Exam 2: Corporations: Introduction and Operating Rules

Red Corporation,a C corporation that has two equal shareholders,earned $450,000 during 2012.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.

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

Rajib is the sole shareholder of Robin Corporation,a calendar year S corporation.Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses)and distributed $80,000 to Rajib.Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

In 2012,Bluebird Corporation had net income from operations of $75,000.Further,Bluebird recognized a long-term capital loss of $30,000,and a short-term capital gain of $10,000.Which of the following statements is correct?

A calendar year C corporation with average annual gross receipts of $5 million or less must use the cash method of accounting.

Albatross,a C corporation,had $140,000 net income from operations and a $25,000 short-term capital loss in the current year.Albatross Corporation's taxable income is $140,000.

Crow Corporation,a C corporation,donated scientific property (basis of $30,000,fair market value of $50,000)to State University,a qualified charitable organization,to be used in research.Crow had held the property for four months as inventory.Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

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?

Beige Corporation,a C corporation,purchases a warehouse on August 1,1996,for $1 million.Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 11,2012,for $1.2 million.What is the amount and character of the gain recognized by Beige on the sale of the realty?

On December 31,2012,Lavender,Inc. ,an accrual basis C corporation,accrues a $90,000 bonus to Barry,its vice president and a 70% shareholder.Lavender pays the bonus to Barry,who is a cash basis taxpayer,on March 15,2013.Lavender can deduct the bonus in 2013,the year in which it is included in Barry's gross income.

Robin Corporation,a calendar year C corporation,had taxable income of $1.9 million,$1.2 million,and $900,000 for 2009,2010,and 2011,respectively.Robin has taxable income of $1.5 million for 2012.The minimum 2012 estimated tax installment payments for Robin are:

Explain the rules regarding the accounting periods available to corporate taxpayers.

On December 28,2012,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 2012 and 2013,respectively.Describe the tax consequences to Taupe Corporation under the following independent situations.

Donald owns a 60% interest in a partnership that earned $230,000 in the current year.He also owns 60% of the stock in a C corporation that earned $230,000 during the year.Donald received $50,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $188,000 of income on his individual income tax return for the year.

Bear Corporation has a net short-term capital gain of $35,000 and a net long-term capital loss of $200,000 during 2012.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 2013.

If a C corporation uses straight-line depreciation on real estate (§ 1250 property),no gain on the sale of the property will be recaptured as ordinary income.

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?

Katherine,the sole shareholder of Purple Corporation,a calendar year C corporation,has the corporation pay her a salary of $450,000 in the current year.The Tax Court has held that $150,000 represents unreasonable compensation.Purple Corporation's taxable income is unaffected by the Tax Court's determination.

Heron Corporation,a calendar year C corporation,had an excess charitable contribution for 2011 of $5,000.In 2012,Heron made a further charitable contribution of $20,000.Heron's 2012 deduction is limited to $15,000 (10% of taxable income).The current year's contribution must be applied first against the $15,000 limitation.

Peach Corporation had $210,000 of active income,$45,000 of portfolio income,and a $230,000 passive loss during the current 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.