Corporate Tax (C&S corps) Flashcards
For the year ended December 31, 2012, Marshall Corporation reported book income, before federal income taxes, of $200,000. The following items were included in the determination of income before federal income taxes.
Provision for state corporate income tax $15,000
Interest earned on United States obligation 20,000
Net long-term capital loss from the sale of marketable securities 10,000
Interest paid on loan to purchase United States obligations 12,000
Marshall’s taxable income on its 2012 federal income tax return would be
$192,000
$193,000
$210,000
$225,000
C. A corporation’s capital loss can only be used to offset capital gains. The only reconciling item is the NLTCL of $10,000 which was deducted per books, but is not deductible in computing taxable income. Taxable income is $200,000 + $10,000 = $210,000.
Aztec, a C corporation, distributed an asset to Burn, a shareholder. The asset had a fair market value of $30,000 and was subject to a $40,000 liability, assumed by Burn. The asset had an adjusted basis of $25,000. What amount of gain must Aztec recognize? $0 $ 5,000 $10,000 $15,000
D. The requirement is to determine the amount of gain that Aztec corporation must recognize on the distribution of property and liability to a shareholder. Generally, a corporation must recognize gain on the distribution of appreciated property to a shareholder. The gain is measured by treating the corporation as if it had sold the property to the shareholder for fair market value. However, if there is a liability on the property that is assumed by the shareholder and the amount of liability exceeds the property’s fair market value, then the amount of liability is used to measure the gain. Here, Aztec’s recognized gain would be the $40,000 liability — $25,000 basis = $15,000.
The distributing corporation recognizes gain on the distribution of appreciated property as if such property were sold for its FMV. However, no loss can be recognized on the nonliquidating distribution of property to shareholders.
EXAMPLE: A corporation distributes property with a FMV of $10,000 and a basis of $3,000 to a shareholder. The corporation recognizes a gain of $10,000 – $3,000 = $7,000.
(1) If the distributed property is subject to a liability (or if the distributee assumes a liability) and the FMV of the distributed property is less than the amount of liability, then the gain is the difference between the amount of liability and the property’s basis.
EXAMPLE: A corporation distributes property with a FMV of $10,000 and a basis of $3,000 to a shareholder, who assumes a liability of $12,000 on the property. The corporation recognizes a gain of $12,000 – $3,000 = $9,000.
(2) The type of gain recognized (e.g., ordinary, Sec. 1231, capital) depends on the nature of the property distributed (e.g., recapture rules may apply).
Tau Corp. which has been operating since 2008, has an October 31 year-end, which coincides with its natural business year. On May 15, 2012, Tau filed the required form to elect S corporation status. All of Tau’s stockholders consented to the election, and all other requirements were met. The earliest date that Tau can be recognized as an S corporation is November 1, 2011. May 15, 2012. November 1, 2012. January 1, 2013.
C. A subchapter S election that is filed on or before the 15th day of the third month of a corporation’s taxable year is generally effective as of the beginning of the taxable year in which filed. If the S election is filed after the 15th day of the third month, the election is generally effective as of the first day of the corporation’s next taxable year. Tau Corp. uses a fiscal year which begins November 1 and ends October 31 of each year. Here, its S election was filed on May 15, 2012, which is beyond the 15th day of the third month of its taxable year (January 15th). Therefore, Tau Corp.’s Subchapter S election will become effective as of the first day of its next taxable year, November 1, 2012.
For the year ended December 31, 2012, Atkinson, Inc. had gross business income of $160,000 and dividend income of $100,000 from unaffiliated domestic corporations that are 20%-owned. Business deductions for 2012 amounted to $170,000. What is Atkinson’s dividends-received deduction for 2012? $0 $72,000 $80,000 $90,000
B. The DRD (normally 80% of dividends from unaffiliated corporations 20%-owned) may be limited to 80% of TI before the DRD, except when the full 80% DRD creates or increases a net operating loss.
Gross business income $ 160,000 Dividend income 100,000 $ 260,000 Less business deductions (170,000) Taxable income before DRD $90,000 DRD ($90,000 × 80%) (72,000) Taxable income $18,000
Since the full deduction (80% × $100,000 = $80,000) would not create a NOL, the limitation applies.
Which one of the following statements concerning the eligibility requirements for S corporations is not correct?
A partnership is not permitted to be a shareholder of an S corporation.
An S corporation is permitted to own 75% of the stock of another S corporation.
An S corporation is permitted to be a partner in a partnership.
An S corporation is permitted to own 100% of the stock of a C corporation.
B. The eligibility requirements restrict S corporation shareholders to individuals (other than nonresident aliens), estates, and certain trusts. Partnerships and C corporations are not permitted to own stock in an S corporation. However, an S corporation is permitted to be a partner in a partnership, and may own any percentage of stock of a C corporation, as well as own 100% of the stock of a qualified subchapter S subsidiary.
Eligibility requirements for S corporation status
a. Domestic corporation
b. An S corporation may own 80% or more of the stock of a C corporation, and 100% of the stock of a qualified subchapter S subsidiary.
(1) An S corporation cannot file a consolidated return with its affiliated C corporations.
(2) A qualified subchapter S subsidiary (QSSS) is any domestic corporation that qualifies as an S corporation and is 100% owned by an S corporation parent, which elects to treat it as a QSSS. A QSSS is not treated as a separate corporation and all of its assets, liabilities, and items of income, deduction, and credit are treated as belonging to the parent S corporation.
c. Only one class of stock issued and outstanding. A corporation will not be treated as having more than one class of stock solely because of differences in voting rights among the shares of common stock (i.e., both voting and nonvoting common stock may be outstanding).
d. Shareholders must be individuals, estates, or trusts created by will (only for a two-year period), voting trusts, an Electing Small Business Trust (ESBT), a Qualified Subchapter S Trust (QSST), or a trust all of which is treated as owned by an individual who is a citizen or resident of the US (i.e., Subpart E trust).
(1) A QSST and a Subpart E trust may continue to be a shareholder for two years beginning with the date of death of the deemed owner.
(2) Code Sec. 401(a) qualified retirement plan trusts and Code Sec. 501(c) charitable organizations that are exempt from tax under Code Sec. 501(a) are eligible to be shareholders of an S corporation. The S corporation’s items of income and deduction will flow through to the tax-exempt shareholder as unrelated business taxable income (UBIT).
e. No nonresident alien shareholders
f. Number of shareholders limited to 100
(1) Husband and wife (and their estates) are counted as one shareholder.
(2) Each beneficiary of a voting trust is considered a shareholder.
(3) If a trust is treated as owned by an individual, that individual (not the trust) is treated as the shareholder.
(4) All members of a family can elect to be treated as one shareholder. The election may be made by any family member and will remain in effect until terminated. Members of a family include the common ancestor, the lineal descendants of the common ancestor, and the spouses (or former spouses) of the common ancestor and lineal descendants. The common ancestor cannot be more than six generations removed from the youngest generation of shareholders at the time the S election is made.
Some of the items which must be separately passed through to retain their identity include
A shareholder of an S corporation must separately take into account (for the shareholder’s taxable year in which the taxable year of the S corporation ends) (1) the shareholder’s pro rata share of the corporation’s items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the tax liability of any shareholder, plus (2) the shareholder’s pro rata share of all remaining items which are netted together into “ordinary income (loss) from trade or business activity.”
a. Some of the items which must be separately passed through to retain their identity include
(1) Net long-term capital gain (loss)
(2) Net short-term capital gain (loss)
(3) Net gain (loss) from Sec. 1231 casualty or theft
(4) Net gain (loss) from other Sec. 1231 transactions
(5) Tax-exempt interest
(6) Charitable contributions
(7) Foreign income taxes
(8) Depletion
(9) Investment interest expense
(10) Dividend, interest, and royalty income
(11) Net income (loss) from real estate activity
(12) Net income (loss) from other rental activity
Lark Corp. and its wholly owned subsidiary, Day Corp., both operated on a calendar year. In January 2012 Day adopted a plan of complete liquidation. Two months later, Day paid all of its liabilities and distributed its remaining assets to Lark. These assets consisted of the following:
Cash $50,000 Land (at cost) 10,000 Fair market value of the land was $30,000. Upon distribution of Day’s assets to Lark, all of Day’s capital stock was cancelled. Lark’s basis for the Day stock was $7,000. Lark’s recognized gain in 2012 on receipt of Day’s assets in liquidation was $0 $50,000 $53,000 $73,000
A. No gain or loss will be recognized by a parent corporation (Lark Corp.) on the receipt of property in complete liquidation of an 80% or more owned subsidiary (Day Corp.).
Liquidation of subsidiary
(1) No gain or loss is recognized to a parent corporation under Sec. 332 on the receipt of property in complete liquidation of an 80% or more owned subsidiary. The subsidiary’s basis for its assets along with all tax accounting attributes (e.g., earnings and profits, NOL and charitable contribution carryforwards) will carry over to the parent corporation.
(2) No gain or loss is recognized to a subsidiary corporation on the distribution of property to its parent if Sec. 332 applies to the parent corporation.
(a) If the subsidiary has debt outstanding to the parent, nonrecognition also applies to property distributed in satisfaction of the debt.
(b) Gain (but not loss) is recognized on the distribution of property to minority (20% or less) shareholders.
Prime Corp., which had earnings and profits of $250,000, made a nonliquidating distribution of property to its shareholders as a dividend. This property, which had an adjusted basis of $25,000 and a fair market value of $10,000 at date of distribution, did not constitute assets used in the active conduct of Prime’s business. How much loss did Prime recognize as a result of this distribution? $0 $10,000 $15,000 $25,000
A. Although a gain would be recognized if the property had been appreciated, no loss can be recognized on nonliquidating corporate distributions to shareholders.
On June 30, 2012, Ral Corporation had retained earnings of $100,000. On that date, it sold a plot of land to a noncorporate stockholder for $50,000. Ral had paid $40,000 for the land in 2008, and it had a fair market value of $80,000 when the stockholder bought it. The amount of dividend income taxable to the stockholder in 2012 is $0 $10,000 $20,000 $30,000
d. If a corporation sells property to a shareholder for less than fair market value, the shareholder is considered to have received a constructive dividend to the extent of the difference between the fair market value of the property and the price paid. Thus, the shareholder’s dividend income is $30,000 ($80,000 FMV — $50,000 purchase price).
In 2012, Daly Corp. had the following income:
Profit from operations $100,000
Dividends from a less than 20%-owned taxable domestic corporation 1,000
In Daly’s 2012 taxable income, how much should be included for the dividends-received?
$0
$ 300
$ 700
$1,000
b. Since the dividends were received from a less than 20%-owned taxable domestic corporation, they are eligible for a 70% dividends-received deduction. Thus, the amount of dividends to be included in taxable income is $1,000 — (70% x $1,000) = $300.
On July 1, 2012, in connection with a recapitalization of Yorktown Corporation, Robert Moore exchanged 1,000 shares of stock which cost him $95,000 for 1,000 shares of new stock worth $108,000 and bonds in the principal amount of $10,000 with a fair market value of $10,500. What is the amount of Moore’s recognized gain during 2012? $0 $10,500 $23,000 $23,500
b. When boot is received in a reorganization, gain must be recognized based on the fair market value of the boot received.
Dole, the sole owner of Enson Corp., transferred a building to Enson. The building had an adjusted tax basis of $35,000 and a fair market value of $100,000. In exchange for the building, Dole received $40,000 cash and Enson common stock with a fair market value of $60,000. What amount of gain did Dole recognize? $0 $ 5,000 $40,000 $65,000
C. The cash is treated as other property (boot) received.
No gain or loss is recognized if property is transferred to a corporation solely in exchange for stock if the transferor is in control of the corporation immediately after the exchange. If consideration other than stock is received, a realized gain must be recognized to the extent of the boot received. Here, Dole realized a gain of ($40,000 + $60,000 stock) — $35,000 basis = $65,000 on the transfer of the building, and must recognize the gain to the extent of the $40,000 of cash received.
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 itsshareholders. What amount should the shareholders report as dividend income? $20,000 $60,000 $70,000 $80,000
C. Dividends are limited to a corporation’s earnings and profits.
Amounts distributed to shareholders are dividends to the extent paid out of current or accumulated earnings and profits. Here the $20,000 cash and $60,000 property distribution will be a dividend to the extent of the $70,000 of accumulated earnings and profits.
- Corporate distributions of property to shareholders on their stock are subject to a three-step treatment.
(a) Dividend—To be included in gross income
(b) Return of stock basis—Nontaxable and reduces shareholder’s basis for stock
(c) Gain—To extent distribution exceeds shareholder’s stock basis
2. The amount of distribution to a shareholder is the cash plus the FMV of other property received, reduced by liabilities assumed.
3. A shareholder’s tax basis for distributed property is the property’s FMV at date of distribution (not reduced by liabilities).
4. A dividend is a distribution of property by a corporation to its shareholders out of
(a) Earnings and profits of the current taxable year (CEP), computed at the end of the year, without regard to the amount of earnings and profits at the date of distribution; or,
(b) Earnings and profits accumulated after February 28, 1913 (AEP).
EXAMPLE: Corporation X has earnings and profits of $6,000 and makes a $10,000 distribution to its sole shareholder, A, who has a stock basis of $3,000. The $10,000 distribution to A will be treated as a dividend of $6,000, a nontaxable return of stock basis of $3,000, and a capital gain of $1,000.
(1) CEP are first allocated to distributions on preferred stock, then to common stock.
(2) CEP are allocated pro rata to multiple distributions on the same class of stock if distributions exceed CEP.
(3) AEP are allocated to distributions in the order in which the distributions are made.
EXAMPLE: A corporation has both preferred and common stock outstanding and no accumulated earnings and profits. For the current year, it has current earnings and profits of $15,000, and during the year distributes cash of $10,000 to its preferred shareholders, and $10,000 to its common shareholders. The $15,000 of CEP are first allocated to the distribution to the preferred shareholders, making all $10,000 taxable as a dividend. The remaining $5,000 of CEP is then allocated to the $10,000 distribution to common shareholders, making only $5,000 taxable as a dividend.
EXAMPLE: A corporation has accumulated earnings and profits of $4,000 and current earnings and profits of $20,000. During the current year its distributes $15,000 to its common shareholders in March, and another $15,000 to its common shareholders in October. The $20,000 of CEP are allocated pro rata to the two distributions, making $10,000 of the March distribution and $10,000 of the October distribution taxable as a dividend. The AEP of $4,000 are then allocated to the March distribution. As a result, $14,000 of the March distribution and $10,000 of the October distribution are taxable as a dividend.
Commerce Corp. elects S corporation status as of the beginning of year 2013. At the time of Commerce’s election, it held a machine with a basis of $20,000 and a fair market value of $30,000. In March of 2013, Commerce sells the machine for $35,000. What amount of Commerce’s gain would be subject to the built-in gains tax? $0 $ 5,000 $10,000 $15,000
C. Built-in gains tax applies to the amount of unrealized built-in gain that is recognized during the year.
A C corporation that makes an S election is subject to a built-in gains tax to the extent that its recognized gain is attributable to a net unrealized built-in gain as of the first day of its S status. Here, assuming that Commerce Corp. was a C corporation prior to the year 2013, its recognized gain of $35,000 — $20,000 = $15,000 from the sale of the machine during March of 2013 will be subject to a built-in gains tax to the extent of the machine’s unrealized built-in gain of $30,000 — $20,000 = $10,000 as of the beginning of 2013.
Chicago Corp., a calendar-year C corporation, had accumulated earnings and profits of $100,000 as of January 1, 2012, and had a deficit in its current earnings and profits for the entire 2012 tax year in the amount of $140,000. Chicago Corp. distributed $30,000 cash to its shareholders on December 31, 2012. What would be the balance of Chicago Corp.’s accumulated earnings and profits as of January 1, 2013? $0 $(30,000) $(40,000) $(70,000)
C. Distributions only pay out a corporation’s positive AEP and neither create nor increase a deficit in AEP.
The AEP beginning balance of $100,000 would be reduced by the 2012 deficit of $140,000, resulting in a deficit of $40,000. Since distributions only pay out a corporation’s positive AEP, the AEP deficit of $40,000 is not affected by the $30,000 distributed to shareholders.
