Exam 2: Corporations: Introduction and Operating Rules

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.

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

Cecelia is the sole shareholder of Aqua Corporation,a newly formed C corporation.Joyce is the sole shareholder of Teal Corporation,a newly formed C corporation that is classified as a personal service corporation.Both Cecelia and Joyce plan to have their corporations elect a March 31 fiscal year-end.Will the IRS treat both corporations alike with respect to the fiscal year election? Explain.

Shaw,an architect,is the sole shareholder of Shaw Corporation,a professional association.The corporation paid Shaw a salary of $255,000 during its fiscal year ending October 31,2010.

Generally,corporate net operating loss can be carried back 2 years and forward 20 years to offset taxable income for those years.

Bear Corporation has a net short-term capital gain of $35,000 and a net long-term capital loss of $200,000 during 2010.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 2011.

Juanita owns 45% of the stock in a C corporation that had a profit of $120,000 in 2010.Carlos owns a 45% interest in a partnership that had a profit of $120,000 during the year.The corporation distributed $20,000 to Juanita,and the partnership distributed $20,000 to Carlos.Which of the following statements relating to 2010 is incorrect?

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

As a general rule,a personal service corporation (PSC)must use a fiscal year as its accounting period.

A corporation that is not required to file Schedule M-3 is permitted to file a Schedule M-3 voluntarily.

Unlike individual taxpayers,corporate taxpayers do not receive a preferential tax rate with respect to long-term capital gains.

Sage,Inc. ,a closely held corporation that is not a PSC,has a $110,000 passive loss,$90,000 of active income,and $25,000 of portfolio income during the year.How much of the passive loss can Sage deduct in the current year?

Eagle Company,a partnership,had a long-term capital gain of $15,000 during the year.Aaron,who owns 40% of Eagle,must report $6,000 of Eagle's long-term capital gain on his individual tax return.

Discuss the purpose of Schedule M-1.Give two examples of an addition and two examples of a subtraction that could be reported on Schedule M-1.

The passive loss rules apply to noncorporate taxpayers and to personal service corporations but not to closely held C corporations.

Grocer Services Corporation (a calendar year taxpayer),a wholesale distributor of food,made the following donations to qualified charitable organizations during the year: How much qualifies for the charitable contribution deduction?

Herman and Henry are equal partners in Badger Enterprises,a calendar year partnership.During the year,Badger Enterprises had $305,000 gross income and $230,000 operating expenses.Badger made no distributions to the partners.Badger must pay tax on $75,000 of income.

In the current year,Amber,Inc. ,a calendar C corporation,has income from operations of $400,000 and operating deductions of $535,000.Amber also had $50,000 of dividends from a 10% stock ownership in a domestic corporation.Which of the following statements is incorrect with respect to Amber's net operating loss deduction?

On December 31,2010,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 15,2011.Lavender can deduct the bonus in 2010,the year in which Barry's services were performed.

Canary Corporation,which sustained a $5,000 net capital loss during the year,will enter $5,000 as a subtraction item on Schedule M-1.