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Exam 17: Corporations: Introduction and Operating Rules

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Question 1

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Falcon Corporation,a C corporation,had gross receipts of $3 million in 2008,$7 million in 2009,and $6 million in 2010.Hawk Corporation,a personal service corporation (PSC) ,had gross receipts of $3 million in 2008,$5 million in 2009,and $4 million in 2010.Which of the corporations will be allowed to use the cash method of accounting in 2011?

A) Neither Falcon Corporation nor Hawk Corporation.
B) Both Falcon Corporation and Hawk Corporation.
C) Falcon Corporation only.
D) Hawk Corporation only.
E) None of the above.

F) B) and C)
G) All of the above

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D

Question 2

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During the current year,Violet,Inc.,a closely held corporation (not a PSC) ,has $130,000 of passive loss,$90,000 of active business income,and $70,000 of portfolio income.How much is Violet's taxable income for the current year?

A) $30,000.
B) $70,000.
C) $90,000.
D) $160,000.
E) None of the above.

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

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Question 3

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During the current year,Shrike Company had $220,000 net profit from operations.Carlos,the sole owner of Shrike,is in the 35% marginal tax bracket.Determine the combined tax burden for Shrike and Carlos under the following two independent situations.(Ignore any employment taxes.)

A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

In the current year,Zircon Corporation donated scientific property worth $300,000 to City University (a qualified charitable organization)to be used in research.The basis of the property was $140,000,and Zircon had held it for ten months as inventory.Zircon Corporation may deduct $220,000 as a charitable contribution (ignoring the taxable income limitation).

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 sole proprietorship.

A calendar year C corporation with average annual gross receipts of $5 million or less must use the cash method of accounting.

In the current year,Plum Corporation,a computer manufacturer,donated 100 laptop computers to a local school district (a qualified educational organization) .The computers were constructed by Plum earlier this year,and the school district allocated the computers among its various schools where they will be used for educational purposes.Plum's basis in the computers is $50,000,and their fair market value is $120,000.What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation) ?

On December 20,2011,the directors of Quail Corporation (an accrual basis,calendar year taxpayer)authorized a cash donation of $5,000 to the American Cancer Society,a qualified charity.The payment,which is made on March 15,2012,may be claimed as a deduction for tax year 2011.

Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?

Hippo,Inc.,a calendar year C corporation,manufactures golf gloves.For 2011,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 2011 is:

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is a subtraction on Schedule M-1?

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Heron Corporation,a calendar year,accrual basis taxpayer,provides the following information for this year and asks you to prepare Schedule M-1:

A corporation may elect to amortize startup expenditures over the 60-month period beginning with the month in which the corporation begins business.

During the current year,Quartz Corporation (a calendar year C corporation)has the following transactions: Quartz owns 15% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss)for the year?

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 $250,000 bonus for the year based on her outstanding performance.The directors want to pay the $250,000 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.)

Quail Corporation is a C corporation with net income of $300,000 during 2011.If Quail paid dividends of $50,000 to its shareholders,the corporation must pay tax on $300,000 of net income.Shareholders must report the $50,000 of dividends as income.

Describe the Federal tax treatment of entities formed as limited liability companies.

Donald owns a 60% interest in a partnership that earned $230,000 in the current year.He also owns 60% of the stock in a C corporation that earned $230,000 during the year.Donald received $50,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $188,000 of income on his individual income tax return for the year.