REG 37 - Corporate Taxation 2 - Corp AMT/Penalty/Related Corp Tax 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?
Year 1 Only.
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 2014 alternative minimum taxable income was $200,000.
The exempt portion of Rona’s 2014 alternative minimum taxable income was
A. $0
B. $12,500
C. $27,500
D. $52,500
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 2014 alternative minimum taxable income was $27,500 = $40,000 - [25 percent * ($200,000 - $150,000)].
T/F: Federal income tax reduces alternative minimum taxable income in computing adjusted current earnings.
False.
There is no adjustment required for Federal income taxes when computing ACE (adjusted current earnings).
T/F: The entire excess of adjusted current earnings over alternative minimum taxable income is an adjustment in computing the corporation alternative minimum tax.
False. If ACE (adjusted current earnings) exceeds AMTI (before the ACE adjustment), then 75% of this difference is used as an adjustment for calculating AMTI.
T/F: The interest on “private activity” municipal bonds is a tax preference item.
TRUE
Zero Corp. is an investment company authorized to issue only common stock.
During the last half of 2014, Edwards owned 450 of the 1,000 outstanding shares of stock in Zero. Another 350 shares of stock outstanding were owned, 10 shares each, by 35 shareholders who are neither related to each other nor to Edwards.
Zero could be a personal holding company if the remaining 200 shares of common stock were owned by
A. An estate where Edwards is the beneficiary.
B. Edwards’ brother-in-law.
C. A partnership where Edwards is not a partner.
D. Edwards’ cousin.
A. Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. As such, the corporation will be subject a 15 percent penalty tax on undistributed personal holding company income. The stock ownership test is satisfied if, at some time during the corporation’s tax year, 50 percent or more of the corporation’s stock was directly or indirectly owned by five or fewer individuals.
An individual indirectly owns stock if it is owned by the individual’s family or partner. Family includes the individual’s brothers, sisters, spouse and lineal descendants and ancestors. An individual will not be considered to be the constructive owner of the stock owned by nephews, cousins, uncles, aunts, and any of his/hers spouses relatives. Constructive ownership also may exist if the individual is a partner in a partnership or the beneficiary of an estate that is a shareholder. The income test is satisfied if 60 percent or more of the corporation’s adjusted ordinary gross income is personal holding company income.
With 450 shares, Edwards already directly owns 45 percent of Zero Corp.’s outstanding stock. If an estate where Edwards is the beneficiary owns the remainder of the corporation’s 200 shares of stock, Edwards would directly or indirectly own 65 percent of the corporation. An ownership exceeding the 50 percent direct or indirect ownership percentage is needed to satisfy the stock ownership test.
Hence, Zero Corp. could be a personal holding company if the remaining 200 shares were owned by an estate where Edwards is the beneficiary. Each response given to this question satisfies the stock ownership test for a personal holding company because, in each response, 5 or fewer individuals would own more than 50 percent of the corporation’s stock. However, this response is the best as it concentrates over 50 percent ownership under the control of one individual.
Kari Corp., a manufacturing company, was organized on January 2, 2014. Its 2014 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 2014 if Kari takes only the minimum accumulated earnings credit? A. $300,000 B. $150,000 C. $50,000 D. $0
C. 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 15 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 2014 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.
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
A. Corporation subject to tax only on income not distributed to stockholders.
B. Corporation subject to the accumulated earnings tax.
C. Regulated investment company.
D. Personal holding company.
D. 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 some time during 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.
Edge Corp. met the stock ownership requirements of a personal holding company. What sources of income must Edge consider to determine if the income requirements for a personal holding company have been met?
I. Interest earned on tax-exempt obligations.
II. Dividends received from an unrelated domestic corporation.
II only. For the personal holding company (PHC) tests, interest earned on tax-exempt obligations is excluded from PHC income. PHC 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 only the dividends should be included, this response is correct.
T/F: Banks, insurance, and finance companies are exempt from the personal holding company tax.
True
T/F: Deficiency dividends can be used to reduce both the accumulated earnings tax and the personal holding company tax.
False.
A deficiency dividend is a dividend expressly declared to avoid the tax and is paid within 90 days of tax imposition (the finding of a deficiency due to the PHC tax).
The deficiency dividend will that is paid, can only avoid PHC tax.
T/F: A consent dividend can be used to reduce both the accumulated earnings tax and the personal holding company tax.
True
T/F: ABC meets the stock ownership requirement of a personal holding company. Interest on tax-exempt obligations must be considered to determine whether the income requirement is met for a personal holding company.
False.
There are only 2 tests needed to pass for a corporation to be considered a PHC:
1. The income test - met when income constitutes 60% of adjusted ordinary gross income.
2. The ownership test - met when more than 50% of the value of the stock is owned directly or indirectly by 5 or less individuals at any time during the last half of the year.
T/F: Taxable income is reduced by excess charitable contributions to calculate personal holding company income for purposes of the personal holding company tax.
True
In 2014, Portal Corp. received $100,000 in dividends from Sal Corp., its 80%-owned subsidiary.
What net amount of dividend income should Portal include in its 2014 consolidated tax return? A. $100,000 B. $80,000 C. $70,000 D. $0
D. A C corporation owning 80 percent or more of a domestic corporation may deduct 100 percent of the dividends received or accrued from the corporation. Owning 20 percent but less than 80 percent of a domestic corporation allows for an 80 percent deduction of dividends received or accrued from the corporation. An ownership percentage of less than 20 percent leads to a deduction of 70 percent of the dividends received. However, the dividend received deduction is limited to a percentage of the corporation’s taxable income, unless the corporation sustains a net operating loss. If the corporation has a net operating loss, the dividend received deduction may be taken without limiting the deduction to a percentage of the corporation’s taxable income.
Since Portal Corp. owns 80 percent of Sal Corp., Portal Corp. may deduct all of the dividends received from Sal Corp. and, as a result, have no dividend income.
