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Exam 17: Corporations: Introduction and Operating Rules

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Question 31

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Canary Corporation,an accrual method C corporation,uses the calendar year for tax purposes.Leticia,a cash method taxpayer,is both a shareholder of Canary and the corporation's CFO.On December 31,2010,Canary has accrued a $100,000 bonus to Leticia.Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations.

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Under § 267(a)(2),an accrual method taxp...

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Question 32

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On December 31,2010,Lavender,Inc. ,an accrual basis C corporation,accrues a $90,000 bonus to Barry,its vice president and a 70% shareholder.Lavender pays the bonus to Barry,who is a cash basis taxpayer,on March 15,2011.Lavender can deduct the bonus in 2010,the year in which Barry's services were performed.

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Question 33

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There is no Federal income tax assessed on partnerships (including those formed as LLCs)or S corporations.Since all states follow the Federal approach as to entity taxation,state income taxation is a neutral factor in the selection of an entity form.

Which of the following statements is incorrect about the check-the-box Regulations?

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

Eagle Corporation owns stock in Hawk Corporation and has taxable income of $160,000 for the year before considering the dividends received deduction.Hawk Corporation pays Eagle a dividend of $200,000,which was considered in calculating the $160,000.What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock?

During the current year,Coyote Corporation (a calendar year C corporation)has the following transactions:

Nancy is a 40% shareholder and president of Robin Corporation,a regular corporation.The board of directors of Robin has decided to pay Nancy a $100,000 bonus for the year based on her outstanding performance.The directors want to pay the $100,000 as salary,but Nancy would prefer to have it paid as a dividend.If both Robin Corporation and Nancy are in a 35% 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. )

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

Olga's proprietorship earned a net profit of $95,000 during the year and she withdrew $70,000 of this profit.Olga must report $70,000 net income from the proprietorship on her individual income tax return (Form 1040).

Cecelia is the sole shareholder of Aqua Corporation,a newly formed C corporation.Joyce is the sole shareholder of Teal Corporation,a newly formed C corporation that is classified as a personal service corporation.Both Cecelia and Joyce plan to have their corporations elect a March 31 fiscal year-end.Will the IRS treat both corporations alike with respect to the fiscal year election? Explain.

Hippo,Inc. ,a calendar year C corporation,manufactures golf gloves.For 2010,Hippo had taxable income (before DPAD) of $800,000,qualified domestic production activities income of $950,000,and W-2 wages related to qualified production activities income of $130,000.Hippo's domestic production activities deduction for 2010 is:

During 2010,Sparrow Corporation,a calendar year C corporation,had operating income of $510,000,operating expenses of $370,000,a short-term capital loss of $25,000,and a long-term capital gain of $80,000.How much is Sparrow's tax liability for 2010?

In 2010,Bluebird Corporation had net income from operations of $50,000.Further,Bluebird recognized a long-term capital loss of $20,000,and a short-term capital gain of $5,000.Which of the following statements is correct?

Flycatcher Corporation,a C corporation,has two equal individual shareholders,Nancy and Pasqual.In the current year,Flycatcher earned $200,000 net profit and paid a dividend of $40,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher,Nancy is in the 28% marginal tax bracket and Pasqual is in the 35% marginal tax bracket.With respect to the current year,which of the following statements is incorrect?

To close perceived tax loopholes,Congress enacted two limitations on the amount of any dividends received deduction.Briefly describe the two loophole closing provisions and explain why Congress felt they were necessary.

Bass Corporation received a dividend of $100,000 from Trout Corporation.Bass owns 25% of the Trout Corporation stock.Assuming it is not subject to the taxable income limitation,Bass's dividends received deduction is $80,000.

During the current year,Kingbird Corporation (a calendar year C corporation) had the following income and expenses: On October 1,Kingbird Corporation made a contribution to a qualified charitable organization of $6,300 in cash (not included in any of the above items) .Determine Kingbird's charitable contribution deduction for the current year.

No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days.

Rodney,the sole shareholder of a calendar year,accrual basis C corporation,loaned the corporation a substantial amount of money on January 1,2010.The corporation accrued $25,000 of interest expense on the loan on December 31,2010.It pays the interest to Rodney,a cash basis taxpayer,on February 1,2011.Under these facts: