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Exam 17: Corporations: Introduction and Operating Rules

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Question 51

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Which of the following statements is incorrect regarding the dividends received deduction?

A) A corporation must hold stock for more than 90 days in order to qualify for a deduction with respect to dividends on such stock.
B) The taxable income limitation does not apply with respect to the 100% deduction available to members of an affiliated group.
C) If a stock purchase is financed 75% by debt, the deduction for dividends on such stock is reduced by 75%.
D) The taxable income limitation does not apply if the normal deduction (i.e., 50% or 65% of dividends) results in a net operating loss for the corporation.
E) None of the above.

F) A) and C)
G) B) and C)

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Question 52

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Saleh, an accountant, is the sole shareholder of Turquoise Corporation, a C corporation. Turquoise is a personal service corporation with a fiscal year ending September 30 (pursuant to a § 444 election) . The corporation paid Saleh a salary of $330,000 during its fiscal year ending September 30, 2018. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2018, if the corporation is to continue to use its fiscal year without negative tax effects?

A) $0
B) $27,500
C) $82,500
D) $247,500
E) None of the above

F) C) and D)
G) B) and E)

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Question 53

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Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2017 of $5,000. In 2018, Heron made a further charitable contribution of $20,000. Heron's 2018 deduction is limited to $15,000 (10% of taxable income). The 2018 contribution must be applied first against the $15,000 limitation.

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

In each of the following independent situations, determine the C corporation's income tax liability. Assume that all corporations use a calendar year 2017.

Azure Corporation, a C corporation, had a long-term capital gain of $50,000 in the current year. The maximum amount of tax applicable to the capital gain is $7,500 ($50,000 × 15%).

On December 28, 2018, the board of directors of Taupe Corporation, a calendar year, accrual method C corporation, authorized a contribution of land to a qualified charitable organization. The land (basis of $75,000, fair market value of $125,000) was acquired five years ago and held as an investment. For purposes of the taxable income limitation applicable to charitable deductions, Taupe has taxable income of $800,000 and $950,000 for 2018 and 2019, respectively. Describe the tax consequences to Taupe Corporation under the following independent situations. a. The donation is made on February 15, 2019. b. The donation is made on May 15, 2019.

In the current year, Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

During the current year, Coyote Corporation (a calendar year C corporation) has the following transactions: a. Coyote owns 5% of Roadrunner Corporation's stock. How much is Coyote Corporation's taxable income (loss) for the year? b. Would your answer change if Coyote owned 25% of Roadrunner Corporation's stock?

Tonya, an actuary, is the sole shareholder of Shrike Corporation, a professional corporation. The corporation paid Tonya a salary of $360,000 during its fiscal year ending September 30, 2018. How much salary must Shrike Corporation pay Tonya during the period October 1 through December 31, 2018, to enable the corporation to continue to use its fiscal year without negative tax effects?

Nancy is a 40% shareholder and president of Robin Corporation, a calendar year C corporation. The board of directors of Robin has decided to pay Nancy a $75,000 bonus for the current year based on her outstanding performance. The directors want to pay the $75,000 as salary, but Nancy would prefer to have it paid as a dividend. If Nancy is in the 37% marginal tax bracket irrespective of the treatment of the bonus, discuss which form of payment would be most beneficial for each party. (Ignore any employment tax considerations.)

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket irrespective of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2018. The following expenses were incurred during the first tax year (April 1 through December 31, 2018) of operations. Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2018?

Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2018. Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2018): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500. Hornbill Corporation's 2018 deduction for organizational expenditures is $5,800.

Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year. Albatross Corporation's taxable income is $140,000.

A calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000.

The $1 million limitation on the deduction of executive compensation applies to compensation paid to a publicly traded corporation's principal executive officer, principal financial officer, and Board of Directors.

In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation. Azul owns 25% of the Naranja Corporation stock. Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $19,500.

On December 31, 2018, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?