Ch 11: Corporate Taxpayer

Question 1

What are the legal characteristics of a corporation?

Answer 1

Legal Characteristics of Corporations

• A corporation is an entity formed under state law
to conduct a business enterprise.

• Ownership of the entity is represented by the
outstanding shares of corporate stock.

• Closely held corporations are privately owned by a
relatively small number of shareholders.

• Publicly held corporations are traded on
established securities markets such as NYSE or
Nasdaq.

Question 2

What is the main legal characteristic of liability of a limited liability shareholders?

Answer 2

An important legal characteristic is the limited
liability of shareholders.
• The rights of corporate creditors and other claimants
extend only to corporate assets and not the personal
assets of the corporate owners

Question 3

What distinguishes management of corporations versus partnerships?

Answer 3

Unlike sole proprietorships or general partnerships, publicly held corporations are not directly managed by the owners.

• Managerial decisions are made by a board of directors appointed by and acting on behalf of the shareholders and officers who hired the board.

Question 4

—————————- TRUE or FALSE —————————-
For various legal, financial and managerial
reasons, a single corporate entity may not be the
best organizational form for multifaceted
enterprises.

Answer 4

True

Question 5

What are nonprofit organizations?

Answer 5

Nonprofit corporations are formed to conduct
philanthropic, rather than profit-motivated,
activities, and are, as a general rule, nontaxable
entities.

Question 6

How much of a deduction can corporations receive from charitable donations?

Answer 6

Corporations can deduct charitable contributions
up to 10% of taxable income before charitable
deductions and before dividends-received
deduction

Question 7

What is the “Dividends Deduction”?

Answer 7

Corporations receiving dividends from other taxable

domestic corporations are entitled to a deduction

Question 8

————-Dividends-Received Deduction Example—-

Aragorn Corporation owns 35% of Ent
Corporation and 88% of Legolas Corporation.

————————- QUESTION ———————-
If Aragorn receives dividends of $10,000 from Ent
and $15,000 from Legolas, what is Aragorn’s
DRD?

------------------------ TABLE -------------------------------
Ownership % Deduction
% < 20% of stock 50% DRD
20% < % < 80% 65% DRD
80% < %  100% DRD

Answer 8

$21,500 (($10,000 x 65%) + ($15,000 x 100%))

Question 9

————BOOK INCOME VS TAXABLE INCOME———

What document reconciles book income and taxable income?

Answer 9

Schedules M-1 and M-3 reconcile book income

to taxable income.