Corporate Taxation - General, Part 2

Question 1

A corporation is a personal holding company if:

1) ___ or fewer individuals owns more than ___ of its stock at any time during the ____ of its taxable year
2) At least ____ of its AGI is personal holding company income (dividends, interest, rent, etc.)

Answer 1

5

50%

Last Half

60%

Question 2

T/F

A series of adjustments must be made to a corporation’s taxable income to arrive at undistributed personal holding company income (UPHCI). One of these adjustments is the deduction of federal income taxes (including AMT & foreign income taxes)

Answer 2

TRUE

Question 3

T/F

A series of adjustments must be made to a corporation’s taxable income to arrive at undistributed personal holding company income (UPHCI). One of these adjustments is the deduction for a net capital gain less the amount of federal income taxes attributable to the net capital gain

Answer 3

TRUE

This deduction prevents a personal holding company from paying the PHC tax on its net LTCGs

Question 4

What 2 steps can a corporation take to eliminate or reduce accumulated earnings tax?

Answer 4

1) Demonstrate that the reasonable needs of its business require the retention of all or part of the accumulated taxable income
2) Reduce accumulated taxable income by paying a dividend to its shareholders by the first 2.5 months of the following tax year

Question 5

What is the Accumulated Earnings Tax?

Answer 5

The AET is a penalty tax that can be imposed (in addition to regular income tax) on a corporation if it accumulates earnings in excess of reasonable business needs

Question 6

T/F

AET can be imposed on partnerships

Answer 6

FALSE

Question 7

T/F

AET can be imposed on personal holding companies

Answer 7

FALSE

Question 8

T/F

A corporation that distributes all of its accumulated earnings tax is subject to AET

Answer 8

FALSE

Question 9

T/F

AET can be imposed regardless of the number of stockholders in a corporation

Answer 9

TRUE

Question 10

What is the minimum accumulated earnings credit for non-service corporations? For service corporations?

Answer 10

$250,000

$150,000

Question 11

T/F

The accumulated earnings tax applies to personal holding companies

Answer 11

FALSE

The accumulated earnings tax does not apply to personal holding companies

Question 12

T/F

The personal holding company tax should be self-assessed by filing a separate schedule with the regular tax return

Answer 12

TRUE

Question 13

T/F

Like the personal holding company tax, the AET is self-assessing

Answer 13

FALSE

The AET is assessed by the IRS after finding a tax avoidance intent on the part of the taxpayer

Question 14

T/F

The AET can be imposed on an S-Corporation

Answer 14

FALSE

Because the S Corporation’s earnings pass through and are taxed to shareholders regardless of whether the earnings are actually distributed

Question 15

T/F

In determining accumulated taxable income for the purpose of the accumulated earnings tax, a capital loss carryover from the prior year is allowed as a deduction

Answer 15

FALSE

This would be added back to taxable income in arriving at accumulated taxable income

Question 16

T/F

In determining accumulated taxable income for the purpose of the accumulated earnings tax, a DRD is allowed as a deduction

Answer 16

FALSE

This would be added back to taxable income in arriving at accumulated taxable income

Question 17

T/F

In determining accumulated taxable income for the purpose of the accumulated earnings tax, NOL deduction is allowed as a deduction

Answer 17

FALSE

This would be added back to taxable income in arriving at accumulated taxable income

Question 18

T/F

In determining accumulated taxable income for the purpose of the accumulated earnings tax, a net capital loss for the current year is allowed as a deduction

Answer 18

TRUE

Question 19

The accumulated earnings credit is the greater of:

Answer 19

1) the earnings & profits of the tax year retained for reasonable business needs
2) The minimum tax credit ($150k/$250k) less the accumulated earnings and profits at the end of the preceding year

Question 20

T/F

An S corporation is permitted to own 90% of the stock of a C Corporation

Answer 20

TRUE

Question 21

T/F

An S corporation is permitted to own 100% of he stock of another S Corporation

Answer 21

TRUE

Question 22

T/F

An S corporation is permitted to be a partner in a partnership

Answer 22

TRUE

Question 23

T/F

A partnership is permitted to be a shareholder of an S Corporation

Answer 23

FALSE

The eligibility requirements restrict S corporation shareholders to individuals, estates, and certain trusts

Question 24

Distributions from an S corporation are generally treated as first coming from its ____, and then are treated as coming from its ____

Answer 24

Accumulated Adjustment Account

Accumulated Earnings & Profits

Question 25

A positive balance in an S Corporation's Accumulated Adjustment Account is generally _______ (taxable/nontaxable)

Answer 25

Nontaxable

Question 26

A positive balance in an S Corporation's Accumulated Earnings & Profits is generally _______ (taxable/nontaxable)

Answer 26

Taxable - must be reported as dividend income

Question 27

If an S election is filed after _____, the election is generally effective as of the first day of the corporation's next taxable year

Answer 27

The 15th day of the 3rd Month

Question 28

T/F A shareholder's basis in the stock of an S Corporation is increased by the shareholder's pro rata share of income from Tax-Exempt Interest

Answer 28

TRUE

Question 29

T/F A shareholder's basis in the stock of an S Corporation is increased by the shareholder's pro rata share of income from taxable interest

Answer 29

TRUE

Question 30

A revocation of an S election may be filed by shareholders owning more than ____ of an S Corporation's Outstanding stock.

Answer 30

50%

Question 31

T/F A revocation of an S election may be filed by shareholders owning more than 50% of an S Corporation's Outstanding stock. For this purpose, only voting shares are counted

Answer 31

FALSE For this purpose both voting and nonvoting shares are counted

Question 32

T/F Generally, in order to be an S Corporation, a corporation may have any number of classes of stock outstanding and have any number of shareholders, as long as those shareholders are individuals, estates, or certain trusts

Answer 32

FALSE Generally, in order to be an S Corporation, a corporation may have only one class of stock outstanding and have no more than 100 shareholders who are either individuals, estates, or certain trusts

Question 33

If an S corporation has no AEP, distributions are generally _______ (taxable/nontaxable) & ______ (increase/reduce) a shareholder's basis for stock

Answer 33

Nontaxable Reduce

Question 34

An S corporation's items of income and deduction are allocated on a ____ (daily/monthly/quarterly/yearly) basis to anyone who was a shareholder during the taxable year

Answer 34

Daily

Question 35

An S Corporation who terminates their S status must wait how many years before making a new S election, n the absence of IRS consent to an earlier election

Answer 35

5 years

Question 36

T/F An S Corporation may deduct foreign income taxes

Answer 36

FALSE This must separately pass through to shareholders so that the shareholders can individually elect to treat the payment of foreign income taxes as a deduction or as a credit

Question 37

T/F An S Corporation may deduct a net Section 1231 loss

Answer 37

FALSE This must be separately passed through to shareholders so that the Sec. 1231 netting process can take place at the shareholder level

Question 38

T/F An S Corporation may deduct investment interest expense

Answer 38

FALSE This must be separately passed through to shareholders so the deduction limitation (limited to net investment income) can be applied at the shareholder level

Question 39

T/F An S Corporation may deduct the amortization of organizational expenditures

Answer 39

TRUE Items having no special tax characteristics can be netted together in the computation of the S Corporation's ordinary income or loss with only the net amount passed through to shareholders. Thus ordinary items, such as amortization of organizational expenditures, can be deducted by an S corporation

Question 40

When is a calendar-year S Corporation's income tax return due date if they do not request an automatic 6-month extension of time to file?

Answer 40

March 15 The 15th day of the 3rd month following the close of the taxable year

Question 41

T/F An S corporation is permitted to take a deduction for compensation of officers

Answer 41

TRUE

Question 42

T/F An S corporation is permitted to take a deduction for interest paid to individuals who are not stockholders of the S corporation

Answer 42

TRUE

Question 43

T/F An S corporation is permitted to take a deduction for charitable contributions

Answer 43

FALSE Since this is subject to a percentage limitations at the shareholder level, this must be separately stated and is not deductible in computing an S corporation's ordinary income or loss

Question 44

T/F An S corporation is permitted to take a deduction for employee benefit programs established for individuals who are not stockholders of the S Corporation

Answer 44

TRUE

Question 45

A type-A reorganization is tax-free to the _____

Answer 45

Shareholders & the Corporations

Question 46

What is a type A reorganization?

Answer 46

A consolidation

Question 47

What kind of gain/loss is recognized to a shareholder if stock in one party to a reorganization is exchanged solely for stock in another corporation that is party to the reorganization?

Answer 47

NO Gain or Loss is recognized

Question 48

An F Reorganization is what?

Answer 48

A mere change in identity, form, or place of organization of one corporiation

Question 49

T/F A stock redemption is a reorganization

Answer 49

FALSE Instead this results in dividend treatment or qualifies for exchange treatment

Question 50

A Type E reorganization is what?

Answer 50

A recapitalization

Question 51

T/F Securities in corporations not parties to a reorganization are always "boot"

Answer 51

TRUE

Question 52

For two corporations to qualify for the filing of consolidated returns, at least what percentage of the subsidiary's total a) voting power and b) total value of stock must be directly owned by the parent?

Answer 52

a) 80% | b) 80%

Question 53

How do you calculate a company's accumulated earnings & profits at the end of the year? a) Beg AEP + Taxable Income b) Beg AEP + Taxable Income - Deductions

Answer 53

B

Question 54

How does a company's distributions of land affect their AEP?

Answer 54

Lands FMV - Adjusted Basis (gain on distribution) will be recognized as an increase in AEP