REG 10 Flashcards
Widget Corporation was formed in Year 1. Gross receipts for its first four years of operations are as follows
Year 1 $6,000,000 Year 2 $7,000,000 Year 3 $5,000,000 Year 4 $4,000,000 For each year, is Widget Corporation exempt from the AMT under the small corporation exemption?
In the first year of a corporation’s existence it is automatically exempt from the AMT (Yes). Widget’s first testing window to determine if it is subject to the AMT in Year 2 is just Year 1 gross receipts of $6,000,000. Since this exceeds the $5,000,000 threshold for the first three-year testing window (or portion thereof), Widget is NOT exempt from the AMT in Year 2. Once the small corporation exemption test is failed, then the corporation is NOT exempt for all future tax years, so the answer is NO for Years 3 and 4 also.
Rona Corp.’s 2015 alternative minimum taxable income was $200,000.
The exempt portion of Rona’s 2015 alternative minimum taxable income was
When computing alternative minimum taxable income, corporations may take an exemption of $40,000 minus 25 percent of alternative minimum taxable income exceeding $150,000.
Thus, this exemption is equal to zero when alternative minimum taxable income is equal to or exceeds $310,000.
Rona Corp.’s exempt portion of its 2015 alternative minimum taxable income was $27,500 = $40,000 − [25 percent * ($200,000 − $150,000)].
Acme Corp. has two common stockholders. Acme derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its stockholders. Acme is a
Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. The stock ownership test is satisfied if, at any time during the last half of the corporation’s tax year, 50 percent or more of the corporation’s stock was directly or indirectly owned by five or fewer individuals. Acme Corp. only has two shareholders, satisfying the stock ownership test. The income test is satisfied if 60 percent or more of the corporation’s adjusted ordinary gross income is personal holding company income. Personal holding company income consists of: dividends; interest; annuities; rents; mineral, oil and gas royalties; copyright and patent royalties; produced film rents; compensation for more than 25 percent use of corporate property by shareholders; amounts received under personal services contracts; and amounts received from estates and trusts.
Since all of Acme Corp.’s income comes from investments, all of the corporation’s income is considered personal holding company income and, as a result, the corporation satisfies the income test.
Since Acme Corp. satisfies the stock ownership and income tests, it is a personal holding company. Since there are only nine shareholders, there has to be at least five shareholders who collectively own more than 50% of the stock.
Kari Corp., a manufacturing company, was organized on January 2, 2015. Its 2015 federal taxable income was $400,000 and its federal income tax was $100,000.
What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2015 if Kari takes only the minimum accumulated earnings credit?
The accumulated earnings tax is a penalty tax imposed on corporations that accumulates earnings and profits for the purpose of avoiding income tax for its shareholders. The accumulated earnings tax is equivalent to 20 percent of the corporation’s accumulated taxable income.
Accumulated taxable income is composed of taxable income adjusted downward for federal income and excess profits taxes, charitable deduction in excess of the ceiling, net capital gains and losses, and taxes of foreign countries and U.S. possessions and upward for certain corporate deductions, net operating loss deduction and capital loss carryback or carryover.
When calculating the accumulated earnings tax, corporations are given a credit, the accumulated earnings credit, of $250,000 ($150,000 for certain service corporations) plus dividends paid within the first 2 1/2 months of the corporation’s tax year less accumulated earnings and profits at the end of the preceding tax year.
Hence, the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2015 if Kari Corp. takes only the minimum accumulated earnings credit is $50,000. This amount is composed of $400,000 in taxable income less both a downward adjustment of $100,000 for federal income taxes and the $250,000 accumulated earnings credit.
Dahl Corp. was organized and commenced operations in 1930. At December 31, 2015, Dahl had accumulated earnings and profits of $9,000 before dividend declaration and distribution.
On December 31, 2015 Dahl distributed cash of $9,000 and a vacant parcel of land to Green, Dahl’s only stockholder. At the date of distribution, the land had a basis of $5,000 and a fair market value of $40,000.
What was Green’s taxable dividend income in 2015 from these distributions?
Corporate distributions to shareholders are taxed to shareholders as dividend income to the extent that the distribution does not exceed current and accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits are treated as returns of capital. The distribution of appreciated property increases a corporation’s earnings and profits increase by the amount of the difference between the distributed property’s fair market value and the corporation’s adjusted basis in the distributed property.
Thus, while Dahl Corp. had earnings and profits totaling $9,000 before the dividend declaration and distribution, the corporation’s earnings and profits increased by $35,000, the land’s $40,000 fair market value less its adjusted basis of $5,000, to $44,000 due to the distribution of the land.
Green received $49,000 of property in the distribution - $9,000 in cash and land with a fair market value of $40,000. The amount of the distribution classified as dividend income is limited to the corporation’s earnings and profits. Thus, Green would report $44,000 of dividend income from the distribution.
Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox’s tax basis in the land?
For dividends, the amount distributed is the fair market value of the property received less any liabilities assumed by the shareholder, or $35,000 ($38,000 − $3,000). Fox would have $35,000 of dividend income since earnings and profits is at least this amount. However, the basis in the property received as a taxable dividend is always the fair market value of the property, or $38,000.
On January 1, 2015, Kee Corp., a C corporation, had a $50,000 deficit in earnings and profits. For 2015 Kee had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable as dividend income to Kee’s stockholders?
Corporate distributions to shareholders are taxable to the shareholder as dividend income to the extent earnings and profits, current and accumulated. Distributions in excess of earnings and profits are treated as returns of capital that are nontaxable except to the extent that the distribution exceeds the shareholders basis in the property.
Since Kee Corp. had current earnings of $10,000, the shareholders would be viewed as receiving $10,000 in dividend income. The remaining $20,000 of the distribution would be treated as a return of capital. Distributions are deemed to be paid from current earnings and profits and then from accumulated earnings and profits.
S Corporation was a wholly-owned subsidiary of P Corporation. Both corporations were domestic C corporations. P received a liquidating distribution of property (worth $250 and a basis of $135) from S in cancellation of the stock. What amount of gain will P recognize if P had a basis of $100 in the S stock before the receipt of the property?
If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized. The realized gain to parent is $150 ($250 property received - $100 basis). The recognized gain is zero.
How does a non-corporate shareholder treat the gain on a redemption of stock that qualifies as a partial liquidation of the distributing corporation?
Non-corporate shareholders treat the gain on a redemption of stock that qualifies as a partial liquidation of the distributing corporation as a capital gain, just as if they had sold their stock. Corporate shareholders receive dividend treatment on a partial liquidation.
Pursuant to a plan of corporate reorganization adopted in July 2015, Gow exchanged 500 shares of Lad Corp. common stock that he had bought in January 2015 at a cost of $5,000 for 100 shares of Rook Corp. common stock having a fair market value of $6,000.
Gow’s recognized gain on this exchange was
If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot.
Since Gow received the Rook Corp. stock solely in exchange for his Lad Corp. stock under a plan of reorganization and did not receive any boot, the transaction would be tax-free for Gow.
P corporation acquired the assets of its wholly-owned subsidiary, S corporation, under a plan that qualified as a tax-free complete liquidation of S. Which of the following of S’s unused carryovers may be transferred to P?
Tax attributes of the subsidiary transfer to the parent after a tax-free liquidation of the subsidiary into the parent.
What is a type B reorganization?
A Type B reorganization must be stock for stock, and only voting stock of the acquiring firm, or its parent, is permitted. Acquiring must also control target after the acquisition.
ABC, Inc., has $120,000 U.S. source income, $80,000 of foreign source income, and $25,000 foreign taxes deemed paid. Assume that the U.S. income tax liability before the foreign tax credit is $61,250. ABC’s foreign tax credit is
$25,000, but not to exceed the foreign tax credit limitation of $80,000/($120,000 + $80,000) x $61,250 = $24,500.
Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2015, he has the following income from Spanish sources:
Salary Interest Income
Gross amount $90,000 $20,000
Spanish income tax (20%) (18,000) (4,000)
Net cash received (80%) $72,000 $16,000
The interest income was from a Spanish money market account. Mr. Travel also was provided housing from his employer that had a fair market value of $40,000 (not subject to Spanish tax). Total U.S.-source earned income for Mr. Travel was $60,000. What is Mr. Travel’s minimum includible United States gross income from these transactions? The housing exclusion is $14,112 and foreign earned income exclusion is $100,800 in 2015.
The $90,000 of salary is completely excluded. Foreign-earned income from personal services is limited to $100,800 in 2015.The housing is excludable to the extent it exceeds 16% × $100,800, or $16,128. This excess is $23,872 ($40,000 − $16,128). However, the housing exclusion may never exceed $14,112 in 2015, so the includible housing income is $25,888 ($40,000 − $14,112). The interest income is fully includible as is the U.S. source earned income of $60,000. Therefore, includible income is $25,888 + $20,000 + $60,000, or $105,888.
The private foundation status of an exempt organization will terminate if it
A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public. Therefore, public charities that solicit broad public support do not meet this definition.
