class of stock outstanding. Common and preferred stock would constitute two classes of stock.
What amount of net business income should Boles report on its Form 1120S, U.S. Income Tax Return for an S corporation, Schedule K?
An S corporation reports both separately stated and non-separately stated (net business) items of income. The dividend income is a separately stated item and is not included in the calculation of net business income.
Which of the following entities may adopt any tax year end?
C corporations may adopt any year end, provided the year end is approved by the IRS
Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan's basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?
Like partnerships, S corporations report both separately and non-separately stated items of income and/or loss. Allocations to shareholders are made on a per-share, per-day basis in accordance with ownership percentage. Shareholders in an S corporation must include on their personal income tax return their distributive share of each separate "pass-through" item. Shareholders are taxed on these items, regardless of whether or not these items have been distributed to them during the year.
therefore, 200,000 * 40% = 80,000
Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. Magic's corporate tax rate was 35%. What was Magic's tax liability as a result of the sale?
A distribution or a sale of an S corporation's assets may result in a tax on any "built-in gain" at the corporate level. An unrealized "built-in gain" results when the following two conditions occur: (1) a C corporation elects S corporation status, and (2) the fair market value of the corporate assets exceeds the adjusted basis of corporate assets on the election date. The two conditions exist in the facts of the question. The net unrealized built-in gain is the excess of the fair market value of corporate assets over the adjusted basis of corporate assets at the beginning of the year in which the S corporation status is elected.
FMV: 85,000 - Adj Basis: 40,000 = 45,000
45,000 * 35% tax rate = 15,750
Note: The gain to the corporation is a total of $55,000 ($95,000 − $40,000). An S corporation generally does not pay tax at the corporate level; however, in this case, there was built-in gain of $45,000 upon the election to become an S corporation, so the related C corporation tax must be paid upon the sale of the asset.
Rules: The rules for determining a shareholder's basis in S corporation stock follow:
+ Income items (separately and non-separately stated items)
+ Additional shareholder investments in corporation stock
- Distributions to shareholders
- Loss or expense items
= Ending basis
Which of the following can be an advantage of a limited liability company over an S corporation?
Appreciated property can be distributed tax-free to an owner
Rule: IRC Section 311 controls the taxability of corporate distributions. An S corporation (and a C corporation) recognizes a gain on any distribution of appreciated property (a property dividend) in the same manner as if the asset had been sold to the shareholder at its fair market value.
Absent an election to close the books, the allocation of nonseparately stated income or loss for an S corporation shareholder that changed his ownership interest during the year is computed based on which of the following ownership percentages?
Allocations to shareholders are made on a per-share, per-day basis.
An S corporation is subject to the "built-in gains" tax (as well as the "LIFO Recapture" tax and the "Passive Investment Income" tax) only if?
the S corporation had previously been a C corporation. In this question, the corporation elected "S" status on the day or incorporation; hence, the corporation was never a C corporation. So, the "built-in gains" tax doesn't apply to the facts presented.
Which of the following items must be separately stated on Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K-1?
Gain or loss from the S corporation's sale of collectibles is separately reported on the Schedule K-1 of IRS form 1120S
Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson's individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson's individual return?
S Corporations work in a similar fashion to partnerships. The income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000.
Which of the following increases the accumulated adjustments account of an S corporation?
The accumulated adjustments account (AAA) is increased by separately stated and non-separately stated income and gains (except tax-exempt income and certain life insurance proceeds).
Rule: Unrelated business income is:
Derived from an activity that constitutes a trade or business,
Is regularly carried on, and
Is not substantially related to the organization's tax-exempt purpose.
Note: An unrelated business does not include any activity where all the work is performed for the organization by unpaid volunteers. Thus, using unpaid volunteers makes that business or activity "related."