Corporate Taxation

Question 1

True or False: Corporations can legitimately have multiple sets of books.

Answer 1

True.

Question 2

True or False: Substantially all large corporations use the accrual method of accounting.

Answer 2

True.

Question 3

True or False: NOLs can generally be carried back 2 years and forward 20 years.

Answer 3

True.

Question 4

True or False: If a corporation has a capital loss, they can only deduct the capital loss to the extent the corporation has capital gains.

Answer 4

False. Corporation’s capital gains are taxed at the same rate as ordinary income.

Question 5

True or False: A corporation is subject to the AMT to the extent their Tentative Minimum Tax exceeds their Regular Tax.

Answer 5

True.

Question 6

True or False: The entire AMT may be carried forward indefinitely.

Answer 6

True.

Question 7

True or False: The AMT rate is 20%.

Answer 7

True.

Question 8

True or False: If a corporation is in the AMT, they should generally accelerate the recognition of taxable income in order to take advantage of the lower AMT rate.

Answer 8

False.

Accelerating taxable income to “take advantage” of the 20% AMT rate is not a good strategy. For example, accelerating $100 of taxable income will result in $100 x 20% = $20 of immediate additional AMT, but many tax professionals forget that the AMT credit is also decreased by $15. The marginal tax rate on the accelerated taxable income is still 35% (i.e., 20% AMT currently paid and 15% for the reduction in the AMT credit carryforward). Thus, there is no advantage to the 20% tax rate. In fact, the acceleration of taxable income will result in the payment of $20 of tax sooner than otherwise needed.

Question 9

True or False: Affiliated corporations (as defined by the internal revenue code) must file a consolidated tax return.

Answer 9

False. Affiliated corporations may elect to file a consolidated tax return. The election is not mandatory.

Question 10

True or False: If affiliated corporations file a consolidated tax return they will defer the impact of intercompany transactions.

Answer 10

True.

Question 11

True or False: Corporations are considered affiliated if they are 80% or more directly or indirectly owned by a common parent. Ownership is based upon both voting control and value.

Answer 11

True.

Question 12

True or False: The dividends received deduction is applicable when one corporation receives dividends from another corporation.

Answer 12

True.

Question 13

True or False: From a tax planning perspective, a corporation generally prefers to incur debt rather than equity.

Answer 13

True.

Question 14

True or False: If a corporation is able to characterize a financial instrument as debt for tax purposes, but equity for financial accounting purposes, the financial instrument is an example of a hybrid instrument.

Answer 14

True.

Question 15

True or False: US Multinational Companies usually prefer to locate debt in a low-tax country and equity in a high-tax country.

Answer 15

False. US MNCs usually prefer to locate debt in a high-tax country rather than a low-tax country. Similarly, they also usually prefer to locate equity in a low-tax country rather than a high-tax country.

Question 16

True or False: The expiration of a tax carryforward (e.g., NOL or foreign tax credit) is generally a big deal and therefore significant efforts are made by corporate tax departments to avoid their expiration.

Answer 16

True.

Question 17

What U.S.C. provision governs when a corporation is formed (i.e., created)?

Answer 17

26 U.S.C. § 351

Question 18

What U.S.C. provision governs when a corporation is liquidated and it will be a taxable event to the shareholders?

Answer 18

26 U.S.C. § 331

Question 19

What U.S.C. provision governs when a corporation is liquidated and it will not be a taxable event?

Answer 19

26 U.S.C. § 332

Question 20

What U.S.C. provision governs when the stock of a corporation is acquired and an election is made to treat the acquisition as an asset purchase for tax purposes?

Answer 20

26 U.S.C. § 338

Question 21

What is the tax basis of Corporation B’s assets?

Answer 21

The inside basis is the tax basis that a company has in its assets.

Question 22

What is Corporation A’s tax basis in Corporation B’s stock?

Answer 22

The outside basis is the tax basis that a shareholder (which could be corporate entity) has in the shares of a company.

Question 23

Assume Corporation X makes a $100 cash distribution to its shareholders in proportion to their ownership interest in the corporation. Further assume:

• Corporation X only has $75 of earnings and profits (E+P) for tax purposes, and
• The distribution is not part of a liquidating distribution (partial or otherwise).

Given these facts, how should the $100 cash distribution to be characterized for tax purposes?

Answer 23

$75 of dividend and $25 return of capital.

A pro-rata cash distribution to shareholders will be considered a dividend as long as there is E+P and the distribution is not part of a liquidating distribution.

Given there is only $75 of E+P, $75 will be characterized as a dividend and $25 will be a return of capital.

Question 24

Assume Corporation X distributes property with a fair market value of $100 and a tax basis of $80. Further assume:

• Corporation X only has $75 of earnings and profits (E+P) for tax purposes, and
• The distribution is not part of a liquidating distribution (partial or otherwise).

Given these facts, could Corporation X recognize any gain on the property distribution? If so, how much?

Answer 24

Yes, Corporation X should recognize $100 - $80 = $20 of gain on the distribution unless IRC 332 applies.

Question 25

Corporation Y is planning to purchase Corporation Z but has a choice to purchase either the stock or assets of Corporation Z. Assume the following:

• The tax basis of Corporation Z’s assets less liabilities is $600, but the aggregate fair market value of the assets less liabilities is $1,000.
• Corporation Z has no tax attributes (e.g., NOL or tax credit carryforwards)
• A 338 election will not be made with respect to this acquisition

Given these facts, from solely a tax perspective should Corporation Y prefer to purchase Corporation Z’s stock or assets? Please circle your answer below.

Answer 25

Assets.

If Corporation Y purchases Corporation Z’s assets less liabilities for $1,000, Corporation Y will have a tax basis in Corporation Z’s assets of $1,000. If, however, Corporation Y purchases Corporation Z’s stock, the $600 tax basis in Corporation Z’s assets will carryover. Thus, Corporation Y will prefer to purchase Z’s assets to obtain a higher tax basis.

Question 26

True or False: When the shareholders of a target corporation incur tax on the sale or exchange of their stock it is referred to as a taxable acquisition.

Answer 26

True.

Question 27

True or False: When the shareholders of a target corporation do not incur tax on the sale or exchange of their stock it is referred to as a tax-free acquisition.

Answer 27

True.

Question 28

True or False: The tax policy theory behind a tax-free acquisition is that shareholders of the target corporation continue as shareholders of the acquiring corporation.

Answer 28

True.

Question 29

What is “NOLs”?

Answer 29

Net Operating Losses

Net operating losses is defined at 26 U.S.C. § 172. It is “an amount equal to the aggregate of (1) the net operating loss carryovers to such year, plus (2) the net operating loss carrybacks to such year.” 26 U.S.C. § 172(a) (2012) (Amend. 2014, Pub. L. 113–295).

Question 30

True or False: The AMT carryforward can be utilized in future years when the Tentative Minimum Tax exceeds the Regular Tax in a subsequent year.

Answer 30

False. The AMT carryforward is utilized in future years when the Regular Tax exceeds the Tentative Minimum Tax.

Question 31

True or False: Affiliated corporations (as defined by the internal revenue code) may elect to file a consolidated tax return.

Answer 31

True.

Question 32

True or False: If affiliated corporations file a consolidated tax return they will defer the impact of intercompany transactions.

Answer 32

True.

Question 33

True or False: Corporations are considered affiliated if they are 80% or more directly or indirectly owned by a common parent. Ownership is based upon both voting control and value.

Answer 33

True.

Question 34

True or False: The dividends received deduction is applicable when one corporation receives dividends from another corporation.

Answer 34

True.

Question 35

True or False: One of the main advantages of a consolidated tax return is the ability to offset the loss of one affiliated corporation with the income of another affiliated corporation.

Answer 35

True.

Question 36

True or False: The entities included in a consolidated federal tax return will be the same entities included in the consolidated financial statements.

Answer 36

False. Since the consolidation rules for financial accounting and federal tax purposes are different, the entities included in each consolidation are often different. For example, the ownership test is 80% or greater for federal tax purposes, and generally greater than 50% for financial accounting purposes. In addition, there are certain entities precluded from filing a consolidated federal tax return (e.g., most foreign entities and certain insurance companies) that are not precluded from being included in the consolidated financial statements.

Question 37

True or False: IRC 1504(a) generally defines two corporations as being affiliated if one corporation owns, directly or indirectly, greater than 50% of the vote and value of the other corporation. However, there are certain corporations that are ineligible to file a consolidated tax return.

Answer 37

False. The IRC rule is both 80% voting control and ownership value. The fiscal accounting rule is 50% either voting control or ownership value.

Question 38

True or False: When one corporation owns another corporation there is the possibility of double taxation at the corporate level (i.e., once by the corporation earning the income and a second level of tax on the corporation that receives a dividend). In order to minimize this double taxation, IRC 243 allows a DRD for corporations.

Answer 38

True.

Question 39

True or False: If Corporation A owns less than 20% of Corporation B and is eligible to receive a DRD, Corporation A should receive a 70% DRD with respect to dividends from Corporation B.

Answer 39

True.