Chapter 11: The Corporate Income Tax Key
1. Corporations are granted favorable tax treatment for short-term capital losses.
2. A corporation may carry forward capital losses for an indefinite period.
3. An S corporation files a Form 1120S.
4. A regular corporation with excess charitable contributions may carry the excess forward to the 5 succeeding
tax years.
5. If a corporation’s status as an S corporation is involuntarily terminated in the middle of the tax year, the
corporation must file as an S corporation for the first half of the tax year and a regular corporation for the
second half of the tax year.
6. If the shareholders of an S corporation voluntarily revoke the corporation’s S corporation status in the sixth
month of the tax year and the revocation does not specify a prospective revocation date, the corporation is a
regular corporation for that tax year.
7. The accumulated earnings tax is designed to prevent shareholders from avoiding the individual income tax.
8. A corporation may be found subject to both the accumulated earnings tax and the personal holding company
tax in the same year.
9. The corporate tax rates favor large corporations.
10. Corporations may deduct without limitation any amount of charitable contributions providing the amounts
are paid to qualified organizations.
11. If a corporation is unable to deduct a capital loss against capital gains for a particular tax year, it loses the
tax benefit since the loss may not be carried to other tax years.
12. To prevent triple taxation, a corporation is entitled to deduct 50 percent of the dividends received from other
domestic corporations.
13. Corporations can elect to deduct up to $5,000 of organizational costs in the year they begin business,
assuming their total organizational expenses do not exceed $50,000.
14. Brokers’ fees incurred in the issuance of a corporation’s stock are considered organizational expenditures.
15. A corporation must reconcile, to the IRS’s satisfaction, the difference between taxable income (before
special deductions and net operating losses) as shown on the tax return and net income as shown on the
company’s books.
16. The corporate alternative minimum tax rate is 28 percent.
17. The original due date for a tax return of a corporation with a calendar tax year-end falls before the original
due date of a return for an individual taxpayer with the same tax year.
18. S corporations pay taxes at a higher rate than do regular corporations.
19. The income of an S corporation is computed in much the same manner as that of a partnership.
20. Charitable contributions made by an S corporation are not deductible by the corporation; therefore, the
shareholders receive no tax benefit from the contributions.
21. As a general rule, the transfer of property to a corporation in exchange for stock does not result in a taxable
transaction.
22. Corporations are subject to an alternative minimum tax.
23. Capital losses of a corporation must be used to offset capital gains and net capital losses may not be
deducted from the ordinary income of a corporation.
24. Schedule M-1 on Form 1120 shows the reconciliation of a corporation’s tax liability to the tax expense on
the corporation’s books.
25. Corporations pay a flat 30 percent federal income tax.
26. Corporations are not allowed to amortize the costs of organizing the corporation.
27. A corporation may elect to take a credit for dividends paid in lieu of claiming a dividends received
deduction.
28. The accumulated earnings tax will not be imposed on accumulations that can be shown to be necessary to
meet the reasonable needs of the business.
29. A corporation owning 80 percent or more of the stock of another corporation has a dividends received
deduction of 100 percent.
30. Which of the following is not a requirement for qualification as an S corporation?
31. For 2011, what is the maximum tax rate for personal service corporations?
32. For 2011, the Beech Corporation has net income on its books of $60,000, including the following items:
Net capital losses
$10,000
Federal income tax expense
25,000
Federal tax depreciation exceeds the depreciation deducted on the books by $5,000. What is the corporation’s taxable income?
33. The Nandina Corporation was formed and began operations on July 1, 2011, and incurred the following
expenses during the year:
State fees for incorporation
$ 800
Legal and accounting fees incident to organization
1,500
Legal fees for the issuance of stock
600
Temporary directors’ fees
1,000
If the corporation chooses not to expense but rather amortizes organizational costs over 180 months, what is the amount of its amortization expense
for 2011?
A. $0
34. Harry forms the Nectarine Corporation during the 2011 tax year. To form the corporation, Harry transfers
assets having a fair market value of $650,000 to Nectarine Corporation for 100 percent of the corporation’s
stock. Harry’s adjusted basis in the assets transferred was $350,000 and Nectarine Corporation assumed a
$200,000 mortgage on the assets. If the fair market value of the stock received by Harry is $450,000, what is his
basis in the stock received from the corporation?
35. The Sapote Corporation is a manufacturing corporation. The corporation has accumulated earnings of
$450,000 and the corporation cannot establish a reasonable business need for any of that amount. What is the
amount of the accumulated earnings tax (if any) that will be imposed on the corporation?
A. $45,000
36. On July 1, 2011, Robert forms the Yew Corporation. In exchange for 100 percent of the corporation’s stock,
Robert contributes land with a fair market value of $100,000. Robert acquired the land 5 years ago at a cost of
$30,000. At the date of the contribution, the land is subject to a $10,000 mortgage which the corporation
assumes. What is the basis of the land to Yew Corporation?
A. $20,000
37. In 2011, Parvifolia, Inc. had $400,000 of revenue from operations and $160,000 of dividends from non-
affiliated 15-percent-owned domestic corporations. The corporation’s operating expenses totaled $410,000.
What is Parvifolia, Inc.’s dividends received deduction for 2011?
38. Roberta and Sally formed the Alder Corporation on October 1, 2011. On the same date, Roberta paid
$75,000 cash to Alder Corporation for 750 shares of the corporation’s common stock. Simultaneously, Sally
received 100 shares of Alder Corporation’s stock for services rendered. How much should Sally include in her
taxable income for 2011, and what will be the basis of her Alder Corporation stock?
Taxable Income
39. For the year ended December 31, 2011, Prunus, Inc., reported net income before federal income tax expense
of $900,000 per the corporation’s books. This figure included the following items:
Interest income on tax-exempt municipal securities
$30,000
Loss on sale of land acquired in 1985 as an investment
40,000
Interest expense on loan to purchase tax-exempt municipal securities
16,000
What is the taxable income of Prunus, Inc. for 2011?
40. Ficus, Inc. began business on April 1, 2011, and elected to file its income tax return on a calendar-year
basis. The corporation incurred $600 in organizational expenditures. Assuming the corporation does not elect to
expense but chooses to amortize the costs over 180 months, the maximum allowable deduction for amortization
of organizational expenditures in 2011 is:
41. The accumulated earnings tax, which is imposed on corporations for the accumulation of earnings in excess
of reasonable business needs, does not apply to:
42. On July 1, 2011, Grey formed Arucaria Corporation. On that same date, Grey paid $100,000 cash and
transferred property with an adjusted basis of $50,000 to Arucaria in exchange for 3,000 shares of the
corporation’s common stock. The property transferred had a fair market value of $85,000 on the date of the
transfer. Arucaria Corporation had no other shares of common stock outstanding on July 1, 2011. As a result of
this transaction, Grey’s basis in the stock and Arucaria Corporation’s basis in the property (other than the cash),
respectively, are:
43. What is the maximum amount of accumulated earnings that a corporation is allowed to accumulate, without
regard to business needs, before the accumulated earnings tax is imposed?
44. For its year ended December 31, 2011, Cupressa Corporation, an S corporation, had net income per books
of $216,000 which included $180,000 from operations and a $36,000 net long-term capital gain. During 2011, a
total of $90,000 was distributed to the corporation’s nine equal shareholders, all of whom are on a calendar-year
tax basis. For 2011, each shareholder should report:
45. In 2011, Apricot Corporation had book net income of $120,000. Included in book net income was a $10,000
capital gain. The $120,000 net income does not include a $15,000 capital loss carryforward available from the
previous year. What is Apricot Corporation’s 2011 income tax liability before any tax credits?
46. The F. Repens Corporation has ordinary income of $250,000 for 2011, including dividends of $50,000
received from 30-percent-owned domestic corporations. How much is the F. Repens Corporation’s dividends
received deduction for 2011?
47. The Bay Fig Corporation has a $350,000 gain from operations for 2011, and dividends of $100,000 received
from 30-percent-owned domestic corporations. How much is the Bay Fig Corporation’s dividends received
deduction for 2011?
48. Terry forms the Camphor Corporation during 2011. She transfers property with a value of $700,000 to
Camphor Corporation in exchange for 100 percent of the stock in the corporation. Terry’s basis in the property
transferred was $350,000 and the corporation assumed a $250,000 mortgage on the property. If the fair market
value of the stock received by Terry is $450,000, what is the corporation’s basis in the property received from
Terry?
A. $100,000
49. Which of the following statements is true of corporations?
A. Income of all corporations is taxed in the same way that income of partnerships is taxed.
50. Which of the following statements is not true of S corporations?
A. S corporations are corporations that receive tax treatment similar to that given partnerships.
51. Which of the following companies is taxed at a flat rate of 35 percent?
52. Which of the following is true with respect to capital gains and losses of a corporation?
A. A corporation can offset ordinary income with capital losses.
53. ABC Company owns 40 percent of JMT Company and 95 percent of DEM Company. JMT pays a $100,000
dividend to ABC and DEM pays a $40,000 dividend to ABC in 2011. Assuming that ABC has $1,000,000 of
ordinary income, calculate ABC’s dividends received deduction for 2011.
54. Which of the following items is not generally a schedule M-1 adjustment?
55. Which of the following is false in regards to filing requirements?
56. Which of the following corporations is allowed to make an S corporation election?
57. Rob, Bill, and Steve form Big Company. Rob performs $45,000 of services for his shares of the
company. Bill transferred property with a basis of $5,000 for $75,000 of stock. Steve contributes cash of
$100,000 for his shares. Which of the three must recognize income in the year of the formation?
58. For the year ended June 30, 2011, the Rosaceae Corporation has a long-term capital loss of $25,000.
a.
Assuming that in addition to the capital loss the corporation has ordinary income of $20,000 for 2011, calculate the corporation’s tax
liability before any credits.
b.
Assuming that in addition to the long-term capital loss of $25,000 the corporation has ordinary income of $100,000 and a short-term
capital gain of $10,000 for 2011, calculate the corporation’s tax liability before any credits.
a.
59. During 2011, the Squamata Corporation has $25,000 in ordinary income, a long-term capital loss of
$20,000, and a short-term capital gain of $10,000.
a.
Calculate the Squamata Corporation’s tax liability for 2011.
b.
Explain the nature and amount of any carrybacks or carryforwards that the corporation is entitled to receive.
a.
gains in those years.
60. During 2011, the Melaleuca Corporation received dividends from 50-percent-owned domestic corporations
in the amount of $100,000.
a.
Assuming that in addition to the dividend income the corporation has gross income from operations of $250,000 and operating expenses of
$210,000, calculate the amount of the corporation’s dividends received deduction for 2011.
b.
If, instead of $250,000 in gross income from operations, the corporation has $200,000 in gross income from operations and the same
amount of dividends and expenses, calculate the amount of the corporation’s dividends received deduction for 2011.
61. Fran, George, and Helen form FGH Corporation. In exchange for 300 shares of stock of the corporation,
Fran contributes property with a basis of $15,000, fair market value of $50,000 and subject to a liability of
$20,000 which the corporation assumed. George contributes property with a basis of $20,000, fair market value
of $30,000 in exchange for 250 shares of stock of the corporation with a value of $25,000 plus $5,000 cash.
Helen performs services for the corporation and receives $2,000 worth of stock (20 shares) in exchange for the
services.
a.
What is the amount of Fran’s recognized gain or loss on the transaction?
b.
What is Fran’s basis in the stock of the corporation?
c.
What is the corporation’s basis in the property received from Fran?
d.
What is the amount of George’s recognized gain or loss on the transaction?
e.
What is George’s basis in the stock of the corporation?
a.
b.
c.
d.
e.
62. Rex and Marsha each own 50 percent of the Grandiflora Corporation, an S corporation with a calendar tax
year. At the beginning of the tax year, Marsha and Rex both have a basis in the stock of the corporation of
$25,000. On June 30, 2011, Rex sells his interest in the corporation to George for $200,000, and for 2011 the
Grandiflora Corporation has a loss of $90,000.
a.
Calculate the amount of the corporation’s loss that may be deducted by Rex on his 2011 tax return.
b.
Calculate the amount of the corporation’s loss that may be deducted by George on his 2011 tax return.
c.
Calculate the amount of the corporation’s loss that may be deducted by Marsha on her 2011 tax return.
a.
b.
63. The Lagerstroemia Corporation was formed on January 1, 2011. Calculate the Lagerstroemia Corporation’s
taxable income or loss for 2011 given the following information:
Gross receipts
$250,000
Cost of goods sold
150,000
Dividend income (from 10-percent-owned domestic corporation)
35,000
Interest income
15,000
Business expenses (other than organizational costs and charitable contributions)
125,000
Charitable contributions
5,000
Organizational costs expensed
5,000
Taxable income (loss)
$_________
Gross receipts
$250,000
Gross profit
$100,000
Dividend income
35,000
Interest income
15,000
Total income
$150,000
Business expenses
-125,000
Organizational costs
-5,000
Income before charitable contribution deduction
$ 20,000
Charitable contribution deduction (10% ´ $20,000)
-2,000
Income before dividends received deduction
$ 18,000
Dividends received deduction (70% ´ $35,000 = $24,500)
-24,500
Taxable income (loss)
64. Calculate the corporate tax liability in each of the following circumstances:
a.
X Corporation has taxable income of $250,000 for its 2011 calendar tax year.
b.
Y Corporation has $1,500,000 in taxable income for 2011.
c.
Z Corporation has ordinary income of $100,000, a short-term capital loss of $30,000, and a long-term capital gain of $10,000 in 2011.
a.
b.
corporation’s stock.
65. The Peach Corporation is a regular corporation that contributes $25,000 cash to qualified charitable
organizations during 2011. The corporation has net operating income of $200,000 before deducting the
contributions.
a.
What is the amount of Peach Corporation’s allowable deduction for charitable contributions for the current year?
b.
What may the corporation do with any excess amount of contributions?
a.
b.
66. The Guava Corporation has book net income of $90,000 for 2011. Included in this figure are the following
items which are reported on the corporation’s Schedule M-1, Reconciliation of Income (Loss) per Books with
Income per Return.
1.
Federal income tax expense
$22,000
2.
Depreciation deducted on books, not deductible for tax purposes
5,000
3.
Deduction for 50 percent of meals and entertainment expense not allowed for tax purposes
3,000
4.
Deduction for payroll tax penalties not allowed for tax purposes
2,000
5.
Tax exempt interest income included in book income but not in tax return income
10,000
67. Avocado Corporation paid $3,000 in estimated tax payments for the calendar year ended December 31,
2011. The corporation has an actual tax liability of $4,000 for the year.
a.
If no extension is requested, when is the tax return due?
b.
If an extension of time to file is requested and approved, when is the tax return due?
c.
If an extension of time to file is requested and approved, when is the additional $1,000 of the 2011 tax due?
a.
b.
c.
68. Is it correct to state the maximum corporate tax rate is 35 percent? Please describe the structure of the
corporate tax rate schedule in your answer.
For income between $100,000 and $335,000 the effective rate is 39 percent, that is, 34 percent plus the 5
percent surcharge. For income between $15,000,000 and $18,333,333 the effective rate is 38 percent, that is, 35
percent plus the 3 percent surcharge. The higher effective rates within these dollar limits are sometimes referred
to as the “bubble” rates.
69. What is the purpose of Schedule M-1?