Exam 17: Corporations: Introduction and Operating Rules

Maroon Company had $150,000 net profit from operations in 2010 and paid Bobbie,its sole shareholder,a dividend of $108,250 ($150,000 net profit - $41,750 corporate tax).Assume that Bobbie is in the 35% marginal tax bracket.Would Bobbie's tax situation be better or worse if Maroon Company were a proprietorship and Bobbie withdrew $108,250 from the business during the year? Explain.

Which of the following statements is incorrect regarding the dividends received deduction?

Fender Corporation was organized in 2008 and had profits in 2008 and 2009.The corporation had an NOL in 2010.The corporation should elect to forgo carrying the NOL back:

Heron Corporation,a calendar year,accrual basis taxpayer,provides the following information for this year and asks you to prepare Schedule M-1:

Jay is the sole shareholder of Brown Corporation,which is an S corporation.During the current year,Brown earned net operating income of $80,000 and had a long-term capital loss of $3,000.Also,Jay withdrew $40,000 from the corporation.Jay must report $80,000 of Brown Corporation income and may deduct the $3,000 loss on his Federal individual income tax return.

Owl Corporation,a C corporation,recognizes a gain on the sale of a § 1250 asset in the current year.Owl had used the straight-line method for depreciating the realty.Some of Owl's gain on the sale of the realty will be treated as depreciation recapture (ordinary income).

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.

Vireo Corporation,a calendar year C corporation,has taxable income of $1.3 million and $3 million for 2009 and 2010,respectively.The minimum 2010 estimated tax installment payments for Vireo are: