Chapter 3 Flashcards
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:
S corporations, Foreign corporations, 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.
