ADVANCED CONCEPTS IN FEDERAL INCOME TAXATION - BUS 586 - EXAM 4

Chapter 11, 12 and 18

In terms of dispersal of ownership, corporations are classified as either closely held or publicly held. T/F

T

The corporate characteristic of limited liability is generally more important to the

shareholders than the characteristic of centralized management. T/F

T

The stock of closely held corporations is typically restricted as to transferability by some type of buy-sell agreement and cannot be sold on the open market. T/F

T

The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. T/F

T

At least three corporations are required to form an affiliated group. T/F

F

An affiliated group consists of a parent company that directly owns 80% of at least one subsidiary corporation plus all other subsidiaries that are 80% owned within the group. T/F

T

The corporate characteristic of free transferability exists if the corporate stock is subject to a buy-sell agreement. T/F

F

A nonprofit corporation may incur a federal income tax if it has unrelated business income. T/F

T

After 2017, a 1.4% excise tax applies to the net investment income of all colleges and universities. T/F

F

After 2017, a 37% excise tax applies to compensation in excess of $1 million paid to executives of tax-exempt organizations. T/F

F

After 2017, a 100% dividends-received deduction is permitted for any dividends received from a foreign corporation. T/F

F

Eagle, Incorporated made a contribution to the United Way of $25,000 during its current tax year. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $25,000. T/F

F

Bisou Incorporated made a $48,200 contribution to charity this year. Only $39,000 of the contribution was deductible. Bisou can carry the $9,200 nondeductible contribution back three years and forward five years. T/F

F

The four primary legal characteristics of a corporation are unlimited liability, limited life, free transferability of interests, and centralized management. T/F

F

A nondeductible charitable contribution is a permanent book/tax difference. T/F

F

Corporations are allowed a deduction for charitable contributions, generally limited to 10 percent of taxable income before the deduction. T/F

T

For distributions prior to 2018, dividends-received deductions generally are not allowed for dividends from foreign corporations. T/F

T

The dividends-received deduction is equal to 65% of any dividends-received by a corporate taxpayer. T/F

F

Donatoni Corporation owns 40% of Market, Incorporated voting common stock. During the current year, Donatoni received a $30,000 dividend from Market. Donatoni must report the dividend as gross income, and is allowed a $15,000 dividends-received deduction. T/F

F

Rogers, Incorporated owns 12% of Lampe Corporation's voting common stock. During the current year, Rogers generated $50,000 operating income and received $8,000 dividends from Lampe. Only $2,800 of the dividend is taxable. T/F

F

A corporation is required to report differences between book and taxable income on either Schedule M-1 or Schedule M-3 of the corporate income tax return. T/F

T

The purpose of Schedule M-1 is to explain the differences between financial statement income and taxable income. T/F

T

The Schedule M-3 reconciliation requires less detailed information than the Schedule M-1 reconciliation. T/F

F

Hearth, Incorporated reported $30,000 of depreciation expense on its financial statements. For federal income tax purposes, it deducted depreciation of $35,000. This book/tax difference would result in an increase to net income per books on the Schedule M-1 or M-3. T/F

F

For a consolidated group of corporations, Schedule M-3 Part 1 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group. T/F

T

Corporate taxable income after December 31, 2017 is taxed at a flat rate of 21%. T/F

T

Corporate taxable income after December 31, 2017 is taxed using a progressive rate schedule with a top marginal rate of 21%. T/F

F

Corporate taxable income earned before December 31, 2017 is taxed using a rate schedule that includes rates ranging from 15% to 39%. T/F

T

A corporation with a June 30 fiscal year earns $1 million for its tax year ended June 30, 2018. Regular tax liability on this income is $210,000. T/F

F

Generally, the corporate income tax is computed using a regressive rate schedule. T/F

F

Under normal circumstances, a corporate taxpayer would prefer a $50,000 deduction to a $50,000 credit. T/F

F

For a corporate taxpayer in the 21% marginal tax bracket, a $20,000 tax credit is equivalent to a $95,238 tax deduction. T/F

T

Most tax credits for which a corporate taxpayer would be eligible are nonrefundable. T/F

T

Angel Corporation's current-year regular tax liability is $40,000. Angel is eligible for a general business credit of $45,000. The corporation will receive a $5,000 refund of federal income tax. T/F

F

The corporate alternative minimum tax was designed to ensure that corporations with substantial economic income paid their fair share of the federal tax burden. T/F

T

For tax years beginning after December 31, 2022, the corporate alternative minimum tax rate is 15 percent. T/F

T

The corporate alternative minimum tax applies only to corporations with financial statement income less than $1 billion. T/F

F

In computing adjusted financial statement income for purposes of the corporate alternative minimum tax, an excess of MACRS depreciation over book depreciation is subtracted. T/F

T

A corporation that is unable to meet its original filing deadline may obtain an automatic twelve-month extension of the time to file its federal income tax return. T/F

F

Corporations with more than $1 million taxable income must pay 100% of their current federal income tax liability in the form of quarterly estimate payments to avoid an underpayment penalty. T/F

T

Corporations report their taxable income and calculate the federal income tax on Form 1040. T/F

F

Corporations with less than $1 million of taxable income are not required to make quarterly estimated tax payments. T/F

F

Frazier, Incorporated paid a $150,000 cash dividend to its shareholders. The corporation cannot deduct this payment on its corporate income tax return. T/F

T

A significant advantage of issuing stock instead of debt financing is that payment of

dividends is discretionary. T/F

T

The double taxation of corporate earnings is one of the dominant characteristics of the federal income tax system. T/F

T

The only alternative to double taxation of corporate earnings is to treat corporations as passthrough entities, similar to partnerships. T/F

F

When price competition is fierce, companies easily shift the burden of a tax increase to their customers via higher prices. T/F

F

The burden of corporate taxation is often borne by corporate shareholders, customers, employees, and suppliers. T/F

T

Corporations are rarely targeted in political debates over taxation. T/F

F

Which of the following is a primary legal characteristic of the corporate form of business?

A) The management of the business is centered in a Board of Directors elected by the shareholders.

B) A shareholder must seek permission to sell his stock.

C) The life of the corporation will terminate when a majority of the shareholders die or cease to exist.

D) A shareholder is personally liable for the debts of the corporation.

A

Fleet, Incorporated owns 85% of the stock of Pete, Incorporated and 35% of the stock of Zete, Incorporated The remaining stock of Pete and Zete is owned by unrelated individuals.

Which of the following statements is correct?

A) Fleet, Pete, and Zete are an affiliated group.

B) Fleet and Zete are an affiliated group.

C) Fleet and Pete are an affiliated group.

D) There is no affiliated group here.

C

Fleet, Incorporated owns 85% of the stock of Pete, Incorporated and 35% of the stock of Zete, Incorporated and 90% of the stock of Bete, Incorporated. Bete owns 5% of the stock of Pete and 5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct?

A) Fleet, Zete, Pete, and Bete are an affiliated group.

B) Fleet and Zete are an affiliated group.

C) Fleet and Pete are an affiliated group.

D) Fleet, Pete, and Bete are an affiliated group.

D

The stock of Wheel Corporation, a U.S. company, is publicly traded, with no single shareholder owning more than 5 percent of its outstanding stock. Wheel owns 90 percent of the outstanding stock of Axle, Inc, also a U.S. company. Axle owns 100% of the outstanding stock of Tire Corporation, a German company. Wheel and Tire each own 50 percent of the outstanding stock of Bumper, Incorporated, a U.S. company. Wheel and Axle each own 50 percent of the outstanding stock of Trunk Corporation, a U.S. company. Which of these corporations form an affiliated group eligible to file a consolidated tax return?

A) Wheel, Axle, Tire, Bumper, and Trunk are an affiliated group.

B) Wheel, Axle, and Tire are an affiliated group.

C) Wheel and Axle are an affiliated group.

D) Wheel, Axle, and Trunk are an affiliated group

D

New York, Incorporated owns 100% of Brooklyn, Incorporated and Queens, Incorporated. Taxable income for the three corporations for their first year was as follows:

New York $628,000

Brooklyn 246,000

Queens (105,000)

Which of the following statements is false?

A) Consolidated taxable income is $769,000.

B) Ifa consolidated return is filed, Queens, Incorporated will receive immediate tax benefit from its operating loss.

C) If Brooklyn, Incorporated is a foreign corporation, it can be part of a consolidated return.

D) The corporations are not required to file a consolidated tax return if they are an affiliated group; however, they may elect to do so.

C

Wave Corporation owns 90% of the stock of Surf, Incorporated. Each corporation reports the following separate items for the current tax year:

Wave Surf

Ordinary operating income $ 500,000 $ (100,000)

(loss)

Capital gain (loss) (5,000) 7,000

Section 1231 gain (loss) 3,000 (10,000)

Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

A) $400,000.

B) $395,000.

C) $410,000.

D) $500,000.

B

Aaron, Incorporated is a nonprofit corporation that collects and distributes food for needy families. Aaron, Incorporated also operates a small grocery store for profit. Which of the following statements is true?

A) The income from the collection and distribution of food and the income from grocery store are taxable.

B) No income from either of the activities is taxable.

C) Only the income from the collection and distribution of food is taxable.

D) Only the income from the grocery store is taxable.

D

In its first taxable year (2022), Platform, Incorporated generated a $100,000 net operating loss and made a $10,000 cash donation to a local charity. In its second year (2023), Platform generated $350,000 operating income and made a $20,000 donation to the same charity.

Compute Platform's taxable income for its second year.

A) $225,000

B) $220,000

C) $320,000

D) $230,000

A

Loda Incorporated made an $8,300 nondeductible charitable contribution and a $2,000 nondeductible political contribution this year. Which of the following statements is true?

A) Both nondeductible contributions are permanent book/tax differences.

B) Both nondeductible contributions are temporary book/tax differences.

C) The nondeductible charitable contribution is a temporary book/tax difference. The nondeductible political contribution is a permanent book/tax difference.

D) The nondeductible charitable contribution is a permanent book/tax difference. The nondeductible political contribution is a temporary book/tax difference.

C

Brace, Incorporated owns 90% of West common stock. This year, Brace generated $50,000 operating income and received $10,000 dividends from West. Brace's taxable income is:

A) $53,000

B) $58,000

C) $50,000

D) $52,000

C

Westside, Incorporated owns 15% of Innsbrook's common stock. This year, Westside generated $50,000 operating income and received $20,000 dividends from Innsbrook.

Westside's taxable income is:

A) $60,000

B) $70,000

C) $50,000

D) $40,000

A

Thunder, Incorporated has invested in the stock of several corporations and has $500,000 current year operating income before dividends:

Corporation Dividend Ownership % Incorporated

Hail, Incorporated $ 52,000 14 Delaware

Hurricane Company 17,500 62 France

Lightening, Incorporated 2,800 41 Utah

Tornado Corporation 131,000 92 New Jersey

Calculate Thunder's dividends-received deduction and taxable income:

A) DRD, $152,920; taxable income, $347,080.

B) DRD, $135,420; taxable income, $533,660.

C) DRD, $176,320; taxable income $526,980.

D) DRD $169,640; taxable income, $330,360

C

Which of the following statements regarding the current year tax treatment of corporate dividends is true?

A) All shareholders receiving dividend payments from U.S. corporations are entitled to a dividends-received deduction.

B) Dividends-received from foreign corporations are not eligible for the dividends received deduction.

C) Corporations are entitled to deduct dividend payments to shareholders in calculating corporate taxable income.

D) Dividend payments between members of an affiliated group of corporations filing a consolidated return are tax exempt.

D

Sonic Corporation has a 21% marginal tax rate and received $10,000 of dividends from Roller, Incorporated, a U.S. corporation in which Sonic owns less than 2% of the outstanding stock. Sonic's effective tax rate on the Roller dividend is:

A) 21%

B) 0%

C) 10.5%

D) None of these choices are correct

C

A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income?

A) Schedule M-1

B) Schedule M-2

C) Schedule M-3

D) Schedule M-4

C

Poppy's book income of $739,300 includes a net long-term capital loss of $42,000 and federal income tax expense of $170,000. Based only on these items, Poppy's taxable income is:

A) $739,300

B) $951,300

C) $909,300

D) $781,300

B

Mandrake, Incorporated has book income of $569,300. Its income includes a $50,700 bad debt expense, determined by the allowance method. Actual write offs this year were $48,000.

Based only on this information, compute Mandrake's taxable income.

A) $569,300

B) $572,000

C) $566,600

D) $528,600

B

Palm Corporation has book income of $424,000. Book income reflects $130,000 federal income tax expense and $55,000 depreciation expense. Tax depreciation expense computed under MACRS is $65,000. Palm received $25,000 of prepaid rent not included in book income. Based only on these items, compute Palm's taxable income.

A) $569,000

B) $539,000

C) $589,000

D) $519,000

A

Honu, Incorporated has book income of $1,200,000. Book income includes $380,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of business meals expense. Based only on these items, compute Honu's taxable income.

A) $1,580,000

B) $1,665,000

C) $1,720,000

D) $1,645,000

D

Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of realty. Based only on these items, compute Airfreight's taxable income.

A) $370,000

B) $395,000

C) $345,000

D) $420,000

C

Slipper Corporation has book income of $500,000. Book income includes a $50,000 gain on the sale of equipment. The equipment originally cost $110,000 and was sold for $75,000. Accumulated book depreciation was $85,000; accumulated MACRS depreciation was $90,000. Based only on these items, compute Slipper's taxable income.

A) $505,000

B) $495,000

C) $555,000

D) $445,000

A

Which of the following statements regarding Schedule M-3 is false?

A) The IRS developed Schedule M-3 with the goal of increasing transparency between reported net income for financial accounting purposes and reported net income for tax purposes.

B) Schedule M-3 reports the temporary versus permanent characterization of book-tax differences.

C) Part I of Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.

D) Schedule M-3 replaces Schedule M-1 for all corporations for tax years beginning

after December 31, 2004

D

Which of the following statements regarding Schedule M-1 is true?

A) The corporate dividends-received deduction is reported on Line 8 of Schedule M-1.

B) A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1.

C) Line 2 of schedule M-1 should reflect the corporation's actual federal income tax liability for the current year.

D) A corporation realizing a current gain on a like-kind exchange that is deferred for tax purposes would not report that gain on Schedule M-1

B

Forward Incorporated's 2023 book income of $739,000 includes a net long-term capital loss of $42,000 and charitable contribution of $170,000. Taxable income shown on the Schedule M-1 would be:

A) $855,900

B) $951,000

C) $781,000

D) $909,000

A

TasteCo, Incorporated reported $210,500 of taxable income this year. What is its regular tax liability?

A) $44,205

B) $65,345

C) $54,775

D) $71,570

A

John's, Incorporated manufactures and sells fine furniture. What is John's regular tax liability if it had taxable income of $40,000,000 for its fiscal year ended September 30, 2018?

A) $14,000,000

B) $9,800,000

C) $8,400,000

D) $11,200,000

B

Maxwell, Incorporated had taxable income of $2,500,000 for its fiscal year ended June 30, 2018. Compute Maxwell’s regular tax liability.

A) $525,000

B) $850,000

C) $687,500

D) $1,000,000

C

Liston, Incorporated had taxable income of $1 million for the current year. Compute Liston’s regular tax liability.

A) $340,000

B) $350,000

C) $210,000

D) $200,000

C

Borough, Incorporated is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability before credits is $450,000. No estimated tax payments have been made. Which of the following statements istrue?

A) The corporation should receive a tax refund for the current year.

B) The portion of the rehabilitation credit that cannot be used this year will be lost.

C) The $500,000 current year credit equals 1/ 5" of the total credit allowed for

rehabilitation of a certified historic structure.

D) The credit is available for restoration of a building that is at least ten years old.

C

Weston Corporation has taxable income of $40 million and adjusted financial statement income of $57 million. Weston’s AMT and total tax liability are:

A) $0 AMT and $8.4 million total tax liability.

B) $150,000 AMT and $8.4 million total tax liability.

C) $150,000 AMT and $8.55 million total tax liability.

D) $0 AMT and $8.55 million total tax liability

C

Cranston Corporation has financial statement net income of $22,567,000, after recording federal income tax expense of $4,100,000 and book depreciation of $13,999,000. If Cranston’s MACRS depreciation is $15,122,000 and it has no NOL carryyforwards, adjusted financial statement income for purposes of the corporate alternative minimum tax is:

A) $22,567,000

B) $26,667,000

C) $11,545,000

D) $25,544,000

D

Which of the following statements regarding the rehabilitation credit is false?

A) After 2017, the credit is available only for costs incurred to rehabilitate certified

historic structures.

B) The credit is intended to encourage businesses to undertake urban renewal projects.

C) The credit is claimed only in the year in which the rehabilitated property is placed in service.

D) The credit equals 20 percent of qualified rehabilitation costs

C

What is the extended due date of the federal income tax return of a corporation with a tax year ended June 30, 2023?

A) October 15, 2023

B) May 15, 2024

C) April 15, 2024

D) March 15, 2024

C

Harmon, Incorporated was incorporated and began business on January 1, 2022. Its tax liability for 2022 was $36,000. Its tax liability for 2023 was $50,000. Which of the following is a correct statement concerning the payment of estimated taxes for 2023?

A) Harmon must pay $12,500 on the 15" day of April, June, September, and December.

B) Harmon must pay $9,000 on the 15th day of April, June, September and December. The $14,000 balance is payable by April 15, 2024.

C) Harmon may pay the $50,000 tax no later than April 15, 2024.

D) None of these statements are correct.

B

Torquay Incorporated's (a calendar-year taxpayer) 2022 taxable income was $15,837,850, and its tax liability was $3,325,948. Torquay's director of tax estimates that the corporation's 2023 taxable income will be $13,350,000. Compute Torquay's 2023 estimated tax payment due on April 15, 2023.

A) $3,337,500

B) $513,566

C) $831,487

D) $700,875

D

For tax years beginning after December 31, 2015, which of the following statements regarding corporate tax filing requirements is false for corporations with a calendar year end?

A) Corporations must file their annual federal income tax returns by the 15th day of the fourth month following the close of the taxable year.

B) Calendar year corporations may request an automatic five-month extension of time to file their federal income tax returns.

C) An extension of the income tax filing deadline does not extend the payment deadline for any balance of tax due for the taxable year.

D) Corporations must file their annual federal income tax returns by 15th day of the third month following the close of the taxable year

d

Assume Jacky, Incorporated is not subject to the business interest limit and has a marginal tax rate of 21%. Which of the following statements is true?

A) Jacky, Incorporated borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $37,920.

B) Jacky, Incorporated issued 1,000 shares of 7%, $100 par preferred stock for

$100,000. The after-tax cost of the $7,000 dividend paid was $5,530.

C) Jacky, Incorporated issued 1,000 shares of 7%, $100 par preferred stock for

$100,000. The after-tax cost of the $7,000 dividend paid was $1,470.

D) Jacky, Incorporated borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $10,080.

A

Which of the following is a means to avoid the double taxation burden imposed on the profits of corporations?

A) Treat all corporations as passthrough entities for federal tax purposes.

B) Enact tax legislation that would make dividends nontaxable to all of the corporation's shareholders.

C) Allow corporate shareholders a credit on their tax returns for the taxes paid by the corporation on the profits currently distributed to shareholders as dividends.

D) All of these choices would avoid double taxation

D

Joanna has a 35% marginal tax rate and owns 100% of the stock of Loman Corporation. This year, Loman generated $400,000 of taxable income, paid $84,000 of corporate income tax, and paid a $50,000 dividend to Joanna. Suppose that the federal income tax system has been amended to allow shareholders to gross up dividend income by the corporate tax paid with respect to the dividend and credit this tax against their individual tax. Further assume that dividends-received by individuals are not eligible for a preferential tax rate. Calculate Joanna's reported dividend income and her tax due on the dividend.

A) Dividend income, $63,291; tax due, $8,861

B) Dividend income, $60,500; tax due, $10,675

C) Dividend income, $50,000; tax due, $17,500

D) Dividend income, $50,000; tax due, $500

A

Which of the following statements regarding the taxation of corporate profits is true?

A) Dividends payments are deductible in computing corporate taxable income.

B) The tax treatment of corporate dividends creates a bias in favor of debt financing.

C) Corporations cannot deduct interest payments in computing corporate taxable income.

D) Corporations with high debt-to-equity ratios have less burdensome cash flow commitments and lower risk of insolvency.

B

In determining the incidence of the corporate income tax:

A) Corporations may pass the tax burden onto consumers in the form of higher prices

B) Corporate shareholders may bear the burden of the corporate tax in the form of lower return on investment

C) Corporate employees may bear the burden of the corporate tax in the form of lower compensation

D) All of these parties may bear the indirect burden of the corporate income tax

D

When price competition is fierce, the incidence of the corporate income tax

A) Cannot be passed on to customers or suppliers, and must be borne solely by

shareholders

B) May be passed on to employees through lower compensation

C) Is borne primarily by customers through higher prices or lower product quality

D) Can be mitigated only with tax reform

B

Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation. T/F

F

The net operating losses of a C corporation can be carried forward to reduce its taxable income in future tax years. T/F

T

Bart owns 100% of an S corporation that had a net operating loss in the current year. If there is sufficient basis in the stock, he will carry this loss back to reduce taxes in a prior S corporation tax year. T/F

F

If a business is operated as a passthrough entity, the startup losses of the business may be deducted against the current taxable income of the owner. T/F

T

If a new business organized as a C Corporation incurs start-up losses, the tax benefits of those losses will be recognized in the current tax year. T/F

F

If a business is formed as a C Corporation, the income may be subject to double taxation. T/F

T

Typically, family-owned businesses are operated as passthrough entities. T/F

T

After-tax cash flow is minimized when a business operates as a passthrough entity rather than a taxable corporation. T/F

F

Owners of a small business often minimize tax costs and maximize cash flow by operating as a passthrough entity. T/F

T