REG 4 - Corporate Taxation

Question 1

What should a corporation records as basis when it receives property from shareholders at inception?

Answer 1

the basis is the greater of:

1. adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder
2. debt assumed by the corporation

Question 2

Sole shareholder formed an S Corp and contributed equipment with a FMV of $20K, basis of $6K subject to $12K liability. What gain would the shareholder recognize?

Answer 2

The gain would be $6K. The amount of excess over the basis must be recognized as gain. This is applicable for C Corps too

Question 3

When a corporation is formed, when can a shareholder who contributes property NOT have to record a gain or loss on the property transferred to the corporation?

Answer 3

The shareholder will not have to record a gain or loss if:

1. 80 Percent Control: Immediately after the transaction the shareholder contributing the property has 80% control of the nonvoting stock
2. No Receipt of Boot: shareholder must only receive stock in exchange for the property

Question 4

What is the shareholder’s basis in the common stock of a corporation

Answer 4

1. Cash contributed - basis is the amount contributed to company
2. Property Contributed - basis is the NBV of the property, reduced by the cash received and FMV of boot received; AND, any debt on the property that is assumed by the corporation
3. Services contributed: basis is the FMV of the services as this whole amount is taxable to shareholder

Question 5

Can the LIFO method be used for tax purposes?

Answer 5

It can ONLY be used if the taxpayer uses LIFO for financial statement purposes

Question 6

What are the percentage deductions for the dividend received deduction for a corporation?

Answer 6

0 to <20% - 50% deduction
20 to <80% - 65% deduction
80 or more - 100% deduction

Question 7

When does the accrual tax must be used for tax purposes?

Answer 7

1. the accounting for purchases and sales of inventory provided the business has greater than $27M of average annual gross receipts for the three year period ending with the prior tax year.
2. Certain farming corporations, provided the business has greater than $27M of the average gross receipts for the three year period ending with the prior tax year
3. Corporations, trusts with unrelated trader or business income, and partnerships having a C corp as a partner provided the business has greater than $27M average annual gross income

Question 8

What is the accumulated earnings tax?

Answer 8

it is an ADDITIONAL tax for C corporations whose accumulated (retained) earnings are in excess of $250K if earnings are considered to be improperly retained instead of being distributed as dividends to shareholders. The tax rate is 20%

**Personal service corporations are entitled to only $150K

**personal holding companies are not liable

Question 9

What is considered a personal holding company?

Answer 9

to be a personal holding company, 60% of the adjusted ordinary gross income consists of:

1. Dividends
2. Taxable interest
3. Royalties (not mineral, oil, gas, or copyright royalties)
4. Net Rent (if less than 50% of ordinary gross)

AND it needs to be owned more than 50% by five or fewer people

Question 10

What is the required annual tax payment for a C Corp?

Answer 10

1. 100% of the tax liability for the prior year; or,
2. 100% of the current year tax liability; or,
3. 100% of the estimated current year tax liability according to the annualized income method

**there will be a penalty for underpayment of taxes at year end

Question 11

Greg Inc, a MFG, was organized on Jan 1, Y1. It had $400K in taxable income and its federal income tax was $100K. What is the max amount of accumulated taxable income that may be subject to accumulated earnings tax for Y1, if Greg Inc takes only the minimum accumulated earnings credit?

Answer 11

It would be $50K.

Taxable Income $400K
Federal Income Tax ($100K)
Min. Acc. Earnings Credit ($250K)
= $50K

Question 12

Rig owns 85% of Steele and 40% of Urco, Steele owns 50% of Urco. Can Rig file a consolidated tax return for all entities?

Answer 12

yes Rig can file a consolidated tax return. Rig has 90% ownership of Urco (40% + 50%)

Question 13

In order to for a dividend from a foreign corporation to qualify for the Dividend Received Deduction, it must meet the following criteria:

Answer 13

1. must not be a foreign personal holding company
2. be subject to federal taxation
3. be 10% or more owned by the domestic corporation; and,
4. have income from effectively connected business sources in the US

Question 14

How can a C Corp net capital losses be used in other years?

Answer 14

CAPITAL losses can be carried back 3 years and carried forward 5 years; they can only offset capital gains and they are limited to the taxable income for that year

Question 15

What is the tax treatment for net operating losses for the following years:

1. Pre 2017
2. 2018 to 2020
3. 2021 plus

Answer 15

1. Pre 2017 - carry back 2 and carry forward 20
2. 2018 to 2020 - carry back 5 and carry forward Indefinitely. NOLS can offset 100% of taxable income
3. 2021 plus - not allowed to carry back and carry forward Indefinitely. NOLS can offset 80% of taxable income

Question 16

Summer, a single individual, had gross income of $80K and a $50K section 1244 stock loss. Summer also had a $20K section 1244 stock loss carried forward from previous years. What is the amount and character of the section 1244 loss that Summer can deduct for the current year?

Answer 16

Summer can deduct a $50K ordinary loss. The max section 1244 a single taxpayer can deduct in a year is $50K ($100 MFJ) and the losses are only considered ordinary.

Question 17

On December 31, a C corp made a non-liquidating distribution of the following assets to its sole shareholder:

Land: FMV $100K, Basis $50K
Patent: FMV $25K, Basis $0K
Building: FMV $50K, Basis $150K

What gain or loss should the corporation recognize as a result of the distribution?

Answer 17

The corporation should recognize a $75K gain. Losses are NOT deductible

Question 18

Max inherited Bean Corp common stock from his parents. Bean is a qualified small business under Section 1244. The stock cost Max’s parents $20K and had a FMV of $25K on date of parents’ death. Bean declared bankruptcy and Max was informed that the stock was worthless. What amount may Max deduct and what is the treatment?

Answer 18

$0 as Max was not the original owner of the stock. If Max had been the original owner, he would have been able to deduct up to $50K against ordinary income

Question 19

Ron, David, and Mary formed Widget Inc. They made the following contributions at inception:

Ron contributed land AB $20K and FMV $70K, with a $30K liability assumed by the corporation.

David contributed land AB $15K and FMV $30K, and contributed $10K cash

Mary received stock for her services rendered, worth $20K

What is Ron’s taxable gain and basis as a result of this transaction?

What is Widget’s basis in the land received?

Answer 19

Ron’s taxable gain is $10K. Ron is relieved of his liability, but his property only had an AB of $20K so he would have to report the excess $10 ($20 - $30) as a gain.

Ron’s basis in the corporation would be $0

Widget’s basis is $30K. The basis in the asset is the greater of the carryover basis of $20K or the debt assumed of $20K

Question 20

The Dividend Received Deduction is not available to..

Answer 20

S Corps, Personal holding companies, and personal service corporations.

Question 21

ABC Corp paid two distributions during Y5. The first was $60K and the second was $40K. E&P at the end of Y4 was $80K and Y5 E&P is $30K. How should the second distribution be allocated btwn current and accumulated E&P?

Answer 21

1. total distributions is $100K
2. 2nd distribution is 40% of total distribution ($40K x 40%)
3. Current E&P is $30K so apply 40% to the $40K. $12K is current E&P
4. Accumulated E&P is the left over. $30K minus $12K, is $18K Accumulated E&P.

As such you apply current E&P of $12K and Accumulated E&P of $18K to the 2nd distribution.

Question 22

Current E&P is $15K, Accumulated E&P is $10K. A company made 4 cash distributions of $7.5K throughout the year (Feb, Apr, Aug, and Nov). How is current and accumulated E&P applied to the distributions.

Answer 22

1. Current E&P - since this is allocated pro rate so each distribution will get $3.75K from current
2. Accumulated E&P - since accumulated is applied in chronological order the Feb distribution will get $3.75K of accumulated, then the Apr distribution will get $3.75 of accumulated, then the Aug distribution will get $2.5K of accumulated, the Nov payment will not get any allocation of accumulated E&P.
3. Aug payment will have $1.25K return of capital, and Nov will have $3.75K return of capital

Question 23

Ernesto was an employee of Med-Tech Corporation for all of 2021. He earned $150,000 in salary. What is the amount of FICA tax paid by Med-Tech Corporation with respect to Ernesto?

Answer 23

The total FICA is $11,289. This is calculated by taking:

$147,000 x 6.2% = $9,114
$150,000 x 1.45% = $2,175

*$147,000 is the max for OASDI for 2022

Question 24

Is the self employment tax deductible?

Answer 24

it is partially deductible from gross income in arriving at AGI. A self-employed person may deduct the employer’s portion of the self-employment tax paid

Question 25

Mr. T has been a night watchman at Y Company for 10 years. During the current year, he received the following payments from Y Company:

Salary - $15,000
Hospitalization insurance premiums - $3,600
Required lodging on Y’s premises for Y’s convenience as a condition to T’s employment - $2,400
Reward for preventing a break-in - $1,000
Christmas ham (value) - $15

What amount is includible in Mr. T’s gross income in the current year?

Answer 25

$16,000

The hospitalization insurance premiums paid by Mr. T’s employer are excluded from gross income under Sec. 106. Since Mr. T was required to live on Y’s premises both for Y’s convenience and as a condition for his employment, the cost of such lodging is excluded from gross income under Sec. 119. The Christmas ham is excluded from gross income under Sec. 132 as a de minimis fringe. Therefore, Mr. T’s salary of $15,000 and the reward of $1,000 are the only items included in gross income as compensation for services rendered (Sec. 61).

Question 26

Howard, an employee of Ogden Corporation, died on June 30, 2021. During July, Ogden made employee death payments of $10,000 to his widow and $10,000 to his 15-year-old son. What amounts should be included in gross income by the widow and son in their respective tax returns for 2021?

Answer 26

$10K for both;

All death benefits received by the beneficiaries or the estate of an employee from or on behalf of an employer are included in gross income. Therefore, the widow and the son should each include the full $10,000 received as employee death benefits.

Question 27

Phil Armonic is actively engaged in the oil business and owns numerous oil leases in the Southwest. During 2021, he made several trips to inspect oil wells on the leases. As a result of these overnight trips, he paid the following:

Plane fares $4,000
Hotels $1,000
Meals (purchased from restaurants) $800
Entertaining lessees $500

Of the $6,300 in expenses incurred, he can claim as deductible expenses?

Answer 27

$5800

A deduction is allowed for travel expenses while away from home in the pursuit of a trade or business. Meals purchased from restaurants are fully deductible. Generally, entertainment expenses are not deductible. Assuming that Armonic’s expenses meet the business relation requirements, his total deduction is

Question 28

Greg contributes property with a basis of $40K and FMV of $82K with a $10K mortgage to Corporation at inception. Meets the 80% test. What is Greg’s recognized gain? What is the company’s basis in the property?

Answer 28

no gain is recognized;

Company’s basis is $40K. The debt assumed does not impact the basis.

Question 29

Greg the sole owner of Misonix Corp, transferred a building to Misonix. The building had an adjusted tax basis of $35K and a FMV of $100K. In exchange for the building, Greg received $40K cash and Misonix stock with FMV of $60K. What gain does Greg realize? what amount does he recognize?

Answer 29

realized gain is $65K ($100K - $35K)

recognized gain is $40K. it is the lesser of the realize gain or cash received.

Question 30

X and Y formed Z Corp. X Contributed $50K cash and Y contributed land worth $70K (with basis of $40K). Y also received $20K cash from the corporation. X and Y each receive 50% of the corporation’s stock. What is the tax basis of the land to Z Corp?

Answer 30

Z Corp would take a $60K basis in the land ($40K plus $20K)

The general rule is that the property received from the transferor/shareholder is the greater of:

1. NBV of asset transfered plus any cash paid to shareholder; OR,
2. debt assumed by the corporation.

Question 31

In Year 1, Misonix, an accrual basis calendar year C Corp, received $100K in dividend income from the common stock that it held in an unrelated domestic corporation. The stock was not debt financed and was held for over a year. Misonix recorded the following for Y1.

• Loss from Misonix operations -$10K
• Dividend received $100K
• Taxable Income (before DRD) $90K

What is Misonix DRD on its Year 1 tax return?

Answer 31

The DRD is generally calculated as 50% of dividends received, which would be $50K. However, the DRD is limited to 50% of modified taxable income. DRD modified taxable income is calculated as taxable income before the DRD, any NOL deduction, and capital loss carryback deduction. Because the NOL is a current year loss and not a carry over it is not an adjustment to taxable income.

As such, the DRD is limited to $45K ($90K x 50%)

Question 32

The accumulated earnings tax is imposed on:

1. Regular C Corporations?
2. Personal Service Companies?
3. Tax exempt corporations?
4. Personal Holding Companies?
5. Passive foreign investment corporations?

Answer 32

1. Regular C Corporations? yes, $250K
2. Personal Service Companies? yes, $150K
3. Tax exempt corporations? no
4. Personal Holding Companies? no
5. Passive foreign investment corporations? no

Question 33

What is the test to determine whether a company is a personal holding company?

Answer 33

Two criteria have to be met:

1. more than 50% of the stock must be owned by 5 or fewer individuals
2. at least 60% of the adjusted ordinary gross income must consist of certain investment income (interest, dividends, etc)
   * *tax exempt interest is not included in the test

Question 34

A distribution from a C Corporation to shareholder cannot be treated by the shareholder as which of the following classifications?

1. Nontaxable return of capital
2. Capital Loss
3. Ordinary income
4. Capital Income

Answer 34

A capital loss

Distributions from C Corporations are considered dividend income (ordinary income) to the extent of Current or Accumulated E&P.

Question 35

What is a section 1244 stock and what is the tax treatment when it becomes worthless?

Answer 35

If a small business stock becomes worthless it gets 1244 loss treatment.

the max deduction is $50K for individuals ($100K for MFJ) PLUS the $3K capital loss deduction

loss can only be taken by the original stockholder

Question 36

Krol Corp. distributed marketable securities in redemption of its stock in a complete liquidation. On the date of distribution, these securities had a basis of $100K and a FMV of $150K. What gain does Krol have as a result of the distribution?

Answer 36

$50K Capital gain.

The assets distributed are capital assets as opposed to business assets, therefore, the gain is a capital gain.

Question 37

All of the outstanding stock of Bryant Corporation is owned equally by three individuals. Bryant is not a personal service corporation. During the current year, Bryant had active rental real estate income of $250,000, a passive loss on the rental of an office building (acquired in 1991) of $300,000, and portfolio income of $150,000. The corporation earns more than 60% of its gross receipts from the rental real estate in which it materially participates. How much of Bryant’s income may be offset by the rental loss?

Answer 37

$250,000 rental income and $50,000 portfolio income.

Bryant Corporation is a closely held corporation because more than 50% of the value of its stock is held by five or fewer individuals during the last half of the year. A closely held C corporation is not subject to the passive activity loss rules for real estate trades or businesses if during the tax year the corporation derives more than 50% of its gross receipts from the real property trades or businesses in which it materially participates [Sec. 469(c)(7)(D)]. Therefore, Bryant may offset its $300,000 passive loss against active and portfolio income.

Question 38

A corporation required to file Form 1099-DIV for a tax year with the Internal Revenue Service must do so by which of the following dates (not considering Saturdays, Sundays, or holidays)?

Answer 38

Regulation 1.6042-2 requires that Form 1099-DIV for any calendar year be filed on or before February 28 of the year following the year in which gross dividends of $10 or more are paid to shareholders.

Question 39

Can foreign corporations be members of a affiliated group?

Answer 39

No they cannot

Question 40

Pitkin Theatres, Inc., distributes land to its sole shareholder. The land is valued at $30,000 and has a basis of $10,000. The land is subject to a $16,000 mortgage, which the shareholder assumes. Pitkin has $20,000 in earnings and profits. Ignoring any potential effect of any taxes on the distribution, the net effect of the transaction on earnings and profits (E&P) is

Answer 40

An increase by $6,000.

E&P are increased by current E&P and decreased by the corporation’s distributions to its shareholders. A distribution of appreciated property increases E&P by the gain recognized on the distribution ($20,000) and decreases E&P by the FMV of the property ($30,000) net of any liability assumed by the shareholder ($16,000). Therefore, Pitkin’s E&P will have a net increase of $6,000 ($20,000 – $30,000 + $16,000).

Question 41

A company’s taxable income of $50,000 includes the following unadjusted items:

Interest from municipal bonds $5,000
Depreciation in excess of straight-line $12,000
Excessive compensation $4,000

What is the company’s E&P?

Answer 41

$63K

Positive adjustments to taxable income include (1) exempt income, such as interest from municipal bonds; and (2) deductions for taxable income, but not for book purposes, such as depreciation in excess of straight-line. Negative adjustments to taxable income include nondeductible items for taxable income, such as excessive compensation. Therefore, E&P is $63,000 ($50,000 + $5,000 + $12,000 – $4,000).

Question 42

A shareholder receives property (dividend) valued at $4 on the date of declaration and $5 on the date of distribution? what is the tax consequence of the distribution?

Answer 42

it would be $5 taxable dividend. the FV is valued at the date of distribution

Question 43

what is a proportional stock redemption treated as?

Answer 43

it is treated as a dividend distribution

Question 44

Classic, Inc., a C corporation, distributed property to its sole shareholder as part of a complete liquidation. Classic’s adjusted basis in the property was $660,000. The property had a fair market value of $730,000 at the time of the distribution and was subject to a liability of $700,000. The shareholder’s tax basis in Classic’s stock was $740,000. As a result of the distribution of the property, Classic will recognize a

Answer 44

$70K gain

A corporation recognizes any gain or loss realized on distributions in complete liquidation as if the property were sold at its FMV to the shareholder immediately before its distribution. The amount realized by Classic on the distribution is the $730,000 FMV. Classic’s adjusted basis in the property was $660,000. The recognized gain is therefore $70,000 ($730,000 amount realized – $660,000 adjusted basis).