Exam 2: Corporations: Introduction and Operating Rules

Francisco is the sole owner of Rose Company. For 2011, the only income of Rose was a long-term capital gain of $25,000. The business made no distributions during the year to Francisco. Irrespective of Rose Company, Francisco's marginal tax rate is 35% and he has no capital asset transactions. Which of the following statements is incorrect?

Vireo Corporation, a calendar year C corporation, has taxable income of $1.3 million and $3 million for 2010 and 2011, respectively. The minimum 2011 estimated tax installment payments for Vireo are:

During the current year, Quartz Corporation (a calendar year C corporation) has the following transactions: Quartz owns 15% of ABC Corporation's stock. How much is Quartz Corporation's taxable income (loss) for the year?

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 $250,000 bonus for the year based on her outstanding performance. The directors want to pay the $250,000 as salary, but Nancy would prefer to have it paid as a dividend. If both Robin Corporation and Nancy are in a 35% 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.)

Peach Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive loss during the year. If Peach is a closely held C corporation that is not a PSC, it can deduct $230,000 of the passive loss in the year.

No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days.

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 an addition on Schedule M-1?

There is no Federal income tax assessed on partnerships (including those formed as LLCs) or S corporations. Since all states follow the Federal approach as to entity taxation, state income taxation is a neutral factor in the selection of an entity form.

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 15% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?

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

Under the "check-the-box" Regulations, a single-member LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

The corporate marginal tax rates range from 10% to 39%, while the individual marginal tax rates range from 15% to 35%.

Shareholders of closely held C corporations frequently engage in transactions that produce a tax benefit to the corporations. In many cases, shareholders receive compensation for employment with closely held corporations, and such payments generate a deduction for the corporations. To avoid the double taxation effect, shareholders generally prefer these and other corporate deductible payments over dividend distributions. Explain how this strategy avoids double taxation, including examples of other shareholder-corporation transactions that could be used for such purpose. Also, discuss the possible pitfalls surrounding corporate payments to shareholders.

In the current year, Zircon Corporation donated scientific property worth $300,000 to City University (a qualified charitable organization) to be used in research. The basis of the property was $140,000, and Zircon had held it for ten months as inventory. Zircon Corporation may deduct $220,000 as a charitable contribution (ignoring the taxable income limitation).

The dividends received deduction may be subject to a limitation based on a percentage of taxable income computed without regard to the NOL deduction, the domestic production activities deduction, the dividends received deduction, and any capital loss carryback to the current tax year.

Rose is a 50% partner in Wren Partnership. During the year, Wren earned net profit of $100,000 ($210,000 gross income - $110,000 operating expenses) and distributed $20,000 to each partner. Rose must report Wren Partnership profit of $20,000 on her Federal income tax return.

Bear Corporation has a net short-term capital gain of $35,000 and a net long-term capital loss of $200,000 during 2011. Bear Corporation has taxable income from other sources of $600,000. Prior years' transactions included the following: Compute the amount of Bear's capital loss carryover to 2012.

Warbler Corporation, an accrual method regular corporation, was formed and began operations on March 1, 2011. The following expenses were incurred during its first year of operations (March 1 - December 31, 2011):

Red Corporation, a C corporation that has two equal shareholders, earned $450,000 during 2011. Orange Company, a partnership that has two equal partners, earned $450,000 during the year. Red did not make any distributions to its shareholders, and Orange's partners did not make any withdrawals. Contrast the tax treatment of the shareholders of Red Corporation and the partners of Orange Company.

What is the purpose of Schedule M-3? Which corporations are required to file Schedule M-3?