Prentice Hall's Federal Taxation 2011: Corporations, 24e (Pope) Chapter 3 The Corporate Income Tax

1) A C corporation must use a calendar year as its tax year unless it has a substantial business purpose to use a fiscal year. Answer: FALSE
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%) Corporations are permitted to deduct &#'((( in net capital losses annually. Answer: FALSE
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#) *r!ani+ational expenses incurred after %((, are amorti+ed o-er fi-e years. Answer: FALSE
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,) Corporations may deduct the ad/usted basis of in-entory plus one$half of the excess of the property0s F12 o-er its ad/usted basis if the in-entory is used for the care of the ill' needy or infants. Answer: 3"4E
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5) Corporations may carry charitable contributions in excess of the income limitation forward for fi-e years. Answer: 3"4E
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)) 3he di-idends$recei-ed deduction is desi!ned to reduce double taxation of corporate di-idends payable to indi-idual shareholders. Answer: FALSE
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6) Spar7s Corporation recei-es a di-idend of &1(('((( from 8ill Corporation' a C Corporation. Spar7s owns 6(9 of 8ill Corporation stoc7. Spar7s0 di-idends recei-ed deduction is &.('(((. Answer: 3"4E
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.) An election to for!o an :*L carrybac7 must be made on or before the return due date ;includin! extensions) for the year in which the :*L is incurred. Answer: 3"4E
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<) =f a controllin! shareholder sells depreciable property to a controlled corporation and the property is depreciable by the purchaser' any !ain on the sale is 1%#1 !ain. Answer: FALSE
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1() All of the taxable income of a personal ser-ice corporation is taxed at a flat #59 rate. Answer: 3"4E
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11) Corporate estimated tax payments are due April 15' 8une 15' September 15 and 8anuary 15. Answer: FALSE
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1%) A deferred tax asset indicates that a firm will reali+e the tax benefit of an e-ent 1 Copyright 2011 Pearson Education, Inc.

sometime in the future. Answer: 3"4E

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1#) >eferred tax liabilities occur when expenses are deductible for boo7 purposes before tax purposes. Answer: FALSE
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1,) =dentify which of the followin! statements is true. A) A corporation is a separate taxpayin! entity that must file a tax return annually. ?) A newly formed corporation must select its basic accountin! method. C) 3he terms @re!ular corporation@ and @C corporation@ are synonymous. >) All of the abo-e are true. Answer: >
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15) =dentify which of the followin! statements is false. A) A corporation0s fiscal year !enerally must end on the last day of the month. ?) A fiscal year may not end on >ecember #1. C) A new corporation can elect a fiscal year that runs from February 1) to February 15 of the followin! year. >) A corporation0s first tax year may not co-er a full 1%$month period. Answer: C
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1)) =dentify which of the followin! statements is true. A) A corporation that is a member of an affiliated !roup filin! a consolidated tax return may be allowed a tax year which is different from the !roup0s parent. ?) An S corporation must !enerally use a calendar year. C) A corporation0s first year must co-er a twel-e$month period. >) All are false. Answer: ?
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16) Ahich of the followin! results in a deferred tax assetB A) "e-enue or !ains are reco!ni+ed earlier for boo7 purposes than for tax purposes. ?) *peratin! loss or tax credit carryforwards exist. C) 3ax basis of an asset is less than its boo7 >) Expenses are deductible earlier for tax purposes than for boo7 purposes. Answer: ?
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1.) Ahich of the followin! items will not create a deferred tax liabilityB A) "e-enues or !ains are reco!ni+ed earlier for boo7 purposes than for tax purposes. ?) Expenses or losses are deductible earlier for tax purposes than for boo7 purposes. C) 3ax basis of an asset is less than its boo7 basis. >) *peratin! loss or tax credit carryforwards exist. Answer: >
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1<) Ahich of the followin! types of e-idence indicate that a -aluation allowance is needed to reduce the deferred tax assetB A) Cistory of profits. ?) Excess of appreciated asset -alues o-er C) Existin! contracts or sales bac7lo!s which will !enerate si!nificant future income. >) Short carrybac7 or carryo-er periods. Answer: >
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%() Ahich of the followin! items is a permanent difference between taxable and financial accountin! incomeB A) >epreciation. ?) >i-idends$recei-ed deduction. C) ?ad debts. >) :et capital loss. Answer: ?
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%1) Ahich of the followin! items is a temporary difference between tax income and financial accountin! incomeB A) roduction acti-ities deduction. ?) roceeds on life insurance on a 7ey executi-e. C) >i-idends$recei-ed deduction. >) >epreciation. Answer: >
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%%) *nce a corporation has elected a taxable year it can chan!e the taxable year without ="S permission if A) the resultin! short period does not ha-e a net operatin! loss. ?) the corporation has not chan!ed its accountin! period within the last ten years. C) the annuali+ed income for the short period is at least .(9 of the corporation0s income for the precedin! taxable year. >) All of the abo-e conditions must be met. Answer: >
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%#) A new corporation may !enerally select one of the followin! accountin! methods with the exception of A) cash method. ?) accrual method. C) retail method. >) hybrid method. Answer: C
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%,) =dentify which of the followin! statements is false. A) A corporation with annual !ross receipts of &5'((('((( or less can use the accrual method to account for sales' cost of !oods sold' in-entories' accounts recei-able and payable and the cash method for other income and expenses. ?) Casualty losses incurred by a corporation are deductible sub/ect to a nondeductible floor similar to those applicable to indi-iduals. C) 3he passi-e loss rules do not apply to widely held C corporations. >) Corporations may recei-e a deduction for di-idends recei-ed from other corporations. Answer: ?
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%5) =dentify which of the followin! statements is true. A) A corporate capital loss can be carried bac7 three years' and then can be carried forward fi-e years. ?) Corporate capital loss carrybac7s can offset corporate ordinary income earned in pre-ious years. C) At the election of a corporation' a net capital loss carrybac7 can be for!one and carried forward only. >) All are false. Answer: A
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%)) 3rail Corporation has !ross profits on sales of &1,('((( and deductible expenses of &1.('(((. =n addition' 3rail has a net capital !ain of &)('(((. 3rail0s taxable income is A) &%('((( loss. ?) &,('((( loss. C) &)('(((. >) &%('(((. Answer: >
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%6) =dentify which of the followin! is false. A) Corporations that sell real property at a !ain must report an additional %(9 of the entire !ain as ordinary income. ?) Corporations sellin! real property that pre-iously had been depreciated usin! an accelerated method are sub/ect to Sec. %<1. C) Section %<1 reduces the amount of net Sec. 1%#1 !ains that can be offset by corporate capital losses. >) Section %<1 recapture applies to Sec. 1%5( property. Answer: A
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%.) >allas Corporation' not a dealer in securities' reali+es taxable income of &)('((( from the operation of its business. Additionally' in the same year >allas reali+es a lon!$term capital loss of &1('((( from the sale of mar7etable securities. =f the corporation reali+es no other capital !ains or losses' what is the proper treatment for the &1('((( lon!$term capital loss on the tax returnB A) 4se &#'((( of the loss to reduce taxable income and carry &6'((( of the lon!$term capital loss forward for fi-e years. ?) 4se &)'((( of the loss to reduce taxable income by and carry &,'((( of the lon!$term capital loss forward for fi-e years. C) 4se &1('((( of the lon!$term capital loss to reduce taxable income.. >) Carry the &1('((( lon!$term capital loss bac7 three years as a short$term capital loss then forward fi-e years. Answer: >
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%<) E-ans Corporation has a &15'((( net capital loss in %((6. 3he corporation reported the followin! capital !ain net income durin! the past three years. =dentify which of the followin! statements is true. Year %(() %((6 %((. Capital Gain Net Income &1('((( 11'((( 5'(((

A) 3he loss is used to offset the !ains from %(() and then carried bac7 to offset &1('((( of the !ains in %((6. ?) 3he loss is used to offset the &11'((( of the %((6 !ains and then carried bac7 to offset &,'((( of the year %(() net !ain. C) 3he loss is used to offset &#'((( of the current year ordinary income' all of the year %((6 capital !ains and &6'((( of the year %((. net !ain. >) 3he loss is used to offset the year %(() net !ains' then &5'((( of the year %((6 net !ains. Answer: > Explanation: >) 3he net capital loss is carried bac7 to the year %((, and then used to offset capital !ains in subseEuent tax years.
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#() ?ooth Corporation sells a buildin! classified as a residential rental property for &%(('(((. 3he 1AC"S strai!ht$line depreciation ta7en is &%('((( and the ad/usted basis of the buildin! is &16('(((. ?ooth Corporation must reco!ni+e ordinary income of A) &#('(((. ?) &%('(((. C) &,'(((. >) &(. Answer: C Explanation: C) Sales price 1inus: Ad/usted &%(('((( basis ; 16('((() "eali+ed !ain & #('((( 1inus: *rdinary income under ; ,'((() Sec. %<1 ;lesser of: ;1) &%('((( depreciation recapture under Sec. 1%,5 x (.%( Sec. 1%#1 !ain & %)'((( or ;%) &#('((( reali+ed !ain x (.%()
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#1) Ahich of the followin! items indicate that a company does not need a -aluation allowanceB A) Existin! sales contracts that will produce sufficient income to reali+e the deferred tax asset. ?) Excess of appreciated asset -alue o-er tax basis sufficient to reali+e the deferred tax asset. C) A stron! history of earnin!s without considerin! the deferred tax asset. >) All of the abo-e. Answer: >
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#%) Ahich of the followin! statements is correctB A) >eferred tax assetsFliabilities are always classified as current on the balance sheet. ?) 3he classification of deferred tax assetsFliabilities depends upon whether the related asset is current or noncurrent. C) >eferred tax assets are classified based on their expected re-ersal dates. >) >eferred tax assetsFliabilities are classified as noncurrent on the balance sheet. Answer: ?
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##) *r!ani+ational expenditures include all of the followin! except for A) costs incurred when issuin! stoc7. ?) le!al costs incident to the creation of the corporation. C) expenses of or!ani+ational meetin!s. >) fees paid to the state of incorporation. Answer: A
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#,) Green Corporation is incorporated on 1arch 1 and be!ins business on 8une 1. Green0s first tax year ends on *ctober #1' i.e.' a short year. Green incurs the followin! expenses durin! the year: Date February 1arch 1arch April >ecember Type >raft charter Stoc7 commission Accountin! fees to set up boo7s 3emporary director fees Charter modification fee Amount & %'((( #('((( %'((( %'((( 1'(((

Ahat is the deduction for or!ani+ational expenses if Green chooses to deduct its costs as soon as possibleB A) &#)'((( ?) &5'(%. C) &))6 >) &5(( Answer: ? Explanation: ?) Amorti+ation of or!ani+ational expenses does not include the stoc7 commission which reduces paid$in capital' and the charter modification which is incurred after the initial year$end. &%'((( H &%'((( H &%'((( I &)'((( $ &5'((( I &1'(((F1.( mo. J 5 mo. I &%. &5'((( H %. I &5'(%.
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#5) Edison Corporation is or!ani+ed on 8uly #1. 3he corporation starts business on Au!ust 1(. 3he corporation adopts a :o-ember #( fiscal year en.> 3he followin! expenses are incurred durin! the year: Date )$#( 6$1( 6$15 )$#( 1%$) Type Attorneys fees associated with obtainin! charter 4nderwriter fees for stoc7 sale 3ransfer cost for property contributed to the corporation for stoc7 Costs of or!ani+ational meetin!s Le!al fees to modify charter Amount &1('((( %5'((( #'((( %'((( ,'(((

Ahat is the maximum amount of or!ani+ational expenditures that can be deducted by the corporation for its first tax year endin! :o-ember #(B A) &1)'((( ?) &1%'((( C) &5'15) >) &.(( Answer: C Explanation: C) 3he underwriter fees and asset transfer cost are not or!ani+ational costs. 3he le!al fee to modify charter is incurred after the :o-ember #( initial year$end. &1('((( H &%'((( I &1%'((( $ &5'((( I &6'((( ;&6'(((F1.() J , I &15)D &5'((( H 15) I &5'15)
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#)) =dentify which of the followin! statements is true. A) *r!ani+ational expenditures incurred by a corporation do not include the cost of accountin! ser-ices necessary to create the corporation. ?) *r!ani+ational expenditures incurred by a corporation do not include the cost of printin! stoc7. C) 4namorti+ed or!ani+ational expenses cannot be deducted when the corporation is liEuidated. >) All are false. Answer: ?
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#6) =dentify which of the followin! statements is true. A) A corporation that accrues compensation payable to an employee must pay the amount within two and one$half months after the close of the taxable year to deduct the amount in the year of the accrual. ?) Accrued compensation that is deductible in the year of accrual is considered to be part of an ="S deferred compensation plan. C) Accrued compensation not paid within three and one$half months after the close of the corporation tax year is deducted in the year followin! the accrual. >) All are false. Answer: A
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#.) Super Corporation !i-es a paintin! to a museum for public display on Au!ust ). 3he paintin! was purchased on April # of the same year for &%('((( and is worth &#('((( at the date of !ift. Also' Super accrues a charitable contribution on >ecember #( and pays the &1%'((( contribution on February 1 of the next year. Super Corporation is a calendar$year corporation that uses the accrual method of accountin!. ?efore considerin! the 1(9 limitation rule' the maximum deduction for the current year is A) &1%'(((. ?) &%('(((. C) &#('(((. >) &#%'(((. Answer: > Explanation: >) 3he &%('((( basis for the paintin! is used to compute the deduction since it is held less than one year and the appreciation would be a short$term capital !ain if sold. As lon! as the pled!e is paid in the first % 1F% months of the next tax year' the corporation may deduct the entire &1%'((( in the current year. 3he total deduction is &#%'((( ;&1%'((( H &%('((().
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#<) =dentify which of the followin! statements is true. A) @*rdinary income property@ in re!ard to the charitable contribution deduction does not include property whose sale would ha-e produced a short$term capital !ain. ?) 3he 3wili!ht Corporation purchases in-entory for &5'(((. =ts F12 on the date it is donated to the ?lue$Gray Cospital for the care of the needy is &1,'(((. 3he maximum charitable contribution deduction a-ailable for the donation is &<'5((. C) Corporations0 charitable deductions are limited to %(9 of their ad/usted taxable income. >) All are false. Answer: ?
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,() =n February of the current year' ?rent Corporation donates computer eEuipment that it purchased six months a!o to Eastside Ci!h School for use in its educational pro!ram. 3he donated property had a &%('((( ad/usted basis to ?rent and a &,('((( F12. Ahat is the amount of the !iftB A) &%('((( ?) &#('((( C) &#5'((( >) &5('((( Answer: ? Explanation: ?) K&%('((( H .5( ;&,('((( $ &%('((()L I &#('(((.
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,1) Garth Corporation donates in-entory ha-in! an ad/usted basis of &,('((( and a F12 of &15('((( to a Eualified public charity. 3he in-entory will be used by the charity for care of the ill. 3he maximum charitable contribution deduction before consideration of the 1(9 limitation is A) &,('(((. ?) &55'(((. C) &.('(((. >) &<5'(((. Answer: C Explanation: C) F12 &15('((( 1inus: ?asis ; ,('((() Appreciation &11('((( J (.5( I &55'((( I 1F% profit lus: >onated property0s basis ,('((( 3entati-e charitable contribution deduction &<5'((( Limited to twice the basis ;&,('((( J %) I &.('(((
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,%) ?lueboy =nc. contributes in-entory to a Eualified charity for use in feedin! the needy. 3he in-entory has a &6('((( F12 and a &#('((( ad/usted basis. ?lueboy =nc. can ta7e a charitable contribution deduction of A) &%('(((. ?) &#('(((. C) &5('(((. >) &)('(((. Answer: C Explanation: C) F12 &6('((( 1inus: ?asis ;#('((() Appreciation &,('((( J (.5( I &%('((( I 1F% profit lus: >onated property0s basis #('((( 3entati-e charitable contribution deduction &5('((( Limited to twice the basis ;&#('((( J %) &)('(((
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,#) =dentify which of the followin! statements is true. A) Ahen a corporation donates appreciated capital !ain property to a charity' the amount of the contribution deduction !enerally eEuals the propertys F12. ?) Ahen a corporation donates appreciated capital !ain property to a pri-ate nonoperatin! foundation' the corporation0s contribution is limited to the property0s F12 minus the ordinary !ain that would ha-e resulted from the property0s sale. C) Ahen a corporation contributes appreciated property to a charity' the charitable contribution deduction is the property0s F12 or ad/usted basis dependin! on the election made by the taxpayer. >) All are false. Answer: A
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,,) =f a corporation0s charitable contributions exceed the deduction limitation in a particular year' the excess A) is not deductible in any future year. ?) becomes a carryo-er to a maximum of fi-e succeedin! years. C) may be carried bac7 to the third precedin! year. >) is carried o-er indefinitely. Answer: ?
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,5) "ichards Corporation has taxable income of &%.('((( calculated before the charitable contribution deduction and before its di-idends$recei-ed deduction of &#,'(((. "ichards ma7es cash contributions of &#5'((( to charitable or!ani+ations. Ahat is "ichards Corporation0s charitable contribution deduction for the current yearB A) &%,')(( ?) &%.'((( C) &#1',(( >) &#5'((( Answer: ?
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,)) 8LA is a 4.S. shoe manufacturer. =ts domestic production income is &1'((('((( and 4.S. A$% wa!es are &)(('(((. 3axable income before the domestic production deduction is &5(('(((. Ahat is the amount of the production acti-ities deductionB A) &15'((( ?) &%('((( C) &,5'((( >) &5('((( Answer: C Explanation: C) &5(('((( J <9 I &,5'(((.
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,6) 3he 4.S. production acti-ities deduction is based on a percenta!e of which of the followin!B A) 3axable income before the production acti-ities deduction. ?) 5(9 of A$% wa!es C) Mualified production acti-ities income. >) A and C Answer: >
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,.) For purposes of the production acti-ities deduction' domestic production !ross receipts do not include the followin!: A) Construction performed in the 4.S. ?) En!ineerin! or architectural ser-ices performed in the 4.S. for construction pro/ects in the 4.S. C) Lease' rental' license' sale or other disposition of Eualified production property manufactured' produced' !rown or extracted in whole or in si!nificant part within the 4.S. >) Sale of food and be-era!es prepared at a retail establishment. Answer: >
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,<) =n %((6 Summer Corporation earns domestic !ross receipts of &% million and incurs allocable expenses of &.(('(((. =t has &,(('((( of income from other sources' resultin! in taxable income of &1.) million before the 4.S. production acti-ities deduction. Ahat is its 4.S. production acti-ities deductionB A) &1,,'((( ?) &1(.'((( C) &)('((( >) &#)'((( Answer: ?
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5() =sland Corporation has the followin! income and expense items for the year. Gross receipts from sales &)('((( >i-idends recei-ed from 159$owned domestic corporation ,('((( Expenses connected with sales #('((( 3he taxable income of =sland Corporation A) &1(('(((. ?) &6('(((. C) &,6'(((. >) &,%'(((. Answer: > Explanation: >) Sales lus: >i-idends Gross income 1inus: Expenses 3axable income before >"> 1inus: 6(9 >"> ;(.6( J &,('((() 3axable income
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is

& )('((( ,('((( &1(('((( ; #('((() & 6('((( ; %.'((() & ,%'(((

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51) 1axwell Corporation reports the followin! results. Gross income from operations >i-idends recei-ed from 1.9$owned domestic corporation Expenses

& <('((( 6('((( 1(('(((

1axwell0s di-idends$recei-ed deduction is A) &,%'(((. ?) &,<'(((. C) &5)'(((. >) &6('(((. Answer: A Explanation: A) 3he di-idends$recei-ed deduction is limited to &,%'((( unless usin! the full &,<'((( di-idends$recei-ed deduction will produce a :*L ;i.e.' taxable income would be &11'((( ;&)('((( $ &,<'(((). As shown below' the full di-idends$recei-ed deduction does not produce a :*L. Gross income from operations & <('((( lus: >i-idends 6('((( J (.6( I &,<'((( ;3entati-e >">) Gross income &1)('((( 1inus: Expenses ; 1(('((() 3axable income before >"> & )('((( J (.6( I &,%'((( ;>"> Limit)
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5%) =dentify which of the followin! statements is true. A) 3he di-idends$recei-ed deduction is desi!ned to reduce double taxation of corporate di-idends. ?) 3he full .(9 di-idends$recei-ed deduction is a-ailable without restriction. C) =f a corporation recei-es di-idends eli!ible for the .(9 di-idends$recei-ed deduction and the 6(9 di-idends$recei-ed deduction' the 6(9 di-idends$recei-ed deduction reduces taxable income prior to the .(9 deduction. >) All are false. Answer: A
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5#) =dentify which of the followin! statements is false. A) 3he 6(9 di-idends$recei-ed deduction is limited to 6(9 of the taxable income of the corporation without re!ard to any :*L deduction' any capital loss carrybac7 and the di-idends$recei-ed deduction itself unless the di-idends$recei-ed deduction produces an :*L. ?) 1embers of an affiliated !roup can claim a <(9 di-idends$recei-ed deduction for di-idends recei-ed from other !roup members that is not sub/ect to a taxable income limitation. C) A corporate di-idends$recei-ed deduction is not allowed for di-idends recei-ed on stoc7 held for ,( days. >) All are false. Answer: ?
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5,) 1oney Corporation has the followin! income and expenses for the tax year. Gross profit on sales &%(('((( Expenses 6(('((( >i-idends recei-ed from less$than$%(9$owned domestic corporations %('((( Ahat is 1oney0s net operatin! lossB A) &,<,'((( ?) &,.('((( C) &5%('((( >) &%%('((( Answer: A Explanation: A) Gross income from operations &%(('((( lus: >i-idends %('((( Gross income &%%('((( 1inus: expenses ; 6(('((() 3axable income before >"> ;&,.('((() 1inus: >"> ;&%('((( J (.6() ; 1,'((() :*L ;&,<,'((()
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55) 1iller Corporation has !ross income of &1(('(((' which includes &,('((( of di-idends from a 1(9$owned corporation. =n addition' 1iller has &.('((( of expenses. 1iller0s taxable income or loss is A) &%('(((. ?) &)'((( C) &(. >) ;&.'(((). Answer: > Explanation: >) 3he di-idends$recei-ed deduction of 6(9 of di-idends recei-ed is not limited since usin! the entire &%.'((( amount will produce a :*L. *ther income & )('((( lus: >i-idends ,('((( Gross income &1(('((( 1inus: Expenses ; .('((() 3axable income before >"> & %('((( 1inus: >"> ;(.6( J &,('((() ; %.'((() 3axable income ;& .'((()
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5)) 3wo days before the ex$di-idend date' >rexel Corporation buys 1(( shares of Nebra Corporation stoc7 ;less than 19) for &%(('(((. >rexel Corporation recei-es &1('((( of di-idends from Nebra Corporation. 3wo wee7s after the ex$di-idend date' >rexel Corporation sells the Nebra Corporation stoc7 for &1<('(((. Ahich of the followin! statements is correctB A) >rexel Corporation cannot reco!ni+e a capital loss. ?) >rexel Corporation cannot ta7e a di-idends$recei-ed deduction on the Nebra Corporation di-idend. C) >rexel Corporation will be allowed a 6(9 di-idends$recei-ed deduction when reportin! the Nebra Corporation di-idend. >) >rexel Corporation will recei-e no di-idends$recei-ed deduction because the stoc7 was purchased ex$di-idend. Answer: ? Explanation: ?) 3he forty$six day minimum stoc7 ownership reEuirement pre-ents ta7in! a di-idends$recei-ed deduction.
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56) Aest Corporation purchases 5( shares ;less than 19) of erch Corporation common stoc7 on April #. 3he ex$di-idend date is April ,. Aest Corporation pays &5('((( for the stoc7 and recei-es a di-idend of &5'((( on the erch stoc7. *n 1ay 1' Aest Corporation sells the erch stoc7 for &,5'(((. Aest0s taxable income before the di-idends$recei-ed deduction is &,'(((. Aest0s di-idends$recei-ed deduction is A) &#'5(( ?) &#'%((. C) &%'.((. >) &(. Answer: > Explanation: >) 3he forty$six minimum day stoc7 ownership reEuirement pre-ents ta7in! a di-idends$recei-ed deduction.
a!e "ef.: C:#$16

5.) =dentify which of the followin! statements is true. A) A corporate :*L can be carried bac7 two years and forward 15 years. ?) An election to for!o an :*L carrybac7 must be made on or before the return due date ;includin! extensions) for the year in which the :*L is incurred. C) =n computin! an :*L for the current year' a deduction is allowed for :*Ls from pre-ious years. >) All are false. Answer: ?
a!e "ef.: C:#$1.

5<) =dentify which of the followin! statements is true. A) 3he charitable contribution deduction is computed after the deduction for a :*L. ?) 3he charitable contribution deduction is computed after the di-idends recei-ed deduction. C) 3he :*L deduction claimed by a corporation must be ta7en after the di-idends$recei-ed deduction. >) All are false. Answer: C
a!e "ef.: C:#$1<

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)() Aebster' who owns all the ?ear Corporation stoc7' purchases a dump truc7 from ?ear Corporation in 8anuary. 3he truc7 cost &1%'((( and has a &1('((( ad/usted basis at the time of the sale. Aebster pays ?ear the truc70s &.'((( F12. Later in the same year Aebster sells the dump truc7 to an unrelated party for &)'(((. Aebster can reco!ni+e a loss of A) &,'(((. ?) &%'(((. C) &#'(((. >) &5'(((. Answer: ? Explanation: ?) Aebster and ?ear Corporation are related parties under Sec. %)6;b). 3he &%'((( loss on ?ear Corporation0s sale to Aebster is disallowed. Cowe-er' no disallowance of the &%'((( loss occurs on the sale by the purchaser to an unrelated party. 3he disallowed loss on the first sale cannot be used by Aebster when he sells the truc7 unless he has a !ain to offset it a!ainst. =n this problem he has a &%'((( loss ;&)'((( sales price $ &.'((( basis).
a!e "ef.: C:#$%1

)1) Aalter' who owns all of the A/ax Corporation stoc7' purchases a truc7 from A/ax Corporation in 8anuary. 3he truc7 cost &1%'((( and has a &1('((( ad/usted basis. Aalter pays the truc70s &.'((( F12. Later in the same year' Aalter sells the truc7 to an unrelated party for &1#'(((. Aith respect to these transactions' A) A/ax Corporation reports a loss of &%'((( and Aalter reports a !ain of &5'(((. ?) A/ax Corporation reports no loss and Aalter reports a !ain of &#'(((. C) A/ax Corporation reports a loss of &,'((( and Aalter reports a !ain of &5'(((. >) A/ax Corporation reports no loss and Aalter reports a !ain of &5'(((. Answer: ? Explanation: ?) A/ax reco!ni+ed no loss on the sale because of the Sec. %)6;a) related party sale transaction rules ;i.e.' A/ax Corporation and Aalter are related parties). Ahen Aalter sells the truc7 for a &5'((( ;&1#'((( $ &.'((() !ain' he is allowed to use the &%'((( disallowed loss as an offset.
a!e "ef.: C:#$%1

)%) >a-is Corporation' a manufacturer' has taxable income of &15('(((. >a-is0s re!ular tax liability is A) &15'(((. ?) &,1'65(. C) &#,'(((. >) &#5'(((. Answer: ? Explanation: ?) &5('((( J (.15 I & 6'5(( %5'((( J (.%5 I )'%5( %5'((( J (.#, I .'5(( 5('((( J (.#< I 1<'5(( "e!ular tax &,1'65(
a!e "ef.: C:#$%#

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)#) >elux Corporation' a retail sales corporation' has a taxable income of &5(('(((. >elux Corporation0s re!ular tax liability is A) &15.'%5(. ?) &1)%'%((. C) &16('(((. >) &165'(((. Answer: C Explanation: C) &5(('((( J (.#, I &16('(((
a!e "ef.: C:#$%#

),) Access Corporation' a lar!e manufacturer' has a taxable income of &1)'((('(((. Access Corporations0s tax is A) &5',,('(((. ?) &5'5#('(((. C) &5')(('(((. >) &5').('(((. Answer: ? Explanation: ?) K;1)'((('((( O 15'((('((() J (.#.L H 5'15('((( I 5'5#('(((J
a!e "ef.: C:#$%#

)5) Glacier Corporation' a lar!e retail sales company' has a taxable income of &%('((('(((. Ahat is Glacier Corporation0s taxB A) &)'.(('((( ?) &6'((('((( C) &6'.(('((( >) &6'%(('((( Answer: ? Explanation: ?) Ahen taxable income eEuals or exceeds &1.'###'###' the tax is calculated by usin! a flat #59 rate. 3herefore the tax is &6'((('((( ;(.#5 J &%('((('((().
a!e "ef.: C:#$%#

))) ?axter Corporation is a personal ser-ice corporation. ?axter Corporation has taxable income of &1('(((. ?axter Corporation0s tax is A) &1'5((. ?) &#',((. C) &#'5((. >) &#'<((. Answer: C Explanation: C) ersonal ser-ice corporations pay an income tax liability eEual to #59 of taxable income.
a!e "ef.: C:#$%,

)6) Ahich of the followin! is not sub/ect to classification as a personal ser-ice corporationB A) Construction. ?) Law. C) Accountin!. >) erformin! arts. Answer: A
a!e "ef.: C:#$%,

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).) =dentify which of the followin! statements is true. A) ersonal ser-ice corporations may be sub/ect to the passi-e acti-ity limitations. ?) All C corporations may be sub/ect to the passi-e acti-ity limitations. C) ersonal ser-ice corporations may use passi-e losses and credits to offset net acti-e income but not portfolio income. >) ?oth A and ? are true. Answer: A
a!e "ef.: C:#$%,

)<) 8o7er Corporation owns .(9 of Plue Corporation. 8o7er Corporation also owns ,59 of Lion Corporation and ,59 of 1ar7 Corporation. Plue Corporation owns ,(9 of Lion Corporation and 1(9 of 1ar7 Corporation. Ahich corporations are members of a controlled !roupB A) Plue' Lion' and 1ar7 Corporations ?) 8o7er' Plue' Lion' and 1ar7 Corporations C) 8o7er' Plue' and Lion Corporations >) 8o7er and Plue Corporations Answer: C
a!e "ef.: C:#$%5$C:#$%)

6() =dentify which of the followin! statements is false. A) ?rown Corporation owns )(9 of Clar7 Corporation and )59 of >a-is Corporation. >a-is Corporation owns 1(9 of Clar7 Corporation' and Clar7 Corporation owns 1(9 of >a-is Corporation. 3he remainin! stoc7 is owned by an indi-idual shareholder. ?rown' >a-is' and Clar7 Corporations are a parent$subsidiary controlled !roup. ?) 3here are three cate!ories of control !roups: parent$subsidiary' brother$sister' and combined. C) 3he controlled !roup test is applied on >ecember #1. >) A controlled !roup must apportion certain tax benefits amon! its members. Answer: A
a!e "ef.: C:#$%5$C:#$%.

61) Andy owns %(9 of :orth Corporation and )(9 of 3ent Corporation. :orth and 3ent ha-e only one class of stoc7 outstandin!. ?arbara owns 5(9 of :orth Corporation and %(9 of 3ent Corporation. :orth and 3ent Corporations will be brother$sister corporations if A) no stoc7 ownership chan!e occurs. ?) ?arbara acEuires an additional 1(9 of :orth stoc7. C) Andy acEuires an additional 1(9 of :orth stoc7 and ?arbara acEuires an additional 1(9 of 3ent stoc7. >) ?arbara acEuires an additional 1(9 of :orth stoc7 and an additional 1(9 of 3ent stoc7. Answer: C
a!e "ef.: C:#$%5$C:#$%)

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6%) Sun and 1oon Corporations each ha-e only one class of stoc7 outstandin!. 3heir stoc7 ownership is shown below. Shareholder Arthur ?renda Charles Sun Corporation 5(9 %(9 #(9 Moon Corporation )(9 ,(9 $$$

Ahich of the four stoc7 ownership chan!es that are illustrated is the minimum chan!e that is needed if Sun and 1oon Corporations are to be brother$sister corporationsB ;Assume the two corporations are eEually -alued.) A) :o stoc7 ownership chan!e is reEuired. ?) Charles must acEuire an additional 1(9 of Sun Corporation. C) Charles must acEuire an additional 59 of 1oon Corporation. >) Arthur must acEuire an additional #(9 of 1oon Corporation. Answer: ?
a!e "ef.: C:#$%)$C:#$%.

6#) Grant Corporation is not a lar!e corporation for estimated tax purposes and reports on a calendar$year basis. Grant expects the followin! results. "e!ular tax Alternati-e minimum tax 3otal tax due &%,.'((( ,('((( &%..'(((

Grant0s tax liability for last year was &%,('(((. Grant0s minimum total estimated tax payment for this year to a-oid a penalty is A) &%,('(((. ?) &%,.'(((. C) &%..'(((. >) &%.('(((. Answer: A Explanation: A) 3he estimated tax liability for a small corporation is the lesser of 1((9 of the current year0s tax liability ;re!ular tax and alternati-e minimum tax)' or 1((9 of last year0s tax liability' or &%,('(((.
a!e "ef.: C:#$#5

6,) =dentify which of the followin! statements is true. A) A corporate tax return must be filed by the fifteenth day of the fourth month followin! the close of the corporation0s tax year. ?) A corporation is reEuired to file a tax return e-en if it has no taxable income. C) A corporation with !ross receipts' total income' and total assets of &1'((('((( or less is permitted to file Form 11%($A. >) All are false. Answer: ?
a!e "ef.: C:#$#6' C:#$#.

65) =dentify which of the followin! statements is false. A) A corporation must file a tax return annually. ?) A corporation can obtain an automatic six$month extension of time to file its tax return. C) 3he ="S will permit an extension of time to file a corporate return beyond the ori!inal due date only when the corporation0s delay is reasonable. >) 3he ="S can rescind the extension period. Answer: C
a!e "ef.: C:#$#<

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6)) =dentify which of the followin! statements is true. A) Form 11%( Schedule L contains the corporation0s income statement. ?) Schedule 1$1 ;Form 11%() is an analysis of the corporation0s retained earnin!s. C) *r!ani+ational expense amorti+ed o-er fifteen years for purposes of determinin! taxable income results in an upper ad/ustment in the initial years to boo7 income on the Schedule 1$ 1 when the expense is bein! amorti+ed o-er ten years for boo7 income purposes. >) All are false. Answer: C
a!e "ef.: C:#$#<' C:#$,(

66) ?ishop Corporation reports taxable income of &6(('((( on its tax return. Gi-en the followin! information from the corporation0s records' determine ?ishop0s net income per its financial accountin! records. >eduction for federal income taxes per boo7s &%,('((( >epreciation claimed on the tax return 1#5'((( >epreciation reported on the financial accountin! boo7s 65'((( Life insurance proceeds on death of a corporate officer 1(('((( A) &5%('((( ?) &)%('((( C) &))('((( >) &5)('((( Answer: ? Explanation: ?) 3axable income &6(('((( lus: Excess of tax depreciation o-er boo7 depreciation )('((( lus: :ontaxable life insurance proceeds 1(('((( 1inus: Federal income taxes ;%,('((() :et income &)%('(((
a!e "ef.: C:#$#<' C:#$,(

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6.) >reyfuss Corporation reports the followin! items: 4nappropriated retained earnin!s' be!innin! of year &.(('((( :et income 6(('((( Federal income tax refund for last year ta7en directly to retained earnin!s 5('((( Cash di-idends paid this year 5(('((( 3he unappropriated retained earnin!s at year$end are A) &1'((('(((. ?) &1'(5('(((. C) &1'5(('(((. >) &%'(5('(#(. Answer: ? Explanation: ?) ?e!innin! balance & .(('((( lus: :et income 6(('((( lus: 3ax refund 5('((( 1inus: >i-idends paid ; 5(('((() Endin! balance &1'(5('(((
a!e "ef.: C:#$,(D Example C:#$5(

6<) Ainter Corporation0s taxable income is &5(('(((. =n addition' Ainter has the followin! items: >epreciation for tax purposes &)('((( >epreciation for financial accountin! purposes ,('((( :et capital loss ;%'((() =nterest on loan to acEuire tax$exempt securities 6'((( Ahat is Ainter0s financial accountin! incomeB A) &511'(((. ?) &51#'(((. C) &51.'(((. >) &5%('(((. Answer: A Explanation: A) 3axable income &5(('((( lus: >ifference between boo7 and tax depreciation %('((( 1inus: :et capital loss ; %'((() 1inus: =nterest on loan to acEuire tax$exempt securities ; 6'((() Financial accountin! income &511'(((
a!e "ef.: C:#$#<' C:#$,(

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.() Lass Corporation reports a &%5'((( net capital loss this year. 3he corporation reports the followin! net capital !ains durin! the past three years. Net on!"Term Capital Gain &5'((( 6'((( $($ Net Short"Term Capital Gain &)'((( #'((( $($

Year 3hird pre-ious year Qear before last Last year

>etermine the amount of net capital loss carried bac7 to each precedin! tax year and the amount of capital loss' if any' a-ailable as a carryforward. Answer: 3he capital loss offsets all &11'((( of capital !ain reported in the third pre-ious year and &1,'((( can be carried o-er to the year before last. &1('((( of the carryo-er is used in the year before last lea-in! &,'((( to be carried o-er to next year.
a!e "ef.: C:#$6

.1) 8ac7son Corporation' not a dealer in securities' reali+es taxable income of &.('((( from the operation of its business. Additionally' 8ac7son Corporation reali+es a &1('((( lon!$term capital loss from the sale of mar7etable securities. Explain the treatment of the loss on the corporate return for this and any other years. Answer: 3he loss cannot be deducted this year since 8ac7son did not report any capital !ains. 3he loss must be carried bac7 to the three precedin! tax years and used as a short$ term capital loss. =f part or all of the loss is unused as a carrybac7' it can be carried forward as a short$term capital loss for fi-e years.
a!e "ef.: C:#$6

.%) ?ri!ht Corporation purchased residential real estate fi-e years a!o for &,5('(((' of which &5('((( was allocated to the land and &,(('((( was allocated to the buildin!. ?ri!ht boo7ed strai!ht$line 1AC"S deductions of &55'((( durin! the past fi-e years. 3his year' ?ri!ht sells the property for &55('((( of which &1(('((( is allocated to the land and &,5('((( is allocated to the buildin!. Ahat are the amount and character of ?ri!ht0s reco!ni+ed !ain or loss on the saleB Answer: ?ri!ht reco!ni+es &5('((( ;&1(('((($&5('((() of Sec. 1%#1 !ain on the sale of the land. ?ri!ht also reco!ni+es &1(5'((( K&,5('((( $ ;&,(('((( $ &55'((()L on the sale of the buildin! of which &11'((( ;%(9 of the lesser of ;1) &55'((( depreciation claimed or ;%) &1(5'((( !ain reco!ni+ed) is ordinary income recaptured under Sec. %<1. 3he remainin! &<,'((( ;&1(5'((( $ &11'((() !ain on the sale of the buildin! is Sec. 1%#1 !ain.
a!e "ef.: C:#$6

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.#) "yan Corporation sells a commercial buildin! and land. 3he sales proceeds attributable to the buildin! is &1,5'(((. Ahen purchased' the buildin! is allocated &65'((( of the purchase price. 3he firm has depreciated the buildin! usin! the AC"S rules. 3he AC"S deductions ta7en total &)('(((. =f the buildin! had been depreciated on a strai!ht$line basis' the depreciation would be &5('(((. Ahat is the amount and character of "yan0s reco!ni+ed !ainB Answer: "eali+ed !ain: &1,5'((( $ ;&65'((( $ &)('((() I &1#('(((. "eco!ni+ed !ain: &1#('(((. Since the buildin! is Sec. 1%,5 property' all of the depreciation recapture potential of &)('((( is ordinary income. 3he remainin! &6('((( !ain is Sec. 1%#1 !ain. Section %<1 does not affect the answer since all of the depreciation has already been recaptured.
a!e "ef.: C:#$6

.,) 3he followin! expenses are incurred by Salter Corporation when it is or!ani+ed on 8uly 1. Attorney fees to draft charter &%('((( 4nderwriter fees for stoc7 sale 1('((( 3ransfer cost for property contributed to the corporation for stoc7 ,'((( Costs of or!ani+ational meetin!s before be!innin! business 5'((( Costs of directors meetin!s after be!innin! business .'((( Salter commenced business on September .. Ahat is the maximum amount of or!ani+ational expenditures that can be deducted by the corporation for its first tax year endin! >ecember #1B Answer: ;&%('((( H &5'((() I &%5'((( total or!ani+ational costs. >eduction is &5'((( H K ) J ;%('(((F1.()L I &5'))6.
a!e "ef.: C:#$<

.5) *n >ecember 1(' %((<' >ell Corporation ;a calendar year taxpayer) accrues an obli!ation for a &1(('((( bonus to 1uriel' a sales representati-e who had had an outstandin! year. 1uriel owns no >ell Corporation stoc7. 3he bonus is paid on 1ay 5' %(1(. Ahat is >ell0s deduction for %((<B Ahat is >ell0s deduction for %(1(B Answer: >ell is allowed &( deduction for %((< as the bonus is not paid by 1arch 15' %(1(. >ell will ta7e the &1(('((( deduction in %(1(.
a!e "ef.: C:#$1(D Example C:#$6

.)) Chambers Corporation is a calendar year taxpayer usin! the accrual method of accountin!. =n %((<' its board of directors authori+es a &%('((( contribution to the ?oy Scouts. Chambers pays the contribution on 1arch 1%' %(1(. Ahat is the maximum contribution allowed in %((< Ahat is the maximum contribution allowed in %(1(B Answer: 3he maximum allowable in %((< is &%('(((. Chambers may elect to treat all or part of the contribution as ha-in! been made in the year in which it was accrued. =f Chambers ma7es this election' it may ta7e the remainin! amount in %(1(. =n this case' &( would be remainin!. =f Chambers does not ma7e the election' the &%('((( contribution is deductible when paid in %(1(.
a!e "ef.: C:#$11

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.6) rince Corporation donates in-entory ha-in! an ad/usted basis of &%)'((( and a F12 of &,('((( to County Cospital' which is a Eualified public charity. Ahat is the amount of rince0s deductionB Answer: rince may deduct the ad/usted basis plus 5(9 of the excess of the property0s F12 o-er the ad/usted basis ;not to exceed twice the property0s ad/usted basis) for a total of &##'((( K&%)'((( H ;.5( J &1,'((()L.
a!e "ef.: C:#$11

..) >urin! the year' Soup Corporation contributes some of its in-entory to a Eualified charity for use in feedin! the needy. 3he in-entory has a F12 of &.5'((( and an ad/usted basis of &%5'(((. Ahat is the amount of Soup Corporation0s charitable contribution deduction for the donation of the in-entory as determined without re!ard to the o-erall charitable contribution limitationB Answer: &%5'((( H (.5( ;&.5'((( $ &%5'((() I &55'((( tentati-e deduction. 3his amount is limited to twice the property0s ad/usted basis or &5('((( ;% J &%5'(((). Soup Corporation can claim a &5('((( deduction.
a!e "ef.: C:#$1#

.<) ?ermuda Corporation reports the followin! results in %((. and %((<: Ad/usted taxable income Charitable contributions #$$% &,(('((( 6('((( #$&$ &)(('((( 5('(((

Ahat is ?ermuda0s contribution deduction in %((< and %(1(B Ahat is the disposition of any remainin! amountB Answer: ?ermuda0s %((< contribution deduction is limited to &,('((( ;(.1( J &,(('(((). ?ermuda has a &#('((( ;&6('((( $ &,('((() contribution carryo-er to %(1(. 3he %((< contribution deduction is limited to &)('((( ;(.1( J &)(('(((). ?ermuda0s deduction for %(1( is composed of the &5('((( donated in %(1(' and &1('((( of the %((< carryo-er. A &%('((( carryo-er from %(1( carries o-er to %(11' %(1%' %(1#' and %(1,.
a!e "ef.: C:#$1#D Example C:#$11

<() Nerotech Corporation donates the followin! property to an elementary school: R Computer printer purchased three years a!o for &1'(((. 3he printer has a &5(( F12 and &$($ ad/usted basis on contribution date. R Computer eEuipment acEuired one year a!o at a cost of &5'(((. 3he eEuipment has a &.'((( F12 and &$($ ad/usted basis on contribution date. R Computer software acEuired two months a!o at a cost of &1('(((. 3he software will be used in a pre$7inder!arten pro!ram. =ts F12 on the contribution date is &1('((( and it has an ad/usted basis of &$($. a. =dentify any donation Eualifyin! for special treatment. b. Ahat is Nerotech0s charitable contribution deductionB Answer: a. :one of the eEuipment Eualifies for a special deduction. b. 3here is no charitable deduction.
a!e "ef.: C:#$1%$1#

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<1) Francine Corporation reports the followin! income and expense items for the tax year endin! >ecember #1. Gross receipts from sales >i-idends recei-ed from 159$owned domestic corporation Expenses connected with sales &55'((( %.'((( %('(((

Ahat is Francine Corporation0s taxable incomeB Answer: &55'((( H &%.'((( $ &%('((( $ ;(.6( J &%.'((() I &,#',((. 3he di-idends$ recei-ed deduction limitation is &,,'1(( K;&55'((( H &%.'((( $ &%('((() J (.6(L and does not apply.
a!e "ef.: C:#$15

<%) Carter Corporation reports the followin! results for the current year: Gross profits on sales >i-idends from less than %(9$owned corporations *peratin! expenses &))('((( #(('((( )5('(((

a. Ahat is Carter Corporation0s taxable income for the current yearB b. Cow would your answer to art a chan!e if Carter0s operatin! expenses are instead &6(('(((B c. Cow would your answer to art a chan!e if Carter0s operatin! expenses are instead &6)('(((B Answer: a. Carter0s taxable income is &1(('((( ;&))('((( H &#(('((( $ &)5('((( $&%1('((( >">). 3he >"> limitation is &%16'((( K(.6( J ;&))('((( H &#(('((( $ &)5('((()L and does not apply. b. Carter0s taxable income is &6.'((( ;&))('((( H &#(('((( $ &6(('((( $ &1.%'((( >">). Since a :*L is not created by claimin! the full &%1('((( >"> ;see part a)' the >"> is limited to 6(9 of &%)('((( ;))('((( H #(('((( O 6(('((()' or &1.%'(((. c. Carter reports a :*L of &1('((( ;&))('((( H &#(('((( $ &6)('((( $ &%1('((( >">). :o limitation on the >"> is imposed if the result is a :*L when the full &%1('((( >"> is claimed.
a!e "ef.: C:#$15$C:#$1<

<#) ?ebop Corporation reports the followin! results in the current year. Gross income from operations >i-idends from 159 owned domestic corporation Expenses &15('((( 5('((( 1,('(((

Ahat is ?ebop0s taxable incomeB Answer: Gross income from operations &15('((( >i-idends recei-ed 5('((( Gross income &%(('((( 1inus: Expenses 1,('((( 3axable income before special deductions & )('((( 1inus: >i-idends$recei-ed deduction ;(.6( J 5('((() ; #5'((() 3axable income & %5'(((
a!e "ef.: C:#$15D Example C:#$15

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<,) 8ac7el' =nc. has the followin! information for the current tax year. Gross sales &#5('((( Cost of !oods sold 5('((( >i-idends recei-ed ;1(9) ,('((( *peratin! expenses #('((( Charitable contributions ,5'((( Ahat is 8ac7el0s charitable contribution deductionB Ahat is 8ac7el0s taxable incomeB Answer: &#5('((( Gross sales ,('((( lus: >i-idend income ; 5('((() 1inus: Cost of sales ; #('((() 1inus: *peratin! expenses &#1('((( 3axable income before >"> and charitable contributions x (.1( & #1'((( Charitable contribution limit 3he 1(9 charitable contribution deduction limitation is computed before the di-idends$ recei-ed deduction. 3he &1,'((( ;&,5'((( $ &#1'((() excess contributions are carried o-er for up to 5 years. &#1('((( ; #1'((() &%6<'((( ; %.'((() &%51'((( 3axable income before >"> 1inus: Charitable deduction 3axable income before >"> 1inus: >i-idends$recei-ed deduction 3axable income

a!e "ef.: C:#$15' C:#$1)

<5) >exter Corporation reports the followin! results for the current year: Gross income from operations >i-idends from less than %(9$owned corporations *peratin! expenses Charitable contributions &<('((( 5('((( 65'((( 1('(((

=n addition' >exter has a &%5'((( :*L carryo-er from the precedin! tax year. Ahat is >exter0s taxable income for the current yearB Answer: Gross income ;<('((( H 5('((() &1,('((( 1inus: *peratin! expenses ; 65'((() =ncome before special deductions & )5'((( 1inus: Charitable contribution ; ,'((()a >i-idends$recei-ed deduction ; #5'((() :*L ; %5'((() 3axable income & 1'((( a3he charitable contribution is limited to &,'((( K(.1( J ;&)5'((( $ &%5'((()L. 3he di-idends$recei-ed deduction is not limited by the 6(9 >"> limitation K;&)5'((( $&,'((() J (.6( I &,%'6((L.
a!e "ef.: C:#$1<' C:#$%(

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<)) Chase Corporation reports the followin! results in the current year. Gross income from operations >i-idends from 159 owned domestic corporation Expenses Ahat is Chase0s taxable incomeB Answer: Gross income from operations >i-idends recei-ed Gross income 1inus: Expenses 3axable income before special deductions 1inus: >i-idends$recei-ed deduction S 3axable income &15('((( 5('((( 155'(((

&15('((( 5('((( &%(('((( 155'((( & ,5'((( ; #1'5(() & 1#'5((

S3he >"> is limited to the lesser of 6(9 of di-idends recei-ed ;&#5'((() or 6(9 of taxable income before the >"> ;&#1'5(( I &,5'((( J (.6().
a!e "ef.: C:#$1)D Example C:#$1.

<6) >umont Corporation reports the followin! results in the current year. Gross income from operations >i-idends from 159 owned domestic corporation Expenses Ahat is >umont0s taxable incomeB Answer: Gross income from operations >i-idends recei-ed Gross income 1inus: Expenses 3axable income before special deductions 1inus: >i-idends$recei-ed deduction S 3axable income &15('((( 5('((( 1)5'5((

&15('((( 5('((( &%(('((( 1)5'5(( & #,'5(( ; #5'((() & 5((

S>umont0s >"> is not restricted by the limitation of 6(9 of taxable income before the >"> because' after ta7in! into account the tentati-e &#5'((( >">' the corporation has a &5(( :*L for the year.
a!e "ef.: C:#$1)D Example C:#$1.

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<.) Courtney Corporation had the followin! income and expenses for the tax year. Gross profit on sales &#(('((( Expenses &)(('((( >i-idends recei-ed from less$than$%(9$ owned domestic corporations & %('((( Courtney had taxable income for the past three years of: %((5 %(() %((6 &1(('((( &1%('((( & .('(((

a. >etermine the corporation0s :*L for the current year. b. >etermine the amount of :*L carried bac7 to each precedin! tax year and the amount of :*L' if any' a-ailable as a carryforward. Answer: a. Gross income from operations &#(('((( lus: >i-idends %('((( Gross income &#%('((( 1inus: expenses )(('((( 3axable income before >"> ;%.('((() 1inus: >"> ;&%('((( J (.6() ; 1,'((() :*L ;&%<,'((() b. %((5 %(() &1%('(((
a!e "ef.: C:#$1<

&( Carryforward

%((6 &<,'(((

&.('(((

<<) aul' who owns all the stoc7 in "od!ers Corporation' purchases a truc7 from the corporation in 8anuary. 3he truc7 cost &11'((( and has an ad/usted basis of &<'(((. aul pays "od!ers the truc70s &6'((( F12. aul sells the truc7 later in the tax year to an unrelated party for &1%'(((. Ahat is the amount and character of the income that aul will report on this year0s tax returnB Answer: 3he corporation could not reco!ni+e the &%'((( ;&11'((( $ &<'((() reali+ed loss on the sale of the truc7 since aul and the corporation are related parties ;Sec. %)6;a);1)). aul would reco!ni+e a !ain of only &#'((( K;&1%'((( $ &6'((() $ &%'((( disallowed lossL on his subseEuent sale.
a!e "ef.: C:#$%%

1(() Little Corporation uses the accrual method of accountin!. Little0s sole shareholder' "enee' uses the cash method of accountin!. ?oth taxpayers use the calendar year as their tax year. 3he corporation accrues a &%5'((( interest payment to "enee on >ecember %5' %((< and ma7es the payment on 1arch 1(' %(1(. Ahat are the tax conseEuences of the transactions to both taxpayers in %((. and %(1(B Answer: Little Corporation cannot deduct the interest in %((<' but must wait until "enee reports the income in %(1(. 3here are no tax conseEuences to either taxpayer in %((<.
a!e "ef.: C:#$%1D Example C:#$%6

2 Copyright 2011 Pearson Education, Inc.

1(1) Aestwind Corporation reports the followin! results for the current year: Gross profit on sales Lon!$term capital !ain Lon!$term capital loss Short$term capital !ain Short$term capital loss *peratin! expenses &%5('((( %5'((( 1('((( 6'5(( 1%'5(( .('(((

Ahat are Aestwind0s taxable income and re!ular tax liability before credits for the current yearB Answer: 3he net capital !ain is &1('((( K;&%5'((( $ &1('((() H ;&6'5(( $ &1%'5(()L. Gross profit on sales lus: :et capital !ain 1inus: *peratin! expenses 3axable income 3ax on first &1(('((( of taxable income 3ax on remainin! taxable income ;&.('((( J (.#<) 3ax liability
a!e "ef.: C:#$%#' C:#$%,

&%5('((( 1('((( ; .('((() &1.('((( & %%'%5( #1'%(( & 5#',5(

1(%) Aoods and 3i!er Corporations ha-e only one class of stoc7 outstandin!' owned by the followin! indi-iduals: Shareholder 8ohn Sarah Stoc7 *wnership ercenta!es Aoods Corp. 3i!er Corp. .(9 %59 %(9 659

Are Aoods and 3i!er members of a brother$sister controlled !roupB Ahy or why notB Answer: Fi-e or fewer indi-iduals own at least .(9 ;they own 1((9) of each corporation0s stoc7. Cowe-er' those same indi-iduals own only ,59 of each corporation0s stoc7 ta7in! into account only their common ownership. 3he common ownership is %59 for 8ohn and %(9 for Sarah for a total of ,59. ?ecause the more$than$5(9 test is not met' Aoods and 3i!er are not members of a brother$sister controlled !roup.
a!e "ef.: C:#$%)' C:#$%6D Example C:#$#)

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1(#) ?en and 8erry Corporations are members of the ?en$8erry controlled !roup. 3he corporations file separate tax returns for the current year and report the followin! results: Corporation ?en 8erry 3axable =ncome ;:*L) &;%5'((() 1(('(((

a. =f they elect no special apportionment plan' what is their combined tax liabilityB b. =f they >* elect a special apportionment plan' what is their lowest combined tax liabilityB Answer: a. =f they elect no special apportionment plan' ?en and 8erry are limited to &%5'((( each taxed at a 159 rate and to &1%'5(( each taxed at a %59 rate. Since ?en has a :*L' it has no tax liability. 8erry0s tax liability is as follows: 159 tax brac7et: (.15 J &%5'((( %59 tax brac7et: (.%5 J &1%'5(( #,9 tax brac7et: (.#, J &)%'5(( Subtotal for 8erry Corporation 3otal for ?en$8erry controlled !roup & #'65( #'1%5 %1'%5( &%.'1%5 &%.'1%5

b. =f the corporations elect a special apportionment plan' the !roup may apportion the full &5('((( and &%5'((( amounts for each of the reduced tax rate brac7ets to 8erry Corporation. Since ?en has a :*L' it has no tax liability. 8erry0s tax liability is as follows: 159 tax brac7et: (.15 J &5('((( %59 tax brac7et: (.%5 J &%5'((( #,9 tax brac7et: (.#, J &%5'((( Subtotal for 8erry Corporation
a!e "ef.: C:#$#%' C:#$##D Example C:#$,%

& 6'5(( )'%5( .'5(( &%%'%5( &%%'%5(

3otal for ?en$8erry controlled !roup

1(,) Exam Corporation reports taxable income of &.(('((( on its federal income tax return. Gi-en the followin! information from the corporation0s records determine its boo7 income. >eduction for federal income taxes per financial accountin! records &%6%'((( >epreciation claimed on the tax return 1,('((( >epreciation recorded on the financial accountin! records .('((( >i-idends$recei-ed deduction ,.'((( Life insurance proceeds on death of corporate officer <('((( Answer: &.(('((( $ &%6%'((( H ;&1,('((( $ &.('((() H &,.'((( H &<('((( I &6%)'((( 3he reconcilin! number on the Schedule 1$1 is taxable income before special deductions. 3hus' the di-idends$recei-ed deduction amount would not re!ularly be included in the Schedule 1$1 reconciliation but must be included here since the startin! point for the calculation is taxable income.
a!e "ef.: C:#$,(

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1(5) Continental Corporation anticipates a #,9 tax rate for the next se-eral years and has a &5(('((( :*L carryo-er. a. Ahat is the /ournal entry to record the :*L carryo-er0s tax benefits assumin! that no -aluation is neededB b. Ahat is the /ournal entry if Continental Corporation estimates that one$half of the :*L will not be reali+edB Answer: a. >eferred tax asset 16('((( Federal income tax expense ;benefit) 16('((( b. >eferred tax asset Liability for unreco!ni+ed tax benefit Federal income tax expense ;benefit)
a!e "ef.: C:#$#$C:#$1#

16('((( .5'((( .5'(((

1()) Cow does the use of a net capital loss differ for indi-idual and corporate taxpayersB Answer: :et capital losses are treated differently for indi-idual and corporate taxpayers. =ndi-iduals may use up to &#'((( per year of net capital losses to offset ordinary income' cannot carry bac7 net capital losses but can carry forward net capital losses indefinitely. Corporations may not use any net capital losses to offset ordinary income' can carry net capital losses bac7 three years' and can carry net capital losses forward for only fi-e years.
a!e "ef.: C:#$6

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1(6) 8ames Corporation purchased residential real estate in %((5 for &%%5'((( of which &%5'((( was allocated to land and &%(('((( was allocated to the buildin!. 8ames Corporation too7 strai!ht$line 1AC"S deductions of &#('((( durin! the years %((5$%((<. =n %(1(' 8ames corporation sold the property for &%.5'(((' of which &)('((( is allocated to the land and &%%5'((( is allocated to the buildin!. Ahat are the amounts and character of 8ames Corporation0s reco!ni+ed !ain or loss on the saleB Answer: Land: Sales rice & )('((( 1inus: ?asis ;ori!inal price) ;%5'((() Sec. 1%#1 !ain on land & #5'((( ?uildin!: Sales rice 1inus: ?asis ;ori!inal price) 1inus: >epreciation "eco!ni+ed !ain &%%5'((( ;16('((() & 55'(((

&%(('((( ; #('((()

"ecapture amount on buildin! as if Sec. 1%,5 property: Lesser of: &#('((( ;depreciation claimed) or &55'((( ;reco!ni+ed !ain) 3imes: Sec. %<1 percenta!e *rdinary income under Sec. %<1 Sec. 1%#1 !ain on buildin!: "eco!ni+ed !ain 1inus: *rdinary income portion Sec. 1%#1 !ain on buildin! Summary: Asset Land ?uildin! 3otal Sec. 1%#1 &#5'((( ,<'((( &.,'((( 3ype of Gain *rdinary & $($ )'((( & )'(((

& #('((( J(.%( & )'((( & 55'((( ; )'((() & ,<'((( 3otal &#5'((( 55'((( &<('(((

a!e "ef.: C:#$6

1(.) Ahat are start$up expendituresB Answer: Start$up expenditures usually occur before the actual operation of a trade or business and in-ol-e the costs incurred in in-esti!atin! and creatin! an acti-e trade or business.
a!e "ef.: C:#$1(

1(<) For corporations' what happens to excess charitable contributionsB Answer: Corporations may not deduct charitable contributions in excess of 1(9 of ad/usted taxable income. Excess charitable contributions are eli!ible for a fi-e$year carryforward but cannot be carried bac7. Excess charitable contributions are sub/ect to the same 1(9 limitation in the carryo-er years.
a!e "ef.: C:#$1#

32 Copyright 2011 Pearson Education, Inc.

11() >escribe the domestic production acti-ities deduction. Answer: 3he %((, 8obs Act added Sec. 1<<' which allows a 4.S. production acti-ities deduction eEual to a percenta!e times the less of ;1) Eualified 4.S. production acti-ities for the year' or ;%) taxable income before the 4.S. production acti-ities deduction. 3he phased$ in percenta!es are as follows: %((6$%((< )9 %(1( and after <9 3he deduction cannot exceed 5(9 of the corporation0s A$% wa!es for the year. Mualified production acti-ities income is R the taxpayer0s domestic production !ross receipts less cost of !oods sold allocable to these receiptsD R other deductions' expenses and losses directly allocable to domestic production !ross receiptsD and R a ratable portion of nondirectly allocable deductions' expenses and losses. >omestic production !ross receipts include receipts from R the lease' rental' license' sale' exchan!e' or other disposition of ;1) Eualified production property ;tan!ible property' computer software' and sound recordin!s) manufactured' produced !rown' or extracted in whole or si!nificant part within the 4nited StatesD ;%) Eualified film productionD or ;#) electricity' natural !as or potable water produced within the 4.S. RConstruction performed in the 4.S. REn!ineerin! or architectural ser-ices performed in the 4.S. for 4.S. construction pro/ects.
a!e "ef.: C:#$1,

111) Ahat are the -arious le-els of stoc7 ownership by corporate shareholders for the di-idends recei-ed deduction ;>">)B Ahat is the >">9 for each le-el of ownershipB Answer: =f a corporate shareholder owns less than %(9 of another corporation0s stoc7' their >">9 is 6(9. =f a corporate shareholder owns at least %(9 but less than .(9 of another corporation0s stoc7' their >">9 is .(9. =f a corporate shareholder owns .(9 or more of another corporation0s stoc7' their >">9 is 1((9.
a!e "ef.: C:#$1,' C:#$15

11%) Cow does the use of an :*L differ for indi-idual and corporate taxpayersB Answer: An indi-idual must ma7e ad/ustments to his taxable income to calculate his :*L. A corporation0s :*L is simply the excess of its deductions o-er its income.
a!e "ef.: C:#$1.

11#) Ahen computin! corporate taxable income what is the proper seEuencin! of deductionsB Answer: 3he correct order for ta7in! deductions is: ;1) all deductions other than the charitable contributions deduction' the di-idends$recei-ed deduction' and the :*L deduction. ;%) the charitable contributions deduction. ;#) the di-idends$recei-ed deduction ;,) the :*L deduction. ;5) the production acti-ities deduction.
a!e "ef.: C:#$1<

11,) Ahat impact does an :*L carryforward ha-e on the proper seEuencin! of deductions to compute corporate taxable incomeB Answer: 3he :*L deduction must be computed twice. 3he :*L first must be calculated in determinin! taxable income for the charitable contribution deduction. 3he :*L deduction is then added bac7 to taxable income and recomputed after both the charitable contribution and di-idends$recei-ed deductions ha-e been computed.
a!e "ef.: C:#$1<

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115) Ahat is probably the most common reason for ma7in! a consolidated return electionB Answer: Filin! consolidated returns allows the !roup to offset losses of one corporation a!ainst the profits of other members of the !roup.
a!e "ef.: C:#$%<

11)) Ahat are some of the ad-anta!es and disad-anta!es of filin! a consolidated returnB Answer: Ad-anta!es include 1. profits of one member of the !roup can be offset a!ainst losses of another member of the !roupD %. capital !ains of one member of the !roup can be offset a!ainst capital losses of another member of the !roupD and #. profits or !ains reported on intercompany transactions are deferred until a sale outside the !roup ta7es place. >isad-anta!es include 1. the election is bindin! on all subseEuent tax years unless the ="S !rants permission to discontinue filin! consolidated returns or the affiliated !roup is terminatedD %. losses on intercompany transactions are deferred until a sale outside the !roup ta7es placeD #. Sec. 1%#1 losses are offset by Sec. 1%#1 !ains instead of bein! reported as an ordinary lossD ,. losses of an unprofitable member may reduce the deduction or credit limits of the !roup below what would be a-ailable if separate tax returns were filedD and additional administrati-e costs may be incurred in maintainin! records needed to file a consolidated return.
a!e "ef.: C:#$#(

116) >iscuss the estimated tax filin! reEuirements for a C corporation. Answer: E-ery corporation that expects to owe more than &5(( tax for the current year must pay four installments of estimated tax' each eEual to %59 of its reEuired annual payment. =f a corporation is not a lar!e one' its reEuired annual payment is the lesser of 1((9 of the tax shown on the current year0s return or 1((9 of the tax shown on the precedin! year0s return. =f a corporation is a lar!e one' its reEuired annual payment is 1((9 of the tax shown on the current year0s return. =ts first estimated tax payment may be based on the precedin! year0s tax liability' but any shortfall must be made up when the second installment is due. Special rules apply if the corporation bases its estimated tax payments on the annuali+ed income or ad/usted seasonal income methods.
a!e "ef.: C:#$#,' C:#$#5

11.) Ahat are the four principles underlyin! ASC 6,(B Answer: 1. "eco!ni+e a current tax liability or asset for taxes payable or refundable on current year tax returns. %. "eco!ni+e a deferred tax liability or asset for future tax effects attributable to temporary differences and carryforwards. #. 1easure current and deferred tax liabilities and assets usin! only enacted tax law' not anticipated future chan!es. ,. "educe deferred tax assets by the amount of tax benefits the firm does not expect to reali+e' based on a-ailable e-idence and ad/usted -ia a -aluation allowance.
a!e "ef.: C:#$%$C:#$1#

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11<) :ewco Corporation has as7ed you to help determine whether it should use the accrual method or the cash method of accountin!. Ahat are the tax issues in-ol-ed in ma7in! this determinationB Answer: R =s :ewco a farmin! corporationB R =f so' does it ha-e !ross receipts of less than &%5 millionB R =s the corporation en!a!ed in the performance of ser-ices in the fields of health' law' en!ineerin!' architecture' accountin!' actuarial science' performin! arts' or consultin!B R =f so' is substantially all of its stoc7 held by current or retired employees performin! the ser-ices listed abo-e' by their estates' or ;for two years only) by persons who inherited stoc7 from such employeesB R Cas the corporation had a-era!e !ross receipts of less than &5 million for the last three tax yearsB R =f the corporation has not been in existence for three years' has it had a-era!e !ross receipts of less than &5 million durin! its existenceB R =s it an S corporationB A corporation must use the accrual method of accountin! unless it is a Eualified family farmin! corporation' a Eualified personal ser-ice corporation' meets the &5 million !ross receipts test' or is an S corporation.
a!e "ef.: C:#$,' C:#$5

1%() Neta Corporation recei-ed a &15('((( di-idend from *me!a Corporation this year. Neta owns 1(9 of *me!a0s sin!le class of stoc7. Ahat tax issues should Neta Consider with respect to its di-idend incomeB Answer: R =s the property bein! recei-ed cash or a noncash assetB =f a noncash asset' are any liabilities assumed or acEuired by the shareholderB R >oes the distribution come from the distributin! corporation0s ET B R Ahat is Neta0s !ross income amountB R =s either Neta or *me!a a forei!n corporationB R Ahat is the appropriate di-idends$recei-ed deduction percenta!eB R >oes the o-erall di-idends$recei-ed deduction limitation restrict the a-ailability of the deductionB R >oes one of the other special limitations on the di-idends$recei-ed deduction apply ;e.!.' ,5$day rule or debt$financed stoc7)B R =f Neta recei-es noncash property' what is the basis of the property to NetaB Since Neta owns 1(9 of *me!a Corporation' it normally is entitled to a &1(5'((( ;(.6( J &15('((() di-idends$recei-ed deduction. Cowe-er' se-eral limitations may apply. =f Neta0s taxable income before the di-idends$recei-ed deduction is less than &1(('(((' but at least &6('(((' the deduction is limited to 6(9 of its taxable income before the di-idends$recei-ed deduction. =f Neta0s taxable income after the di-idends$recei-ed deduction is ne!ati-e ;i.e.' an :*L)' the di-idends$recei-ed deduction limitation does not apply. =n addition' if ;1) Neta has held the *me!a stoc7 for ,5 days or less' ;%) the *me!a stoc7 is debt$financed' or ;#) *me!a is a forei!n corporation' Neta will recei-e either a reduced or no di-idends$recei-ed deduction.
a!e "ef.: C:#$1,$C:#$1.

35 Copyright 2011 Pearson Education, Inc.

1%1) 2anda Corporation sold a truc7 with an ad/usted basis of &5('((( to ?arbara for &#('(((. 2anessa owns %59 of the 2anda stoc7. Ahat tax issues should 2anda and 2anessa consider with respect to the saleFpurchaseB Answer: R Ahat is 2anda Corporation0s reali+ed !ain or lossB R Ahat is 2anda Corporation0s reco!ni+ed lossB R >oes the sale of property to a shareholder at a loss tri!!er the application of the Sec. %)6 related party rulesB R =s 2anessa related to any other 2anda Corporation shareholders ;e.!.' spouses' siblin!s' or other entities) whose attribution of stoc7 ownership causes her stoc7 ownership to exceed 5(9 of 2anda0s outstandin! stoc7B R =f a loss is disallowed 'can the transaction be restructured to permit reco!nition of the lossB R Ahat is 2anessa0s basis for the truc7B >oes it reflect an ad/ustment for the disallowed lossB 3he primary issue is whether 2anessa is a related party to 2anda Corporation under the Sec. %)6 rules. =f so' the loss on the sale of the truc7 is disallowed. =n this case' since 2anessa does not own more than 5(9 of the 2anda stoc7' she is not a related party' and 2anda may deduct a &%('((( ;&5('((( $ &#('((() loss. 3he loss is a Sec. 1%#1 loss if the truc7 was used by 2anda in the conduct of its trade or business. Cowe-er' if 2anessa0s spouse' siblin!s' or other parties or entities related to her own more than %59 of the stoc7' 2anessa is deemed to own more than 5(9 of 2anda Corporation' and the loss will be disallowed under Sec. %)6.
a!e "ef.: C:#$%1

36 Copyright 2011 Pearson Education, Inc.

1%%) Qou are the C A who prepares the tax returns for >udley' his wife 1ar!o' and their two corporations. >a-e owns 1((9 of >uri!ht Corporation0s stoc7. >uri!ht0s current year taxable income is &1(('(((. 1ar!o owns 1((9 of :orthwest Corporation0s stoc7. :orthwest0s current year taxable income is &15('(((. >udley and 1ar!o file a /oint federal income tax return. Ahat issues should be considered with respect to the calculation of the three tax return liabilitiesB Answer: R Ahat is the tax liability for >uri!ht CorporationB For :orthwest CorporationB R Are >uri!ht and :orthwest Corporations C corporationsB S corporationsB R Are >uri!ht and :orthwest Corporations members of a controlled !roupB R Are 1ar!o and >udley related parties for purposes of the controlled !roup stoc7 ownership testsB R Ahat effect does bein! a member of the controlled !roup ha-e on the reduced tax rate benefits of each corporationB R Are >uri!ht and :orthwest Corporations personal ser-ice corporationsB R Ahat amounts ;if any) are >uri!ht and :orthwest Corporations payin! to >udley and 1ar!oB R Ca-e the taxpayers di-ided up the payments amon! the three entities ;>uri!ht' :orthwest' and the /oint return) to minimi+e their tax liabilitiesB R Can the taxpayers ad/ust their salaries andFor frin!e benefits to reduce their total tax costsB R =f >uri!ht andFor :orthwest Corporations are C corporations' would an S election be ad-isableB 3he primary issue is the appropriate corporation classification for >uri!ht and :orthwest Corporations. =f both corporations are C corporations' they constitute a controlled !roup and must share the tax benefits of the reduced 15' %59' and #,9 tax brac7ets. 3wo other important issues are: ;1) can either one of the corporations benefit from an S election and ;%) what amount of salaries and frin!e benefits should be withdrawn from each of the two corporations to maximi+e the corporate and shareholder benefits. 3he last two points are too complicated to arri-e at a definiti-e answer with the limited facts !i-en here.
a!e "ef.: C:#$%,$C:#$%<

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1%#) Cric7et Corporation has a &5('((( :*L in the current year. Cric7et0s taxable income in each of the pre-ious two years was &%5'(((. Cric7et expects its taxable income for next year to exceed &,(('(((. Ahat issues should be considered with respect to the use of the :*LB Answer: R Ahat carryo-ers and carrybac7s are a-ailable for Cric7et0s current year :*LB R Ahat tax benefit can be obtained by carryin! the :*L bac7 to the second and first precedin! yearsB Are any other tax benefits lostB R Cow does Cric7et carry the loss bac7 to a precedin! tax yearB Cow does it obtain the refundB R Ahat tax benefit can Cric7et obtain by carryin! the :*L forwardB R Cow is the election to for!o the carrybac7 madeB R Ahat effect does the carryo-er ha-e on Cric7et0s estimated tax payments in the next yearB 3he primary issue is whether Cric7et should carry &%5'((( of its loss bac7 to the second and first precedin! tax years. =f it does' it will recei-e a refund of &#'65( ;&%5'((( J (.15) for each year. 3his amount does not ta7e into account any other tax benefits that mi!ht be lost. Cowe-er' if it for!oes the carrybac7 and carries the loss to the next year' it may !et a much hi!her refund. Since its taxable income exceeds &##5'(((' the tax sa-in!s in the next year eEuals &16'((( ;(.#, J &5('(((). 3he carryforward reduces Cric7et0s estimated tax payments in the next year. 3he election is made by chec7in! the appropriate box on the Form 11%(.
a!e "ef.: C:#$1.$C:#$%(

1%,) Muality Corporation' a re!ular corporation' has an opportunity to reali+e &5('((( of additional income in either the current year or next year. Ahat tax issues need to be considered in determinin! when to reali+e the incomeB Answer: R Ahat is Muality0s current year taxable incomeB R Ahat is Muality0s expected taxable income next yearB R Ahat is Muality0s mar!inal tax rate this yearB R Ahat is Muality0s expected mar!inal tax rate next yearB R =s M in the 59 surtax ran!e this year or next yearB
a!e "ef.: C:#$%#

3 Copyright 2011 Pearson Education, Inc.

1%5) ?eta Corporation recently purchased 1((9 of UQN Corporation stoc7. Qou are their C A. Ahat tax issues need to be addressed before determinin! whether or not to file a consolidated tax returnB Answer: R >oes either ?eta or UQN ha-e lossesB R >oes one corporation ha-e capital !ains and the other capital lossesB R Ca-e there been transactions between the two companiesB R Aould the two companies want to file a consolidated return in future yearsB R >oes one corporation ha-e Sec. 1%#1 losses and the other Sec. 1%#1 !ainsB R Aill any deductions or credits be reduced if a consolidated return is filedB =f the !roup members file separate returns' members with :*Ls or capital losses must either carry bac7 these losses to earlier years or carry them forward to future years. Althou!h the losses of one !roup member can offset the profits of another !roup member when the !roup files a consolidated return' some important limitations apply to the use of a member corporation0s :*L. 3hese limitations pre-ent one corporation from purchasin! another corporation0s :*L carryo-ers to offset its own taxable income or purchasin! a profitable corporation to facilitate the use of its own :*L carryo-ers. =f an election is made to file a consolidated return' it is bindin! on all subseEuent tax years unless ="S permission is !ranted to discontinue the filin! or the affiliated !roup is terminated. rofits and losses on intercompany transactions are deferred unto a sale outside the !roup ta7es place. *ne members Sec. 1%#1 losses are offset by another member0s Sec. 1%#1 !ains instead of bein! reported as ordinary losses.
a!e "ef.: C:#$%<' C:#$#(

1%)) 8effrey Corporation has as7ed you to prepare its corporate federal income tax return usin! Form 11%($A if possible. Ahat tax issues need to be addressedB Answer: R Are the corporation0s !ross receipts under &5(('(((B R =s its total income under &5(('(((B R Are its total assets under &5(('(((B
a!e "ef.: C:#$#6

1%6) 8unod Corporation0s boo7 income is &5(('(((. Ahat tax issues must be addressed in determinin! taxable incomeB Answer: R Ahat is the amount of federal income tax expenseB R =s there an excess of capital losses o-er capital !ainsB R =s there any income sub/ect to tax but not recorded on the boo7s this yearB R Are there any expenses recorded on the boo7s that area not deductible for tax purposes this yearB R =s there any income recorded on the boo7s this year that is not taxable in the current yearB R Are there any items of deduction or loss that can be claimed on the tax return that do not reduce boo7 income in the current yearB Some boo7 income is not taxable ;e.!. tax$exempt interest). Some !ross income is not reflected in boo7 income for the current period ;e.!. prepaid rent). Some financial accountin! expenses are not deductible for tax purposes ;e.!. federal income taxes). Some deductions allowed for tax purposes are not expenses in determinin! boo7 income for the current period ;e.!. asset costs expensed under Sec. 16<).
a!e "ef.: C:#$#<' C:#$,(

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