R3

Question 1

Personal holding company

Answer 1

Choice “a” is correct. There are two criteria in determining whether a company is a personal holding company: a) more than 50% of the stock must be owned by 5 or fewer individuals, and b) at least 60% of the adjusted ordinary gross income must consist of certain investment income (e.g., interest, div idends, etc.). So, the stock ownership test is 50% while the income test is 60%.

Question 2

Capital gains and losses

Answer 2

. Capital losses offset capital gains. If a corporation has net capital gains, they are taxed at ordinary (corporate) income tax rates.
Taxable income from business operations

Question 3

Corporate income tax expense

Answer 3

When computing a corporation’s income tax expense for estimated income tax purposes, both corporate tax credits and the alternative minimum tax should be taken into account.

Question 4

schedule M1

Answer 4

Schedule M-1 of the Form 1120 is used to reconcile the differences between book income and taxable income. Since the interest incurred on loans to carry U.S. obligations and the provision for state corporation income tax are treated the same for both book purposes and tax return purposes, no Schedule M-1 adjustment is required. However, if the interest expense were to carry non-taxable municipal obligations, then the interest would not be tax deductible and would be an adjustment on the Schedule M-1 reconciliation.

Question 5

Private foundation status

Answer 5

The private foundation status of an exempt organization will terminate if it becomes a public (50% type) charity. Rule: Section 509 private foundations include all Code 501(C)(3) organizations, except:
1. Max 50% charitable deduction donees 2. Broadly publicly-supported organizations 3. Supporting organizations 4. Public safety organizations

Question 6

Exempt organization

Answer 6

to ualify as an exempt organiation, an applicant must not be a private foundation organied and operated exclusively to influence legislation. Need to be specifically identified as one of the classes upon which exemption is conferred by the nternal Revenue Code, provided that the organiation’s purposes and activ ities are of a nonprofit nature.

Question 7

shareholder basis

Answer 7

Rule: Both tax-exempt and taxable interest income increase a shareholder’s basis in S corporation stock.

Question 8

Consolidated return

Answer 8

operating losses of one group member of a consolidated return may be used to offset operating profits of the other members included in the consolidated return.the common parent must directly own stock possessing at least 80% of the total voting power of at least one of the other includible corporations and hav ing a value equal to at least 80% of the total value of the stock of the corporation. Choice “d” is incorrect. ntercompany dividends are eliminated during the process of consolidation and are therefore not includible to any extent in the consolidated return taxable income.

Question 9

S corporation

Answer 9

Rule: An S corporation may have only one class of stock. A difference in voting privileges (i.e., voting and non-voting common stock) does not constitute another class of stock, and they are combined for S election (and revocation) purposes. Rule: The election for an S corporation is revoked on the date when over 50% of the shareholders elect to revoke

Question 10

1244 loss

Answer 10

The maximum Section 1244 loss that can be deducted by a single taxpayer in any year is $50,000. All losses designated as Section 1244 losses are ordinary by definition

Question 11

S Corp

Answer 11

Rule: An S corporation is a hybrid of a corporation and a partnership, but is mostly like a partnership. Earnings ordinary income is separately defined from other types of income and cash distributions reductions to basis are treated as they ould be in a partnership. he - is the form used by the S corporation to report activ ity of the corporation related to the shareholders. Note: osses are limited to basis in the corporation, so it should be calculated for each shareholder. Basis cannot be negative, or capital gain ill be recognied. Rule: ax-exempt income is reportable but not taxable on the orm . t is reported on the - for the S corporation for the shareholder.

Question 12

personal holding company NIRD

Answer 12

Rule: Personal holding company status applies if a corporation is owned more than 50% by five or fewer indiv iduals at any time during the last half of the tax year and if at least 60% of adjusted ordinary gross income for the tax year is personal holding company income (which would include income from investments in stocks and securities).

Question 13

General business credit

Answer 13

The general business credit combines several nonrefundable tax credits and prov ides rules for their absorption against the taxpayer’s liability.

Question 14

Charitibke deduction

Answer 14

ule A charitable deduction is limited to the amount paid during the year or by the 15th day of the third month after the taxpayer year ends.

Question 15

Income before special deductions

Answer 15

income before special deductions includes sales and cost of sales and excludes dividend received deduction which is a a special deduction

Question 16

Dividends received

Answer 16

Dividends are a distribution of property by a corporation out of its earnings and profits (EP). Dividends come from current EP and then from accumulated EP. If current EP is positive and accumulated EP is negative, distributions are dividends only to the extent of current EP. Any excess distribution above EP reduces the shareholders basis in the stock, if any. If the shareholder has no basis, then the excess distribution is reported as a capital gain.

Question 17

Transfer pricing

Answer 17

Transfer pricing issues exist when a U .S.-based taxpayer shares costs with an affiliate that either (i) is not subect to the .S. income tax or (ii) does not file a consolidated income tax return with the U.S.based taxpayer.

Question 18

Reorg

Answer 18

This is a Type A reorganization in the form of a consolidation (e.g., A + B C). enerally, no gain or loss is recognized by the shareholders of the various corporations except when they receive cash or other consideration in addition to the stock or securities. In addition, no gain or loss is recognized by the acquired corporations or the acquiring corporation pursuant to a tax-free reorganization.

Question 19

Alternative minimum tax

Answer 19

If a corporations tentative minimum tax exceeds the regular tax, the excess amount is the alternative minimum tax which is payable in addition to the regular tax.. There is no carryback of the alternative minimum tax. t. . The excess amount is added to the regular tax to get the total tax liability.

Question 20

S Corporations

Answer 20

grantor trusts, ection 6 trusts, qualified ubchapter trusts (Ts), certain testamentary trusts, and voting trusts are allowed to be shareholders in an corporation.

Question 21

last months rent is also rental income in the current year

Answer 21

Payments for cancelling a lease (30,000) are rental income in ear 1. The two months rent for ovember and December (5,000 for each month) are rental income. In addition, the last months rent (5,000, which is not indicated is a refundable security deposit) is rental income. The total is 45,000.

Question 22

S Corp

Answer 22

An S corporation may deduct compensation of officers hich is an ordinary and necessary business deduction as long as it is reasonable in amount. Charitable contributions and foreign income taxes are separately stated items that are passed through to the individual shareholders and are reported on their individual returns in accordance ith their percentage onership of the corporation and are subect to any limitations at that level. perating losses of an S corporation are passed through to the individual shareholders each year and are deductible by the shareholders subect to the basis and “at risk” limitations. Since the operating losses are passed through each year, S corporation net operating loss carryovers do not exist.

Question 23

UBI

Answer 23

An exempt organiation is not taxed on unrelated business income of less than $1,000. The exempt organiation is allowed a specific deduction of $1,000 from its unrelated business income. An unrelated business is a trade or business regularly carried on by the organiation that is not substantially related to the exercise or performance of its exempt purpose or function. If the business activ ity is intermittent and carried on once a year, the tax imposed on unrelated business income would not be assessed

Question 24

Consolidated returns

Answer 24

Rule: iling a consolidated return is a priv ilege afforded to affiliated groups of corporations (Code ections 1501 and 1504(b)), and it can only be filed if all of the affiliated corporations consent to such a filing. An affiliated group has ownership through a common parent. The common parent must directly own at least 0% of the voting power of at least one of the affiliated (includible) corporations and at least 0% of the value of the stock of that corporation, and the other corporations not controlled by the parent must be controlled under the 0% ownership test by an includible corporation. ot all corporations are allowed the priv ilege of filing a consolidated return. Examples of those that are denied the privilege include:
1. S corporations, 2. Foreign corporations, . Most real estate investment trusts (REITs), 4. some insurance companies, and 5. Most exempt organiations

Question 25

transfer pricing

Answer 25

The APA is a binding contract between the RS and the taxpayer by which the RS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return for a covered year consistent with the agreed transfer pricing method.

Question 26

Liquidation

Answer 26

n a corporate liquidation, distributions are subject to two levels of taxation. First, the corporation must recognie gain or loss as if it sold the assets for the fair market value. Second, the shareholders would report gain or loss determined by the difference between the fair market value of the assets received and the shareholders adjusted basis of the stock. he gain at the corporate level would be calculated as the combined fair market value of 1,000 less the combined basis of 0,000 or ,000.

Question 27

Bonus deduction

Answer 27

The deduction is an ordinary and necessary business expense treated just as any other compensation expense is treated. Axis is an accrual basis taxpayer, and the deduction is taken on the return for the year in which the expense accrued because it was paid within 3/ months of yearend.

Question 28

underpayment of tax

Answer 28

No underpayment of estimated tax penalty will be imposed if the total tax for the year is less than 500.