Exam 2: Corporations Introduction and Operating Rules

Don, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?

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?

For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.

Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.

Orange Corporation owns stock in White Corporation and has net operating income of $400,000 for the year. White Corporation pays Orange a dividend of $60,000. What amount of dividends received deduction may Orange claim if it owns 45% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2016. The following expenses were incurred during the first tax year (April 1 through December 31, 2016) of operations. Expenses of temporary directors and of organizational meetings \ 27,000 Fee paid to the state of incorporation 1,000 Accounting services incident to organization 15,500 Legal services for drafting the corporate charter and bylaws 9,500 Expenses incident to the printing and sale of stock certificates 6,000 ? Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2016?

Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

Robin Corporation, a calendar year C corporation, had taxable income of $1.9 million, $1.2 million, and $900,000 for 2013, 2014, and 2015, respectively. Robin has taxable income of $1.5 million for 2016. The minimum 2016 estimated tax installment payments for Robin are:

Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2016. Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2016): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500. Hornbill Corporation's current year deduction for organizational expenditures is $5,800.

A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2016. He also owns 60% of the stock in a C corporation that earned $150,000 during the year. The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn. How much income must Bjorn report from these businesses?

Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000. For income tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.

In the current year, Crimson, Inc., a calendar C corporation, has income from operations of $180,000 and operating deductions of $225,000. Crimson also had $30,000 of dividends from a 15% stock ownership in a domestic corporation. Which of the following statements is correct with respect to Crimson for the current year?

During the current year, Violet, Inc., a closely held corporation (not a PSC), has $55,000 of passive activity loss, $80,000 of net active income, and $20,000 of portfolio income. How much is Violet's taxable income for the current year?

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2015 of $5,000. In 2016, Heron made a further charitable contribution of $20,000. Heron's 2016 deduction is limited to $15,000 (10% of taxable income). The 2016 contribution must be applied first against the $15,000 limitation.

Which of the following statements is incorrect regarding the taxation of C corporations?

On December 16, 2016, the directors of Quail Corporation (an accrual basis, calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on April 11, 2017, may be claimed as a deduction for tax year 2016.

Gerald, a cash basis taxpayer, owns 70% of the stock of Black Corporation, a calendar year, accrual basis C corporation. On December 31, 2016, Black accrued a bonus of $80,000 to Gerald, and paid the bonus to Gerald on January 6, 2017. When does Gerald report the bonus, and when does Black Corporation deduct the bonus? Would your answers change if Gerald was a 40% shareholder of Black?

Thrush Corporation files Form 1120, which reports taxable income of $200,000. The corporation's tax is $56,250.