Special Deck - Corporate Taxation 2

Question 1

In a corporate distribution when a shareholder receives property which value is used for the tax basis?

Answer 1

FMV

Question 2

When a parent corp receives property from a 100% owned subsidiary corp is gain involved in the transfer?

Answer 2

No. Gain not recognized

Question 3

Are Life insurance proceeds collected on death of key corporate employees taxable? If not, why not?

Answer 3

No, income from life insurance proceeds on death of key employee are non-taxable because the life insurance premiums are not deductible for tax purposes.

Question 4

Property transfer from shareholder to corporation in a 351 exchange: is gain recognized? Is is taxable?

Answer 4

Gain not recognized; non-taxable.

Question 5

What is the accumulated adjustment account for an S Corp comprised of?

Answer 5

All the S Corps income sources minus all their expenses and distributions.

Question 6

When a corporation starts up in the first few years, what year-to-year requirements are there to stay exempt from AMT?

Answer 6

1st year- automatically exempt. 2nd year- yr 1 average gross receipts under $5 million. 3rd year- average gross receipts yr 1+yr 2 under 7.5 million. 4th year- years 1-3 average gross receipts under $7.5 million. Yr 5 and beyond- prior 3 year period less than $7.5 million average gross receipts.

Question 7

Name the DRD exception equation.

Answer 7

Div income* %

Then you use % * Pre-DRD income

Question 8

Show how DRD is calculated

Answer 8

Gross business income

+ Dividend income

xxxxxxxxxxxx

• business deductions

Taxable income before DRD

• DRD(dividend inc * %)

Taxable income

Question 9

When an affiliated group of corporations choose to file a consolidated return, what percentage of dividend revenue should be reported?

Answer 9

None. Consolidated returns filed by affiliate corporations eliminate reporting of dividends

Question 10

In a non-liquidating distribution of property to a shareholder, does a corporation recognize gain or loss?

Answer 10

gain only. Loss is never recognized by a corp in a non-liquidating distribution.

Question 11

What types of corp reorganization are each of the following?:

1. Recapitalization
2. Mere change in identity
3. Statuatory merger
4. Stock Redemption

Answer 11

1. Type E
2. Type F
3. Type A
4. NOT a corporate reorganization.

Question 12

The amount of dividends received by a company’s shareholders is limited to what?

Answer 12

The company’s earnings and profits.

Question 13

When a company distributes property to a shareholder, does teh company ever pay taxes on it?

Answer 13

Only if the property has appreciated. Then the difference between basis and FMV is taxed.

Question 14

When receiving dividends what types of property are taxable to the shareholder.

Answer 14

Any kind. Cash or FMV of non cash property.

Question 15

List adjustments and preference for AMT computation

Answer 15

Mneumonic - A SLIM PILE

A SLIM is used in determining ACE, PILE used in arriving at pre-ACE adjustment AMTI

• Amortization of business expenses
• Seventy percent dividends received deduction
• Life Insurance proceeds
• Municipal Bond Interest
• Private activity bond interest
• Installment sales of inventory-difference between accrual and installment method when installment method used for tax purposes
• Long term construction contract method used must be %-of-completion
• Excess depreciation on personal property - when DDB (200%) was used, use 150% DB

Question 16

How does one compute Corporate AMT?

Answer 16

Regular Taxable income

+/- adjustments and preferences

= AMTI before ACE adjustment

+/- Adjusted Current Earnings (ACE) adjustment( SLIM x 75%)

=AMTI before exemption

- AMT Exemption($40,000 - 25%(AMTI before exemption-$150,000))

AMTI

x Tax Rate (20%)

= Tentative Minimum tax

- Regular tax

AMT

Question 17

What is the ACE adjustment actually comprised of?

Answer 17

ACE adjustent is comrsied of the following 4 items

Mneumonic - SLIM

• Seventy-five percent DRD deduction on dividends from unrelated companies(70% only)
• Life Insurance proceeds from death of key employee
• Municipal bond interest

75% of all these values comprise the ACE Adjustment. Or you can add all three values, then take 75% and that will be your ACE adjustment.

Question 18

What is the Adjusted Current Earnings (ACE) comprised of?

Answer 18

The total of AMTI before the ACE adjustment, and the items that comprise the adjustment itself (SLIM)

Question 19

What is amount of allowable deductible charitable contribution?

• gross receipts: $50,000 before charitable deduction of $6,000, but after DRD deduction of $3,000

What is the max Charitable deduction allowed?

Answer 19

$3,000 DRD deduction

plus $50,000 gross income (charitable deduction included in amount)

$53,000 x 10% = $5,300

Question 20

Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan’s basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?

Answer 20

The answer is $80,000

• Start with $2,000 basis.
• Add 40% of $200,000 income ($80,000). This increases his basis to $82,000.
• Then he receives 40% of $100,000 distribution ($40,000)
• This $40,000 will reduce his basis to $42,000.
• Most importantly, the $40,000 will be treated as a NONTAXABLE RETURN OF BASIS!!!!
• Talk about tax optimization!