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Exam 2: Corporations: Introduction and Operating Rules

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Question 1

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Thrush Corporation files Form 1120,which reports taxable income of $200,000.The corporation's tax is $56,250.

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B) False

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Question 2

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Ostrich Corporation has net short-term capital gains of $50,000 and net long-term capital losses of $280,000 during 2008.Ostrich had taxable income from other sources of $1 million.Prior years' transactions included the following: a.How are the capital gains and losses treated on Ostrich's 2008 tax return? b.Determine the amount of the 2008 capital loss that is carried back to each of the previous years. c.Compute the amount of capital loss carryover, if any, and indicate the years to which the loss may be carried. d.If Ostrich were a proprietorship, how would Ellen, the owner, report these transactions on her 2008 tax return?

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Question 3

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A corporate net operating loss can be carried back 3 years and forward 5 years to offset taxable income for those years.

Penguin Corporation,a C corporation,has two equal shareholders,Bob and Leo.Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to each shareholder.Before considering the dividend,Bob is in the 10% marginal tax bracket and Leo is in the 28% marginal tax bracket.Which of the following statements is incorrect?

During the year,Coyote Corporation (a calendar year taxpayer)has the following transactions: a.Coyote owns 18% 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 30% of Roadrunner Corporation's stock?

Before paying salaries to its two shareholders,Steamboat Corporation has net income of $640,000 during the year ($1,200,000 revenue - $560,000 operating expenses).Dean and Mary are equal shareholders of Steamboat and work in similar jobs as employees of the corporation.Steamboat pays each shareholder-employee a salary of $320,000,which results in zero taxable income for the corporation.On audit,an IRS agent determines that $40,000 of the amount paid to each of the shareholders is unreasonable compensation.The shareholders' tax adviser has told them that the IRS agent is probably correct in his determination.What effect will the IRS agent's finding have on the taxable income of Dean,Mary,and Steamboat Corporation?

Bjorn owns a 40% interest in an S corporation that earned $150,000 in 2008.He also owns 30% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $35,000 to Bjorn and the C corporation paid dividends of $35,000 to Bjorn.How much income must Bjorn report from these businesses?

Wallaby,Inc.,a calendar year C corporation,had the following income and expenses in 2008: A)How much is Wallaby, Inc.'s charitable contribution deduction for 2008? B)What happens to the portion of the contribution not deductible in 2008?

Which of the following statements is incorrect regarding the taxation of C corporations?

Saguaro Corporation,a cash basis and calendar year taxpayer,was formed and began operations on August 1,2008.Saguaro incurred the following expenses during its first year of operations (August 1-December 31,2008) : If Saguaro Corporation makes a timely election under § 248 to amortize qualifying organizational expenses,how much may the corporation deduct for tax year 2008?

Aqua,Inc.,paid $15,000 interest on a loan to purchase tax-exempt bonds.The $15,000 is a subtraction on Aqua's Schedule M-1.

An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

Redwood,Inc.,a closely held personal service corporation,has a $240,000 passive loss from a rental activity,$135,000 of active business income,and $105,000 of portfolio income.How much of the passive loss can Redwood deduct?

Eagle Corporation owns stock in Hawk Corporation and has taxable income of $233,000 for the year before considering the dividends received deduction.Hawk Corporation pays Eagle a dividend of $300,000,which was considered in calculating the $233,000.What amount of dividends received deduction may Eagle claim if it owns 25% of Hawk's stock?

Copper Corporation owns stock in Bronze Corporation and has net operating income of $600,000 for the year.Bronze Corporation pays Copper a dividend of $200,000.What amount of dividends received deduction may Copper claim if it owns 95% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income) ?

Which of the following C corporations will be allowed to use the cash method of accounting for 2008? Explain your answers. a.Cardinal Corporation, which had net profits as follows: $3 million in 2005, $6 million in 2006, and $4 million in 2007. b.Redbird Corporation, which had gross receipts as follows: $2 million in 2005, $6 million in 2006, and $9 million in 2007.

Under the "check-the-box" Regulations,a single-member LLC that fails to elect to be to treated as a corporation will be taxed as a partnership.

Egret Corporation,a calendar year taxpayer,had an excess charitable contribution for 2007 of $10,000.In 2008,it made a further charitable contribution of $14,000.Its 2008 deduction is limited to $16,000.In applying the 10% limitation,the $10,000 carryover must be used after the current year contribution.

Compensation that is determined to be unreasonable is usually treated as a constructive dividend to the shareholder and is not deductible by the corporation.

Norma formed Hyacinth Enterprises,a proprietorship,in 2008.In its first year,Hyacinth had operating income of $150,000 and operating expenses of $100,000.In addition,Hyacinth had a long-term capital loss of $4,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $25,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2008?