Chat with AIExam 5: Other Corporate Tax Levies
Identify which of the following statements is true.
(64) 
VerifiedD
Eight individuals own Navy Corporation,a C corporation.Three shareholders make up the board of directors and own 51% of the stock.The corporation has a successful manufacturing business.It has accumulated $3 million of E&P and expects to accumulate another $200,000 of E&P annually.Annual dividend payments are $30,000.Demand for Navy's goods has been strong,but the company does not anticipate any expansion or repair of the current plant for three to five years.Management has invested $200,000 annually in growth stocks.Its current investment portfolio is $1.2 million.The portfolio is held as protection against a business slowdown.Loans to shareholder-employees currently are $400,000.As Navy's CPA,what tax issues should you have your client consider?
(73) VerifiedThe following tax issues need to be addressed about Navy Corporation's earnings accumulation:
•Has Navy Corporation accumulated earnings beyond the reasonable needs of the business?
•If Navy Corporation has accumulated earnings beyond the reasonable needs of the business,was tax avoidance one of the directors' motivations for retaining the earnings?
•What business needs can Navy Corporation's management use to justify the current and prior years' earnings accumulation?
•What business needs can Navy Corporation's management use to justify any future earnings accumulations?
•What steps can Navy Corporation take to reduce its current accumulated earnings tax exposure? Its future accumulated earnings tax exposure?
•Should Navy Corporation bring the accumulated earnings tax issue to the IRS's attention?
•Should an S election be made to reduce future exposure to the accumulated earnings tax?
Navy Corporation has a large E&P balance ($3 million currently),which is growing annually at a $200,000 rate.Few dividends have been paid,and a substantial portion of the current-year profit has been invested in portfolio investments or loaned to shareholders.The investment activities and loans indicate a possible accumulated earnings tax problem.Guidance should be provided to Navy Corporation that "active business" investments should replace "portfolio" investments if the corporation is to avoid the accumulated earnings penalty tax.The corporation is well past its statutory exemption and needs to document that the earnings are being retained to meet the reasonable needs of the business.No indication has been given whether such documentation exists,although there is an indication that some of the investments are being made to protect against a business downturn,which is a legitimate use of corporate earnings.
Explain the carryover provisions of the minimum tax credit.
(80) VerifiedThe minimum tax credit carries forward indefinitely and offsets regular tax liabilities in future years,but only to the extent the regular tax exceeds the corporation's TMT in the carryforward year.The minimum tax credit cannot be carried back to an earlier tax year.
Door Corporation's alternative minimum taxable income before the statutory exemption is $200,000.What is Door's tentative minimum tax before credits?
(97) Church Corporation is a closely held C corporation.All of the stock is owned by Charles and Chanda Church.The corporation,in its second month of operation in its initial tax year,anticipates earning $150,000 of gross income in the current year.Gross income is expected to be approximately 40% dividends,30% corporate bond interest,and 30% net real estate rentals (after interest,property taxes,and depreciation).Administrative expenses are expected to be $20,000.What special problems does the large amount of passive income that Church Corporation expects to earn present to you as their CPA?
(88) The courts and the Treasury Regulations have mentioned a number of reasonable needs that allow a corporation to accrue earnings and avoid the accumulated earnings tax.What are these reasons?
(82) Smartmoney,Inc.was formed by three wealthy dentists to pool their investment funds.They each invested $200,000 in the corporation,which was immediately used to purchase stocks to be held as investments.The first year,the corporation received dividends of $70,000 and filed a tax return paying a corporation tax in the amount of $3,150 [($70,000 dividends - $49,000 DRD)× .15 = $3,150].The IRS audits this corporation and sends a tax bill in the amount of $13,370 ($66,850 UPHCI × 0.20 = $13,370)plus underpayment penalty and interest.What is this additional tax and what should the dentists do about it? What action(s)do you recommend the corporation take for the tax year in question and subsequent tax years?
(90) Which of the following is not permitted an accumulated earnings credit based on reasonable needs of the business?
(80) Investors Corporation has ten unrelated individual shareholders who each own 10% of the outstanding stock.For their tax year ended December 31 of this year,Investors' gross income includes: 
No dividends are paid during the tax year or during the 2-1/2 month throwback period.Deductible administrative expenses total $4,000 for the year.Rental income has been reduced by $1,000 of depreciation and $2,000 of interest expense.What is Investors' undistributed personal holding company income?
No dividends are paid during the tax year or during the 2-1/2 month throwback period.Deductible administrative expenses total $4,000 for the year.Rental income has been reduced by $1,000 of depreciation and $2,000 of interest expense.What is Investors' undistributed personal holding company income? (87) Which of the following actions cannot be used to eliminate a potential accumulated earnings tax liability situation involving a corporation owned by a mother and a father?
(84) Dragon Corporation reports a distribution on its return from the third previous year as a stock redemption producing a capital gain.When the return is audited during the current year,the distribution of the third previous year is characterized by the IRS as a dividend.This change causes Dragon Corporation to be classified as a personal holding company for the third previous year.Which of the following statements is correct?
(70) When using the Bardahl formula,an increase in annual credit sales (while holding the average accounts receivable balance constant)has which of the following effects on the working capital requirements?
(76) The Small C corporation exemption from AMT continues as long as average gross receipts for the three preceding tax years are
(78) The ACE adjustment always increases alternative minimum taxable income (AMTI).
(83) 
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