Exam 2: Corporations: Introduction and Operating Rules

Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the year. Bronze Corporation pays Copper a dividend of $150,000. What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income)?

On December 31, 2014, Lavender, Inc., an accrual basis C corporation, accrues a $50,000 bonus to Barry, its vice president and a 40% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 13, 2015. Lavender can deduct the bonus in 2015, the year in which it is included in Barry's gross income.

Lucinda is a 60% shareholder in Rhea Corporation, a calendar year S corporation. During the year, Rhea Corporation had gross income of $550,000 and operating expenses of $380,000. In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000. During the year, Rhea Corporation distributed $50,000 to Lucinda. With respect to this information, which of the following statements is correct?

A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

Norma formed Hyacinth Enterprises, a proprietorship, in 2014. In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000. In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses, how does this information affect her taxable income for 2014?

Canary Corporation, an accrual method C corporation, uses the calendar year for tax purposes. Leticia, a cash method taxpayer, is both a shareholder of Canary and the corporation's CFO. On December 31, 2014, Canary has accrued a $75,000 bonus to Leticia. Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations. a. Leticia owns 35% of Canary Corporation's stock and the corporation pays the bonus to Leticia on February 3, 2015. b. Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on April 3, 2015. c. Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on February 3, 2015.

What is the purpose of Schedule M-3? Which corporations are required to file Schedule M-3?

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

Contrast the tax treatment of capital gains and losses of C corporations with that of individual taxpayers.

Tonya, an actuary, is the sole shareholder of Shrike Corporation, a professional corporation. The corporation paid Tonya a salary of $360,000 during its fiscal year ending September 30, 2014. a. How much salary must Shrike Corporation pay Tonya during the period October 1 through December 31, 2014, to enable the corporation to continue to use its fiscal year without negative tax effects? b. If Shrike Corporation had taxable income of $75,000 for the year ending September 30, 2014, what is its tax liability?

During the current year, Coyote Corporation (a calendar year C corporation) has the following transactions: a. Coyote owns 5% of Roadrunner Corporation's stock. How much is Coyote Corporation's taxable income (loss) for the year? b. Would your answer change if Coyote owned 25% of Roadrunner Corporation's stock?

In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting 5 years ago for $10,000. Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year. Albatross Corporation's taxable income is $140,000.

Warbler Corporation, an accrual method regular corporation, was formed and began operations on March 1, 2014. The following expenses were incurred during its first year of operations (March 1 - December 31, 2014): Expenses of temporary directors and organizational meetings $25,000 Incorporation fee paid to state 2,000 Expenses incurred in printing and selling stock certificates 10,000 Accounting services incident to organization 12,000 a. Assuming a valid election under § 248 to amortize organizational expenditures, what is the amount of Warbler's deduction for 2014? a., except that Warbler also incurred in 2014 legal fees of $15,000 for the drafting of the corporate charter and bylaws. What is the amount of Warbler's 2014 deduction for organizational expenditures? b. Same as

During the current year, Owl Corporation (a C corporation), a retailer of children's apparel, made the following donations to qualified charitable organizations. Adjusted Basis Fair Market Value Children's clothing held as inventory, to Haven For Hope $10,000 $15,000 Stock in Exxon Corporation acquired two years ago and 5,000 3,000 Held as an investment, to City University Land acquired four years ago and held as an investment, 50,000 75,000 To Humane Society How much qualifies for the charitable contribution deduction?

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

Eagle Corporation owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. Hawk Corporation pays Eagle a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock?

Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

In each of the following independent situations, determine the corporation's income tax liability. Assume that all corporations use a calendar year and that the year involved is 2014.

Dawn is the sole shareholder of Thrush Corporation, a C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Dawn. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk.