634 MODULE 39 TAXES: CORPORATE
24. (c) The requirement is to determine the exempt por- offset by a dividends received deduction. Therefore, both
tion of Rona Corp.' s alternative minimum taxable income
(AMTI). A corporation is allowed an exemption of $40,000
'N~;t:,\- r. in computing its AMTI. However, the $40,000 exemption is
y~
<, reduced by 25% of the corporation's AMTI in excess of
$150,000. Here, the amount of exemption is $40,000-
[($200,000 - $150,000) x 25%] = $27,500.
25. (c) The requirement is to determine which item is a
tax preference that must be included in the computation of a
corporation's alternative minimum tax (AMT) for 2010.
Tax-exempt interest on private activity bonds issued in 2009-
is a tax preference item. Answer (a) is incorrect because it is
the excess of income under the percentage-of-completion
method over the amount reported using the completed-
contract method that is a positive adjustment in computing
the AMT. Answer (b) is incorrect because a deduction for
casualty losses is allowed in the computation of AMT.
Answer (d) is incorrect because capital gains are not a
preference item in computing the AMT.
26. (b) For real property that was placed in service be-
fore January 1, 1999, an AMT adjustment is necessary be-
cause for AMT purposes, real property must be depreciated
using the straight-line method over a forty-year recovery
period, rather than the thirty-nine year or twenty-seven and
one-half year recovery period used for regular tax purposes.
However, note that this adjustment has been eliminated for
real property first placed in service after December 31, 1998.
The dividends received deduction, charitable contributions,
and investment interest expense are neither adjustments nor
tax preference items.
r-27. (d) The requirement is to determine when a corpora-
tion will not be subject to the alternative minimum tax
(AMT) for 2010. A corporation is exempt from AMT for its
first tax year. After the first year, a corporation is exempt
from AMT for each year that it passes a gross receipts test.
A corporation is exempt for its second year if its gross re-
ceipts for the first year did not exceed $5 million. For all
subsequent years, a corporation is exempt if its average an-
nual gross receipts for the testing period do not exceed $7.5
million. Exemption.from the AMT is not based on asset size
nor number of shareholders.
28. (c) A corporation is exempt from the corporate
AMT for its first tax year. It is exempt for its second year if
its first year's gross receipts were $5 million or les . To be
. exempt-for its third ye , the corporation's average gross
receipts for the first two years must be $7.5 million or less.
To be exempt for the fourth year(and subsequent years), the
corporation's average gross receipts for an prior three-year
-periods also must be $7.5 million or less. Here, Bradbury is
exempt for 2008 because its average gross receipts for 2006-
2007 were $6.75 million. However, Bradbury loses its ex-
emption for 2009 and all sub equent years because its aver-
age gross receipts for 2006-2008 exceed $7.5 million ($7.67
million).
C.3. Gross Income
29. (a) The requirement is to indicate whether personal
service corporations and personal holding companies must
include 100% of dividends received from unrelated taxable
domestic corporations in gross income in computing regular
taxable income. Since the question concerns gross income,
not taxable income, no part of the dividend income would be
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personal service corporations and personal holding compa-
nies must include 100% of dividends received from unre-
lated taxable domestic corporations in gross income.
30. (d) The requirement is to determine the amount of
bond sinking fund trust income taxable to Andi Corp. in
2009. Since the trust income will be accumulated and bene-
fit Andi Corp. by reducing the amount of future contribu-
tions that Andi must make to the bond sinking fund, all of
the trust income, consisting of $60,000 of interest and
$8,000 of long-term capital gain, is taxable to Andi Corp.
Ai'. (a) The requirement is to determine the amount of
/~;pital gain recognized by Lee Corp. on the sale of its trea-
sury stock. A corporation will never recognize gain or loss
on the receipt of money or other property in exchange for its
stock; including treasury stock.
r;~n
~ (d) The requirement is to determine the amount of
to be recognized by Ral Corp. when it issues its stock in
exchange for land. No gain or loss is ever recognized by a
corporation on the receipt of money or other property in
exchange for its own stock (including treasury stock).
1( 3. (c) The requirement is to determine the amount of
dividend reportable by a corporate distributee on a property
distribution. The amount of dividend to be reported by a
corporate distributee is the ~V of the property ~ any
liability assumed. Kile's dividend would be $12,000, re-
duced by the liability of $5,000 = $7,000.
C.4.b. Organizational Expenditures
34. (d) The requirement is to determine which costs are
deductible organizational expenditures. Organizational
expenditures include fees for accounting and legal services
incident to incorporation (e.g., fees for drafting corporate
charter, bylaws, terms of stock certificates), expenses of
organizational meetings and of temporary directors
meetings, and fees paid to the state of incorporation.
However, the costs incurred in issuing and selling stock and
securities (e.g., professional fees to issue stock, printing
.costs, underwriting commissions) do not qualify as
organizational expenditures and are not tax deductible.
35. (a) The requirement is to determine the amount that
Brown should deduct for organizational expenditures for
2010. For organizational expenditures incurred or paid after
October 22, 2004, a corporation may elect to deduct up to
$5,000 for the tax year in which the corporation begins busi-
ness. The $5,000 amount must be reduced by the amount by
which organizational expenditures exceed $50,000. Re-
maining expenditures are deducted ratably over the 180-
month period beginning with the month in which the corpo-
ration begins business. Brown's qualifying organizational
expenditures include the $40,000 of legal fees, $15,000 for
temporary directors' meetings, and $4,400 of state incorpo-
ration fees, a total of $59,400. The $25,000 of underwriting
commissions and other costs of issuing stock are not de-
ductible, and merely reduce paid-in capital. Since Brown
began business in July, Brown's deduction for ~01O is
/'10 f.~
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$59,400 x 6/180 = $1,980.fi';
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J 36. (a) The requirement is to determine the correct
statement regarding the costs of organizing a corporation
during 2010. A corporation's organizational expenditures
(e.g., legal fees for drafting the corporate charter, bylaws, I;:
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