Name: ________________________ Class: ___________________ Date: __________ ID: A

14
Chapter 03
True/False
Indicate whether the statement is true or false.
____ 1. The domestic production activities deduction is limited to manufacturers.
____ 2. The DPAD is not available to estates and trusts.
____ 3. In terms of the effect of DPAD, the maximum tax savings for a corporation with $11 million of taxable
income is $346,500 in 2011.
____ 4. The domestic production activities deduction is intended to preserve U.S. manufacturing jobs and discourage
their outsourcing.
____ 5. The overall effect of the domestic production activities deduction is similar to a rate reduction.
____ 6. In the case of an individual, modified AGI is substituted for QPAI in the DPAD formula.
____ 7. The DPAD is limited by 50% of the total W-2 wages paid by a taxpayer.
____ 8. Modified AGI means AGI without any DPAD allowance.
____ 9. DPAD for 2011 is 9% of the greater of QPAI or TI, but not to exceed the W-2 wages limitation.
____ 10. For purposes of the DPAD wage limitation, amounts paid to independent contractors can be considered.
____ 11. A company with a NOL carryforward for a tax year is ineligible for the DPAD if the carryforward eliminates
current income.
____ 12. As taxable income is reduced by an NOL carryback, there is a corresponding increase in the DPAD.
____ 13. If QPAI cannot be used in any one year due to the TI limitation, it can be carried over for 5 years.
____ 14. DPGR Allowable Indirect Costs =QPAI. Is this formula correct?
____ 15. Red Company, a U.S. corporation based in Mississippi, manufactures and sells a product which includes some
components made in Mexico. None of Reds income from sales constitute DPGR.
____ 16. DPGR cannot include the cost of an embedded service that is part of in the sale of a manufactured product.
____ 17. One of the components of DPGR is qualified production property (QPP). The QPP must be manufactured,
produced, grown, or extracted entirely within the U.S.
____ 18. In connection with the construction of a housing project, a contractor pays an architect to design the homes
being built. The architects fee is an embedded service that qualifies as DPGR.
Name: ________________________ ID: A
2
____ 19. May Corporation, a Miami contractor, pays Crane Engineering a fee to design bridges for a highway May will
build in the Cayman Islands. The fee Crane receives is DPGR.
____ 20. Martin, a real estate developer, pays Alan, a general contractor, to construct a housing project. Alan has no
DPGR since he does not own the property.
____ 21. Stacey, an advertising executive, pays a contractor to build a lodge on property she owns in Colorado. If
Stacey sells the lodge, the proceeds (less the cost of the land) will be DPGR.
____ 22. A taxpayer who prepares and sells Chinese food at several of its restaurant locations can qualify for DPAD as
to the receipts only from take-out orders and home-delivery sales.
____ 23. Some of the meals a food service company prepares for its chain of restaurants is frozen and shipped to
supermarkets for resale. The proceeds from such sales will qualify as DPGR.
____ 24. Under some circumstances, the sale of prepared food at a taxpayers retail facility can qualify as DPGR.
____ 25. The definition of an expanded affiliated group (EAG) for DPAD purposes is broader than that applicable to
the filing of consolidated tax returns.
____ 26. In the case of corporations that are members of an expanded affiliated group (EAG), the DPAD is determined
by treating the group as a single taxpayer.
____ 27. J unco Corporation is a member of an expanded affiliated group (EAG) and has QPAI but no W-2 wages.
J unco cannot claim a DPAD.
____ 28. In working with the W-2 wage limitation on DPAD, a partner can count any guaranteed payments he receives
from the partnership.
____ 29. The objective of the AMT is to force taxpayers that are more profitable than their taxable income reflects to
pay additional income taxes.
____ 30. The DPAD is not allowed for AMT purposes.
____ 31. The AMT rate for corporations is the same as for individuals.
____ 32. Once a small corporation for AMT purposes, always a small corporation.
____ 33. Grebe Corporation was formed in 2000. If in 2011, it has average gross receipts of under $5 million, the
company cannot be subject to the AMT.
____ 34. Netting refers to the process of AMT adjustments reversing themselves and then being deducted from taxable
income to arrive at AMTI.
____ 35. NOLs are negative adjustments.
Name: ________________________ ID: A
3
____ 36. Passive activity losses of certain closely held corporations and personal service corporations are tax
preferences.
____ 37. If mining exploration and development costs are capitalized and written off over 10 years, no adjustment is
necessary for AMT purposes.
____ 38. Tax-exempt interest on state and local private activity bonds (issued in 2010) is a tax preference item.
____ 39. Intangible drilling costs are a tax preference item only for integrated oil companies.
____ 40. The ACE adjustment can be positive or negative.
____ 41. A negative ACE adjustment is beneficial to a corporation.
____ 42. AMTI may be defined as regular taxable income after AMT adjustments (other than the NOL and ACE
adjustments) and after tax preferences.
____ 43. The regular foreign tax credit is available to reduce AMT liability.
____ 44. The AMT exemption amount of $40,000 phases out entirely once a corporations average gross receipts
exceeds $5 million.
____ 45. The AMT NOL deduction is limited to 90%.
____ 46. The accumulated earnings credit for a personal service corporation is the greater of $150,000 or the current
E & P for the year needed to meet the reasonable needs of the business.
____ 47. ATI =Taxable Income Adjustments Dividends paid Accumulated earnings credit.
____ 48. Reasonable needs for purposes of the accumulated earnings tax include loans to shareholders.
____ 49. The penalty tax in 2011 for AET and PHC situations is the highest rate applicable to individual taxpayers.
____ 50. Long-term capital gains are taxed under the AET and PHC taxes.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 1. Which statement is false?
a. The AMT is not limited to C corporations.
b. The DPAD is not limited to C corporations.
c. The penalty tax on PHCs is not dependent on the existence of a tax avoidance motive.
d. In the case of a sole proprietor, the DPAD is a deduction from adjusted gross income.
e. All are true.
Name: ________________________ ID: A
4
____ 2. Staff, Inc., has taxable income of $14 million in 2011. What is the maximum DPAD tax savings for this C
corporation?
a. None.
b. $204,000.
c. $210,000.
d. $428,400.
e. $441,000.
____ 3. Lemon, Inc., has taxable income of $15 million in 2011. What is the maximum DPAD tax savings for this C
corporation?
a. $132,600.
b. $265,200.
c. $273,000.
d. $472,500.
e. None of the above.
____ 4. Which, if any, of the following is a characteristic of the DPAD?
a. Not applicable in situations involving S corporations.
b. Applicable only to manufactured goods that are exported from the U.S.
c. Can never apply when the rendition of personal services is involved.
d. Can sometimes apply when some of the components of a product are manufactured in
foreign countries.
e. None of the above.
____ 5. In a sole proprietorship situation, a DPAD would be a:
a. Deduction from AGI.
b. Deduction for AGI.
c. Possible deduction from and deduction for.
d. 9% credit.
e. All of the above.
____ 6. Which statement is false?
a. The overall tax effect of a DPAD is a rate reduction or a tax credit.
b. For a flow-through entity, modified AGI is substituted for taxable income.
c. FASB requires the DPAD to be reported as a special charge.
d. MPGE refers to a merge, paid, gain, and expense.
e. All of the above are correct.
____ 7. Which formula is correct for DPAD?
a. Smaller of 9% of QPAI or 9% of modified AGI, not to exceed 50% of allocable wages.
b. Larger of 9% of QPAI or 9% of taxable income, not to exceed 50% of allocable wages.
c. Smaller of 9% of QPAI or 9% of taxable income, not to exceed 60% of allocable wages.
d. Larger of 9% of QPAI or 9% of alternative minimum tax, not to exceed 60% of allocable
wages.
e. None of the above.
Name: ________________________ ID: A
5
____ 8. Yvonne Corporation manufactures and sells ceramic dinnerware. The company also sells dinnerware that is
purchased from unrelated foreign producers. During tax year 2011, Yvonne had a U. S. profit of $1.2 million
(QPAI) and a loss from the imported merchandise of $100,000. What is Yvonnes DPAD?
a. $33,000.
b. $66,000.
c. $99,000.
d. $1,080,000.
e. None of the above.
____ 9. Tanweer, Inc., manufactures and sells glassware. The company also sells dinnerware that is purchased from
unrelated foreign producers. During tax year 2011, Tanweer had a U.S. profit of $1.2 million (QPAI) and a
loss from the imported dinnerware of $200,000. What is Tanweers DPAD?
a. None.
b. $33,000.
c. $66,000.
d. $99,000.
e. None of the above.
____ 10. May Corporation manufactures and sells ceramic dinnerware. The company also sells dinnerware that is
purchased from unrelated foreign producers. During the tax year 2011, May had a U.S. profit of $1.2 million
(QPAI) and a profit from the imported merchandise of $100,000. What is Mays DPAD?
a. $36,000.
b. $72,000.
c. $108,000.
d. $117,000.
e. None of the above.
____ 11. Bacon Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kershaw
Corporation for $1,000 in 2011. Kershaw incurs TV advertising expenses of $300 and sells the machine by
phone order for $1,600. If Bacon and Kershaw corporations are members of an expanded affiliated group
(EAG), their DPGR is:
a. $30.
b. $500.
c. $1,000.
d. $1,600.
e. None of the above.
____ 12. Boasso Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kirby
Corporation for $1,000 in 2011. Kirby incurs TV advertising expenses of $300 and sells the machine by
phone order for $1,700. If Boasso and Kirby corporations are members of an expanded affiliated group
(EAG), their QPAI is:
a. $30.
b. $600.
c. $1,000.
d. $1,600.
e. None of the above.
Name: ________________________ ID: A
6
____ 13. Bow Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kite
Corporation for $1,000 in 2011. Kite incurs TV advertising expenses of $300 and sells the machine by phone
order for $1,600. If Bow and Kite corporations are members of an expanded affiliated group (EAG), their
DPAD is:
a. $30.
b. $45.
c. $72.
d. $500.
e. None of the above.
____ 14. Which of the following statements does not reflect the rules regarding pass-through entities and DPAD?
a. Since the deduction is determined at the owner level, each owner must make the
computation separately.
b. The entity allocates to each owner his or her share of any QPAI.
c. In the case of partnerships, guaranteed payments are regarded as W-2 wages.
d. A partner cannot be allocated any W-2 wages if the share of QPAI is zero.
e. None of the above.
____ 15. Which statement is false?
a. The stock ownership requirement for the EAG rules is 80%.
b. Members of an EAG are treated as a single taxpayer for purposes of the DPAD.
c. For an EAG, the DPAD is allocated among the members in proportion to each members
respective amount of QPAI.
d. The DPAD of a consolidated group must be allocated to the groups members in
proportion to each members QPAI.
e. None of the above is false.
____ 16. Peggys sole proprietorship consists of a bakery and retail food sales. The bakerys DPGR is $700,000, but
after CGS, direct expenses, and a ratable portion of indirect expenses are deducted, QPAI is $100,000. W-2
wages related to DPGR are significant. The retail food sales have a loss of $1 million. If Peggy files a joint
return and her modified AGI is $119,500, what is her allowable DPAD, if any, for 2011?
a. None.
b. $6,000.
c. $9,000.
d. $10,755.
e. Some other amount.
____ 17. Lee, Inc., an S corporation, has taxable income of $15 million in 2011. Assume there are two shareholders,
each in the top individual tax bracket. What is the maximum total DPAD tax savings for the S corporation
shareholders?
a. None.
b. $294,000.
c. $472,500.
d. $1,260,000.
e. None of the above.
Name: ________________________ ID: A
7
____ 18. Which reason is unlikely to cause a regular corporation to have to pay AMT?
a. A service-type of company with little inventory.
b. A high level of investment in assets such as equipment and structures.
c. Low taxable income due to a cyclical downturn, strong international competition, a
low-margin industry, or other factors.
d. Investment at low real interest rates, which increases the companys deductions for
depreciation relative to those for interest payments.
e. None of the above.
____ 19. Nickel Corporation has average gross receipts of $5.6 million, $4.6 million, and $4.7 million in 2009, 2010,
and 2011, respectively. Nickel is:
a. Not subject to the corporate income tax.
b. A small corporation with respect to the AMT.
c. Subject to the AMT.
d. Not a small corporation with respect to the AMT.
e. None of the above.
____ 20. A corporation has the following items related to the AMT.
Alternative minimum tax base $98,502,900
Regular tax 11,201,520
Foreign AMT tax credit 1,400,000
The corporations AMT, if any, is:
a. $0.
b. $7,099,060.
c. $8,703,900.
d. $18,300,580.
e. None of the above.
____ 21. Primeline, Inc., has the following items related to the AMT:
Alternative minimum tax base $102,755,000
Regular corporate tax 11,125,000
Foreign AMT tax credit 2,300,000
The corporations AMT, if any, is:
a. $0.
b. $7,126,000.
c. $9,426,000.
d. $18,251,000.
e. None of the above.
____ 22. Which of the following would not be a positive tax preference item in 2010?
a. Accelerated depreciation on real property in excess of straight-line.
b. Intangible drilling costs.
c. Private activity bond interest income.
d. Percentage depletion in excess of adjusted basis.
e. None of the above.
Name: ________________________ ID: A
8
____ 23. Which statement, if any, is false?
a. An S corporation is not subject to the corporate AMT.
b. A high level of investment in assets (e.g., equipment or structures) is a reason a company
may be subject to the AMT.
c. Many of the adjustments that apply to individuals also apply to corporations.
d. The AMT is a separate tax system from the corporate income tax.
e. None of the above.
____ 24. Which AMT adjustment would only be negative?
a. Passive activity losses.
b. AMT NOL deduction.
c. DPAD.
d. Completed contract method.
e. None of the above.
____ 25. Which of the following items will be a deduction from unadjusted AMTI in arriving at ACE?
a. Federal income tax.
b. 80% dividends received deduction.
c. Penalties and fines.
d. Premiums paid on key employee insurance.
e. None of the above.
____ 26. Which of the following items will be an addition to AMTI in arriving at ACE?
a. Excess capital loss.
b. Federal income tax.
c. Tax-exempt income.
d. Excess charitable contributions.
e. None of the above.
____ 27. Which of the following has no effect in arriving at ACE?
a. Tax-exempt income (net of expenses).
b. Excess charitable contributions.
c. Key employee insurance proceeds.
d. Deferred gain on installment sales.
e. Premiums paid on key employee insurance.
____ 28. Which of the following is added in arriving at ACE?
a. Tax-exempt income (net of expenses).
b. Federal income tax.
c. Premiums paid on key employees insurance.
d. Loss on sale between related parties.
e. None of the above.
____ 29. Which statement is false?
a. The starting point for computing AMTI is taxable income.
b. A tax preference is added to taxable income.
c. The ACE adjustment can be a negative amount.
d. The starting point for computing ACE is taxable income.
e. None of the above.
Name: ________________________ ID: A
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____ 30. Which of the following items will have an effect (add or subtract) on unadjusted AMTI to arrive at ACE?
a. Federal income tax.
b. Tax-exempt interest income.
c. Excess capital losses.
d. 80% dividends received deduction.
e. None of the above.
____ 31. A small corporation with unused minimum tax credits may use what percentage of regular tax as a minimum
credit in 2011?
a. 0.
b. 25%.
c. 50%.
d. 75%.
e. None of the above.
____ 32. Ford Corporation, a calendar year corporation, has alternative minimum taxable income (before any
exemption) of $1.28 million for 2011. The company is not a small corporation. If the regular corporate tax is
$211,050, Fords alternative minimum tax for 2011 is:
a. $44,950.
b. $209,000.
c. $256,000.
d. $1,280,000.
e. None of the above.
____ 33. In 2011, Fay Corporation (a calendar year taxpayer) had the following transactions:
Taxable income $4,000,000
Mining exploration costs claimed 1,000,000
Percentage depletion claimed (the property had a zero adjusted basis) 1,400,000
Donation of stock held since 1988 as investment (basis of $100,000
and fair market value of $400,000) to a qualified charity 400,000
For 2011, Fay Corporations AMTI is:
a. $6,300,000.
b. $7,150,000.
c. $7,250,000.
d. $7,300,000.
e. None of the above.
____ 34. During 2011, Gold Corporation (a calendar year taxpayer) has $4,000,000 of taxable income and the
following transactions:
AMTI (not including adjusted current earnings) $5,000,000
Adjusted current earnings 8,000,000
Gold Corporations alternative minimum tax (AMT) for 2011 is:
a. $1,360,000.
b. $700,000.
c. $500,000.
d. $90,000.
e. None of the above.
Name: ________________________ ID: A
10
____ 35. Ravi Corporation, a calendar year taxpayer, has AMTI (before adjustment for adjusted current earnings) of $6
million for 2011. If Ravi Corporations ACE is $15 million, its tentative minimum tax for 2011 is:
a. $2.02 million.
b. $2.55 million.
c. $3.45 million.
d. $4.2 million.
e. None of the above.
____ 36. Tanver Corporation, a calendar year corporation, has alternative minimum taxable income of $7 million in
2011 (before adjustment for adjusted current earnings). If Tanvers adjusted current earnings is $16 million,
its tentative minimum tax for 2011 is:
a. $310,000.
b. $2,750,000.
c. $6,750,000.
d. $7,000,000.
e. Some other amount.
____ 37. Which entity is subject to the ACE provisions?
a. S corporation.
b. Real estate investment trust (REITs).
c. Regulated investment companies.
d. Real estate mortgage investment conduits.
e. None of the above.
____ 38. The exemption amount is phased out entirely when AMTI reaches:
a. $40,000.
b. $310,000.
c. $1,000,000.
d. $5,000,000.
e. Some other amount.
____ 39. For purposes of the penalty tax on accumulated earnings under 531, reasonable needs of the business does
not include:
a. Product liability losses.
b. Self-insurance.
c. Loans to suppliers and customers.
d. Loans to shareholders.
e. Plant expansion.
____ 40. Cave Corporation, a calendar year taxpayer, has a beginning balance in accumulated E & P of $3.5 million
and current earnings of $1 million. If Cave can justify accumulations for the needs of the business of $3.7
million, its accumulated earnings credit for ATI purposes is:
a. $3.7 million.
b. $250,000.
c. $200,000.
d. $0.
e. None of the above.
Name: ________________________ ID: A
11
____ 41. Maroon Corporation incurred the following taxes for the year 2011:
Regular tax liability $187,000
Tentative minimum tax 156,000
Personal holding company tax 67,000
Accumulated earnings tax 65,400
Maroon Corporations total tax liability is:
a. $187,000.
b. $254,000.
c. $265,000.
d. $421,000.
e. Some other amount.
____ 42. What amount of accumulated earnings of a manufacturing corporation is considered within the reasonable
needs of a business without the corporation having to show a bona fide business reason for the accumulation?
a. $150,000 or less.
b. $200,000 or less.
c. $250,000 or less.
d. $300,000 or less.
e. None of the above.
____ 43. Blue, Inc., a calendar year closely held corporation, is not a PHC. If the company reports the following items,
the accumulated taxable income is:
Taxable income $200,000
Long-term capital gain (net of tax) 18,300
Federal income tax on LTCG 11,700
Dividends received deduction 18,000
Accumulated earnings credit 80,000
Federal income taxes 65,150
a. $54,550.
b. $62,850.
c. $80,850.
d. $109,700.
e. None of the above.
____ 44. Which of the following is always personal holding company income?
a. Gas royalties.
b. Rent income.
c. Dividends
d. Personal service contract income.
e. All of the above.
Name: ________________________ ID: A
12
Problem
1. Chase Corporation manufactures and sells birdhouses and feeders. The company also sells similar items that
are imported from foreign countries. During the current year, Chase had a profit of $600,000 from its own
products but a loss of $50,000 from the imported goods.
a. What is Chases QPAI?
b. What is Chases DPAD in 2011?
2. Emerald, Inc. engages in production activities that generate QPAI of $560,000 and taxable income (without
taking into account the DPAD and NOL) of $700,000 in 2011. The company also has an NOL carryover to
2011 of $600,000 and qualified W-2 wages of $350,000. Calculate any DPAD.
3. In each of the following independent situations, determine the DPAD for 2011 for the corporation involved.
Taxpayer QPAI TI W-2 wages
a. Siskin $400,000 $500,000 $ 30,000
b. Ibis 800,000 700,000 130,000
c. Scamp 700,000 900,000 200,000
d. Pipits 900,000 900,000* 280,000
e. Puffin 900,000 900,000 200,000**
*Does not include a $120,000 NOL carryover from the prior year.
**Only $60,000 relates directly to manufacturing activities.
4. Robin Corporation, a calendar year taxpayer, manufactures and sells candles. It has several factories in the
U.S. and one in J amaica. During 2011, it had DPGR of $4.1 million from the U.S. factories.
a. If the gross receipts from the products made in J amaica are $200,000, what is Robins DPGR
for 2011?
b. If the gross receipts sourced to the J amaica plant are $300,000, what is Robins DPGR for
2011?
5. Ecru Corporation sells customized outdoor grills. The company purchases various parts and materials from
foreign sources for $750 and incurs $240 in labor costs at a factory in North Carolina to fabricate and
assemble the product. Ecru also incurs packaging, selling, and other costs of $60 and sells the grill for $1,200.
If tax year 2011 is involved, calculate Ecrus per unit:
a. DPGR
b. QPAI
c. DPAD
Name: ________________________ ID: A
13
6. Scarlet, Inc., has $4 million in gross receipts of which $2.4 million is DPGR. CGS is $1,700,000 and other
deductions (marketing, administrative) are $700,000. Using the small business simplified deduction method,
determine Scarlets QPAI.
7. Maize Corporation has gross receipts of $3 million of which $1 million are non-DPGR. CGS identified with
DPGR is $1.3 million, while overall selling and administrative expenses are $600,000. Under the simplified
deduction method, determine Maizes QPAI.
8. Swan Corporation has average gross receipts of $5.5 million, $4.7 million, and $4.6 million in 2008, 2009,
and 2010, respectively. Is the company a small corporation with respect to the AMT?
9. A retail company has the following items related to AMT.
Alternative minimum taxable base $98,502,900
Regular tax 11,202,098
Foreign AMT tax credit 1,400,000
Calculate the companys AMT, if any.
10. In each of the following independent situations, calculate accumulated taxable income, if any. Assume the
corporation is not a mere holding or investment company.
Copper Corporation Bronze Corporation
Taxable income $150,000 $500,000
Accrued Federal income taxes 41,750 170,000
Capital loss adjustment 2,000
Net LTCG 42,000
Tax on LTCG 14,280
Charitable contributions in excess of 10% 15,000
NOL deduction 24,000
70% dividends received deduction 35,000
Dividends paid deduction 7,200 18,000
Accumulated earnings credit 44,000 92,500
11. a. Calculate the personal holding company tax in 2011 based upon the following information.
Taxable income $520,000
Dividends received deduction 46,000
Excess charitable contributions 23,400
Dividends paid 52,000
Federal income taxes 177,375
b. Calculate the effective tax rate of this company.
Name: ________________________ ID: A
14
Essay
1. Why is the DPAD benefit somewhat unique?
2. Explain the wages limitation.
3. Explain the expanded affiliated group (EAG) rules.
4. How is DPAD handled in an S corporation or a partnership situation?
5. What are some of the differences (at least three) between the application of the AMT for individuals and
corporations?
6. With respect to the AMT, what is the minimum tax credit?
7. What is personal holding company income?