CORPORATE TAX

Question 1

When forming a corp, under what circumstances is no gain or loss recognized?

Answer 1

1. only property received from the corporation is stock
2. the stock is received in exchange for property or cash
3. the group transferring property and receiving stock owns at least 80% of voting power

Question 2

What is the control club

Answer 2

the people who contribute property or cash to form the corporation. cannot contribute services

Question 3

What if stock is received for services?

Answer 3

• FMV of stock is reported as wages

- The corp has a salary expense deduction

Question 4

Boot and recognizing a gain

Answer 4

Anything received other than stock

Gain is recognized as the lower of

• FMV of boot received OR
• realized gain (amount realized - ab)

Question 5

What happens when the liabilities assumed by the corporation is more than the total AB of property received?

Answer 5

Recognize a gain

= liabilities assumed - AB of received property

Question 6

Shareholder basis in stock received by corporation formula

Answer 6

= 
AB of property transferred to corp
\+ gain recognized 
- boot received
- liabilities assumed by the corp

Question 7

Corporate capital losses

Answer 7

Can only be used to offset gains

CB 3; CF 5

Question 8

Corporations are required to use accrual method unless:

Answer 8

1. average gross receipts are less than 5m
2. personal service corp
3. it is an S Corp

Question 9

M-1 adjustments for corporations

Answer 9

Non-deductibles (+) to BI (fed tax exp)
Taxable Income NOT in book (+) to BI
Deductions NOT expensed in book (-) from BI (DRD, sec 179)
Non-taxable income in book (-) from BI (muni interest, life insurance)

Question 10

Personal service corporation

Answer 10

corp whose principal activity is to perform personal services by employees who own substantially all of the stock

Question 11

Passive loss rules

Answer 11

• no limits for a corp
• closely held can offset corp income but not portfolio income
• PSC cannot offset against active or portfolio income

Question 12

DRD

Answer 12

Dividends Received Deduction

When corp owns stock in another company, and the other company pays dividends

Question 13

DRD ownership % for dividends

Answer 13

If company owns less than 20% = DRD * 70%
If company owns 20-79% = DRD * 80%
If company owns 80-more = DRD * 100%

If the company’s taxable income is less than total DRD, can only deduct up to taxable income amount

Question 14

Charitable Contribution Rules if Inventory is contributed

Answer 14

Lower of
AB of property + 50% (FMV-AB)
OR
AB * 2

Question 15

Deduction for charitable contributions

Answer 15

limited to 10% of taxable income before special deductions

CF 10 years only; No CB

Question 16

Organizational costs that can be deducted

Answer 16

accounting services, organizational meetings of directors and shareholders, fees paid to incorporate, legal fees, temporary director fees

Question 17

Organizational and startup cost rules

Answer 17

$5,000 can be deducted from taxable income; but reduced by any amount above $50,000

The rest must be capitalized over 180 months (15yrs)

Stock issuance costs are “syndication” NOT deductible

Question 18

Domestic Production Deduction

Answer 18

9% of the lower of :

• qualified production activity income OR
• taxable income

Question 19

Qualified production activity income formula

Answer 19

Gross Receipts

• COGS
• Direct fees, allocable to the income, including wages
• prorated share of indirect expenses

Question 20

AMT Exemption rule

Answer 20

Average annual gross receipts do not exceed $7.5 million
First year is automatically exempt and first 3 years annual average GR test is $5m
Once it failed once it applies in all future years

Question 21

AMT Formula with Exemption

Answer 21

40,000 - [25%*(AMTI - 150,000)]

Question 22

When tentative minimum tax is more than regular tax, you do what?

Answer 22

Add it to the regular tax = total tax liability
If also PHC tax, also add to it

Gives you total regular tax and tentative
Take difference and add difference to the regular

Question 23

Accumulated earnings tax

Answer 23

penalty when corp accumulates earnings and profits for the purpose of avoiding tax for its shareholders = 20% of accumulated taxable income

Any DRD is added back to income

Question 24

Accumulated earnings credit

Answer 24

amount that can be accumulated for reasonable business needs

the greater of:

• amount of earnings needed OR
• 250,000 (150,000 for nonmanuf business) less than accumulated earnings and profits at the end of the preceding year

Question 25

PHC standards

Answer 25

- own more than 50% of stock by 5 or fewer individuals | - substantial portion 60% or more must be passive income (dividends, interest, rents, royalties)

Question 26

Affiliate Group

Answer 26

C Corp owns at least 80% of voting power of another C - or multiple C Corps and can file consolidated return S Corp, foreign and insurance co. is NOT allowed to be a member

Question 27

How are dividends and gains/losses treated for affiliated groups

Answer 27

Dividends are eliminated | G/L are not recognized until sold to an outside party

Question 28

General rule for corporate distributions

Answer 28

depends on accumulated earnings and profits if distributions are larger than AE&P the remaining is return of capital and NOT taxable except when corp gain on appreciated property is deferred and then distributed = taxable

Question 29

Difference between affiliated and controlled groups

Answer 29

``` Affiliated = every day of the year; 80% for voting AND value Control = by last day of the tax year; 80% for voting OR value ```

Question 30

Ordinary Distributions

Answer 30

1. taxable as dividend income to the extent of E&P 2. Excess is tax-free to extent of stock basis and decreases the basis 3. Any remaining is treated as capital gain

Question 31

Increases and Decreases to E&P

Answer 31

Increased by all income and decreased by all deductions/non-deductibles reduced by cash distribution and property using greater of FMV less liabilities or AB less liabilities

Question 32

When property distribution from corp to shareholder has appreciated value

Answer 32

Recognize a gain on the corp for the amount that the basis increased to FMV i.e. Basis = 5 FMV = 40 Gain on corp = 35 + beginning basis less cash distributions

Question 33

Redemption

Answer 33

When corp buys back stock from shareholder; qualifies as a sale/exchange treatment if ends up owning less than 80% or 50% of total combined voting power When corp is completely liquidated, distribution is capital gain NOT ordinary Partial liquidiation - non-corp shareholders = capital gain, corp shareholders = dividend

Question 34

Expenses related to corp distributions and to a liquidation

Answer 34

are deductible

Question 35

What is the usual result to the shareholders of a distribution in complete liquidation of a corp?

Answer 35

capital gain or loss

Question 36

If a subsidiary is liquidated under a parent, how is the G/L calculated?

Answer 36

In general nothing is recognized

Question 37

How is reorganization treated for tax purposes?

Answer 37

It is generally tax-free to the corporation and its shareholders

Question 38

How are losses recognized in liquidation

Answer 38

They may not be if: 1. property was contributed in the last 5 years OR 2. property is distributed to a related party

Question 39

General definition of corporate reorganization

Answer 39

where two corps (acquiring and target) choose to merge or consolidate, or one spins off part of its operations as a separate corp

Question 40

Summarize the types of reorganizations

Answer 40

1. Assets of target are exchanged for stock in acquiring (statutory merger - target is dissolved) 2. Stock for stock (acquiring must own 80% after this - otherwise recognize gain) 3. Acquiring gets 90% of net assets of target in exchange for voting stock. target distributes to shareholders 4. Divisive - one corp divides by transferring assets to a sub in exchange for stock in a sub

Question 41

Consequences to a Corp in reorganizaiton

Answer 41

1. gain or loss is generally not recognized 2. if acquiring transfers appreciated property to target a gain - but NO loss is recognized 3. if target distributes appreciated property to shareholders, gain but NO loss is recognized

Question 42

Nexus

Answer 42

taxing corporate income does not exist if limited to: 1. sale of tangible personal property that are shipped and accepted outside of the state 2. advertising 3. determining reorder needs of customers 4. furnishing auto to sales staff

Question 43

How are foreign currency exchange gains and losses treated?

Answer 43

If through investment/person = capital | If through course of business = ordinary

Question 44

Describe exempt organization

Answer 44

charities, labor orgs, social clubs, pension and profit-sharing trusts, political orgs and private foundations may be a corporation or a trust, and must apply for an receive exemption from taxation must not engage in political campaigns/activities

Question 45

Filing requirements for exempt organization

Answer 45

Must file if gross receipts are more than $50,000

Question 46

How is an exempt organization taxed?

Answer 46

based on its unrelated business income (UBI): 1. substantially all work is performed for no compensation 2. business carried on for the convenience of students or members 3. sale of merchandise received as contributions 4. in general, investment income 5. rents from real property

Question 47

Types of personal service corps

Answer 47

health, law, engineering, architectures, accounting and consulting

Question 48

When a corporate material event occurs, what is the filing that must be completed

Answer 48

8-K within 4 days of the event