Chapter 11 - The Corporate Taxpayer

Question 1

Define ACE Adjustment

Answer 1

An adjustment to regular taxable income in the computation of corporate AMTI. The adjustment equals 75% of the adjusted current earnings in excess of AMTI computed before the adjustment.

Question 2

Define Affiliated Group

Answer 2

A parent corporation and its 80% or more controlled subsidiaries.

Question 3

Define Alternative Minimum Tax

Answer 3

A second federal tax system parallel to the regular tax system. Congress enacted the AMT to ensure that every individual and corporation pays at least a minimal tax every year.

Question 4

Define Alternative Minimum Taxable Income

Answer 4

The tax based for the AMT: regular taxable income increased or decreased by AMT adjustments and increased by AMT tax preferences.

Question 5

Define AMT Adjustments

Answer 5

Increases or decreases to regular taxable income in the computation of AMTI.

Question 6

Define Buy-Sell Agreement

Answer 6

A binding agreement that restricts the conditions and terms under which shareholders may dispose of corporate stock.

Question 7

Define Centralized Management

Answer 7

A legal characteristic of the corporate form of business corporations are managed by a board of directors appointed by and acting on behalf of the shareholders.

Question 8

Define Closely Held Corporation

Answer 8

Corporations privately owned by a relatively small number of shareholders.

Question 9

Define Consolidated Tax Return

Answer 9

A single Form 1120 reporting the combined results of the operations of an affiliated group of corporations.

Question 10

Define Dividends-Received Deduction

Answer 10

A corporate deduction equal to a percentage of dividend income received from other taxable domestic corporations. The purpose of which is to mitigate “triple” taxation.

Question 11

Define Domestic Production Activities Deduction

Answer 11

A tax preference deduction for US manufacturers equal to a percentage of net income from a qualified domestic production activity.

Question 12

Define Free Transferability

Answer 12

A legal characteristic of the corporate form of business shareholders can buy and sell corporate stock with maximum convenience and minimal transaction costs.

Question 13

Define General Business Credit

Answer 13

The aggregate of numerous different tax credits available to business enterprises.

Question 14

Define Limited Liability

Answer 14

A legal characteristic of the corporate form of business: Corporate shareholders are not personally liable for the unpaid debts of the corporation.

Question 15

Define Minimum Tax Credit

Answer 15

AMT liability carried forward indefinitely as a credit against future regular tax liability.

Question 16

Define Nonprofit Corporation

Answer 16

A corporation formed for philanthropic purposes and, as a result, exempt from the federal income tax.

Question 17

Define Personal Service Corporation

Answer 17

Closely held corporations owned by individuals who perform services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting for the corporation’s clientele. Personal service corporations are subject to a flat 35% tax rate.

Question 18

Define Publicly Held Corporation

Answer 18

Corporation with outstanding stock traded on an established securities market.

Question 19

Define Rehabilitation Credit

Answer 19

A business credit equal to a percentage of the cost of rehabilitating commercial buildings placed in service before 1936 or certified historic structures.

Question 20

Define Surtax

Answer 20

In the corporate context, the extra 5% or 3% tax imposed to recoup the benefit of the progressive tax rates.

Question 21

Define Tax Credit

Answer 21

A direct reduction in tax liability.

Question 22

Define Tax Preferences

Answer 22

In the general context, provisions included in the federal tax law as incentives to encourage certain behaviors or as subsidies for certain activities; in AMT context, specific items added to regular income in the computation of AMTI.

Question 23

Define Tentative Minimum Tax

Answer 23

AMTI in excess of the exemption multiplied by the AMT rates. Any excess of tentative minimum tax over regular tax is the AMT for the year.

Question 24

Define Underpayment Penalty

Answer 24

The penalty imposed by the Internal Revenue Code on both individuals and corporations that fail to make required estimated payments on current tax on a timely basis.

Question 25

Define Unlimited Life

Answer 25

A legal characteristic of the corporate form of business: A corporation’s legal existence is not affected by changes in the identity of its shareholders.

Question 26

What are the four legal characteristics of a corporation?

Answer 26

• Limited liability of shareholders
• Unlimited life
• Free transferability
• Centralized management (elected by shareholder)

Question 27

What is the advantage of filing consolidated tax return?

Answer 27

losses and profits of affiliated members offset. Like financial accounting, intercompany transactions are eliminated.

Question 28

What is a Schedule M1 for?

Answer 28

It tells the IRS where your tax and book differences come from.