Missed MCQ's 11.8.23 Flashcards
All of the following are true with respect to the filing of consolidated tax returns except that
A. Each corporation that has been a member of a parent-subsidiary affiliated group during any part of the taxable year for which the first consolidated return is to be filed must consent to the initial filing.
B. By filing a consolidated return, the corporations in the group can defer intercompany profits and losses.
C. Once a consolidated return is filed, the affiliated group must continue to file consolidated returns unless it obtains permission from the IRS to do otherwise.
D. The filing of consolidated returns is available to brother-sister corporations.
D. The filing of consolidated returns is available to brother-sister corporations.
Corporations must be members of an affiliated group to file a consolidated tax return. An affiliated group consists of one or more chains of includible corporations that are connected through stock ownership with a common parent corporation [Sec. 1504(a)]. Eighty percent of voting power and 80% of value ownership are required. Only parent-subsidiary affiliated groups will meet this requirement of having a common parent corporation. Brother-sister corporations do not have a common parent and therefore cannot file a consolidated tax return.
In computing an individual’s net operating loss, which of the following is not considered business income or deduction(s)?
A. Gain on sale of business property.
B. Gain on sale of investment property.
C. Wages.
D. Personal casualty loss.
B. Gain on sale of investment property.
Business and nonbusiness income and deductions need to be distinguished because nonbusiness deductions are deductible in computing a NOL only to the extent of nonbusiness income. Nonbusiness deductions and income are those that are not attributable to, or derived from, a taxpayer’s trade or business. Also, capital losses are only deductible to the extent of capital gains. A gain on the sale of investment property is a capital gain and not business income.
For the year ended December 31, 2023, Dodd Corp. had net income per books of $100,000. Included in the computation of net income were the following items:
Dodd’s 2023 taxable income was
A. $135,000
B. $132,000
C. $130,000
D. $127,000
A. $135,000
None of the items are deductible in computing taxable income even though they decrease book income. Therefore, they must be added back to book income to find taxable income.
On January 1, Year 1, Locke Corp., an accrual-basis, calendar-year C corporation, had $30,000 in accumulated earnings and profits. For Year 1, Locke had current earnings and profits of $20,000 and made two $40,000 cash distributions to its shareholders: one in April and one in September of Year 1. What amount of the Year 1 distributions is classified as dividend income to Locke’s shareholders?
A. $80,000
B. $0
C. $50,000
D. $20,000
C. $50,000
The amount of a distribution is a dividend to the extent, first, of any current E&P and, then, of any accumulated E&P. When distributions during the year exceed current E&P, pro rata portions of each distribution are deemed to be from current E&P. Therefore, current E&P of $10,000 [$20,000 × ($40,000 distribution ÷ $80,000 total distributions for the year)] is allocated to each distribution. Accumulated E&P is then allocated to distributions in chronological order. The first distribution is allocated $30,000 of accumulated E&P and the second distribution is not allocated any accumulated E&P because none remains after the allocation to the first distribution. Hence, the total dividend is $20,000 from current E&P and $30,000 from accumulated E&P.
Mr. L purchased stock in Corporation O in Year 1 for $500. In Year 2, Mr. L received a distribution of $200 at a time when Corporation O had no current or accumulated earnings and profits, so it was a nontaxable return of capital. Mr. L sold his Corporation O stock in Year 3 for $700. What is the amount of gain to be reported by Mr. L?
A. $400
B. $200
C. $700
D. $0
A. $400
L’s gain will be the amount realized ($700) less the adjusted basis of the stock. The adjusted basis is L’s original basis of $500 reduced by the return of capital ($200), or $300 [Sec. 1016(a)(4)]. The $400 gain ($700 – $300) is long-term because the stock had been held for more than 1 year.
During 2023, ABC Corporation had the following income and expenses:
What is ABC’s charitable contribution deduction for 2023?
A. $19,400
B. $15,600
C. $20,000
D. $17,600
A. $19,400
Charitable contributions made to qualified organizations and paid within the taxable year may be deducted from taxable income. A corporation’s charitable deduction is limited to 10% of taxable income computed before the charitable contribution deduction, capital loss carryback, and the dividends-received deduction. ABC’s charitable contribution deduction for 2023 is $19,400 as computed below.
Sam Johnson, a calendar-year taxpayer, applied for and received an extension for filing his Year 1 tax return. Mr. Johnson filed his tax return on June 2 of Year 2 and paid the balance due. The return reflected a tax liability of $50,000 and estimated tax payments made timely of $45,000. Based on these facts, Mr. Johnson owes
C. Failure to File Penalty = $0
Failure to Pay Penalty = $50
Payment of tax is due by the due date for filing a tax return. The tax return is due April 15th for a calendar-year taxpayer. Since Mr. Johnson received an extension to file his tax return and filed it before the end of the extension period, there is no failure to file penalty.
The penalty for failure to pay tax is 0.5% of the amount due for each month (or fraction thereof) during which such tax remains unpaid. The maximum penalty under this provision is 25% (Sec. 6651). Mr. Johnson’s failure to pay penalty is computed as follows:
The failure to pay penalty is computed only on the amount of tax due. There is no penalty for failure to pay estimated taxes because 90% of the total tax shown on the current-year return was paid as estimated payments during the year.
