Exam 2: Corporations: Introduction and Operating Rules

Rodney,the sole shareholder of a calendar year,accrual basis C corporation,loaned the corporation a substantial amount of money on January 1,2008.The corporation accrued $45,000 of interest expense on the loan on December 31,2008.It pays the interest to Rodney,a cash basis taxpayer,on April 1,2009.Under these facts:

Bluebird Corporation received a $200,000 dividend from Canary Corporation.Bluebird,which owns 80% of Canary Corporation,may take a dividends received deduction of $200,000.

Wren Corporation received a dividend from Martin Corporation in December 2007; at that time,Wren owned 70% of Martin's stock.Wren acquires the remaining 30% of Martin's stock in 2008.Assume Martin pays a dividend in 2008.How will this stock acquisition affect the amount of dividend income that Wren Corporation will report for 2008?

Albatross,a C corporation,had $200,000 net income from operations and a $25,000 short-term capital loss in 2008.Albatross Corporation's taxable income is $200,000.

The passive loss rules apply more favorably to closely held C corporations than to personal service corporations (PSCs).

An individual who owns a proprietorship must report profit from the proprietorship on his/her Federal income tax return.

Lou,an employee and sole shareholder of Amarillo Corporation,a C corporation,has the corporation pay him $175,000.Lou is in the 35% tax bracket.His income tax will be the same,regardless of whether Amarillo treats the payments as a dividend or as salary.

Red Corporation,which owns stock in Blue Corporation,had net operating income of $400,000 for the year.Blue pays Red a dividend of $60,000.Red takes a dividends received deduction of $48,000.Which of the following statements is correct?

Rhino,Inc.,a calendar year C corporation,had the following income and expenses in 2008: How much is Rhino's charitable contribution deduction for 2008?

Compare the basic tax and nontax factors of doing business as a partnership,an S corporation,and a C corporation. Circle the corrent answers.

On December 29,2008,the directors of Greyhawk Enterprises (an accrual basis,calendar year taxpayer)authorized a cash donation of $10,000 to the United Way,a qualified charity.The payment is made on March 13,2009. a.Can Greyhawk claim the $10,000 contribution as a deduction for tax year 2008? Explain. b.Would your answer differ if Greyhawk were a partnership and its partners authorized a donation on December 29, 2008, and Greyhawk paid it on March 13, 2009? Explain.

Macayo,Inc.,received $800,000 life insurance proceeds on the death of its president.The $800,000 will be an addition item on Macayo's Schedule M-1.

Patrick,an attorney,is the sole shareholder of Gander Corporation.Gander is a PSC with a fiscal year ending October 31.The corporation paid Patrick a salary of $360,000 during its fiscal year ending October 31,2008.How much salary must Gander pay Patrick during the period November 1 through December 31,2008,to permit the corporation to continue to use its fiscal year without negative tax effects?

During 2008,Violet Corporation (a calendar year taxpayer)had the following income and expenses: In addition to the above,Violet had a domestic production activities deduction of $3,000,and a charitable contribution carryover (originating in 2004)of $6,000. A)What is Violet's charitable contribution deduction for 2008? B)If any of Violet's charitable contributions are not deductible in 2008, how is such excess treated?

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 2008.

Peach Corporation had $135,000 of active income,$180,000 of portfolio income,and a $155,000 passive loss during the year.If Peach is a closely held C corporation that is not a PSC,it can deduct the $155,000 passive loss.

Chuck is the sole proprietor of Chuck's Carpet Shop,which had gross income of $432,000 and operating expenses of $225,000 during the year.In addition,Chuck sold a capital asset that had been held by the business for 3 years for a $10,500 capital loss.He withdrew $112,500 from the business for living expenses during the year.What is Chuck's net income from the proprietorship for the year?

A corporation with no taxable income need not file a Form 1120.

Orange Corporation owns stock in White Corporation and has net operating income of $800,000 for the year.White Corporation pays Orange a dividend of $300,000.What amount of dividends received deduction may Orange claim if it owns 18% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?

Robin is a 50% shareholder in Robin-Wren,an S corporation.Robin-Wren earned net income of $100,000 during the year,and Robin received a distribution of $35,000 from the corporation.Robin must report a $35,000 dividend on his individual Federal income tax return (Form 1040).