Pearson's Federal Taxation 2019 Corporations Partnerships Estates & Trusts 32nd Edition by Timothy J. Rupert - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Pearson's Federal Taxation 2019: Comprehensive, 32e (Rupert/Anderson) Chapter C5: Other Corporate Tax Levies LO1: Use of C Corporation to …
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Pearson’s Federal Taxation 2019 Corporations Partnerships Estates & Trusts 32nd Edition by Timothy J. Rupert – Test Bank
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Sample Questions Are Posted Below
Pearson’s Federal Taxation 2019: Comprehensive, 32e (Rupert/Anderson)
Chapter C5: Other Corporate Tax Levies
LO1: Use of C Corporation to Avoid Income Taxes
1) A high tax bracket individual can enhance the avoidance of income taxes through a C corporation by having the corporation retain its after tax earnings rather than paying them out as a dividend.
Answer: TRUE
Page Ref.: C:5-2
Objective: 1
2) A high tax bracket individual can enhance the avoidance of income taxes through a C corporation by having the corporation retain its after tax earnings so that when the individual dies, his or her heirs can liquidate the corporation and realize little to no gain because of a step-up in basis.
Answer: TRUE
Page Ref.: C:5-2
Objective: 1
3) A low tax bracket individual can enhance the avoidance of income taxes through a C corporation by having the corporation retain its after tax earnings rather than paying them out as a dividend.
Answer: FALSE
Page Ref.: C:5-2
Objective: 1
4) In years beginning in 2018 through 2020, any minimum tax credit carryover from prior alternative minimum tax.years will be allowed to the extent of the regular tax liability plus 50% of the excess of the minimum tax credit over the amount credited against the regular tax.
Answer: TRUE
Page Ref.: C:5-2
Objective: 1
LO2: Personal Holding Company Tax
1) Wind Corporation is a personal holding company. Its taxable income for this year is $100,000. The corporation’s charitable contributions are $5,000 greater than its income tax charitable contribution deduction limitation. Wind’s UPHCI is $95,000, assuming no other adjustments must be made.
Answer: TRUE
Page Ref.: C:5-6 and C:5-7
Objective: 2
2) The personal holding company tax might be imposed
Answer: C
Page Ref.: C:5-15
Objective: 2
3) Foster Corporation has gross income for regular tax purposes of $100,000, which includes a net Sec. 1231 gain of $10,000 and a net capital gain of $10,000. Ordinary gross income for personal holding company purposes is
Answer: B
Page Ref.: C:5-15
Objective: 2
4) Identify which of the following statements is false.
Answer: A
Page Ref.: C:5-15
Objective: 2
5) Identify which of the following statements is true.
Answer: A
Page Ref.: C:5-14
Objective: 2
6) Identify which of the following statements is true.
Answer: B
Page Ref.: C:5-15 and C:5-22
Objective: 2
7) The personal holding company penalty tax rate is
Answer: A
Page Ref.: C:5-19
Objective: 2
8) Which of the following is not an adjustment to taxable income when computing the personal holding company tax?
Answer: D
Page Ref.: C:5-20; Figure C:5-2
Objective: 2
9) Identify which of the following statements is false.
Answer: A
Page Ref.: C:5-20
Objective: 2
10) Identify which of the following statements is true.
Answer: B
Page Ref.: C:5-22 and C:5-23
Objective: 2
11) Identify which of the following statements is true.
Answer: D
Page Ref.: C:5-22 and C:5-23
Objective: 2
12) A personal holding company cannot take a dividends-paid deduction for
Answer: D
Page Ref.: C:5-22 and C:5-23
Objective: 2
13) 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?
Answer: A
Page Ref.: C:5-22 and C:5-23
Objective: 2
14) Which of the following actions cannot be used to eliminate a possible personal holding company tax liability involving a corporation owned by a mother and a father?
Answer: A
Page Ref.: C:5-22 and C:5-23
Objective: 2
15) The personal holding company tax
Answer: B
Page Ref.: C:5-22 and C:5-23
Objective: 2
16) 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 $7,350 [($70,000 dividends – $35,000 DRD) × .21 = $7,350]. The IRS audits this corporation and sends a tax bill in the amount of $12,530 ($62,650 UPHCI × 0.20 = $12,530) 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?
Answer: This additional tax that was imposed is the personal holding company tax. The dentists should arrange to have the corporation pay deficiency dividends so as to avoid the penalty tax. The interest and penalties that have been imposed cannot be avoided by the payment of the deficiency dividend. The dentists should consider liquidating the corporation and have the assets held individually by the shareholders. The liquidating distributions are eligible for the dividends-paid deduction and can reduce the UPHCI amount. An S election might be considered. It could alleviate the personal holding company problem for future tax years, but not for prior tax years.
Page Ref.: C:5-21 and C:5-22
Objective: 2
17) 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:
Interest on federal government obligations $10,000
Dividends from savings and loan associations
on passbook savings accounts $2,000
Interest earned on notes receivable $5,000
Net rental income $3,000
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?
Answer: Investors is not a personal holding company since it is not more than 50% owned by five or fewer shareholders.
Page Ref.: C:5-15
Objective: 2
18) Khuns Corporation, a personal holding company, reports the following:
Rental income $50,000
Depreciation 10,000
Interest expense 5,000
Real estate taxes 2,000
Maintenance expenses 5,000
Administrative expenses 5,000
Calculate Khuns Corporation’s adjusted income from rents (AIR).
Answer:
Rental income $50,000
Minus: depreciation (10,000)
interest ( 5,000)
Real estate taxes ( 2,000)
Adjusted income from rents $33,000
Page Ref.: C:5-16; Example C:5-14
Objective: 2
19) Lake Corporation is a personal holding company. Lake reports the following results for the current year:
Rental income $100,000
Operating profit 80,000
Dividend income 30,000
Interest income 20,000
Depreciation 30,000
Mortgage interest expense 18,000
Real estate taxes 8,000
Other expenses 20,000
No dividends are paid during the current year or the 2-and-one-half-month throwback period. The mortgage relates to the rental properties. Calculate the adjusted income from rents exclusion from personal holding company income.
Answer:
OGI $230,000
Minus: rental expenses ( 56,000)
AOGI $174,000
Rental income $100,000
Minus: depreciation ( 30,000)
interest ( 18,000)
real estate taxes ( 8,000)
AIR $ 44,000
The rents cannot be excluded since AIR ($44,000) does not exceed 50% of AOGI ($87,000 = $174,000 × 0.50).
Page Ref.: C:5-18; Example C:5-15
Objective: 2
20) Eagle Corporation, a personal holding company, has the following results:
Taxable income $200,000
Dividends-received deduction 30,000
Excess charitable contributions 10,000
Long-term capital gains 10,000
Federal income taxes 61,000
Calculate the PHC tax.
Answer:
Taxable income $200,000
Plus: dividends-received deduction 30,000
Minus: excess charitable contributions ( 10,000)
Long-term capital gains (net of taxes)* ( 7,900)*
Federal income taxes ( 42,000)
Undistributed personal holding company income $170,100
Times: rate × 0.20
Personal holding company tax $ 34,020
*$10,000 – (0.21 × $10,000) = $7,900
Page Ref.: C:5-22; Example C:5-18
Objective: 2
21) Raptor Corporation is a PHC for 2009 and reports $200,000 of taxable income on its federal income tax return.
Operating profit $100,000
Long-term capital gain 80,000
Dividends (20%-owned corporation) 90,000
Interest 100,000
Gross income 370,000
Salaries expense (50,000)
General and administrative expense (25,000)
Dividends-received deduction (58,500)
Taxable income $236,500
Regular tax liability $ 49,665
What is Raptor’s PHC tax, assuming that it does not pay any dividends?
Answer:
Taxable income 223,000
Less: federal tax (49,665)
Less: Net capital gain (net of taxes)* (63,200)
Plus DRD 58,500
PHCI 168,635
PHC Tax (0.20 tax rate × 163,635) 33,727
* 80,000 – (80,000 * .21) = 63,200
Page Ref.: C:5-21 and C:5-22
Objective: 2
22) Mullins Corporation is classified as a PHC for the current year, reporting $263,000 of taxable income on its federal income tax return:
Operating profit $150,000
Long-term capital gain 20,000
Short-term capital gain 20,000
Dividends (from 25%-owned domestic corporation) 200,000
Interest 150,000
Gross income $540,000
Minus: general and administrative expenses ( 40,000)
Minus: salaries ( 30,000)
“Adjusted” taxable income $470,000
Minus: charitable contributions ( 47,000)
Taxable income before special deductions $423,000
Minus: dividends-received deduction (130,000)
Taxable income $293,000
Actual charitable contributions made by Mullins Corporation were $75,000. What are the federal income tax due and the personal holding company (PHC) tax liability? Discuss the methods (if any) by which payment of the PHC tax can be avoided.
Answer:
Corporate Income tax liability (293,000 * .21) $61,530
Taxable income $293,000
Plus: dividends-received deduction 130,000
Minus: excess charitable contributions ($75,000 – $47,000) ( 28,000)
Federal income tax ( 61,530)
Long-term capital gain (net of taxes) ( 15,800)a
UPHCI $317,670
Times: tax rate × 0.20
PHC tax $ 63,534
a$20,000 – ($20,000 × 0.21) = $15,800
Payment of the PHC tax can be avoided by paying a timely deficiency dividend in the amount of $296,980.
Page Ref.: C:5-22; Example C:5-18
Objective: 2
23) What is a personal holding company?
Answer: A personal holding company is any corporation that (1) has five or fewer individual shareholders who own more than 50% of the corporation’s outstanding stock at any time during the last half of its tax year, and (2) has personal holding company income that is at least 60% of its adjusted ordinary gross income for the tax year. Corporations that have certain special tax status generally are excluded from the PHC definition. Among those excluded are S corporations and tax-exempt organizations.
Page Ref.: C:5-14
Objective: 2
24) Define personal holding company income.
Answer: Personal holding company income includes dividends, interest, annuities, adjusted income from rents, royalties, produced film rents, income from personal service contracts involving a 25% or more shareholder, rental income for corporate property used by a 25% or more shareholder, and distributions from estates or trusts.
Page Ref.: C:5-16
Objective: 2
25) What is the effect of the two-pronged test that allows the exclusion from PHCI of certain AIR (adjusted income from rents)?
Answer: The effect of the two-pronged test is that it makes it difficult to use rents to shelter other passive income. PHCI does not include rents if (1) AIR is at least 50% of AOGI, and (2) the dividends-paid deduction equals or exceeds the amount by which nonrental PHCI exceeds 10% of OGI.
Page Ref.: C:5-17
Objective: 2
26) 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?
Answer: The following tax issues need to be addressed about Church Corporation’s first year of operations:
Projections indicate that 70% of Church Corporation’s gross income will be interest and dividends. The remaining 30% is net rental income. Therefore, it appears that all of Church’s income is personal holding company income. Since Church has only two shareholders (both of whom are related), it is quite likely that Church Corporation will be classified as a personal holding company. Church can attempt to change the nature of its activities to increase net rental income above 50% of AOGI and reduce the level of other PHCI earned (e.g., dividends and interest). If such changes are made, perhaps personal holding company status can be avoided in the initial tax year. If personal holding company status cannot be avoided for the initial year, the PHC can pay a large enough amount of dividends to minimize the penalty tax, interest, and penalties. Alternatively, Church Corporation might consider an S election for its initial year or its second year, although the built-in gains tax may pose a possible problem when the corporation has retained C corporation status in its initial tax year and makes an S election for its second tax year.
Page Ref.: C:5-15 through C:5-17
Objective: 2
LO3: Accumulated Earnings Tax
1) A corporation can be subject to both the accumulated earnings tax and the personal holding company tax in the same year.
Answer: FALSE
Page Ref.: C:5-25
Objective: 3
2) To avoid the accumulated earnings tax, a corporation needs to have a definite plan for expending the accumulated earnings.
Answer: TRUE
Page Ref.: C:5-26
Objective: 3
3) The accumulated earnings tax does not apply to corporations that
Answer: B
Page Ref.: C:5-23
Objective: 3
4) Identify which of the following statements is true.
Answer: C
Page Ref.: C:5-23
Objective: 3
5) Which of the following entities is subject to the accumulated earnings tax?
Answer: C
Page Ref.: C:5-23
Objective: 3
6) Identify which of the following statements is true.
Answer: D
Page Ref.: C:5-23 through C:5-25
Objective: 3
7) Which of following generally does not indicate an unreasonable earnings accumulation?
Answer: C
Page Ref.: C:5-25
Objective: 3
8) All of the following are recognized as reasons for accumulating earnings except
Answer: D
Page Ref.: C:5-25
Objective: 3
9) 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?
Answer: B
Page Ref.: C:5-27 and C:5-28; Example C:5-19
Objective: 3
10) Identify which of the following statements is true.
Answer: A
Page Ref.: C:5-27 and C:5-28; Example C:5-19
Objective: 3
11) When using the Bardahl formula, an increase in accounts payable (while holding purchases and operating expenses constant) has which of the following effects on the working capital requirements?
Answer: B
Page Ref.: C:5-28
Objective: 3
12) Identify which of the following statements is true.
Answer: A
Page Ref.: C:5-29
Objective: 3
13) A corporation cannot reasonably accumulate earnings to
Answer: D
Page Ref.: C:5-29
Objective: 3
14) The accumulated earnings tax is imposed at what rate?
Answer: B
Page Ref.: C:5-29
Objective: 3
15) When computing the accumulated earnings tax, which of the following is not a reduction to arrive at accumulated taxable income?
Answer: B
Page Ref.: C:5-30
Objective: 3
16) Identify which of the following statements is true.
Answer: D
Page Ref.: C:5-31
Objective: 3
17) When computing the accumulated earnings tax, the dividends-paid deduction is not available for
Answer: C
Page Ref.: C:5-31
Objective: 3
18) In determining accumulated taxable income for the purpose of the accumulated earnings tax, which one of the following is allowed as a deduction?
Answer: D
Page Ref.: C:5-30
Objective: 3
19) Which of the following is not permitted an accumulated earnings credit based on reasonable needs of the business?
Answer: B
Page Ref.: C:5-31
Objective: 3
20) 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?
Answer: C
Page Ref.: C:5-31
Objective: 3
21) The following information is reported by Acme Corporation.
Cost of goods sold $350,000
Average inventory balance 35,000
Average accounts receivable balance 65,000
Sales (all on account) 325,000
Average accounts payable balance 45,000
Operating expenses (excluding depreciation) 500,000
Purchases 40,000
What is Acme Corporation’s average operating cycle as a percentage of the year?
Answer:
Inventory turnover = ($35,000/$350,000) × 365 = 36.50 days
Receivables turnover = ($65,000/$325,000) × 365 = 73.00 days
Payables turnover = [$45,000/($40,000 + $500,000)] × 365 = 30.42 days
Operating cycle = [(36.50 + 73.00 – 30.42)/365] × 100 = 21.67% of a year
Page Ref.: C:5-27 and C:5-28; Example C:5-19
Objective: 3
22) Given the following information about Jones Corporation, what are Jones’s working capital needs using the Bardahl formula, assuming that federal income taxes are not an operating expense?
Average inventory $ 33,000
Cost of goods sold 300,000
Purchases 250,000
Average accounts receivable balance 80,000
Average credit sales 320,000
Average accounts payable balance 30,000
Operating expense 400,000
Depreciation claimed as operating expense 50,000
Federal income taxes 25,000
Advances to suppliers 30,000
Answer: Inventory turnover (as a percent of the year) = $33,000/$300,000 = 0.11.
Accounts receivable turnover = $80,000/$320,000 = 0.25.
Credit turnover = $30,000/($400,000 – $50,000 + $250,000) = 0.05.
Operating cycle = (0.11 + 0.25 – 0.05) = 0.31.
Working capital needs = 0.31 × ($400,000 – $50,000 + $300,000 + $25,000) = $209,250.
Page Ref.: C:5-27 and C:5-28; Example C:5-19
Objective: 3
23) A manufacturing corporation has accumulated E&P of $210,000 and current E&P of $65,000. Accumulated taxable income, before reduction for the accumulated earnings credit, is $90,000 for the current year. No dividends were paid during the year. The corporation has an increase in reasonable business needs of $35,000. If the corporation is not a service corporation and has reported no long-term capital gains, what is the amount of earnings subject to the accumulated earnings tax?
Answer: $90,000 – $40,000 accumulated earnings credit* = $50,000 accumulated taxable income.
1.* Accumulated E&P $210,000
2a. Current year minimum credit 40,000
3a. Current E&P retained for reasonable needs 35,000
3b. Current E&P greater than reasonable needs 30,000
Page Ref.: C:5-32 and C:5-33; Example C:5-21
Objective: 3
24) Green Corporation, a closely held operating corporation, reports the following:
Taxable income $200,000
Long-term capital gain 30,000
Dividends-received deduction 20,000
Federal income taxes on long-term capital gain 11,700
Accumulated earnings credit 80,000
Federal income taxes 65,150
Calculate Green’s accumulated taxable income.
Answer:
Taxable income $200,000
Plus: dividends-received deduction 20,000
Minus: LTCG (net of taxes)* ( 23,700)
Minus: accumulated earnings credit ( 80,000)
Minus: federal income taxes ( 42,000)
Accumulated taxable income $ 74,300
*$30,000 * .21% = $16,300 $30,000 – $6,300 = $23,700
Page Ref.: C:5-32 and C:5-33; Example C:5-21
Objective: 3
25) Lawrence Corporation reports the following results during the current year:
Taxable income $500,000
Federal income taxes 105,000
Dividends paid: June 5 50,000
Accumulated E&P balance: January 1 800,000
No dividends were paid in the throwback period. A long-term capital gain of $50,000 is included in taxable income. The statutory accumulated earnings tax exemption has been used up in prior years. An additional earnings accumulation of $60,000 for the current year can be justified as meeting the reasonable needs of the business. What is Lawrence Corporation’s accumulated earnings tax liability?
Answer:
Taxable income $500,000
Minus: long-term capital gain $50,000
Minus: income taxes (10,500) ( 39,500)
Minus: federal income taxes (105,000)
Minus: dividends-paid deduction ( 50,000)
Minus: accumulated earnings credit ( 20,500)*
Accumulated taxable income $285,000
Times: tax rate × 0.20
Accumulated earnings tax $ 57,000
*$60,000 reasonable needs of business accumulation – $39,500 capital gains net of taxes = $20,500.
Page Ref.: C:5-32 and C:5-33; Example C:5-21
Objective: 3
26) 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?
Answer:
Page Ref.: C:5-26
Objective: 3
27) How is the accumulated earnings tax liability computed?
Answer: See Figure C:5-3 on p. C:5-30.
Page Ref.: C:5-30
Objective: 3
28) 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?
Answer: The following tax issues need to be addressed about Navy Corporation’s earnings accumulation:
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.
Page Ref.: C:5-25 through C:5-29
Objective: 3
LO4: Tax Planning Considerations
1) There are no questions for this section.
LO5: Compliance and Procedural Considerations
1) Identify which of the following statements is false.
Answer: A
Page Ref.: C:5-36
Objective: 5
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
