Exam 2: Corporations: Introduction and Operating Rules

To close perceived tax loopholes,Congress enacted two limitations on the amount of any dividends received deduction.Briefly describe the two loophole closing provisions and explain why Congress felt they were necessary.

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.

On December 31,2010,Peregrine Corporation,an accrual method,calendar year taxpayer,accrued a performance bonus of $100,000 to Charles,a cash basis,calendar year taxpayer.Charles is president and sole shareholder of the corporation.When can Peregrine deduct the bonus?

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.

Thrush Corporation files Form 1120,which reports taxable income of $110,000.The corporation's tax is $26,150.

Hippo,Inc. ,a calendar year C corporation,manufactures golf gloves.For 2010,Hippo had taxable income (before DPAD)of $800,000,qualified domestic production activities income of $950,000,and W-2 wages related to qualified production activities income of $130,000.Hippo's domestic production activities deduction for 2010 is:

During the current year,Flamingo Corporation,a regular corporation in the book publishing business,made charitable contributions to qualified organizations as follows: Flamingo Corporation's taxable income (before any charitable contribution)is $1 million.

Ostrich,a C corporation,has a net short-term capital gain of $40,000 and a net long-term capital loss of $180,000 during 2010.Ostrich also has taxable income from other sources of $1 million.Prior years' transactions included the following:

Generally,corporations with no taxable income must file a Form 1120.

Warbler Corporation,an accrual method regular corporation,was formed and began operations on July 1,2010.The following expenses were incurred during its first year of operations (July 1 - December 31,2010):

Emerald Corporation,a calendar year C corporation,was formed and began operations on July 1,2010.The following expenses were incurred during the first tax year (July 1 through December 31,2010)of operations: Assuming a § 248 election,what is the Emerald's deduction for organizational expenditures for 2010?

Bass Corporation received a dividend of $100,000 from Trout Corporation.Bass owns 25% of the Trout Corporation stock.Assuming it is not subject to the taxable income limitation,Bass's dividends received deduction is $80,000.

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.

Bjorn owns a 35% interest in an S corporation that earned $200,000 in 2010.He also owns 10% of the stock in a C corporation that earned $200,000 during the year.The S corporation distributed $10,000 to Bjorn and the C corporation paid dividends of $10,000 to Bjorn.How much income must Bjorn report from these businesses?

On December 30,2010,the board of directors of Gull Corporation,a calendar year,accrual method C corporation,authorized a contribution of $50,000 to a qualified charitable organization.For purposes of the taxable income limitation applicable to charitable deductions,Gull has taxable income of $420,000 and $370,000 for 2010 and 2011,respectively.Describe the tax consequences to Gull Corporation under the following independent situations.

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

In 2010,Bluebird Corporation had net income from operations of $50,000.Further,Bluebird recognized a long-term capital loss of $20,000,and a short-term capital gain of $5,000.Which of the following statements is correct?

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

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 $210,000 of the passive loss in the year.

C corporations can elect fiscal years that are different from those of their shareholders,but personal service corporations (PSCs)are subject to substantial restrictions in the choice of a fiscal year.Why are the fiscal year choices of PSCs limited?