Federal Taxation VII: More Corporate Taxation

Question 1

Accumulated Earnings Tax

Answer 1

20% penalty imposed on undistributed accumulated taxable income

Question 2

Accumulated Earnings Tax Formula

Answer 2

Taxable income
\+/- Adjustments:   
   - corporate Income tax
   - excess charitable donations
   - net capital loss
   - net capital gain (after tax)
   \+ dividends received deduction
   \+ net operating/capital loss carryovers
- Dividends paid/deemed paid
- Accumulated earnings credit
= Accumulated Taxable Income

Question 3

Accumulated Earnings Credit

Answer 3

Greater of:

1. Amount of current E&P needed for the “reasonable needs” of the business
2. Flat $250K (or $150K for service corps) less the accumulated E&P at close of preceding year

Question 4

Personal Holding Company (PHC) Tax

Answer 4

20% Penalty imposed on PHC

Penalty tax triggered by relatively high levels of investment income in a corporation. Operates by imposing penalty tax on undistributed income.

Question 5

PHC Tax Formula

Answer 5

Taxable Income
\+/- Adjustments:
   - corporate income tax
   - excess charitable contributions
   - net capital gain (after tax)
   \+ dividends received deduction
   \+ net operating loss carryover (not previous year)
= Adjusted Taxable Income
- Dividends paid/deemed paid
 = Undistributed PHC Income

Question 6

PHC Income Test

Answer 6

Met if Passive Income > 60% of adjusted ordinary gross income (AOGI)

Question 7

PHC Ownership Test

Answer 7

Met if > 50% of the value of the stock is owned directly or indirectly by < 5 individuals at any time during last half of year

Question 8

Passive Income

Answer 8

• taxable dividends
• interest

sometimes

• rents/royalties
• personal service contracts.

Question 9

Adjusted Ordinary Gross Income (AOGI)

Answer 9

Gross income excluding capital and 1231 gains and reduced by expenses associated with the production of rent/royalty income

Question 10

Indirect Ownership determined by stock attribution rules.

Answer 10

Define ownership to include stock held by an entity or family members (brother, sisters, spouse, ancestor, and lineal descendants)

Question 11

Difference between adjustments for PHC and accumulated earnings taxes

Answer 11

In PHC there is no adjustment for net capital losses and the adjustment for net operating loss carryovers does not include an NOL from the previous year

Question 12

Deficiency Dividend

Answer 12

Dividend expressly declared to avoid the PHC tax. Paid within 90 days of tax imposition.

Question 13

Affiliated Group

Answer 13

exists when a corporation owns at least 80% of the voting power of another corporation AND holds shares representing at least 80% of its value.

This test must be met every day of the year.

Question 14

Eligible affiliated corporations can elect to file consolidated return, which permits (3)

Answer 14

1. the corporations to eliminate intercompany profits/losses
2. allows profitable corporation to offset its income against losses of another corp
3. permits net capital losses of one corp to offset capital gains of another

Question 15

Controlled Group

Answer 15

1. entitled to one $250K accumulated tax credit
2. limited to taxable income in each of the first two brackets, as though the group were one corp
3. receives only one Section 179 expense deduction and one AMT exemption

Question 16

Controlled Group: Parent-Subsidiary

Answer 16

Focuses on Corporate Ownership

Exists if:

1. stock possessing > 80% of voting power of all classes of stock entitled to vote OR > 80% of total value of shares of all classes of stock of each of the corps, except the common parent, is owned by one or more of the other corps
2. the common parent owns stock possessing > 80% of the total combined voting power of all classes of stock entitled to vote OR > 80% of the total value of share of all classes of stock of at least one of the other corporations

Question 17

Controlled Group: Brother-Sister

Answer 17

Focuses on individual ownership

Exists if:

2 or more corps are owned by 5 or fewer persons (individuals, estates, trusts)

1. who have common ownership of > 50% of total combined voting powers of all classes of stock entitled to vote OR > 50% of total value of shares of all classes of stock of each corp
2. who possess stock representing at least 80% of the total combined voting power of all classes of stock entitled to vote OR at least 80% of total value of shares of all classes of each corporation

AND

3. the 80% test does not apply for determining brother-sister corps when determining corporate tax brackets, the accumulated earnings credit, and the minimum tax exemption

Question 18

E&P: Additions to taxable income

Answer 18

made for exempt income or deductions that do not represent an economic outlay:

1. Municipal interest/life insurance proceeds
2. Dividends-received deduction
3. Carryforwards
4. Domestic production activities deduction
5. Proceeds from corporate life insurance policy (less cash surrender value)

Question 19

E&P: Expenditure that are not deductible but represent economic outlays

Answer 19

These expenditures reduce taxable income in computing E&P:

1. Federal Income Tax (net of credits)
2. Related party losses
3. Penalties, fines, lobbying expenses, “key” life insurance, disallowed portion of meals and entertainment

Question 20

E&P: Modifications to taxable income

Answer 20

Timing differences that can be positive or negative:

1. Deferred portion of a gain from a current installment sale (added this year, reversed later)
2. Amount of depreciation deducted in excess of straight-line (added this year, reversed later)
3. Section 179 expense
4. Net capital loss and the excess amount of charitable contributions

Question 21

E&P: Distributions

Answer 21

Generally reduce E&P

1. Cash Distributions
2. Property Distributions reduce E&P by greater of value or adjusted basis les any liabilities assumed by s/h
3. Appreciated Property Distribution - first increase E&P by amount of gain
4. Distributions cannot create a deficit in E&P, but net operating losses can

Question 22

E&P: Dividend Treatment

Answer 22

1. Taxable as dividend income to extent of s/h pro-rata share of E&P
2. Excess is tax-free to extent of s/h basis in stock (and reduceds basis)
3. Remaining distribution is taxed as a capital gain
4. Both current and accumulated E&P are used to determine whether a distribution is a dividend

Question 23

Property Distributions

Answer 23

1. Value of property distributed less any debt assumed by s/h is amount eligible for dividend treatment
2. Distribution of appreciated property causes the corporation to recognize gains like a sale of the property
3. If liability on the property exceeds FMV, the FMV is treated as being equal to the liability
4. Amount distributed = FMV - liabilities on property
5. Basis of property to the shareholder is FMV

Question 24

Constructive Dividend

Answer 24

Payment to s/h that is regarded as a dividend, such as property distributions