Exam 17: Corporations: Introduction and Operating Rules

A taxpayer is considering the formation of a business that would derive some amounts of tax-exempt interest,qualified dividends,and capital gains.Explain how these income categories would be reported and taxed under the various types of entity forms discussed in the chapter.Consider the tax implications both to the entities and to their owners.

Warbler Corporation,an accrual method regular corporation,was formed and began operations on March 1,2015.The following expenses were incurred during its first year of operations (March 1 - December 31,2015): ​ 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 2015? ​ ​ a. ,except that Warbler also incurred in 2015 legal fees of $15,000 for the drafting of the corporate charter and bylaws.What is the amount of Warbler's 2015 deduction for organizational expenditures? ​ b. Same as

Ostrich,a C corporation,has a net short-term capital gain of $20,000 and a net long-term capital loss of $90,000 during 2015.Ostrich also has taxable income from other sources of $1 million.Prior years' transactions included the following: 2011 net short-term capital gains $20,000 2012 net long-term capital gains 15,000 2013 net short-term capital gains 25,000 2014 net long-term capital gains 5,000 ​ a.How are the capital gains and losses treated on Ostrich's 2015 tax return? b.​ Determine the amount of the 2015 net capital loss that is carried back to each of the previous years. c.​ Compute the amount of capital loss carryover,if any,and indicate the years to which the loss may be carried. d.​ If Ostrich were a proprietorship,how would Ellen,the owner,report these transactions on her 2015 tax return?

What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?

During the current year,Quartz Corporation (a calendar year C corporation) has the following transactions: Income from operations $350,000 Expenses from operations 370,000 Dividends received from ABC Corporation 50,000 Quartz owns 25% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss) for the year?

Amber Company has $100,000 in net income in the current year before deducting any compensation or other payment to its sole owner,Alfredo.Assume that Alfredo is in the 33% marginal tax bracket.Discuss the tax aspects of each of the following independent situations.(Assume that any salaries are reasonable in amount and ignore any employment tax considerations. ) a.Alfredo operates Amber Company as a proprietorship. b.Alfredo incorporates Amber Company and pays himself no salary and no dividend. c.​ Alfredo incorporates Amber Company and pays himself a $50,000 salary and a dividend of $42,500 ($50,000 - $7,500 corporate income tax).

During the current year,Skylark Company had operating income of $420,000 and operating expenses of $250,000.In addition,Skylark had a long-term capital loss of $20,000,and a charitable contribution of $5,000.How does Toby,the sole owner of Skylark Company,report this information on his individual income tax return under following assumptions? a.Skylark is an LLC,and Toby does not withdraw any funds from the company during the year. b.​ Skylark is an S corporation,and Toby does not withdraw any funds from the company during the year. c.​ Skylark is a regular (C) corporation,and Toby does not withdraw any funds from the company during the year.

During the current year,Maroon Company had $125,000 net income from operations.Belinda,the sole owner of Maroon,is in the 33% marginal tax bracket.Determine the combined tax burden for Maroon and Belinda under the following independent situations.(Ignore any employment taxes. ) a.Maroon Company is a C corporation and all of its after-tax income is distributed to Belinda. b.Maroon Company is a proprietorship and all of its after-tax income is withdrawn by Belinda. c.Maroon Company is an S corporation and all of its after-tax income is distributed to Belinda.

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is a subtraction on Schedule M-1?

Nancy is a 40% shareholder and president of Robin Corporation,a regular corporation.The board of directors of Robin has decided to pay Nancy a $75,000 bonus for the year based on her outstanding performance.The directors want to pay the $75,000 as salary,but Nancy would prefer to have it paid as a dividend.If Robin Corporation is in the 34% marginal tax bracket and Nancy is in the 33% marginal tax bracket irrespective of the treatment of the bonus,discuss which form of payment would be most beneficial for each party.(Ignore any employment tax considerations. )

Almond Corporation,a calendar year C corporation,had taxable income of $900,000,$1.1 million,and $1.2 million for 2012,2013,and 2014,respectively.Almond's taxable income is $2 million for 2015.Compute the minimum estimated tax payments for 2015 for Almond Corporation.

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.

Heron Corporation,a calendar year,accrual basis taxpayer,provides the following information for this year and asks you to prepare Schedule M-1. ​ Net income per books (after-tax) $239,700 Taxable income 195,000 Federal income tax liability 59,300 Interest income from tax-exempt bonds 5,000 Interest paid on loan incurred to purchase tax-exempt bonds 2,000 Life insurance proceeds received as a result of death of Heron's president 100,000 Premiums paid on policy on life of Heron's president 4,500 Excess of capital losses over capital gains 2,000 Retained earnings at beginning of year 375,000 Cash dividends paid 90,000 Tax depreciation in excess of book depreciation 7,500 ​

During the current year,Coyote Corporation (a calendar year C corporation) has the following transactions: Income from operations $260,000 Expenses from operations 285,000 Dividends received from Roadrunner Corporation 115,000 ​ 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?

During the current year,Gray Corporation,a C corporation in the financial services business,made charitable contributions to qualified organizations as follows: ∙ Stock (basis of $20,000,fair market value of $45,000) in Drab Corporation,held for six months as an investment,to the Salvation Army.(Salvation Army plans on selling the stock. ) ∙ Painting (basis of $90,000,fair market value of $250,000),held for four years as an investment,to the Museum of Fine Arts.(The Museum plans on including the painting in its collection. ) Gray Corporation's taxable income (before any charitable contribution deduction) is $1.8 million. a.What is the total amount of Gray's charitable contributions for the year? b.What is the amount of Gray's charitable contribution deduction in the current year,and what happens to any excess charitable contribution,if any?

Compare the basic tax and nontax factors of doing business as a partnership,an S corporation,and a C corporation.Circle the correct answers. ​ ​ Tax Questions ​ Column A Partnership Column B S Corporation Column C C Corporation Who pays tax on the entity's income? ​ Partners Partnership ​ Shareholders S corporation Shareholders C Corporation Are operating losses passed through to owners? ​ Yes No Yes No Yes No Are capital gains (losses) reported on owners' tax returns as such? ​ Yes No Yes No Yes No Are distributions of profits taxable to owners? Yes No Yes No Yes No ​ ​ ​ ​ Nontax Factors Partnership S Corporation C Corporation ​ Is the liability of owners limited? Yes No ​ Yes No Yes No Is there free transferability of ownership interests? Yes No Yes No Yes No ​

On December 28,2015,the board of directors of Taupe Corporation,a calendar year,accrual method C corporation,authorized a contribution of land to a qualified charitable organization.The land (basis of $75,000,fair market value of $125,000) was acquired five years ago and held as an investment.For purposes of the taxable income limitation applicable to charitable deductions,Taupe has taxable income of $800,000 and $950,000 for 2015 and 2016,respectively.Describe the tax consequences to Taupe Corporation under the following independent situations. a.The donation is made on February 16,2016. b.The donation is made on April 11,2016.

In each of the following independent situations,determine the corporation's income tax liability.Assume that all corporations use a calendar year 2015. ​ ​ Taxable Income Violet Corporation $ 63,000 Indigo Corporation 180,000 Orange Corporation 510,000 Blue Corporation 11,100,000 Green Corporation (personal service corporation) 225,000 ​

Adrian is the president and sole shareholder of Pigeon Corporation.He also lends money and rents a building to the corporation.Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation.What limitations are there on the use of such relationships?

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 31,2015,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 3,2016. b.​ Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on April 4,2016. c.​ Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on February 3,2016.