Exam 2: Corporations: Introduction and Operating Rules

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 $100,000 bonus for the year based on her outstanding performance.The directors want to pay the $100,000 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. )

Canary Corporation,an accrual method C corporation,uses the calendar year for tax purposes.Leticia,a cash method taxpayer,is both a shareholder of Canary and the corporation's CFO.On December 31,2010,Canary has accrued a $100,000 bonus to Leticia.Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations.

Geneva,a sole proprietor,sold one of her business assets for a $5,000 long-term capital gain.Geneva's marginal tax rate is 25%.Gulf,a C corporation,sold one of its assets for a $5,000 long-term capital gain.Gulf's marginal tax rate is 25%.What tax rates are applicable to these capital gains?

Donald owns a 40% interest in a partnership that earned $140,000 in the current year.He also owns 40% of the stock in a C corporation that earned $140,000 during the year.Donald received $30,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $60,000 of income on his individual income tax return for the year.

Olga's proprietorship earned a net profit of $95,000 during the year and she withdrew $70,000 of this profit.Olga must report $70,000 net income from the proprietorship on her individual income tax return (Form 1040).

A corporation with $10 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

In connection with the deduction of organizational expenditures under § 248,comment on the following:

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

During the current year,Coyote Corporation (a calendar year C corporation)has the following transactions:

Nicole owns and operates a sole proprietorship.She is considering incorporating the business as a C corporation and has asked you to explain how a corporate tax return differs from the return for a sole proprietorship.In addition,she has asked you to explain the nontax factors that she should consider in deciding whether to incorporate her business.

Patrick,an attorney,is the sole shareholder of Gander Corporation.Gander is a personal service corporation with a fiscal year ending September 30.The corporation paid Patrick a salary of $294,000 during its fiscal year ending September 30,2010.How much salary must Gander pay Patrick during the period October 1 through December 31,2010,to permit the corporation to continue to use its fiscal year without negative tax effects?

Glen and Michael are equal partners in Trout Enterprises,a calendar year partnership.During the year,Trout Enterprises had gross income of $400,000 and operating expenses of $220,000.In addition,the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000.During the year,Glen withdrew $60,000 from the partnership,and Michael withdrew $60,000.Discuss the impact of this information on the taxable income of Trout,Glen,and Michael.

During the current year,Quartz Corporation (a calendar year C corporation)has the following transactions: Quartz owns 25% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss)for the year?

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:

Norma formed Hyacinth Enterprises,a proprietorship,in 2010.In its first year,Hyacinth had operating income of $200,000 and operating expenses of $100,000.In addition,Hyacinth had a long-term capital loss of $9,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $50,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2010?

Schedule M-1 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Almond Corporation,a calendar year C corporation,had taxable income of $900,000,$1.1 million,and $790,000 for 2007,2008,and 2009,respectively.Almond's taxable income is $1.5 million for 2010.Compute the minimum estimated tax payments for 2010 for Almond Corporation.

Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the year.Bronze Corporation pays Copper a dividend of $150,000.What amount of dividends received deduction may Copper claim if it owns 65% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income)?

Emma,the sole shareholder of Quail Corporation (a C corporation),has the corporation pay her a salary of $300,000 in 2010.The Tax Court has held that $80,000 represents unreasonable compensation.Assuming Emma is in the 35% bracket in 2010,the Tax Court's holding will increase total tax she pays in 2010.

For purposes of the estimated tax payment rules,a "large corporation" is defined as a corporation that had an average taxable income of $1 million or more over the preceding three-year period.